Filed with the Securities and Exchange Commission on June 19, 1998
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------------
SECOND NATIONAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
--------------------------------
<TABLE>
<S> <C>
VIRGINIA 6712 54-1542438
- ----------------------------------------- -------------------------- -----------------------------
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification No.)
Classification
Code Number)
</TABLE>
102 South Main Street, Culpeper, Virginia 22701
(540) 825-4800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Copies to:
<TABLE>
<S> <C>
O. R. Barham, Jr. Timothy P. Veith, Esquire David H. Baris, Esquire
102 South Main Street Mays & Valentine, L.L.P Kennedy, Baris & Lundy, L.L.P.
Culpeper, Virginia 22701 1111 East Main Street Suite 300
(540) 825-4800 Richmond, VA 23219 4719 Hampden Lane
(Name, Address, Including Zip Bethesda, Maryland 20814
Code, and Telephone Number,
Including Area Code, of Agent For
Service)
</TABLE>
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the proposed merger (the "Merger")
described herein have been satisfied or waived.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered(1) Share (2) Price(2) Registration Fee
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C>
Common Stock, 533,716 $40.00 $21,348,640 $6,297.85
$2.50 par value
</TABLE>
(1) The maximum number of shares to be issued.
(2) Estimated solely for purposes of calculating the registration fee and
calculated in accordance with Rule 457(f)(1) thereunder, on the basis
of the per share average of the bid and asked price as of 5 business
days prior to the date hereof for the Registrant's common stock to be
received by Virginia Heartland Bank holders pursuant to the business
combination described in the enclosed Prospectus/Proxy Statement.
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 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 said Section 8(a), may determine.
<PAGE>
VIRGINIA HEARTLAND BANK
4700 Harrison Road
FREDERICKSBURG, VIRGINIA 22408
July __, 1998
To the Shareholders of Virginia Heartland Bank:
You are cordially invited to attend a Special Meeting of the
Shareholders (the "Special Meeting") of Virginia Heartland Bank to be held at
the Main Office, 4700 Harrison Road, Fredericksburg, Virginia, at 2:30 p.m.
local time, on Wednesday, September 9, 1998. Notice of Special Meeting, a Joint
Proxy Statement/Prospectus, and a Proxy Card are enclosed.
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve an Agreement and Plan of Reorganization and the related Plan
of Merger, dated as of April 18, 1998 (the "Agreement"), which provides for a
merger of equals of Virginia Heartland Bank and Second National Financial
Corporation ("SNFC"), the bank holding company for Second Bank & Trust ("SBT"),
Culpeper, Virginia. The Agreement calls for the continued operation of Virginia
Heartland Bank and SBT as subsidiaries of SNFC, which will change its name to
Virginia Commonwealth Financial Corporation (the "Holding Company") in
connection with these transactions. The Agreement also contains provisions
regarding the Boards of Directors and Senior Management of the Holding Company.
The merger of equals will be accomplished through a merger (the
"Merger") of Virginia Heartland Bank with and into Virginia Heartland Interim
Bank ("VHIB"), with VHIB the surviving corporation resulting from the Merger.
VHIB will be formed as a wholly-owned subsidiary of SNFC. At the effective time,
VHIB will change its name to Virginia Heartland Bank, with the purpose of the
transaction to make the surviving bank a wholly-owned subsidiary of the Holding
Company. Upon consummation of the Merger, each share of Virginia Heartland Bank
common stock issued and outstanding will be exchanged for 1.15 shares of Holding
Company common stock, with cash being paid in lieu of issuing fractional shares,
and each share of SNFC Stock outstanding at the time of the Merger will
represent one share of Holding Company common stock after the Merger.
Certificates for shares of the Holding Company will be issued to the
shareholders of Virginia Heartland Bank and SNFC pursuant to procedures included
in the Agreement. No shareholder should send in any certificates now.
The Joint Proxy Statement/Prospectus describes in more detail the
Agreement and the proposed Merger, including a description of the conditions to
consummation of the Merger and the effects of the Merger on the rights of
Virginia Heartland Bank shareholders. Please read these materials carefully and
consider thoughtfully the information set forth in them.
The exchange ratio and other terms of the Merger and the Agreement were
negotiated by the Board of Directors of Virginia Heartland Bank and SNFC.
Crestar Securities Corporation has rendered its opinion to the Board of
Directors of Virginia Heartland Bank that the exchange ratio in the merger is
fair to the shareholders of Virginia Heartland Bank from a financial point of
view. Your Board of Directors has unanimously approved the Agreement and the
Merger, and recommended that you vote FOR approval of the Agreement.
Approval of the Agreement will require the affirmative vote of
two-thirds of the votes entitled to be cast at the Special Meeting by the
holders of the issued and outstanding shares of Virginia Heartland Bank common
stock. Accordingly, whether or not you plan to attend the Special Meeting, you
are urged to complete, sign, and return promptly the enclosed proxy card. If you
attend the Special Meeting, you may vote in person if you wish, even if you
previously have returned your proxy card. The proposed Merger with SNFC is a
significant step for Virginia Heartland Bank and your vote on this matter is of
great importance.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO VOTE FOR APPROVAL
OF THE AGREEMENT BY MARKING THE ENCLOSED PROXY CARD "FOR" ITEM ONE.
We look forward to seeing you at the Special Meeting.
Sincerely,
William B. Young
Chairman of the Board
and Chief Executive Officer
<PAGE>
VIRGINIA HEARTLAND BANK
4700 Harrison Road
FREDERICKSBURG, VIRGINIA 22408
(540) 898-1110
=============================================
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AT 2:30 P.M. ON SEPTEMBER 9, 1998
=============================================
To the Shareholders of Virginia Heartland Bank:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Special Meeting") of Virginia Heartland Bank will be held at the Main Office,
4700 Harrison Road, Fredericksburg, Virginia, on Wednesday, September 9, 1998,
at 2:30 P.M., local time, for the following purposes:
1. Merger. To consider and vote upon a proposal to approve an Agreement
and Plan of Reorganization and the related Plan of Merger, dated as of April 18,
1998 (the "Agreement"), between Virginia Heartland Bank and Second National
Financial Corporation ("SNFC"), the bank holding company for Second Bank and
Trust ("SBT"), Culpeper, Virginia, which contemplates a merger of equals
transaction. Pursuant to the Agreement, (i) Virginia Heartland Bank will merge
(the "Merger") with and into an interim Virginia state bank subsidiary of SNFC
that will ultimately be named Virginia Heartland Bank, (ii) each share of the
$5.00 par value common stock of Virginia Heartland Bank ("VHB Stock") issued and
outstanding at the effective time of the Merger will be exchanged for 1.15
shares of the $2.50 par value common stock of the Holding Company and cash in
lieu of any fractional share, all as more fully described in the accompanying
Joint Proxy Statement/Prospectus. The Agreement provides that SNFC will change
its name to Virginia Commonwealth Financial Corporation at the effective time of
the merger, and that, thereafter, Virginia Heartland Bank and SBT will operate
as separate bank subsidiaries of Virginia Commonwealth Financial Corporation.
The Agreement also contains provisions regarding the Boards of Directors and
Senior Management of the Holding Company. A copy of the Agreement is set forth
in Appendix A to the accompanying Joint Proxy Statement/Prospectus and is hereby
incorporated by reference herein.
2. Other Business. To transact such other business as may come properly
before the Special Meeting or any adjournments or postponements of the Special
Meeting.
Only shareholders of record at the close of business on July __, 1998,
will be entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. Approval of the Agreement requires the
affirmative vote of two-thirds of the votes entitled to be cast at the Special
Meeting by holders of the issued and outstanding shares of VHB Stock.
Neither the Agreement nor the Merger entitles any shareholder of
Virginia Heartland Bank or SNFC to dissenters' appraisal rights.
THE BOARD OF DIRECTORS OF VIRGINIA HEARTLAND BANK RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT.
By Order of the Board of Directors
William B. Young
Chairman of the Board
and Chief Executive Officer
Fredericksburg, Virginia
July __, 1998
Whether or not you plan to attend the Special Meeting, please complete,
date, and sign the enclosed form of proxy and return it promptly in the enclosed
postage paid return envelope in order to ensure that your shares will be
represented at the Special Meeting.
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
102 South Main Street
Culpeper, Virginia 22701
July __, 1998
To the Shareholders of Second National Financial Corporation:
You are cordially invited to attend a Special Meeting of the
Shareholders (the "Special Meeting") of Second National Financial Corporation
("SNFC") to be held at the Holiday Inn, Highway 29 Business, Culpeper, Virginia,
at 4:00 P.M., local time, on Thursday, September 10, 1998. Notice of the Special
Meeting, a Joint Proxy Statement/Prospectus, and a Proxy Card are enclosed.
At the Special Meeting, you will be asked to consider and vote on the
terms of an Agreement and Plan of Reorganization and the related Plan of Merger,
dated as of April 18, 1998 (the "Agreement"), which provides for an affiliation
of Second National Financial Corporation ("SNFC"), the bank holding company for
Second Bank & Trust ("SBT"), Culpeper, Virginia, with Virginia Heartland Bank,
Fredericksburg, Virginia ("VHB"). Among other provisions of the Agreement, upon
the effective date of the transactions contemplated, SNFC will change its name
pursuant to an amendment (the "Amendment") to its articles of incorporation to
"Virginia Commonwealth Financial Corporation" (referred to herein as of the
effective date as the "Holding Company"). In addition, the Agreement calls for
VHB to merge with and into an interim, wholly-owned subsidiary bank of SNFC (the
"Merger"). . Upon consummation of the Merger, each share of VHB common stock
issued and outstanding will be exchanged for 1.15 shares of Holding Company
common stock, with cash being paid in lieu of issuing fractional shares, and
each share of SNFC Stock outstanding immediately prior to the time of the Merger
will represent one share of Holding Company common stock.
Certificates for shares of the Holding Company will be issued to the
shareholders of VHB and SNFC pursuant to procedures included in the Agreement.
No shareholder should send in any certificates now.
When VHB merges with and into SNFC's interim subsidiary bank, Virginia
Heartland Interim Bank ("VHIB"), VHIB will be the surviving corporation. On the
effective date, VHIB will changes its name to Virginia Heartland Bank, with the
purpose of the transaction to make the surviving bank a wholly-owned subsidiary
of the Holding Company. Following consumation of the merger transaction, VHB and
SBT will continue operation as subsidiaries of SNFC. The Agreement also contains
provisions regarding the Boards of Directors and Senior Management of the
Holding Company.
The Joint Proxy Statement/Prospectus describes in more detail the
Agreement and the proposed Merger, including a description of the conditions to
consummation of the Merger. Please read these materials carefully and consider
thoroughly the information set forth in them.
The exchange ratio and other terms of the Merger and the Agreement were
negotiated by the Board of Directors of VHB and SNFC. The Carson Medlin Company
has rendered its opinion to the Board of Directors of SNFC that the exchange
ratio in the merger is fair to the shareholders of SNFC from a financial point
of view. Your Board of Directors has unanimously approved the Agreement and the
Merger, and recommends that you vote FOR approval of the Agreement, which
includes the Amendment and the issuance of Holding Company stock to VHB
shareholders.
Approval of the Agreement will require the affirmative vote of more
than two-thirds of all votes entitled to be cast on the Merger at the Special
Meeting. Therefore it is important that whether or not you plan to attend the
Special Meeting, you are urged to complete, sign, and return promptly the
enclosed proxy card. If you attend the Special Meeting, you may vote in person
if you wish, even if you previously have returned your proxy card. The proposed
Merger with Virginia Heartland Bank is a significant step for SNFC and your vote
on this matter is of great importance.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO VOTE FOR APPROVAL
OF THE AGREEMENT AND ITS RELATED ACTIONS BY MARKING THE ENCLOSED PROXY CARD
"FOR" APPROVAL OF THE AFFILIATION.
We look forward to seeing you at the Special Meeting.
Sincerely,
Taylor E. Gore O. R. Barham, Jr.
Chairman of the Board President and
Chief Executive Officer
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
102 South Main Street
Culpeper, Virginia 22701
(540) 825-4800
==========================================
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AT 4:00 P.M. ON SEPTEMBER 10, 1998
=============================================
To the Shareholders of Second National Financial Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Special Meeting") of Second National Financial Corporation ("SNFC") will be
held at the Holiday Inn, Highway 29 Business, Culpeper, Virginia, on Thursday,
September 10, 1998, at 4:00 P.M., local time, for the following purposes:
1. The Affiliation. To consider and vote upon a proposal for SNFC to
affiliate with Virginia Heartland Bank ("VHB") pursuant to an Agreement and Plan
of Reorganization and the related Plan of Merger, dated as of April 18, 1998
(the "Agreement"), between VHB and SNFC. The Agreement contemplates a merger of
equals transaction pursuant to which (i) SNFC will amend its articles of
incorporation (the "Amendment") to change its name to "Virginia Commonwealth
Financial Corporation" (referred to on and after the effective date as the
"Holding Company"), (ii) VHB will merge (the "Merger") with and into a Virginia
chartered interim bank to be formed as a wholly-owned subsidiary of SNFC, and
(iii) each share of the $5.00 par value common stock of VHB ("VHB Stock") issued
and outstanding at the effective time of the Merger will be exchanged for 1.15
shares of the $2.50 par value common stock of Holding Company (the "Holding
Company Stock") and cash in lieu of any fractional share, all as more fully
described in the accompanying Joint Proxy Statement/Prospectus. The Agreement
provides that VHB and SBT, SNFC's current sole banking subsidiary, will operate
as separate bank subsidiaries of the Holding Company following the Merger. The
Agreement also contains provisions regarding the Boards of Directors and Senior
Management of the Holding Company. A copy of the Agreement and the Amendment are
set forth in Appendices A and B, respectively, to the accompanying Joint Proxy
Statement/Prospectus and are hereby incorporated by reference herein. Approval
of the Agreement will include approval of the Plan of Merger and will constitute
approval of the Amendment and the issuance of shares of the Holding Company
pursuant to the exchange ratio described above and in greater detail in the
enclosed Joint Proxy Statement/Prospectus.
2. Other Business. To transact such other business as may come properly
before the Special Meeting or any adjournments or postponements of the Special
Meeting.
Only shareholders of record at the close of business on July __, 1998,
will be entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. Approval of the Agreement which provides
for the Amendment and the issuance of Holding Company Stock in connection with
the Merger requires the affirmative vote of more than two-thirds of the total
votes cast on the proposal in person or by proxy at the Special Meeting.
Neither the Agreement nor the Merger entitles any shareholder of SNFC
or VHB to dissenters' appraisal rights.
THE BOARD OF DIRECTORS OF SNFC RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE AGREEMENT, INCLUDING THE AMENDMENT AND THE ISSUANCE OF HOLDING
COMPANY STOCK.
By Order of the Board of Directors,
O. R. Barham, Jr.
President and Chief Executive Officer
Culpeper, Virginia
July ___, 1998
Whether or not you plan to attend the Special Meeting, please
complete, date, and sign the enclosed form of proxy and return it promptly in
the enclosed postage paid return envelope in order to ensure that your shares
will be represented at the Special Meeting.
<PAGE>
PROSPECTUS OF
SECOND NATIONAL FINANCIAL CORPORATION
RELATING TO 533,716 SHARES OF ITS COMMON STOCK
(Par Value $2.50 Per Share)
-----------------------------------
JOINT PROXY STATEMENT/ PROSPECTUS OF
VIRGINIA HEARTLAND BANK
AND
SECOND NATIONAL FINANCIAL CORPORATION
This Joint Proxy Statement/Prospectus (the "Proxy Statement") is being
provided to the holders of the common stock, par value $2.50 per share, of
Second National Financial Corporation ("SNFC") in connection with the
solicitation of proxies by the Board of Directors of SNFC for use at a special
meeting of shareholders (the "SNFC Special Meeting") to be held in Culpeper,
Virginia on Thursday, September 10, 1998 at 4:00 p.m., local time.
The Proxy Statement also is being provided to the holders of the common
stock, par value $5.00 per share, of Virginia Heartland Bank ("VHB") in
connection with the solicitation of proxies by the Board of Directors of VHB for
use at a special meeting of shareholders (the "VHB Special Meeting") to be held
in Fredericksburg, Virginia on Wednesday, September 9, 1998 at 2:30 p.m., local
time.
SNFC and VHB have entered into an Agreement and Plan of Reorganization
and the related Plan of Merger dated as of April 18, 1998 (the "Agreement") that
provides for the affiliation of SNFC and VHB (the "Affiliation") in a merger of
equals transaction through a tax-free, stock-for-stock exchange. The Affiliation
is subject to the approval by the shareholders of SNFC and the shareholders of
VHB, as described in this Proxy Statement. The Agreement provides that on the
effective date of the Merger, SNFC will amend its Articles of Incorporation to
change its name to Virginia Commonwealth Financial Corporation (the "Holding
Company"), which will be the bank holding company for VHB and for SNFC's current
subsidiary bank, Second Bank & Trust ("SBT"). In connection with the
Affiliation, each share of VHB common stock ("VHB Stock") will be converted into
1.15 shares (the "Exchange Ratio") of common stock, par value $2.50 per share of
the Holding Company ("Holding Company Stock") and each share of SNFC common
stock ("SNFC Stock") will become one outstanding share of Holding Company Stock.
The Agreement includes procedures for the common shareholders of VHB and SNFC to
exchange their certificates for VHB and SNFC shares for certificates of Holding
Company Stock.
On July __, 1998, there were 464,101 and 1,504,749 shares of VHB and
SNFC Stock outstanding, respectively. Shares of VHB Stock are traded
occasionally in the over-the-counter market. Shares of SNFC Stock are traded in
the over-the-counter market and quoted electronically through the NASDAQ Small
Cap Market System. The Affiliation contemplated by the Agreement is expected to
become effective before December 31, 1998, subject to required shareholder and
regulatory approvals and conditions set forth in the Agreement.
The Agreement also provides that (i) the Holding Company Board of
Directors will consist of five representatives selected by SNFC, or by its
continuing directors, and three representatives selected by VHB, or its
continuing directors, with such ratio to be maintained for at least five years
following the Effective Date of the Affiliation; (ii) VHB and SBT will continue
to operate as separately chartered commercial banks, with the Board of Directors
of each bank to be elected by the Holding Company from persons nominated by the
respective board of directors, unless and until the Holding Company Board of
Directors determines that such independent organization is not in the best
interests of the banks and the Holding Company; and (iii) the senior management
of the Holding Company will be comprised of the current senior officers of VHB
and SBT; all as more fully described elsewhere in this Proxy Statement.
<PAGE>
The Agreement provides that the Affiliation will be accomplished by a
statutory merger (the "Merger") of VHB with and into Virginia Heartland Interim
Bank ("VHIB"), as described more fully elsewhere in this Proxy Statement.
Pursuant to the Agreement, VHIB will be formed as a subsidiary of SNFC. At the
Effective Date of the Merger, VHIB will change its name to Virginia Heartland
Bank, and will operate as a subsidiary of the Holding Company. VHB will join in
the Agreement by Addendum prior to the Effective Date.
The full text of the Agreement is attached as Appendix A to this Proxy
Statement.
The Carson Medlin Company ("Carson Medlin") has rendered an opinion to
the effect that, as of the date of this Proxy Statement, the Exchange Ratio is
fair, from a financial point of view to the shareholders of SNFC. Crestar
Securities Corporation ("Crestar Securities") has rendered an opinion to the
effect that, as of the date of this Proxy Statement, the Exchange Ratio is fair,
from a financial point of view, to the shareholders of VHB.
Under Virginia Law, holders of SNFC Stock and holders of VHB Stock will
not be entitled to dissenters' rights.
SNFC has filed a Registration Statement on Form S-4 with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of its common stock, par value
$2.50 per share, to be issued upon consummation of the Merger. This Proxy
Statement constitutes a prospectus of SNFC with respect to the issuance of such
shares, and a joint proxy statement of SNFC and VHB with respect to the
solicitation of the approvals of the Agreement by their respective stockholders.
This Proxy Statement does not cover any resales of stock offered hereby
to be received by the shareholders deemed to be affiliates of VHB or SNFC upon
consummation of the Merger. No person is authorized to make use of this Proxy
Statement in connection with such resales, although such securities may be
traded without use of this Proxy Statement by those shareholders of SNFC or the
Holding Company not deemed to be affiliates of VHB or SNFC.
THE BOARDS OF DIRECTORS OF SNFC AND VHB BELIEVE THAT THE AFFILIATION IS
IN THE BEST INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS, AND UNANIMOUSLY
RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS
ACCOUNTS, OR OTHER OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY. THE SECURITIES ARE NOT
OBLIGATIONS OF NOR ARE THE SECURITIES GUARANTEED BY SECOND BANK & TRUST,
VIRGINIA HEARTLAND BANK OR SECOND NATIONAL FINANCIAL CORPORATION. THE
SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL INVESTED.
<PAGE>
This Proxy Statement and the accompanying proxy card are first being
sent to the stockholders of SNFC and VHB on or about July __, 1998.
SNFC's principal executive office is located at 102 South Main Street,
Culpeper, Virginia 22701, and its telephone number is (540) 825-4800. VHB's
principal executive office is located at 4700 Harrison Road, Fredericksburg,
Virginia, and its telephone number is (540) 898-1110.
<PAGE>
AVAILABLE INFORMATION
SNFC is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, is required to file reports, proxy and information statements, and
other information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy and information statements, and other information
can be obtained, at prescribed rates, from the SEC by addressing written
requests for such copies to the Public Reference Section at the SEC at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such
reports, proxy and information statements, and other information can be
inspected at the public reference facilities referred to above and at the
regional offices of the SEC at 7 World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The SEC maintains a World Wide Web site on the Internet
at "http://www.sec.gov" that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including SNFC.
VHB also is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Federal Reserve Board (the "Federal Reserve"). Copies of
such reports, proxy statements and other information filed by VHB may be
obtained from the Federal Reserve at prescribed rates by written requests for
such copies to the Federal Reserve, Records Office, 20th and C Streets, N.W.,
Washington, D.C. 20551, or the Federal Reserve Bank of Richmond, 701 East Byrd
Street, Richmond, Virginia 23219.
This Proxy Statement constitutes part of the Registration Statement on
Form S-4 of SNFC (including any exhibits and amendments thereto, the
"Registration Statement") filed with the SEC under the Securities Act of 1933,
as amended (the "Securities Act"), relating to the securities offered hereby.
This Proxy Statement does not include all of the information in the Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. For further information about SNFC and the securities
offered hereby, reference is made to the Registration Statement. The
Registration Statement may be inspected and copied, at prescribed rates, at the
SEC's public reference facilities at the addresses set forth above.
All information contained in this Proxy Statement or incorporated
herein by reference with respect to SNFC was supplied by SNFC and all
information contained in this Proxy Statement with respect to VHB was supplied
by VHB.
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Proxy
Statement, and, if given or made, such information or representation should not
be relied upon as having been authorized. This Proxy Statement does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this 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 Proxy Statement nor any distribution
of the securities being offered pursuant to this Proxy Statement shall, under
any circumstances, create an implication that there has been no change in the
affairs of SNFC or VHB or the information set forth or incorporated by reference
herein since the date of this Proxy Statement.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Included as an exhibit to this Proxy Statement is SNFC's 1997 Annual
Report to Shareholders and its quarterly report as of and for the three-month
period ended March 31, 1998.
The following documents previously filed with the SEC by SNFC pursuant
to the Exchange Act are hereby incorporated by reference into this Proxy
Statement:
(1) SNFC's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1997,
(2) SNFC's Quarterly Report of Form 10-Q for the period ended
March 31, 1998, and
(3) SNFC's Current Report on Form 8-K filed on April 24, 1998.
All documents filed by SNFC pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
final adjournment of the VHB Special Meeting and SNFC Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement and to be a part
hereof from the date of filing of such documents. Any statement contained herein
or in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein or in any subsequently filed document which
also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part hereof, except as so modified or superseded.
SNFC will provide without charge, upon the written or oral request of
any person, including any beneficial owner, to whom this Proxy Statement is
delivered a copy of any and all information (excluding certain exhibits)
relating to SNFC that has been incorporated by reference in the Registration
Statement. Such requests should be directed to Jeffrey W. Farrar, Senior Vice
President and Chief Financial Officer, Second National Financial Corporation,
P.O. Box 71, Culpeper, Virginia 22701 (telephone (540) 825-4800). In order to
ensure timely delivery of the documents, any request should be made by July 31,
1998.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Holding Company following the consummation of the Merger, including statements
relating to the cost savings and revenue enhancements that are expected to be
realized from the Merger and the expected impact of the Merger on SNFC financial
performance. See "Description of the Merger-Background of and Reasons for the
Merger". 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) expected cost savings from the Merger cannot be
fully realized; (2) deposit attrition, customer loss or revenue loss following
the merger is greater than expected; (3) competitive pressure in the banking
industry increases significantly; (4) costs or difficulties related to the
integration of the business of SNFC and VHB are greater than expected; (5)
changes in the interest rate environment reduce margins; (6) general economic
conditions, either nationally or regionally, are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (7) changes
occur in the regulatory environment; (8) changes occur in business conditions
and inflation; and (9) changes occur in the securities markets.
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY..............................................................................................
The Parties......................................................................................
Meeting of VHB Shareholders......................................................................
Meeting of SNFC Shareholders.....................................................................
The Merger.......................................................................................
Comparative Market Prices of Common Stock........................................................
Comparative Per Share Data.......................................................................
SELECTED FINANCIAL DATA..............................................................................
PRO FORMA CONDENSED FINANCIAL INFORMATION............................................................
COMPARATIVE MARKET PRICES AND DIVIDENDS..............................................................
SPECIAL MEETING OF VHB SHAREHOLDERS..................................................................
Date, Place, Time, and Purpose...................................................................
Record Dates, Voting Rights, Required Votes, and Revocability of Proxies.........................
Solicitation of Proxies..........................................................................
Recommendation...................................................................................
SPECIAL MEETING OF SNFC SHAREHOLDERS.................................................................
Date, Place, Time, and Purpose...................................................................
Record Dates, Voting Rights, Required Votes, and Revocability of Proxies.........................
Solicitation of Proxies..........................................................................
Recommendation...................................................................................
DESCRIPTION OF THE MERGER............................................................................
General..........................................................................................
Possible Adjustment of Exchange Ratio............................................................
Effect of the Merger on Stock Options and Warrants...............................................
Background of and Reasons for the Merger.........................................................
Opinion of VHB's Financial Advisor...............................................................
Opinion of SNFC's Financial Advisor..............................................................
Effective Time of the Merger.....................................................................
Distribution of Holding Company Stock Certificates...............................................
Conditions to Consummation of the Merger, Regulatory
Approvals, Waiver, Amendment, and Termination..............................................
Conduct of Business Pending the Merger...........................................................
Management and Operations after the Merger.......................................................
Interests of Certain Persons in the Merger.......................................................
Option Agreement.................................................................................
Certain Federal Income Tax Consequences..........................................................
Accounting Treatment.............................................................................
Expenses and Fees................................................................................
Resales of Holding Company Stock.................................................................
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS.......................................................
Anti-Takeover Provisions Generally...............................................................
Authorized Capital Stock.........................................................................
Amendment of Articles of Incorporation and Bylaws................................................
Classified Board of Directors and Absence of Cumulative Voting...................................
Removal of Directors.............................................................................
Limitations on Director Liability................................................................
Indemnification..................................................................................
Special Meeting of Shareholders..................................................................
Constituency and Shareholder Provisions..........................................................
Actions by Shareholders Without a Meeting........................................................
Shareholder Nominations and Proposals............................................................
Fair Price Provisions............................................................................
Business Combinations............................................................................
Shareholders' Rights to Examine Books and Records................................................
Dividends........................................................................................
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INFORMATION ABOUT VHB................................................................................
General..........................................................................................
Security Ownership of Management.................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR VHB.......................................................
INFORMATION ABOUT SNFC...............................................................................
General..........................................................................................
Security Ownership of Management.................................................................
CERTAIN REGULATORY CONSIDERATIONS....................................................................
General..........................................................................................
Community Reinvestment...........................................................................
Payment of Dividends.............................................................................
Capital Adequacy.................................................................................
Support of Subsidiary Banks......................................................................
Prompt Corrective Action.........................................................................
FDIC Insurance Assessments.......................................................................
Safety and Soundness Standards...................................................................
Depositor Preference.............................................................................
DESCRIPTION OF SNFC CAPITAL STOCK....................................................................
OTHER MATTERS........................................................................................
EXPERTS..............................................................................................
OPINIONS.............................................................................................
SHAREHOLDER PROPOSALS................................................................................
INDEX TO FINANCIAL STATEMENTS FOR VHB................................................................
APPENDICES
Appendix A: Agreement and Plan of Reorganization and Plan of Merger, dated April 18, 1998
Appendix B: Amendment to Articles of Incorporation of SNFC
Appendix C: Stock Option Agreement, dated April 18, 1998, granting option to VHB
Appendix D: Stock Option Agreement, dated April 18, 1998, granting option to SNFC
Appendix E: Opinion of Crestar Securities Corporation
Appendix F: Opinion of The Carson Medlin Company
FINANCIAL STATEMENTS FOR SNFC
SNFC's Form 10-Q for the quarter ended March 31, 1998
SNFC's 1997 Annual Report To Shareholders
</TABLE>
<PAGE>
SUMMARY
Following is a summary of certain information contained in this Proxy
Statement and the documents incorporated herein by reference. This summary is
not intended to be a complete description of the matters covered in this Proxy
Statement and is qualified in its entirety by the more detailed information
appearing elsewhere or incorporated by reference in this Proxy Statement.
Shareholders are urged to read carefully the entire Proxy Statement, including
the appendices. As used in this Proxy Statement, the terms "SNFC" and "VHB"
refer to those entities, respectively, and, where the context requires, to SNFC
and its subsidiary.
THE PARTIES
VHB. VHB is a Virginia bank corporation headquartered in Spotsylvania,
Virginia that operates three banking offices in Fredericksburg and Spotsylvania
County. VHB offers a broad range of banking and banking-related services. As of
March 31, 1998, VHB had total consolidated assets of approximately $100 million,
total consolidated deposits of approximately $90 million, and total consolidated
shareholders' equity of approximately $9 million. The principal executive
offices of VHB are located at 4700 Harrison Road, Fredericksburg, Virginia
22408, and its telephone number at such address is (540) 898-1110. See
"Available Information" and "Information About VHB."
SNFC. SNFC, a Virginia corporation, is a bank holding company
registered with the Federal Reserve under the federal Bank Holding Company Act
of 1956, as amended (the "BHC Act"). SNFC owns all of the outstanding shares of
Second Bank & Trust, a Virginia bank corporation ("SBT") that operates six
banking offices located in Culpeper, Virginia and in the counties of Madison,
Orange and Rockingham, Virginia. SNFC, through SBT and its subsidiaries, offers
a full range of financial services related to commercial banking, savings and
trusts, including the acceptance of deposits, corporate cash management,
discount brokerage, IRA plans, secured and unsecured loans and trust functions.
As of March 31, 1998, SNFC had total consolidated assets of approximately $228
million, total consolidated deposits of approximately $193 million, and total
consolidated shareholders' equity of approximately $29 million.
The principal executive offices of SNFC and SBT are located at 102
South Main Street, Culpeper, Virginia 22701, and its telephone number at such
address is (540) 825-4800. As part of the Merger, SNFC will change its name to
Virginia Commonwealth Financial Corporation, sometimes referred to herein as the
"Holding Company". Additional information with respect to SNFC and SBT is
included in documents incorporated by reference in this Proxy Statement. See
"Available Information," "Documents Incorporated by Reference" and "Information
About SNFC."
SPECIAL MEETING OF VHB SHAREHOLDERS
This Proxy Statement is being furnished to the holders of VHB Stock in
connection with the solicitation by the VHB Board of Directors of proxies for
use at the VHB Special Meeting at which VHB shareholders will be asked to vote
upon (i) a proposal to approve the Agreement and the Merger and (ii) such other
business as may properly come before the meeting. The VHB Special Meeting will
be held at the Main Office, 4700 Harrison Road, Fredericksburg, Virginia, at
2:30 p.m., local time, on Wednesday, September 9, 1998. See "Special Meeting of
VHB Shareholders--Date, Place, Time, and Purpose."
VHB's Board of Directors fixed the close of business on July __,1998,
as the record date (the "VHB Record Date") for determination of the shareholders
entitled to notice of and to vote at the VHB Special Meeting. Only holders of
record of shares of VHB Stock on the VHB Record Date are entitled to notice of
and to vote at the VHB Special Meeting. Each share of VHB Stock is entitled to
one vote. Shareholders who execute proxies retain the right to revoke them at
any time prior to being voted at the VHB Special Meeting. On the VHB Record
Date, 464,101 shares of VHB Stock were issued and outstanding. See "Special
Meeting of VHB Shareholders--Record Dates, Voting Rights, Required Votes, and
Revocability of Proxies."
<PAGE>
Approval of the Agreement and the Merger requires the affirmative vote
of two-thirds of the votes entitled to be cast at the VHB Special Meeting by the
holders of the issued and outstanding shares of VHB Stock. As of July __, 1998,
directors and executive officers of VHB and their affiliates were entitled to
vote 81,895 shares or approximately 17.7% of the outstanding shares of VHB
Stock. See "Special Meeting of VHB Shareholders--Record Dates, Voting Rights,
Required Votes, and Revocability of Proxies."
SPECIAL MEETING OF SNFC SHAREHOLDERS
This Proxy Statement is being provided to the holders of SNFC Stock in
connection with the solicitation by the SNFC Board of Directors of proxies for
use at the SNFC Special Meeting at which SNFC shareholders will be asked to vote
upon (i) a proposal to approve the Agreement which includes the amendment of
SNFC's Articles of Incorporation, and the Merger, and (ii) such other business
as may properly come before the meeting. The SNFC Special Meeting will be held
at the Holiday Inn, Highway 29 Business, Culpeper, Virginia, at 4:00 p.m., local
time, on Thursday, September 10, 1998.
See "Special Meeting of SNFC Shareholders--Date, Place, Time, and Purpose."
The Board of Directors of SNFC has fixed the close of business on July
__, 1998, as the record date (the "SNFC Record Date") for determination of the
shareholders entitled to notice of and to vote at the SNFC Special Meeting. Only
holders of record of shares of SNFC Stock on the SNFC Record Date will be
entitled to notice of and to vote at the SNFC Special Meeting. Each share of
SNFC Stock is entitled to one vote. Shareholders who execute proxies retain the
right to revoke them at any time prior to being voted at the SNFC Special
Meeting. On the SNFC Record Date, 1,504,749 shares of SNFC Stock were issued and
outstanding. See "Special Meeting of SNFC Shareholders--Record Dates, Voting
Rights, Required Votes, and Revocability of Proxies."
Approval of the Agreement, the Merger, and the amendment of SNFC's
Articles of Incorporation requires the affirmative vote of two-thirds of the
votes entitled to be cast in person or by proxy at the SNFC Special Meeting. As
of July __, 1998, directors and executive officers of SNFC and their affiliates
were entitled to vote 96,570 shares (excluding options) or approximately 6.4% of
the outstanding shares of SNFC Stock. In addition, at July __, 1998, the SBT
Trust Department held, as trustee for various trust accounts, 93,109 shares, or
6.2%, of the then outstanding shares of SNFC Stock. See "Special Meeting of SNFC
Shareholders -- Record Dates, Voting Rights, Required Votes, and Revocability of
Proxies."
THE AGREEMENT AND THE MERGER
General. The Agreement includes the terms and conditions for the
Affiliation of VHB with SNFC. In the Affiliation, SNFC will amend its Articles
of Incorporation in order to change its name to Virginia Commonwealth Financial
Corporation, and pursuant to the terms of the Agreement will be, the bank
holding company for both VHB and SBT. The Affiliation will be accomplished
through the Merger. At the effective time of the Merger, each share of VHB Stock
then issued and outstanding will be converted into and exchanged for 1.15 shares
of Holding Company Stock. See "Description of the Merger--General" and
"--Amendment of the SNFC Articles of Incorporation."
<PAGE>
No fractional shares of Holding Company Stock will be issued. Rather,
cash (without interest) will be paid in lieu of any fractional share interest to
which any VHB shareholder would be entitled upon consummation of the Merger, in
an amount equal to such fractional part of a share of Holding Company Stock
multiplied by the market value of one share of Holding Company Stock at the
Effective Time. The market value of one share of Holding Company Stock at the
Effective Time shall be the average of the closing prices of SNFC Stock as
reported on the National Association of Securities Dealers Automated Quotation
System, Small Cap Market for trades reported during the ten (10) trading days
immediately preceding the Effective Time. See "Description of the
Merger--General."
As of the VHB Record Date, VHB had 464,101 shares of VHB Stock issued
and outstanding. At the Exchange Ratio of 1.15 shares of Holding Company Stock
for each share of VHB Stock, SNFC will issue approximately 533,716 shares of
Holding Company Stock to former VHB shareholders. SNFC common stock held by SNFC
shareholders immediately prior to the Merger will continue to be outstanding
without any change in number, such that no new shares of common stock in the
Holding Company will be issued to former SNFC shareholders as a result of the
Merger. Each shareholder of SNFC immediately prior to the Effective Date will be
entitled to receive newly certificated shares of Holding Company Stock.
Accordingly, based upon the newly issued Holding Company Stock issued to VHB
shareholders and the shares held by SNFC shareholders, there will be
approximately 2,038,465 shares of Holding Company Stock issued and outstanding
immediately following the Merger.
The Agreement also provides that (i) the Holding Company Board of
Directors will consist of five representatives selected by SNFC, or by its
continuing directors, and three representatives selected by VHB, or its
continuing directors, with such ratio to be maintained for at least five years
following the Effective Date of the Affiliation; (ii) VHB and SBT will continue
to operate as separately chartered commercial banks, with the Board of Directors
of each bank to be elected by the Holding Company from persons nominated by the
respective board of directors, unless and until the Holding Company Board of
Directors determines that such independent organization is not in the best
interests of the banks and the Holding Company; and (iii) the senior management
of the Holding Company will be comprised of the current senior officers of VHB
and SBT. See "- Management and Operations After the Merger."
Reasons for the Merger and Recommendations of the Boards of Directors.
The Boards of Directors of VHB and SNFC believe that the Agreement and the
Merger are in the best interests of VHB and SNFC and their respective
shareholders. The VHB Board of Directors unanimously recommends that VHB
shareholders vote FOR approval of the Agreement. The SNFC Board of Directors
unanimously recommends that SNFC shareholders vote FOR approval of the
Agreement. The Boards of Directors of VHB and SNFC believe that the Merger will
result in a combined company with expanded opportunities for profitable growth
and that the resources and capital of VHB and SNFC will provide an enhanced
ability to compete in the changing and competitive financial services industry.
See "Description of the Merger--Background of and Reasons for the Merger."
In approving the Agreement, the Boards of Directors of VHB and SNFC
considered, among other things, VHB's and SNFC's respective financial
conditions, the financial terms and income tax consequences of the Merger, the
likelihood of the Merger being approved by regulatory authorities without undue
conditions or delay, legal advice concerning the proposed Merger, the opinions
of Crestar Securities Corporation ("Crestar Securities") and The Carson Medlin
Company ("Carson Medlin"), respectively, as to the fairness of the Exchange
Ratio, from a financial point of view, to the shareholders of VHB and SNFC,
respectively, and in general the fairness of the terms of the Merger to the
shareholders of VHB and SNFC. See "Description of the Merger--Background of and
Reasons for the Merger."
<PAGE>
Opinions of Financial Advisors. Crestar Securities has rendered an
opinion to VHB that, based on and subject to the procedures, matters and
limitations described in its opinion and such other matters as it considered
relevant, as of the date of this Proxy Statement, the Exchange Ratio is fair,
from a financial point of view, to the shareholders of VHB. Carson Medlin has
rendered an opinion to SNFC that, based on and subject to the procedures,
matters and limitations described in its opinion and such other matters as it
considered relevant, as of the date of this Proxy Statement, the Exchange Ratio
is fair, from a financial point of view, to the shareholders of SNFC. The
opinions of Crestar Securities and Carson Medlin, both dated as of this Proxy
Statement, are attached as Appendices E and F, respectively, to this Proxy
Statement. Shareholders are urged to read the opinions in their entirety for a
description of the procedures followed, matters considered, and limitations on
the reviews undertaken in connection therewith. See "Description of the
Merger--Opinion of VHB's Financial Advisor" and "--Opinion of SNFC's Financial
Advisor."
Effective Time. Subject to the conditions to the obligations of the
parties to effect the Merger, the Effective Time will occur on the date and at
the time that the Articles of Merger become effective with the State Corporation
Commission of Virginia ("SCC"). Unless otherwise agreed upon by VHB and SNFC,
the Effective Time is expected to occur on the first day of the month following
the month or quarter in which the approvals of the Merger by VHB shareholders
and SNFC shareholders are received and the effective date (including expiration
of all applicable waiting periods) of all required consents of any regulatory
authority having jurisdiction over the Merger. See "Description of the
Merger--Effective Time of the Merger," "--Conditions to Consummation of the
Merger," and "--Waiver, Amendment, and Termination."
No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that the other conditions precedent to
the Merger can or will be satisfied. VHB and SNFC anticipate that all conditions
to the consummation of the Merger will be satisfied so that the Merger can be
consummated during 1998. Delays in the consummation of the Merger could occur,
however.
Exchange of Stock Certificates. Promptly after the Effective Time, SNFC
will cause SBT, acting in its capacity as exchange agent for SNFC (the "Exchange
Agent"), to mail to each holder of record of a certificate or certificates
(collectively, the "Certificates") which, immediately prior to the Effective
Time, represented outstanding shares of VHB Stock and SNFC Stock, a letter of
transmittal and instructions ("Transmittal Letter") for use in effecting the
surrender, cancellation and exchange of the Certificates for certificates
representing shares of Holding Company Stock. Cash will be paid to the holders
of VHB Stock in lieu of the issuance of any fractional shares of Holding Company
Stock. Pursuant to the Transmittal Letter, Holders of SNFC Stock simply will be
asked to exchange their certificates of SNFC Stock for a certificate
representing an equal number of Holding Company shares. No fractional shares of
Holding Company Stock will be issued to such SNFC holders. In no event will the
holder of any surrendered Certificate(s) be entitled to receive interest on any
cash to be paid to such holder, and in no event will VHB, SNFC or the Exchange
Agent be liable to any holder of VHB Stock for any Holding Company Stock or
dividends thereon or cash delivered in good faith to a public official pursuant
to any applicable abandoned property, escheat, or similar law.
Regulatory Approvals and Other Conditions. The Merger is subject to
approval by the Board of Governors of the Federal Reserve System (the "FRB"),
the Federal Deposit Insurance Corporation ("FDIC") and the Virginia Bureau of
Financial Institutions (the "Bureau"). Applications for the requisite approvals
have been filed with all of these agencies. The FRB, the FDIC and the Bureau are
expected to approve the Merger in 1998. There can be no assurance that such
regulatory approvals will be obtained or as to the timing of any such approvals.
There also can be no assurance that any such approvals will not impose
conditions that are deemed by VHB or SNFC to materially adversely impact the
economic or business assumptions of the transactions contemplated by this
agreement.
<PAGE>
Consummation of the Merger is subject to various other conditions,
including receipt of the required approval of VHB shareholders and SNFC
shareholders, receipt of an opinion of counsel as to the tax-free nature of
certain aspects of the Merger, and certain other conditions. See "Description of
the Merger--Regulatory Approvals" and "--Conditions to Consummation of the
Merger."
Waiver, Amendment, and Termination. The Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time (i) by mutual
consent of the Boards of Directors of VHB and SNFC, (ii) by the action of the
Board of Directors of either company under certain circumstances, including if
the Merger is not consummated by March 31, 1999, unless the failure to
consummate by such time is due to a breach of the Agreement by the party seeking
to terminate, or (iii) in certain circumstances, by one of the parties in the
event that the other defaults in the performance of its representations,
warranties and agreements contained in the Agreement. If for any reason the
Merger is not consummated, VHB shall continue to operate as a bank under its
present management. To the extent permitted by law, the Agreement may be amended
upon the written agreement of SNFC and VHB without the approval of shareholders;
provided, however, that the provisions of the Agreement relating to the
conversion of and payment for VHB Stock may not be amended after the VHB and
SNFC Special Meetings without the requisite approval of the holders of the
issued and outstanding shares of VHB and SNFC Stock entitled to vote thereon.
See "Description of the Merger--Possible Adjustment of Exchange Ratio" and
"--Waiver, Amendment, and Termination."
Interests of Certain Persons in the Merger. Certain members of VHB's
management and Board of Directors have interests in the Merger in addition to
their interests as shareholders of VHB generally. Those interests relate to,
among other things, the right of VHB under the Agreement to recommend candidates
to fill three (3) directorships on the Holding Company Board of Directors,
negotiation or renegotiation of employment contracts for Messrs. Allison and
Young, appointment of certain current officers of VHB as officers of the Holding
Company, and provisions in the Agreement regarding indemnification. See
"Description of the Merger--Interests of Certain Persons in the Merger."
In connection with the right of VHB to recommend candidates to fill
three (3) directorships on the Boards of Directors of the Holding Company, VHB
has recommended William B. Young, Thomas F. Williams, Jr., and H. Wayne Parrish,
all of whom are currently directors of VHB. In addition, pursuant to the
Agreement, William B. Young, Chairman of the Board and Chief Executive Officer
of VHB will be appointed to the offices of Chairman of the Board and Chief
Executive Officer of the Holding Company and shall serve in these positions
until December 31, 2000. Edward V. Allison, Jr., President of VHB, will become a
Senior Vice President and the Secretary of the Holding Company, as well as
continuing as President of VHB. Other officers of VHB will remain in the same
positions as currently held at VHB. Upon consummation of the Merger, new
employment agreements by and between VHB and Messrs. Young and Allison will
become effective as obligations of VHB. In addition, pursuant to the Agreement,
O. R. Barham will be a President of the Holding Company until December 31, 2000
and Jeffrey W. Farrar will be Senior Vice President and Chief Financial Officer
of the Holding Company. The Holding Company will be bound by Mr. Barham's
existing employment agreement and the Agreement provides Mr. Farrar with a new
employment agreement. See "Description of the Merger--Management and Operations
After the Merger" and "--Interests of Certain Persons in the Merger."
<PAGE>
Option Agreement. In addition to the Agreement, VHB and SNFC have
entered into an option agreements (the "Option Agreements"), pursuant to which
VHB has granted to SNFC and SNFC has granted to VHB an option to purchase under
certain conditions such number of shares of their respective common stock that
would equate to 19.9% of the issued and outstanding common stock of the optionee
at an exercise price of $40.00 in cash per share of VHB Stock and at an exercise
price of $35.00 in cash per share of SNFC Stock (the "Lock-Up Options"). The
Lock-Up Options are exercisable only if: (i) an offer to acquire VHB or SNFC has
been received by VHB or SNFC, or solicited by VHB or SNFC, from a person or
entity other than SNFC or VHB, as the case may be, and (ii) VHB or SNFC and such
person or entity have entered into an agreement concerning any merger, sale of
substantial assets, tender offer, sale of shares of stock or similar transaction
involving VHB or SNFC, as the case may be. Neither party's right to exercise the
Lock-Up Option has been triggered as of the date of this Proxy Statement.
Prior to the Effective Date of the Merger, the Board of Directors of
SNFC is permitted to adopt and approve a shareholders' rights plan which grants
certain rights to acquire preferred stock of the Holding Company in the event of
the occurrence of a transaction that is likely to result in a future change of
control. The shareholders' rights plan is designed to have anti-takeover effects
and may inhibit the ability of a third party to acquire control of the Holding
Company. These rights are to be granted on the same basis with respect to SNFC
Stock as to the shares of Holding Company Stock that will be issued to VHB
shareholders pursuant to the Merger. Any amendment proposing to change the
rights to be granted or any other material terms of the plan prior to the
Effective Date shall require the concurrence of a majority of the Board of
Directors of VHB.
Certain Federal Income Tax Consequences of the Merger. It is intended
that the Merger will be treated as a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
Consummation of the Merger is conditioned upon receipt by VHB and SNFC of a
written opinion of Mays & Valentine, L.L.P., substantially to this effect. If
the Merger qualifies as a tax-free reorganization, no gain or loss will be
recognized by a VHB shareholder upon the exchange of such shareholder's VHB
Stock solely for shares of Holding Company Stock. Subject to the provisions and
limitations of Section 302 of the Code, gain or loss will be recognized with
respect to cash received in lieu of fractional shares. Gain recognition, if any,
will not be in excess of the amount of cash received. Tax consequences of the
Merger for individual taxpayers can vary, however, and all VHB shareholders are
urged to consult their own tax advisors to determine the effect of the Merger on
them under federal, state, local and foreign tax laws. For a further discussion
of the federal income tax consequences of the Merger, see "Description of the
Merger--Certain Federal Income Tax Consequences."
Accounting Treatment. It is intended that the Merger will be
accounted for as a pooling-of-interests for accounting and financial
reporting purposes. See "Description of the Merger--Accounting Treatment."
Certain Differences in Shareholders' Rights. At the Effective Time, VHB
shareholders, whose rights are governed by VHB's Articles of Incorporation and
Bylaws, will automatically become Holding Company shareholders, and their rights
as Holding Company shareholders will be determined by Holding Company's Articles
of Incorporation and Bylaws and by the VSCA.
<PAGE>
The rights of SNFC shareholders differ from the current rights of VHB
shareholders in certain respects. After the Merger, VHB shareholders will have
the same rights as SNFC shareholders since both will be shareholders in the
Holding Company. See "Effect of the Merger on Rights of Shareholders."
Conduct of Business Pending the Merger. Each party has agreed in the
Agreement to, among other things, operate its business only in the ordinary
course and to take no action that would adversely affect its or the other
party's ability to perform its covenants and agreements under the Agreement. In
addition, VHB and SNFC each has agreed not to take certain actions relating to
the operation of VHB pending consummation of the Merger, except as otherwise
permitted by the Agreement. See "Description of the Merger--Conduct of Business
Pending the Merger," for a description of these limitations on the conduct of
VHB's business.
Comparative Market Prices of Common Stock. Shares of SNFC Stock are
traded over-the-counter and quoted electronically through the NASDAQ Small Cap
Market System under the symbol "SEFC." The following table sets forth the
reported closing prices per share for SNFC Stock, the last reported trade price
(on March 24, 1998) for VHB Stock, and the equivalent per share prices (as
explained below) for VHB Stock on April 20, 1998, the last full business day
preceding the public announcement of the intention of the parties to effect the
Merger, and on July __, 1998, the latest practicable date prior to the mailing
of this Proxy Statement.
<TABLE>
<CAPTION>
Historical
----------
Equivalent Pro Forma
VHB SNFC Share Price of VHB Stock
Stock Stock
----- ----- -------------------------
<S> <C>
April 20, 1998 $30.00 $40.00 $46.00
May 28, 1998 $30.00 $40.50 $46.575
</TABLE>
The equivalent pro forma share price of a share of VHB Stock at each
specified date represents the closing sale price of a share of SNFC Stock on
such date multiplied by the Exchange Ratio of 1.15. See "Comparative Market
Prices and Dividends."
There can be no assurance as to what the market price of Holding
Company Stock will be if and when the Merger is consummated.
COMPARATIVE PER SHARE DATA
The following table sets forth: (a) selected comparative per share data
for each of SNFC and VHB on an historical basis; (b) unaudited pro forma
comparative per share data assuming that the Merger had been effective during
the periods presented for SNFC and VHB combined; and (c) VHB pro forma
equivalent amounts, using the Exchange Ratio of 1.15 shares of Holding Company
Stock for each share of VHB Stock. See "The Merger--Exchange Ratio." The
unaudited pro forma data has been prepared giving effect to the Merger as a
pooling-of-interests. For a description of the effect of pooling-of-interests
accounting on the Merger and the historical financial statements of SNFC, see
"The Merger--Accounting Treatment."
<PAGE>
The comparative per share data presented are based on and derived from,
and should be read in conjunction with, the historical consolidated financial
statements and the related notes thereto of each of SNFC and VHB incorporated by
reference herein. See "Documents Incorporated by Reference" and "--Selected
Financial Data."
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, December 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
Earnings per share, basic and assuming dilution:
SNFC historical $ .56 $ .50 $ 2.17 $ 1.91 $ 1.59
VHB historical .47 .46 1.96 1.84 2.29
SNFC and VHB pro forma (1) .52 .47 2.05 1.82 1.69
VHB pro forma equivalent (2) .60 .54 2.35 2.10 1.94
</TABLE>
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, December 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
Cash dividends declared per share:
SNFC historical $ .24 $ .22 $ .90 $ .79 $ .70
VHB historical - - .45 .45 .45
SNFC and VHB pro forma (3) .24 .22 .90 .79 .70
VHB pro forma equivalent (4) .28 .25 1.04 .91 .81
Book value per share:
SNFC historical $ 19.58 $ 17.93 $ 19.26 $ 17.78 $ 16.78
VHB historical 19.62 18.11 19.16 17.66 16.27
SNFC and VHB pro forma (5) 18.92 17.35 18.57 17.14 16.09
VHB pro forma equivalent (6) 21.76 19.96 21.36 19.71 18.50
</TABLE>
- -------------------------------
(1) The pro forma combined earnings per share of SNFC and VHB represents pro
forma combined net income applicable to holders of SNFC Stock, dividend by
pro forma combined average number of shares of SNFC Stock outstanding.
(2) The equivalent pro forma earnings per share of VHB Stock represent pro
forma combined income per share of SNFC Stock multiplied by the exchange
ratio.
(3) The pro forma cash dividends paid per share of SNFC Stock represent pro
forma combined cash dividends paid on common stock outstanding, divided by
pro forma combined average number of shares SNFC Stock outstanding, rounded
to the nearest cent.
(4) The VHB pro forma equivalent cash dividends paid per share represent pro
forma combined per share of SNFC Stock amounts multiplied by the Exchange
Ratio, rounded to the nearest cent. The current annualized dividend rate
per share for SNFC Stock, based on the most recently declared quarterly
dividend rate of $.24 per share paid on May 29, 1998, would be $.96. On an
equivalent pro forma basis, such current annualized SNFC dividends are
dependent on their respective earnings and financial conditions, government
regulations and policies and other factors.
(5) The pro forma combined book value per share of SNFC and VHB Stock amounts
represent the sum of the pro form combined stockholders' equity amounts,
divided by pro forma combined period-end number of shares of SNFC Stock
outstanding.
(6) The equivalent pro forma book value per share of VHB Stock represent the
pro forma combined book value per share of SNFC Stock amounts multiplied
times the exchange ratio.
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial information for each of the
annual periods presented has been derived from historical consolidated financial
statements of SNFC and VHB, respectively, and should be read in conjunction with
such historical financial statements and the notes thereto, which are either
incorporated herein by reference or included herein the selected historical
financial data for SNFC for the three months ended March 31, 1997 and 1996 have
been derived from SNFC's unaudited Quarterly Report on Form 10-Q previously
filed with the Commission and internal records. The selected historical
financial data for VHB for such periods have been derived from VHB's unaudited
financial statements and internal records. Certain information has been
annualized where appropriate. See "Available Information" and "Documents
Incorporated by Reference."
SNFC Selected Historical financial data
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, December 31,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Summary of Operations
Interest income $ 4,093 $ 3,665 $ 15,733 $ 14,501 $ 13,215 $ 12,378 $ 12,464
Interest expense 1,795 1,649 6,884 6,670 6,436 5,676 6,214
--------- ------- --------- --------- --------- --------- ----------
Net interest income 2,298 2,016 8,849 7,831 6,779 6,702 6,250
Provision for loan and lease
losses 75 19 125 - - - -
--------- ------- --------- ---------- ---------- --------- ---------
Net interest income after
provision for loan and
lease losses 2,223 1,997 8,724 7,831 6,779 6,702 6,250
Noninterest income 488 331 1,402 1,140 1,071 914 1,008
Noninterest expense 1,540 1,297 5,557 5,077 4,574 4,574 4,334
--------- ------- --------- --------- ---------- ---------- ---------
Income before income taxes 1,171 1,031 4,569 3,894 3,276 3,042 2,924
Provision for income taxes 331 290 1,324 1,035 894 793 770
----------- ------- --------- --------- ---------- --------- ---------
Net income $ 840 $ 741 $ 3,245 $ 2,859 $ 2,382 $ 2,249 $ 2,154
========= ======== ========= ========= ========= ========= =========
Per Share Data
Earnings $ .56 $ 50 $ 2.17 $ 1.91 $ 1.59 $ 1.50 $ 1.43
Cash dividends declared .24 .22 .90 .79 .70 .68 0.66
Book value 19.58 17.93 19.26 17.78 16.78 14.75 15.09
Average Balance Sheets
Securities at carrying value $ 74,983 $ 78,660 $ 78,150 $ 83,186 $ 85,416 $ 92,407 $ 77,408
Loans 129,302 109,974 118,756 102,747 89,251 78,179 79,819
Other assets 19,038 15,692 16,091 17,345 19,329 23,196 31,047
--------- --------- --------- --------- --------- --------- --------
Total Assets 223,323 204,326 212,997 203,278 193,996 193,782 188,274
========= ========= ========= ========= ========= ========= ========
Deposits 187,548 172,166 179,114 171,179 163,671 165,883 162,260
Other liabilities 6,575 5,696 6,548 5,275 5,074 3,329 1,514
Long-term debt - - - 1,289 1,836 2,136 2,435
Stockholders' equity 29,200 26,464 27,335 25,535 23,415 22,434 22,065
--------- -------- --------- -------- --------- --------- --------
Total liabilities and
stockholders' equity 223,323 204,326 212,997 203,278 193,966 193,782 188,274
========= ======== ========= ========= ========= ========= =======
Period End Balances
Total assets $ 227,716 $207,316 $ 222,070 $ 207,474 $ 195,917 $ 193,655 $ 191,099
Deposits 192,511 174,740 184,605 175,037 164,118 161,128 164,068
Long-term debt - - - - 1,375 1,975 2,275
Stockholders' equity 29,421 26,723 28,895 26,575 25,217 22,154 22,670
Selected Ratios Rate of return on:
Average total assets 1.50% 1.45% 1.52% 1.41% 1.23% 1.16% 1.15%
Average common
stockholders' equity 11.51% 11.09% 11.87% 11.20% 10.17% 10.02% 9.76%
Dividend payout 42.91% 44.25% 41.41% 41.45% 44.15% 45.43% 46.01%
Average equity to average
assets 13.08% 12.95% 12.83% 12.56% 12.07% 11.58% 11.72%
</TABLE>
<PAGE>
VHB Selected Historical Financial Data
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, December 31,
-------------------------- -------------------------------------
1998 1997 1997 1996 1995
---- ----
(Dollars in thousands, except per share data)
<S> <C>
Summary of Operations
Interest income $ 1,910 $ 1,812 $ 7,624 $ 7,218 $ 6,636
Interest expense 952 877 3,630 3,552 2,958
-------- -------- --------- --------- ---------
Net interest income 958 935 3,994 3,666 3,678
Provision for loan and lease
losses 60 70 366 490 341
-------- -------- --------- --------- ---------
Net interest income after
provision for loan and lease
losses 898 865 3,628 3,176 3,337
Noninterest income 79 85 314 268 282
Noninterest expense 657 628 2,600 2,179 2,094
-------- -------- --------- --------- ---------
Income before income taxes 320 322 1,342 1,265 1,525
Provision for income taxes 104 110 436 414 521
-------- -------- --------- --------- ---------
Net income $ 216 $ 212 $ 906 $ 851 $ 1,004
======== ======== ========= ========= =========
Per Share Data
Earnings $ .47 $ .46 $ 1.96 $ 1.84 $ 2.29
Cash dividends declared .45 .45 .45
- -
Book value 19.62 18.11 19.16 17.66 16.27
Average Balance Sheets
Securities at carrying value $ 20,397 $ 20,157 $ 19,238 $ 17,206 $ 12,755
Loans and leases 60,758 56,448 58,913 54,503 51,182
Other assets 13,900 9,934 11,683 10,920 8,236
-------- -------- --------- --------- ---------
Total Assets 95,055 86,539 89,834 82,629 72,173
======== ======== ========= ========= =========
Deposits 85,172 77,514 80,354 73,916 64,581
Other liabilities 875 706 831 692 601
Long-term debt - - - - -
Stockholders' equity 9,008 8,319 8,649 8,021 6,991
-------- -------- --------- --------- ----------
Total liabilities and
stockholders' equity 95,055 86,539 89,834 82,629 72,173
======== ======== ========= ========= ==========
Period End Balances
Total assets $ 100,071 $ 88,445 $ 93,740 $ 87,180 $ 78,500
Deposits 89,727 79,254 83,982 78,196 70,229
Long-term debt - - - - -
Stockholders' equity 9,105 8,404 8,890 8,192 7,551
Selected Ratios
Rate of return on:
Average total assets 0.91% 0.98% 1.01% 1.03% 1.39%
Average common
stockholders' equity 9.59% 10.19% 10.48% 10.61% 14.36%
Dividend payout - - 22.96% 24.46% 19.65%
Average equity to average
assets 9.48% 9.61% 9.64% 9.71% 9.69%
</TABLE>
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following Pro Forma Combined Financial Information and explanatory
notes are presented to show the impact of the Merger on SNFC's historical
financial position and results of operations. The Merger is reflected in the Pro
Forma Combined Financial Information under the pooling-of-interests method of
accounting.
The Pro Forma Combined Balance Sheets presented assume that the Merger
was consummated on the dates indicated, and the Pro Forma Combined Income
Statements assume that the Merger was consummated at the beginning of each
period presented.
The pro forma earnings are not necessarily indicative of the results of
operations had the Merger occurred at the beginning of the periods presented,
nor are they necessarily indicative of the results of future operations.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(In thousands)
Pro Forma Pro Forma
SNFC VHB Adjustments Combined
--------------- --------------- --------------- -----------------
<S> <C>
Assets
Cash and due from banks $ 6,924 $ 2,656 $ $ 9,580
Federal funds sold 3,628 11,144 14,772
Securities 78,877 20,041 98,918
Loans, net 130,330 61,165 191,495
Premises and equipment, net 5,477 2,976 8,453
Interest receivable 1,527 671 2,198
Other real estate owned - 790 790
Other assets 953 628 1,581
----------- ---------- ------------ ----------
Total Assets $ 227,716 $ 100,071 - $ 327,787
=========== ========== ============ ==========
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 24,982 $ 14,159 $ $ 39,141
Savings and interest-bearing deposits 75,910 20,894 96,804
Time deposits 91,619 54,674 146,293
----------- ---------- ----------- ---------
Total deposits 192,511 89,727 - 282,238
Federal funds purchased and securities
sold under agreement to repurchase 1,242 - 1,242
Short-term borrowings 3,263 - 3,263
Interest payable 815 353 1,168
Other liabilities 464 886 1,350
----------- ---------- ------------ ---------
Total Liabilities 198,295 90,966 - 289,261
----------- ---------- ------------ ---------
Stockholders' Equity
Preferred stock - - -
Common stock 3,757 2,320 (986) 5,091
Capital surplus 1,379 5,173 986 7,538
Retained earnings 24,210 1,612 25,822
Accumulated other comprehensive income 75 - 75
----------- ---------- ------------ ---------
Total Stockholders' Equity 29,421 9,105 - 38,526
----------- ---------- ------------ ---------
Total Liabilities and
Stockholders' Equity $ 227,716 $ 100,071 $ - $ 327,787
=========== ========== ============ =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(In thousands)
Pro Forma Pro Forma
SNFC VHB Adjustments Combined
------------- ------------- ----------------- -------------------
<S> <C>
Assets
Cash and due from banks $ 6,546 $ 3,916 $ $ 10,462
Federal funds sold 475 4,036 4,511
Securities 78,055 21,041 99,096
Loans, net 129,352 60,025 189,377
Premises and equipment, net 4,988 2,824 7,812
Interest receivable 1,730 808 2,538
Other real estate owned - 460 -
Other assets 924 630 1,554
------------- ------------- ----------------- -------------
Total Assets $ 222,070 $ 93,740 $ - 315,810
============= ============= ================= =============
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 24,499 $ 14,141 $ $ 38,640
Savings and interest-bearing deposits 72,833 16,759 89,592
Time deposits 87,273 53,082 140,355
------------- ------------- ----------------- -------------
Total deposits 184,605 83,982 - 268,587
Federal funds purchased and securities
sold under agreement to repurchase 3,301 - 3,301
Short-term borrowings 3,838 - 3,838
Interest payable 754 350 1,104
Other liabilities 677 518 1,195
------------- ------------- ----------------- -------------
Total Liabilities 193,175 84,850 - 278,025
------------- ------------- ----------------- -------------
Stockholders' Equity
Preferred stock - - -
Common stock 3,751 2,321 (986) 5,086
Capital surplus 1,309 5,173 986 7,468
Retained earnings 23,730 1,396 25,126
Accumulated other comprehensive income 105 - 105
------------- ------------- ----------------- -------------
Total Stockholders' Equity 28,895 8,890 - 37,785
------------- ------------- ----------------- --------------
Total Liabilities and Stockholders' Equity $ 222,070 $ 93,740 $ - $ 315,810
============= ============= ================= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (1) (2)
(In thousands, except per share data)
Pro forma Pro forma
SFNC VHB Adjustments Combined
------------ ------------- ----------------------------
<S> <C>
Interest Income
Interest and fees on loans $ 2,900 $ 1,524 $ $ 4,424
Interest and dividends on securities 1,111 301 1,412
Interest on federal funds sold 82 85 167
Interest on deposits in banks - - -
------------ ------------- ------------ --------------
Total interest income 4,093 1,910 - 6,003
------------ ------------- ------------ --------------
Interest Expense
Interest on deposits 1,738 952 2,690
Interest on federal funds purchased 24 - 24
Interest on short-term borrowings 33 - 33
------------ ------------- ------------ --------------
Total interest expense 1,795 952 - 2,747
------------ ------------- ------------ --------------
Net interest income 2,298 958 3,256
-
Provision for loan losses 75 60 135
------------ ------------- ------------ --------------
Net interest income after provision for
loan losses 2,223 898 - 3,121
Noninterest Income
Service charges on deposit accounts 184 76 260
Fees for trust services 120 - 120
Mortgage banking fees 111 - 111
Investment services fee income 37 - 37
Other operating income 36 3 39
Gains (losses) on sales of securities
available for sale - - -
------------ ------------- ------------ --------------
Total noninterest income 488 79 - 567
------------ ------------- ------------ --------------
Noninterest Expense
Salaries and employee benefits 855 377 1,232
Net occupancy expense 90 73 163
Supplies and equipment expense 239 49 288
Capital stock tax 44 11 55
Professional services 54 9 63
Marketing 37 12 49
Other operating expenses 221 126 347
------------ ------------- ------------ --------------
Total noninterest expense 1,540 657 - 2,197
------------ ------------- ------------ --------------
Income before income taxes 1,171 320 - 1,491
Income tax expense 331 104 435
------------ ------------- ------------ --------------
Net Income $ 840 $ 216 $ $ 1,056
-
============ ============= ============ ==============
Earnings per Share, basic and
assuming dilution $ .56 $ .47 $ $ .52
-
============ ============= ============ ==============
Average shares outstanding 1,501,340 464,101 - 2,035,056
============ ============= ============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (1) (2)
(In thousands, except per share data)
Pro forma Pro forma
SFNC VHB Adjustments Combined
------------ ------------- --------------------------------
<S> <C>
Interest Income
Interest and fees on loans $ 2,432 $ 1,465 $ $ 3,897
Interest and dividends on securities 1,174 298 1,472
Interest on federal funds sold 46 49 95
Interest on deposits in banks 13 - 13
------------ ------------- ------------ ----------------
Total interest income 3,665 1,812 - 5,477
------------ ------------- ------------ ----------------
Interest Expense
Interest on deposits 1,601 877 2,478
Interest on federal funds purchased - - -
Interest on short-term borrowings 48 - 48
------------ ------------- ------------ ----------------
Total interest expense 1,649 877 - 2,526
------------ ------------- ------------ ----------------
Net interest income 2,016 935 - 2,951
Provision for loan losses 19 70 89
------------ ------------- ------------ ----------------
Net interest income after provision for
loan losses 1,997 865 - 2,862
Noninterest Income
Service charges on deposit accounts 174 85 259
Fees for trust services 86 - 86
Mortgage banking fees 37 - 37
Investment services fee income 4 - 4
Other operating income 29 - 29
Gains (losses) on sales of securities
available for sale 1 - 1
------------ ------------- ------------ ----------------
Total noninterest income 331 85 - 416
------------ ------------- ------------ ----------------
Noninterest Expense
Salaries and employee benefits 731 363 1,094
Net occupancy expense 82 57 139
Supplies and equipment expense 196 43 239
Capital stock tax 47 17 64
Professional services 53 18 71
Marketing 27 14 41
Other operating expenses 161 116 277
------------ ------------- ------------ ----------------
Total noninterest expense 1,297 628 - 1,925
------------ ------------- ------------ ----------------
Income before income taxes 1,031 322 - 1,353
Income tax expense 290 110 400
------------ ------------- ------------ ----------------
Net Income $ 741 $ 212 $ - $ 953
============ ============= ============ ================
Earnings per Share, basic and
assuming dilution $ .50 $ .46 $ - $ .47
============ ============= ============ ================
Average shares outstanding 1,492,667 464,101 - 2,026,383
============ ============= ============ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997 (1) (2)
(In thousands, except per share data)
Pro forma Pro forma
SFNC VHB Adjustments Combined
------------ ------------ -------------------------------------
<S> <C>
Interest Income
Interest and fees on loans $ 10,802 $ 6,223 $ $ 17,025
Interest and dividends on securities 4,792 1,144 5,936
Interest on federal funds sold 139 257 396
------------ ------------ ------------ --------------
Total interest income 15,733 7,624 - 23,357
------------ ------------ ------------ --------------
Interest Expense
Interest on deposits 6,651 3,630 10,281
Interest on federal funds purchased 106 - 106
Interest on short-term borrowings 127 - 127
Interest on note payable
- - -
------------ ------------ ------------ --------------
Total interest expense 6,884 3,630 - 10,514
------------ ------------ ------------ --------------
Net interest income 8,849 3,994 - 12,843
Provision for loan losses 125 366 491
------------ ------------ ------------ --------------
Net interest income after provision for
loan losses 8,724 3,628 - 12,352
Noninterest Income
Service charges on deposit accounts 757 256 1,013
Fees for trust services 409 - 409
Investment services fee income 77 - 77
Other operating income 163 58 221
Gains (losses) on sales of securities
available for sale (4) - (4)
------------ ------------ ------------ --------------
Total noninterest income 1,402 314 - 1,716
------------ ------------ ------------ --------------
Noninterest Expense
Salaries and employee benefits 3,045 1,450 4,495
Net occupancy expense 324 263 587
Supplies and equipment expense 799 399 1,198
Capital stock tax 189 70 259
Professional services 180 78 258
Marketing 125 66 191
Other operating expenses 895 274 1,169
------------ ------------ ------------ --------------
Total noninterest expense 5,557 2,600 - 8,157
------------ ------------ ------------ --------------
Income before income taxes 4,569 1,342 - 5,911
Income tax expense 1,324 436 1,760
------------ ------------ ------------ --------------
Net Income $ 3,245 $ 906 $ - $ 4,151
============ ============ ============ ==============
Earnings per Share, basic and
assuming dilution $ 2.17 $ 1.96 $ - 2.05
============ ============ ============ ==============
Average shares outstanding 1,493,477 464,101 - 2,027,193
============ ============ ============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996 (1) (2)
(In thousands, except per share data)
Pro forma Pro forma
SFNC VHB Adjustments Combined
------------ ------------ --------------------------------
<S> <C>
Interest Income
Interest and fees on loans $ 9,344 $ 5,950 $ $ 15,294
Interest and dividends on securities 4,820 997 5,817
Interest on federal funds sold 282 271 553
Interest on deposits in banks 55 - 55
------------ ------------ ------------ -------------
Total interest income 14,501 7,218 - 21,719
------------ ------------ ------------ -------------
Interest Expense
Interest on deposits 6,379 3,552 9,931
Interest on federal funds purchased 61 - 61
Interest on short-term borrowings 108 - 108
Interest on note payable 122 - 122
------------ ------------ ------------ -------------
Total interest expense 6,670 3,552 - 10,222
------------ ------------ ------------ -------------
Net interest income 7,831 3,666 - 11,497
Provision for loan losses - 490 490
------------ ------------ ------------ -------------
Net interest income after provision for
loan losses 7,831 3,176 - 11,007
------------ ------------ ------------ -------------
Noninterest Income
Service charges on deposit accounts 640 248 888
Fees for trust services 371 - 371
Other operating income 161 20 181
Gains (losses) on sales of securities
available for sale (32) - (32)
------------ ------------ ------------ -------------
Total noninterest income 1,140 268 - 1,408
------------ ------------ ------------ -------------
Noninterest Expense
Salaries and employee benefits 2,869 1,245 4,114
Net occupancy expense 290 213 503
Supplies and equipment expense 714 174 888
Capital stock tax 163 57 220
Professional services 172 70 242
Marketing 90 45 135
Other operating expenses 779 375 1,154
------------ ------------ ------------ -------------
Total noninterest expense 5,077 2,179 - 7,256
------------ ------------ ------------ -------------
Income before income taxes 3,894 1,265 - 5,159
Income tax expense 1,035 414 1,449
------------ ------------ ------------ -------------
Net Income $ 2,859 $ 851 $ - $ 3,710
============ ============ ============ =============
Earnings per Share, basic and
assuming dilution $ 1.91 $ 1.84 $ - $ 1.82
============ ============ ============ =============
Average shares outstanding
1,500,867 464,101 - 2,034,583
============ ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995 (1) (2)
(In thousands, except per share data)
Pro forma Pro forma
SFNC VHB Adjustments Combined
------------ ------------ --------------------------------
<S> <C>
Interest Income
Interest and fees on loans $ 8,089 $ 5,742 $ $ 13,831
Interest and dividends on securities 4,621 656 5,277
Interest on federal funds sold 260 238 498
Interest on deposits in banks 245 - - 245
------------ ------------ ------------ ----------------
Total interest income 13,215 6,636 - 19,851
------------ ------------ ------------ ----------------
Interest Expense
Interest on deposits 6,075 2,958 9,033
Interest on federal funds purchased 78 - 78
Interest on short-term borrowings 114 - 114
Interest on note payable 169 - 169
------------ ------------ ------------ ----------------
Total interest expense 6,436 2,958 - 9,394
------------ ------------ ------------ ----------------
Net interest income 6,779 3,678 - 10,457
Provision for loan losses - 341 341
------------ ------------ ------------ ----------------
Net interest income after provision for
loan losses 6,779 3,337 - 10,116
------------ ------------ ------------ ----------------
Noninterest Income
Service charges on deposit accounts 539 312
851
Fees for trust services 352 -
352
Other operating income 180 (30) 150
Gains (losses) on sales of securities
available for sale - - -
------------ ------------ ------------ ----------------
Total noninterest income 1,071 282 - 1,353
------------ ------------ ------------ ----------------
Noninterest Expense
Salaries and employee benefits 2,561 1,201 3,762
Net occupancy expense 268 154 422
Supplies and equipment expense 672 162 834
Capital stock tax 128 54 182
Professional services 79 73 152
Marketing 93 78 171
Other operating expenses 773 372 1,145
------------ ------------ ------------ ----------------
Total noninterest expense 4,574 2,094 - 6,668
------------ ------------ ------------ ----------------
Income before income taxes 3,276 1,525 - 4,801
Income tax expense 894 521 1,415
------------ ------------ ------------ ----------------
Net Income $ 2,382 $ 1,004 $ - $ 3,386
============ ============ ============ ================
Earnings per Share, basic and
assuming dilution $ 1.59 $ 2.29 $ - $ 1.69
============ ============ ============ ================
Average shares outstanding 1,502,480 438,394 - 2,006,633
============ ============ ============ ================
</TABLE>
- ------------------
(1) It is assumed that the merger will be accounted for on a pooling of
interests accounting basis, and accordingly, the Unaudited Pro Forma
Combined Income Statements reflect the (i) Exchange Ratio, where
appropriate, and (ii) combining of the historical information of SNFC and
VHB.
(2) It is estimated that the merger related costs and restructuring charges,
net of tax, will approximate $300,000.
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
Holding Company Stock is traded over-the-counter and quoted
electronically through the NASDAQ Small Cap Market System under the symbol
"SEFC." Shares of VHB Stock are traded over the counter on an infrequent basis.
The following table sets forth, for the indicated periods, (i) the high and low
sales prices for SNFC Stock as reported on the NASDAQ Small Cap Market System,
(ii) the sales prices of VHB Stock, and (iii) the cash dividends declared per
share of SNFC Stock and VHB Stock for the periods indicated. The following
quotations for SNFC reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
SNFC
Price Range Cash Dividends
High Low Paid Per Share
---- --- --------------
<S> <C>
1996:
First Quarter $ 20.00 $ 18.50 $ .19
Second Quarter 20.00 19.00 .19
Third Quarter 20.00 20.00 .19
Fourth Quarter 21.00 20.00 .22
1997:
First Quarter 22.00 20.00 .22
Second Quarter 23.00 22.00 .22
Third Quarter 30.00 25.50 .22
Fourth Quarter 33.50 27.00 .24
1998:
First Quarter 35.50 32.75 .24
Second Quarter through June 17, 1998 46.50 34.00 .24
VHB (1)
Price Range Cash Dividends
High Low Paid Per Share
---- ---- -------------------
1996:
First Quarter $ 27.00 $ 23.00 $ --
Second Quarter 27.00 24.00 --
Third Quarter 24.00 24.00 --
Fourth Quarter 25.00 25.00 .45
1997:
First Quarter 27.00 26.00 --
Second Quarter 27.00 27.00 --
Third Quarter 27.00 27.00 --
Fourth Quarter 28.00 28.00 .45
1998:
First Quarter 30.00 28.00 --
Second Quarter through June 17, 1998 (2) 30.00 30.00 --
</TABLE>
- ------------------------
(1) There is no established trading market for VHB Stock. The prices shown are
based upon the sales price in actual transactions known to VHB. Only a
total of approximately 46,000 shares exchanged hands during 1997.
(2) The most recent trade occurred on March 24, 1998, at $30.00 per share.
<PAGE>
SPECIAL MEETING OF VHB SHAREHOLDERS
Date, Place, Time, and Purpose
This Proxy Statement is being furnished to the holders of VHB Stock in
connection with the solicitation by the VHB Board of Directors of proxies for
use at the VHB Special Meeting, at which VHB shareholders will be asked to vote
upon a proposal to approve the Agreement. The VHB Special Meeting will be held
at the Main Office, 4700 Harrison Road, Fredericksburg, Virginia, at 2:30 p.m.,
local time, on Wednesday, September 9, 1998. See "Description of the Merger."
Record Dates, Voting Rights, Required Votes, and Revocability of Proxies
The Board of Directors of VHB has fixed the close of business on July
__, 1998, as the VHB Record Date for determining holders of outstanding shares
of VHB Stock entitled to notice of and to vote at the VHB Special Meeting. Only
holders of VHB Stock of record on the books of VHB at the close of business on
the VHB Record Date are entitled to notice of and to vote at the VHB Special
Meeting. As of the VHB Record Date, 464,101 shares of VHB Stock were issued and
outstanding and held by approximately 1,000 holders of record.
Holders of VHB Stock are entitled to one vote on each matter to be
considered and voted upon at the VHB Special Meeting for each share of VHB Stock
held of record as of the VHB Record Date. To conduct business at the VHB Special
Meeting, a quorum must be present. A majority of the shares of VHB Stock issued
and outstanding and entitled to vote, present in person or represented by proxy,
is necessary to constitute a quorum. Votes cast by proxy or in person at the VHB
Special Meeting will be tabulated and counted for purposes of determining if a
quorum exists. Where proxies are marked as abstentions (or VHB stockholders
appear in person but abstain from voting), such abstentions will be treated as
shares that are present and entitled to vote for purposes of determining a
quorum. Broker non-voters will also be considered as present for purposes of
determining a quorum. Since approval of the Agreement requires approval of
two-thirds of the shares issued, outstanding and entitled to vote on the
Agreement, an abstention or a broker non-vote will have the same effect as a
vote against the Agreement and the Merger.
Shares of VHB Stock represented by properly executed proxies, if such
proxies are received in time to be voted at the VHB Special Meeting and not
revoked, will be voted in accordance with the instructions given on the proxies.
If no instructions are given, such proxies will be voted for approval of the
Agreement and in the discretion of the proxyholder as to any other matter which
may properly come before the VHB Special Meeting. If necessary, the proxy holder
may vote in favor of a proposal to adjourn the VHB Special Meeting in order to
permit further solicitation of proxies in the event there are not sufficient
votes to approve the proposal to approve the Agreement at the time of the VHB
Special Meeting.
Failure both to return the proxy card and to vote in person at the VHB
Special Meeting will have the effect of a vote cast against approval of the
Agreement.
A VHB shareholder who has given a proxy may revoke it at any time prior
to its exercise at the VHB Special Meeting by (i) giving written notice of
revocation to the Secretary of VHB, (ii) properly submitting to VHB a duly
executed proxy bearing a later date or (iii) attending the VHB Special Meeting
and voting in person. Attending the meeting, without more, will not revoke a
proxy. All written notices of revocation and other communications with respect
to revocation of proxies should be addressed as follows: Virginia Heartland
Bank, P.O. Box 7267, Fredericksburg, Virginia 22404-7267; Attention: Thomas F.
Williams, Jr., Secretary.
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Solicitation of Proxies
Proxies may be solicited by the directors, officers and employees of
VHB by mail, in person, or by telephone or telegraph. Such persons will receive
no additional compensation for such services. VHB may also retain the services
of a private firm to solicit proxies on behalf of VHB, for which VHB would pay a
fee. VHB may make arrangements with brokerage firms and other custodians,
nominees, and fiduciaries, if any, for the forwarding of solicitation materials
to the beneficial owners of VHB Stock held of record by such persons. Any such
brokers, custodians, nominees, and fiduciaries will be reimbursed for the
reasonable out-of-pocket expenses incurred by them for such services. All
expenses associated with the solicitation of proxies and other expenses
associated with the VHB Special Meeting, (other than expenses related to the
printing and mailing of this Proxy Statement, which will be shared by SNFC and
VHB as provided in the Agreement) will be borne by VHB. See "Description of the
Transaction--Expenses and Fees."
Recommendation
The Board of Directors of VHB has approved the Agreement and the Merger
contemplated thereby, believes that the proposal to approve the Agreement is in
the best interests of VHB and its shareholders, and recommends that the VHB
shareholders vote FOR approval of the proposal to approve the Agreement.
Directors and officers of VHB entitled to vote 81,895 shares of VHB
Stock, or approximately 17.7% of the issued and outstanding shares of VHB Stock,
have indicated that they intend to vote in favor of the Agreement. See "Support
Agreement."
SPECIAL MEETING OF SNFC SHAREHOLDERS
Date, Place, Time, and Purpose
This Proxy Statement is being provided to the holders of SNFC in
connection with the solicitation by the SNFC Board of Directors of proxies for
use at the SNFC Special Meeting, at which SNFC shareholders will be asked to
vote upon a proposal to approve the Agreement, which includes an amendment of
SNFC's Articles of Incorporation, the Merger and the issuance of shares of SNFC
Stock in connection with the Merger. The SNFC Special Meeting will be held at
the Holiday Inn, Highway 29 Business, Culpeper, Virginia, at 4:00 p.m., local
time, on Thursday, September 10, 1998. See "Description of the Merger."
Record Dates, Voting Rights, Required Votes, and Revocability of Proxies
The close of business on July __, 1998, has been fixed as the SNFC
Record Date for determining holders of outstanding shares of SNFC Stock entitled
to notice of and to vote at the SNFC Special Meeting. Only holders of SNFC Stock
of record on the books of SNFC at the close of business on the SNFC Record Date
are entitled to notice of and to vote at the SNFC Special Meeting. As of the
SNFC Record Date, 1,504,749 shares of SNFC Stock were issued and outstanding and
held by approximately 1,500 holders of record.
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Holders of SNFC Stock are entitled to one vote on each matter
considered and voted upon at the SNFC Special Meeting for each share of SNFC
Stock held of record as of the SNFC Record Date. To hold a vote on any proposal,
a quorum must be assembled, which is a majority of the shares of SNFC Stock
issued and outstanding and entitled to vote, present in person or represented by
proxy. In determining whether a quorum exists at the SNFC Special Meeting for
purposes of all matters to be voted on, all votes "for" or "against", as well as
all abstentions, with respect to the proposal receiving the most such votes,
will be counted. The vote required for the approval of the issuance of shares of
SNFC Stock in connection with the Merger is more than two-thirds of the shares
of SNFC entitled to be cast at the SNFC Special Meeting.
Shares of SNFC Stock represented by properly executed proxies, if such
proxies are received in time to be voted at the SNFC Special Meeting and not
revoked, will be voted in accordance with the instructions given on the proxies.
If no instructions are given, such proxies will be voted for approval of the
issuance of shares of SNFC Stock in connection with the Merger and, in the
discretion of the proxy holder, as to any other matter which may properly come
before the SNFC Special Meeting.
An SNFC shareholder who has given a proxy may revoke it at any time
prior to its exercise at the SNFC Special Meeting by (i) giving written
notice of revocation to the Secretary of SNFC, (ii) properly submitting to
SNFC a duly executed proxy bearing a later date or (iii) attending the SNFC
Special Meeting and voting in person. Attending the meeting, without more,
will not revoke a proxy. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: Second National Financial Corporation, P. O. Box 71, Culpeper,
Virginia 22701; Attention: Jeffrey W. Farrar, Secretary.
Solicitation of Proxies
Proxies may be solicited by the directors, officers and employees of
SNFC by mail, in person, or by telephone or telegraph. Such persons will receive
no additional compensation for such services. SNFC may make arrangements with
brokerage firms and other custodians, nominees, and fiduciaries, if any, for the
forwarding of solicitation materials to the beneficial owners of SNFC Stock held
of record by such persons. Any such brokers, custodians, nominees, and
fiduciaries will be reimbursed for the reasonable out-of-pocket expenses
incurred by them for such services. All expenses associated with the
solicitation of proxies and other expenses associated with the SNFC Special
Meeting (other than expenses related to the printing and mailing of this Proxy
Statement, which will be shared by SNFC and VHB as provided in the Agreement)
will be borne by SNFC. See "Description of the Transaction--Expenses and Fees."
Recommendation
The Board of Directors of SNFC has approved the Agreement and the
Merger contemplated thereby, the related issuance of shares of SNFC Stock and to
the Amendment to SNFC's Articles of Incorporation. The SNFC Board of Directors
believes that the proposal to approve the issuance of shares of SNFC Stock in
connection with the Merger is in the best interests of SNFC and its
shareholders, and recommends that the SNFC shareholders vote FOR approval of the
proposal to approve the Agreement, the Merger and the issuance of shares of SNFC
Stock in connection with the Merger.
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As of July __, 1998, the directors and executive officers of SNFC and
their affiliates were entitled to vote 96,570 shares of SNFC Stock, excluding
options, or approximately 6.4% of the issued and outstanding shares of SNFC
Stock. In addition, at July ___, 1998, the SBT Trust Department held, as trustee
for various trust accounts, approximately 93,109 shares, or 6.2%, of the then
outstanding shares of SNFC Stock.
DESCRIPTION OF THE MERGER
The following information describes the material terms of the Merger.
This summary description does not purport to be complete and is qualified in its
entirety by reference to the appendices hereto, including the Agreement, which
is attached as Appendix A to this proxy statement and is incorporated herein by
reference. All shareholders are urged to read the appendices in their entirety.
General
The Agreement provides for the affiliation of VHB with SNFC pursuant to
the merger of VHB with and into a Virginia chartered interim bank to be formed
as a wholly-owned subsidiary of SNFC. At the Effective Time, each share of VHB
Stock then issued and outstanding will be converted into and exchanged for 1.15
shares of Holding Company Stock.
No fractional shares of Holding Company Stock will be issued. Rather,
cash (without interest) will be paid in lieu of any fractional share interest to
which any VHB shareholder would be entitled upon consummation of the Merger, in
an amount equal to such fractional part of a share of Holding Company Stock
multiplied by the average of the closing prices of Holding Company Stock as
reported on the National Association of Securities Dealers Automated Quotation
System, Small Cap Market for trades reported during the ten (10) trading days
immediately preceding the Effective Time.
As of the VHB Record Date, VHB had 464,101 shares of VHB Stock issued
and outstanding. Assuming the Exchange Ratio of 1.15 shares of Holding Company
Stock for each share of VHB Stock, it is anticipated that upon consummation of
the Merger, SNFC would issue approximately 533,716 shares of Holding Company
Stock. Accordingly, SNFC would then have issued and outstanding approximately
2,038,465 shares of Holding Company Stock based on the number of shares of
Holding Company Stock issued and outstanding on the SNFC Record Date.
Background of and Reasons for the Merger
The Chairman of the Board and Chief Executive Officer of VHB and the
current and prior Chief Executive Officers of SNFC have discussed a possible
affiliation of SNFC and VHB, in general terms, from time to time beginning in
1995. The discussions held prior to 1998 did not lead to negotiations or
agreements regarding significant terms of a potential affiliation, and were
abandoned. In January 1998, the President and Chief Executive Officer of SNFC
arranged a meeting with the Chairman of the Board and Chief Executive Officer of
VHB, in which he suggested a possible merger of equals transaction between SNFC
and VHB. Such a potential affiliation was discussed by the VHB Board of
Directors in late January 1998. At that meeting, the Board reviewed materials
prepared by management and discussed the advantages and disadvantages, including
the possible effects on growth, financial performance, and shareholder value, of
a possible sale of control to a larger bank holding company, a possible merger
of equals with SNFC or another community banking organization, and continued
independent operation. At this meeting, the Board also discussed possible terms
for a merger of equals transaction with SNFC, including those discussed at the
meeting between the Chief Executive Officers The Board concluded that a merger
of equals could have significant advantages for VHB and its shareholders, in
that it had the potential to increase shareholder value, dividends, and share
liquidity; allow faster expansion of locations and banking services; provide a
larger lending limit; and produce possible merger efficiencies, while continuing
to allow VHB to operate as a community-focused bank. The Board also discussed
the favorable relationship between VHB and SNFC that had developed through their
joint investment in VHB Mortgage Company, and the Board's comfort with SNFC's
management and Board of Directors. The Board authorized the Chairman of the
Board and Chief Executive Officer and the President to gather additional
information regarding a possible affiliation with SNFC and to consult with
special legal counsel, Kennedy, Baris & Lundy, L.L.P. regarding the potential
affiliation.
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At their February 1998 meeting, the Board of Directors further
discussed the potential terms of a merger of equals, which had been discussed
with special legal counsel to VHB, a pro-forma financial analysis, and materials
prepared by management regarding the financial effects of such a transaction on
VHB and its shareholders, and directed the Chairman of the Board and Chief
Executive Officer and the President to continue discussions with SNFC. At a
Special meeting on March 2, 1998, special legal counsel discussed with the board
the legal, regulatory, and financial issues relating to the consideration of a
sale of control to a larger bank holding company, a merger of equals, and
continued independent operation; the process of developing the terms for a
possible affiliation; and the regulatory and securities processes that would be
followed in order to gain necessary approvals for a merger.
During the following weeks, discussions between officers of VHB and
SNFC continued, due diligence reviews of legal and financial materials were
conducted by each institution, and drafts of possible terms and of a definitive
agreement were exchanged, and a number of meetings between VHB and SNFC officers
was held. The discussions concerned the terms of a potential transaction,
including the exchange ratio; the corporate structure of the Holding Company;
terms regarding independent operation of the VHB and SBT in their respective
markets; regulatory and cost issues relating to the affiliation; composition of
the Boards of Directors of the Holding Company, SBT and VHB; Management of the
Holding Company and of SBT and VHB; employment contracts; the continuing
eligibility of VHB and SBT employees for benefits; and the Holding Company name,
among other things, and the financial condition and prospects of VHB and SNFC.
At its meeting of April 14, 1998, the Board of Directors of VHB met
with special legal counsel and representatives of Crestar Securities to discuss
the potential affiliation, the draft Agreement and related matters. At that
meeting, Crestar Securities presented, and discussed with the Board of Directors
and special legal counsel, an analysis of the potential affiliation with SNFC,
including illustrations of financial effects of the possible transaction on
shareholders of VHB and SNFC; a review of comparable transactions and exchange
ratios suggested by them; a review of the condition and prospects of SNFC and
the performance of its stock; and other financial analyses, and delivered a
preliminary opinion as to the fairness, from a financial point of view, of the
Exchange Ratio. At this meeting, the Board authorized the CEO and the President
to negotiate a final Agreement and related documents. Discussions and exchanges
of drafts of the Agreement, the Options, and other, related materials were
exchanged and discussed through Saturday, April 18, 1998, when the Agreement was
executed and delivered by the parties.
VHB Reasons for the Merger. The terms of the Agreement and the Merger
are the results of arms' length negotiations between officers of SNFC and VHB.
In the Agreement, SNFC and VHB state that the Board of Directors of each of them
believes that the transactions contemplated by the Agreement are in the best
interests of their respective shareholders, and the respective shareholder
values of SNFC and VHB each can be maximized over time through this affiliation.
The Boards of Directors of VHB and SNFC each state in the Agreement their belief
that the larger banking enterprise that will result from the Merger will be more
diversified, better positioned, and more competitive than either company alone;
will be able to provide a wider and improved array of financial services to
consumers and businesses; and will be better position to meet competitive
challenges.
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The VHB Board of Directors considered these and other factors in
approving the terms of the Merger, including information concerning the
financial condition, results of operations and prospects of SNFC, SBT and VHB;
the ability of the combined entity to compete in the relevant banking markets;
the market price of SNFC and VHB Stock; the anticipated tax-free nature of the
Merger to VHB and its shareholders for federal income tax purposes; the
financial terms of other business combinations in the banking industry; and
certain non-financial factors.
The VHB Board of Directors concluded that the Affiliation with SNFC
would be in the best interests of the VHB shareholders, and would further its
goal of enhancing shareholder value. Of particular significance to the VHB Board
of Directors in deciding to proceed with the Merger were the financial terms of
the Merger, including the Exchange Ratio and the history of cash dividends paid
by SNFC, the business strategy of the Holding Company to enhance its competitive
position by operating SBT and VHB as independently chartered banks, responsive
to their respective communities, with directors and officers familiar with the
needs of and opportunities in those communities, the belief of VHB in the
advantages that the markets served by SBT are complementary to those served by
VHB, the future prospects for the combined institution, financial and otherwise;
and other factors that the VHB Board of Directors believed could have a
favorable impact on financial performance and long-term shareholder value.
The VHB Board of Directors believes that each of VHB and SNFC currently
is well-managed and possesses management philosophies and a strategic focus that
are compatible with those of the other, and that each institution would
contribute complementary business strengths resulting in a well-diversified
combined institution. Both VHB and SBT are considered "well-capitalized" under
banking regulatory standards and the capitalization of the combined entity
should allow it to take advantage of future opportunities that otherwise might
not be available to either institution individually. The VHB Board of Directors
also believes that the Merger will enhance the ability of the combined
institution to compete effectively in the rapidly changing marketplace for
banking and financial services and to take advantage of opportunities for growth
and diversification that might not be otherwise available. In addition, VHB's
Board of Directors believes opportunities exist to reduce certain operating
costs subsequent to the Merger as a result of economies of scale and elimination
of certain duplicate functions.
There can be no assurance, however, that the anticipated reductions in
operating costs will be achieved, or that the other advantages and results
anticipated by the VHB Board of Directors in approving the Merger will be
achieved.
The additional material factors considered by the VHB Board of
Directors in approving the Agreement and the Merger were:
(i) the information presented to the directors by the management of VHB
concerning the business, operations, earnings, asset quality, management and
financial condition of SNFC, including the composition of the earning assets
portfolio of SNFC;
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(ii) the financial terms of the Merger, including the relationship of
the value of the consideration issuable in the Merger to the market value,
tangible book value, and earnings per share of SNFC Stock;
(iii) the financial terms of the Merger, including the treatment of the
Merger as a tax-free exchange of VHB Stock for Holding Company Stock for federal
income tax purposes;
(iv) the likelihood of the Merger's being approved by applicable
regulatory authorities without undue conditions or delay;
(v) the opportunity for reducing the noninterest expense of the
operations of the Holding Company and the ability of the operations of VHB and
SBT after the Effective Time to contribute to the earnings of the Holding
Company through their existing products and services;
(vi) the attractiveness of the SNFC franchise, the market position SNFC
in each of the markets in which it operates and the compatibility of the
franchise of VHB with the operations of SNFC in the Piedmont area of the
Virginia economy;
(vii) the compatibility of the community bank orientation of the
operations of VHB with that of SNFC; and
(viii) the fairness opinion rendered by Crestar Securities.
The VHB Board of Directors did not quantify or otherwise attempt to
assign relative or specific weights to the factors considered by the Board in
determining that the Merger is in the best interests of VHB shareholders.
Based upon the factors discussed above, including the presentations of
Crestar Securities discussed above, the VHB Board of Directors determined that
the transaction and the Agreement are in the best interests of VHB and its
shareholders
For a discussion of the ownership of VHB Stock by the Board of
Directors and executive officers of VHB, see "Information about VHB--Security
Ownership of Management."
VHB's BOARD OF DIRECTORS RECOMMENDS THAT VHB SHAREHOLDERS VOTE FOR
APPROVAL OF THE AGREEMENT.
SNFC Background. The Board of Directors of SNFC had within the past few
years developed and adopted a strategic plan to evaluate appropriate
opportunities to acquire or affiliate with other financial institutions. At the
February 12, 1998 Board of Directors meeting, Mr. Barham reported to the Board a
January 9, 1998 meeting with Mr. William B. Young, Chairman of the Board and
Chief Executive Officer of VHB. Mr. Barham discussed with the Board matters
discussed with Mr. Young at their January 9 meeting, including possible terms
for a merger of equals affiliation, which Mr. Barham also had discussed with
Mays & Valentine, L.L.P., counsel to SNFC prior to the February 12 Board of
Directors meeting. Approval was granted by the Board of Directors for Mr. Barham
to proceed with discussions with VHB regarding a possible affiliation. A project
team was named consisting of O.R. Barham, Jr., Taylor E. Gore and Jeffrey W.
Farrar. This team was assigned the task of working on the possible affiliation
between SNFC and VHB. In addition, The Carson Medlin Company ("Carson Medlin")
was retained as SNFC's financial adviser and to assist in the negotiation
process.
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At a special meeting of the SNFC Board on March 3, 1998, Carson Medlin
reviewed in detail material regarding the proposed merger between SNFC and VHB.
Items discussed included stock trading comparables, an estimate of the current
value of stock, and historical and projected data for both institutions. Also, a
list of comparable transactions was reviewed as well as a price range indicated
based on exchange ratios in those comparable transactions. Last, an assessment
of the financial impact on SNFC at various exchange rates was discussed in
detail.
Over the next several weeks, a number of meetings were held between VHB
and SNFC. At these meetings, numerous revisions to possible terms sheet were
discussed, and discussions continued regarding issues including the exchange
ratio, the structure of the holding company, regulatory and cost issues relating
to the affiliation, board membership, employment contracts, terms regarding
independent operation of the VHB and SBT in their respective markets, the
eligibility of VHB and SBT employees for benefits, and the holding company name,
among other things.
On April 17, 1998, another special meeting of the Board of Directors
was convened to review and approve the proposed definitive agreement between VHB
and SNFC. This meeting was attended by representatives of Mays & Valentine,
L.L.P. and The Carson Medlin Company. At the conclusion of the meeting, the
definitive agreement was approved and the project team was authorized to resolve
any outstanding non-material issues and execute the Agreement on the advice of
its advisors. The definitive agreement was executed the following day, April 18,
1998.
SNFC Reasons for the Merger. The SNFC Board of Directors, as part of
its long-range strategic plan to increase shareholder value, has sought growth
in SNFC's business by expanding its geographic markets and increasing presence
in its existing markets. SNFC's Board of Directors believes that the affiliation
with profitable, well-managed financial institution is an effective means of
expanding SNFC's markets and market presence. The SNFC Board of Directors has
concluded that the affiliation with VHB would be consistent with SNFC's
strategic plan because VHB is profitable and adds complementary geographic
markets. VHB currently operates three banking offices in the city of
Fredericksburg and Spotsylvania County, Virginia, which is contiguous to
Culpeper County, Virginia, in which SBT currently operates six banking offices.
In addition, SNFC's Board of Directors believes opportunities exist to produce
incremental revenues through cross-selling of productes and services and reduce
certain operating costs subsequent to the Merger as a result of economies of
scale and elimination of certain duplicate functions. There can be no assurance,
however, that such increases in revenues or reductions in operating costs will
be achieved, or that the results anticipated by the SNFC Board of Directors in
approving the Merger will be achieved.
The additional material factors considered by the SNFC Board of
Directors in approving the Agreement and the Merger were:
(i) the information presented to the directors by the management of
SNFC concerning the business, operations, earnings, asset quality, management
and financial condition of VHB, including the composition of the earning assets
portfolio of VHB;
(ii) the financial terms of the Merger, including the relationship of
the value of the consideration issuable in the Merger to the market value,
tangible book value, and earnings per share of VHB Stock;
(iii) the financial terms of the Merger, including the treatment of the
Merger as a tax-free exchange of VHB Stock for Holding Company Stock for federal
income tax purposes;
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(iv) the likelihood of the Merger's being approved by applicable
regulatory authorities without undue conditions or delay;
(v) the opportunity for reducing the noninterest expense of the
operations of the combined entity and the ability of the operations of VHB and
SBT after the Effective Time to contribute to the earnings of the Holding
Company through their existing products and services;
(vi) the attractiveness of the VHB franchise, the market position of
VHB in each of the markets in which it operates and the compatibility of the
franchise of VHB with the operations of SNFC in the Piedmont area of the
Virginia economy;
(vii) the compatibility of the community bank orientation of the
operations of VHB with that of SNFC; and
(viii) the fairness opinion rendered by Carson Medlin.
The SNFC Board of Directors did not quantify or otherwise attempt to
assign relative or specific weights to the factors considered by the Board in
determining that the Merger is in the best interests of SNFC shareholders.
Based upon the factors discussed above, including the presentations of
Carson Medlin discussed above, the SNFC Board of Directors determined that the
transaction and the Agreement are in the best interests of SNFC and its
shareholders.
SNFC's Board of Directors recommends that SNFC shareholders vote FOR
approval of the issuance of shares of Holding Company Stock in connection with
the Merger.
Opinion of VHB's Financial Advisor
General. The VHB Board of Directors retained Crestar Securities to act
as its financial advisor in connection with the Merger and to render an opinion
as to the fairness, from a financial point of view, of the Exchange Ratio to the
holders of VHB Stock. Crestar Securities is an investment banking and brokerage
firm headquartered in Richmond, Virginia, that provides services to
corporations, financial institutions and state and local governments. The
Investment Banking Division of Crestar Securities provides services for
community banks in the Mid-Atlantic region and has extensive experience in the
Virginia banking market. As part of its investment banking business, Crestar
Securities is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions and for other purposes.
Crestar Securities was selected by the Board of Directors of VHB based upon its
experience and expertise in providing valuation, merger and acquisition, and
advisory services to banks and bank holding companies. No limitations were
imposed by the VHB Board of Directors upon Crestar Securities with respect to
the investigations made or procedures followed by it in arriving at its opinion.
Representatives of Crestar Securities attended the meeting of the VHB
Board of Directors held on April 14, 1998, at which the Agreement was considered
and approved. At that meeting, Crestar Securities delivered its oral opinion to
the VHB Board of Directors that as of such date, the Exchange Ratio, which is
used to calculate the consideration to be received by VHB shareholders in the
form of Holding Company Stock, was fair to the VHB shareholders from a financial
point of view. Crestar Securities has delivered a written opinion to the VHB
Board of Directors dated as of the date of this Proxy Statement to the effect
that, as of such date, the Exchange Ratio is fair, from a financial point of
view, to the holders of VHB Stock.
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The text of the opinion of Crestar Securities which sets forth
assumptions made and matters considered, is attached hereto as Appendix E to
this Proxy Statement. VHB shareholders are urged to read this opinion in its
entirety. The opinion of Crestar Securities is directed only to the fairness,
from a financial point of view, of the Exchange Ratio to the holders of VHB
Stock and does not constitute a recommendation to any shareholder as to how such
shareholder should vote at the Special Meeting. The summary of the opinion of
Crestar Securities set forth in this Proxy Statement is qualified in its
entirety by reference to the text of such opinion.
The opinion of Crestar Securities is just one of the many factors taken
into consideration by the VHB Board of Directors in determining to approve the
Agreement. The opinion of Crestar Securities does not address the relative
merits of the Merger compared to any alternative business strategies that might
exist for VHB, nor does it address the effect of any other business combination
in which VHB might engage.
In arriving at its opinion, Crestar Securities reviewed and analyzed:
(i) the Agreement (ii) the Form S-4 Registration Statement filed with the
Securities and Exchange Commission in connection with the Merger; (iii) VHB's
annual report to shareholders, annual reports on Form 10-KSB, and annual Proxy
Statements to shareholders for the three years ended December 31, 1997; (iv)
VHB's unaudited financial statements for the three months ended March 31, 1998
and 1997; (v) other information related to VHB prepared by VHB's management,
including, but not limited to, information regarding asset quality, reserve
adequacy, margin analysis, interest rate sensitivity, internal controls, loan
policies, regulatory matters and legal matters; (vi) SNFC's annual reports to
shareholders and audited financial statements for the three years ended December
31, 1997; (vii) SNFC's annual report on Form 10-K for the year ended December
31, 1997; (viii) SNFC's unaudited financial statements for the three months
ended March 31, 1998 and 1997; (ix) other information related to SNFC prepared
by SNFC's management, including, but not limited to, information regarding asset
quality, reserve adequacy, margin analysis, interest rate sensitivity, internal
controls, loan policies, regulatory matters and legal matters; (x) information
regarding the trading market for the common stocks of VHB and SNFC and the price
range within which the respective stocks have traded; (xi) the relationship of
prices paid to relevant financial data such as net worth, loans, deposits and
earnings in certain bank and bank holding company mergers and acquisitions in
recent years; and (xii) such other financial studies, analyses, inquiries, and
other matters as Crestar Securities deemed necessary. Crestar Securities has
discussed with members of VHB's and SNFC's senior management the background of
the Merger, the reasons and basis for the Merger, and the business and future
prospects of VHB and SNFC individually and as a combined entity. Crestar
Securities also took into account its assessment of general economic, market and
financial conditions and its expertise in other transactions, as well as its
experience in securities valuations and knowledge of the commercial banking
industry generally.
<PAGE>
In connection with its review, Crestar Securities relied upon and
assumed, without independent verification, the accuracy and completeness of the
financial and other information regarding VHB and SNFC provided to Crestar
Securities by both companies and their representatives. Crestar Securities also
did not independently verify, and has relied on and assumed, that the allowances
for possible loan losses set forth in the balance sheets of VHB and SNFC at
March 31, 1998 were adequate and complied fully with applicable law, regulatory
policy and sound banking practice as of the date of such financial statements.
Crestar Securities was not retained to conduct a physical inspection of any of
the properties or facilities of VHB and SNFC nor did Crestar Securities make any
independent evaluation or appraisal of VHB's and SNFC's assets or liabilities.
Crestar Securities also assumed that the Merger in all respects is, and will be,
in compliance with all laws and regulations that are applicable to VHB and SNFC.
In rendering its opinion, Crestar Securities assumed that, in the
course of obtaining the necessary regulatory approvals for the Merger and in the
preparation of this Proxy Statement, no conditions will be imposed that will
have a material adverse effect on the contemplated benefits of the Merger to
either VHB or, on a pro forma basis, to the Holding Company.
In arriving at its opinion, Crestar Securities performed a variety of
financial analyses. Crestar Securities believes that its analyses must be
considered as a whole and that consideration of portions of such analyses and
the factors considered therein, without considering all factors and analyses,
could create an incomplete view of the analyses and the process underlying the
opinion of Crestar Securities. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis and summary description.
In its analyses, Crestar Securities made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond VHB's or SNFC's control. Any estimates
contained in Crestar Securities' analyses are not necessarily indicative of
future results or values, which may be significantly more or less favorable than
such estimates. Estimates of values of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or their securities may
actually be sold.
The following is a brief summary of the analyses and procedures
performed by Crestar Securities in the course of arriving at its opinion:
Contribution Analysis. Crestar Securities analyzed the contribution as
of December 31, 1997 of VHB to, among other things, the total assets, total
equity and net income of the Holding Company on a pro forma basis and determined
VHB's contribution to be 29.7%, 23.5%, and 21.8%, respectively. This analysis
did not include any assumed cost savings from the Merger. Upon consummation of
the Merger and after giving effect to the Exchange Ratio, VHB's existing
shareholders would own approximately 26.2% of Holding Company Stock.
The Merger provides for the exchange of each outstanding share of VHB
Stock for 1.15 shares of Holding Company Stock. Crestar analyzed the changes in
the amount of earnings, book value, and dividends represented by one share of
VHB Stock before the Merger and 1.15 shares of Holding Company Stock after the
Merger. This analysis indicated that, based on internal estimates of VHB and
SNFC and assuming annual cost savings of $100,000 resulting from the merger,
current holders of VHB Stock would realize a 10.6% increase in per share
earnings, an 9.4% increase in book value per share, and a 87.8% increase in
dividends per share in 1998 from the Merger on a pro forma basis.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, Crestar Securities, using publicly available information, reviewed and
compared selected financial information of VHB, SNFC, and the Holding Company,
on a pro forma basis, relative to a group of fifteen Virginia-based financial
institutions (the "Peer Group") with total assets ranging from $55 million to
$595 million. These financial institutions included American National
Bankshares, C&F Financial Corporation, Central Virginia Bankshares, Community
Bankshares Inc., F&M Bank Corporation, FNB Corporation, Guaranty Financial
Corporation, James River Bankshares, Inc., Mid-Atlantic Community Bank, Marathon
Financial Corporation, National Bankshares, Inc., Resource Bank, Security Bank
Corporation, Southern Financial Bankcorp and Union Bankshares Corporation.
Financial data reviewed and compared by Crestar Securities included, among other
things, return on assets, return on equity, and equity to assets. Historical
financial information used in computing the preceding ratios was as of December
31, 1997. The ratio of equity-to-assets, the return on assets, and the return on
equity was: 11.3%, 1.5% and 12.9%, respectively, for the Peer Group; 9.5%, 1.0%
and 10.6%, respectively, for VHB; 13.0%, 1.5%, and 11.2%, respectively, for
SNFC; and 12.0%, 1.3% and 11.0%, respectively, for the Holding Company, on a pro
forma basis.
<PAGE>
Crestar Securities also analyzed the relative performance and value of
VHB and SNFC by comparing certain market trading statistics for VHB and SNFC
with the Peer Group. The market trading information used in the valuation
analysis was as of April 13, 1998 and included market price to book value per
share and market price to trailing twelve months earnings per share. The
multiple of price to stated book value per share and price to trailing twelve
months earnings per share was: 2.1x and 18.6x, respectively, for the Peer Group;
1.6x and 15.4x, respectively, for VHB; and 1.8x and 16.2x, respectively, for
SNFC.
Analysis of Comparable Acquisition Transactions. Crestar Securities
reviewed all known merger and acquisition transactions, completed and pending,
since the beginning of 1995, of banks with total assets ranging from $100
million to $300 million. Crestar Securities determined the median acquisition
price paid to book value, latest twelve months earnings, assets, and deposits to
be 2.1x, 17.7x, 18.9%, and 21.3%, respectively, for all such transactions
nationally. For transactions completed or pending in Virginia, North Carolina,
West Virginia, the District of Columbia, Maryland, and Pennsylvania, Crestar
Securities determined the median acquisition price paid to book value, latest
twelve months earnings, assets, and deposits to be 2.4x, 22.1x, 23.0%, and
27.9%, respectively. Equally weighting the median multiples of price to stated
book, latest twelve months earnings, assets and deposits and applying these to
VHB, Crestar Securities calculated the implied per share merger value of VHB
Stock to be $34.57 to $50.40.
Present Value Analysis. Using a discounted cash flow analysis, Crestar
Securities determined a range of present values per share of VHB Stock assuming
VHB continued to operate as a stand alone entity. This range was determined by
adding (i) the present value of the future dividend stream that VHB could
produce over a five-year period, and (ii) the present value of a share of VHB
Stock at the end of five years. To determine a projected dividend stream,
Crestar Securities assumed the company performed in accordance with the earnings
forecasts of management and a dividend payout equal to 40% of projected
earnings. The value of VHB at the end of five years was calculated by applying
price/earnings multiples to VHB's projected earnings in the fifth year. The
range of price/earnings multiples considered was 14.0x to 18.0x. Crestar
Securities calculated the implied multiples of book value in the fifth year to
be 1.9x to 2.5x. The discount rates used ranged from 12.0% to 16.0%, which
reflect different assumptions regarding the required rates of return of holders
and prospective buyers of VHB Stock. On the basis of such varying assumptions,
Crestar Securities calculated a present value of VHB Stock on a stand-alone
basis ranging from $29.60 to $43.72.
No company or transaction used as a comparison in the above analyses is
identical to VHB or SNFC or the Merger. Accordingly, evaluating the results of
the foregoing necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of VHB and
SNFC and other factors that could affect the public trading value of the
companies used for comparative purposes in the above analyses.
<PAGE>
In connection with its written opinion as of the date of this Proxy
Statement, Crestar Securities confirmed the appropriateness of its reliance on
the analyses used to render its oral opinion to the VHB Board of Directors on
April 14, 1998, by performing procedures to update certain of such analyses and
by reviewing the assumptions on which such analyses were based and the factors
considered in connection therewith.
The opinion of Crestar Securities was based solely upon the information
available to it and the economic, market and other circumstances as they existed
as of the date of such opinion. Events occurring after that date, could
materially affect the assumptions and conclusions contained in its opinion.
Crestar Securities has not undertaken to reaffirm or revise its opinion or
otherwise comment upon any events occurring after the date thereof.
Pursuant to an engagement letter dated April 8, 1998 and in exchange
for its services, VHB has agreed to pay Crestar Securities an advisory fee of
$45,000, which is payable at closing. VHB has further agreed to indemnify
Crestar Securities against certain liabilities, including certain liabilities
under federal securities laws.
Opinion of SNFC's Financial Advisor
General. Pursuant to an engagement letter dated February 28, 1998, SNFC
retained Carson Medlin to serve as its financial advisor with respect to a
proposed transaction which would lead to the merger of SNFC and VHB. As part of
its engagement, Carson Medlin agreed to render its opinion as to the fairness,
from a financial point of view, of the Exchange Ratio resulting from the terms
of the Merger to the unaffiliated shareholders of SNFC. Carson Medlin is a
National Association of Securities Dealers, Inc. member investment banking firm
which specializes in the securities of southeastern United States financial
institutions. As part of its investment banking activities, Carson Medlin is
regularly engaged in the valuation of southeastern United States financial
institutions and transactions relating to their securities, including mergers
and acquisitions. Carson Medlin will be compensated $______________ for its
services.
A representative of Carson Medlin met with the Board of Directors of
SNFC on April 17, 1998 and delivered its verbal opinion that the Exchange Ratio
is fair to SNFC's unaffiliated shareholders from a financial point of view.
Carson Medlin subsequently confirmed such opinion as of the date of this Proxy
Statement/Prospectus.
The text of Carson Medlin's written opinion dated July ___ is attached
hereto as Appendix F to this Proxy Statement/Prospectus and should be read in
its entirety with respect to the procedures followed, assumptions made, matters
considered and qualifications of and limitations on the review undertaken by
Carson Medlin in connection therewith. Carson Medlin's opinion is addressed to
SNFC's Board only, and the opinion does not constitute a recommendation to any
SNFC shareholder as to how such shareholder should vote at the SNFC Special
Meeting or as to any other matter. The summary of the opinion of Carson Medlin
set forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the text of such opinion attached hereto as Appendix F.
Carson Medlin has relied upon, without independent verification, the
accuracy and completeness of the information reviewed by it for the purpose of
rendering its opinion. Carson Medlin did not undertake any independent
evaluation or appraisal of the assets and liabilities of SNFC or VHB, nor was it
furnished with any such appraisals. Carson Medlin assumed that the financial
forecasts reviewed by it have been reasonably prepared on a basis reflecting the
best currently available judgments and estimates of the managements of SNFC and
VHB, and that such projected financial results will be realized in the amounts
and at the times contemplated thereby.
<PAGE>
Carson Medlin is not expert in the evaluation of loan portfolios,
underperforming or nonperforming assets, net charge-offs of such assets or the
adequacy of allowances for losses with respect thereto; has not reviewed any
individual credit files; and has assumed that the loan loss allowances for each
of SNFC and VHB are in the aggregate adequate to cover such losses. Carson
Medlin is not expert in bank operations and has not examined the data processing
or other systems of either SNFC or VHB with regard to their readiness to satisfy
requirements related to the year 2000 or to similar issues. Carson Medlin
assumed that the Merger will be recorded as a pooling of interests under
generally accepted accounting principles. Carson Medlin's opinion is necessarily
based on economic, market and other conditions as in effect on the date of its
analysis, and on information made available to it dated as of various earlier
dates.
In connection with rendering its opinion, Carson Medlin performed a
variety of financial analyses. The preparation of a financial fairness opinion
of this nature involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances, and, therefore, is not readily susceptible to
partial analysis or summary description. Carson Medlin believes that its
analyses must be considered together as a whole and that selecting portions of
such analyses and the facts considered therein, without considering all other
factors and analyses, could create an incomplete view of the analyses and the
process underlying Carson Medlin's opinion. In its analyses, Carson Medlin made
numerous assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of SNFC and
VHB and which may not be realized. Any estimates contained in Carson Medlin's
analyses are not necessarily predictive of future results or values, which may
be significantly more or less favorable than such estimates. Estimates of values
of companies do not purport to be appraisals or necessarily reflect the prices
at which such companies or their securities may actually be sold. None of the
analyses performed by Carson Medlin was assigned a greater significance by
Carson Medlin than any other.
In connection with rendering its opinion dated July __, 1998 Carson
Medlin reviewed (i) the Agreement; (ii) the annual reports to shareholders of
SNFC, including audited financial statements for the five years ended December
31, 1997; (iii) the Proxy Statement of SNFC dated March 13, 1998, for the annual
meeting of shareholders held on April 23, 1998; (iv) the annual report on Form
10-K of SNFC for the year ended December 31, 1997; (v) the quarterly report on
Form 10-Q of SNFC for the quarter ended March 31, 1998; (vi) the Consolidated
Report of Condition and Income as of March 31, 1998; (vii) the Uniform Bank
Performance Report for SNFC as of December 31, 1997; (viii) the annual reports
to shareholders of VHB, including audited financial statements for the five
years ended December 31, 1997; (ix) the annual report on Form 10-KSB of VHB for
the year ended December 31, 1997; (x) the Proxy Statement of VHB dated April 3,
1998 for the annual meeting of shareholders held on April 25, 1998; (xi) the
quarterly report on Form 10-Q of VHB for the quarter ended March 31, 1998; (xii)
the Consolidated Report of Condition and Income of VHB as of March 31, 1998;
(xiii) the Uniform Bank Performance Report for VHB as of December 31, 1997;
(xiv) a preliminary copy of this Joint Proxy Statement/Prospectus; and (xv)
certain other financial and operating information with respect to the business,
operations and prospects of SNFC and VHB.
Carson Medlin also (i) held discussions with members of the senior
management of SNFC and VHB; (ii) reviewed the historical market prices and
trading activity for the common stocks of SNFC and VHB to the extent available
and compared them with those of certain publicly traded companies which it
deemed to be relevant; (iii) compared the results of operations of SNFC and VHB
with those of certain publicly traded companies which it deemed to be relevant;
(iv) compared the proposed financial terms of the Merger with the financial
terms, to the extent publicly available, of certain other recent business
combinations of commercial banking organizations; (v) analyzed the pro forma
financial impact of the Merger on SNFC; and (vi) conducted such other studies,
analyses, inquiries and examinations as Carson Medlin deemed appropriate.
<PAGE>
The following is a summary of the principal analyses performed by
Carson Medlin in connection with its opinion.
Summary of Transaction Consideration. Carson Medlin reviewed the terms
of the proposed transaction, including the Exchange Ratio and the aggregate
transaction value. Carson Medlin reviewed the implied value of the consideration
offered, which based upon the closing price of SNFC's Stock on April 15, 1998,
was approximately $42.55 per share of VHB's Stock or a total transaction value
of approximately $19.7 million. Carson Medlin calculated that the value of the
consideration to VHB's shareholders, based on the closing price of SNFC's Stock
on April 15, 1998, represented 217% of VHB's stated book value per share at
March 31, 1998, 21.8 times VHB's earnings per share for the year ended December
31, 1997, and 19.4 times VHB's estimated earnings per share for 1998. Carson
Medlin calculated that the total transaction value represented a 13.2% premium
on VHB's March 31, 1998 core deposits (defined as the aggregate transaction
value minus stated book value, as a percentage of core deposits) and 19.7% of
the total assets of VHB at March 31, 1998.
Comparable Transaction Analysis. Carson Medlin reviewed certain
information relating to the mergers of 19 selected southeastern commercial
banking institutions announced between June of 1997 and February of 1998 in
which the acquired institutions had total assets of from $16 million to $292
million (the "Comparable Transactions"). The Comparable Transactions are
(acquiree/acquiror): Dadeland Bancshares/Colonial BancGroup, Inc.; West Coast
Bank/FNB Corp.; First Central Bank/Colonial BancGroup, Inc.; Key Florida
Bancorp, Inc./Regions Financial Corporation; Ameribank Bancshares, Inc./Wachovia
Corporation; Citizens Gwinnett Bankshares, Inc./Premier Bancshares, Inc.; Lanier
Bank & Trust Company/Premier Bancshares, Inc.; City Bank & Trust of
Shreveport/First United Bancshares; Guaranty State Bancorp/Triangle Bancorp,
Inc.; Greenville Financial Corporation/Regions Financial Corporation; First
United Bancorporation/Regions Financial Corporation; ComSouth Bankshares,
Inc./Anchor Financial Corporation; Victory Bancshares/Deposit Guaranty
Corporation; Tysons Financial Corporation/MainStreet BancGroup, Inc.; Regency
Financial Shares, Inc./MainStreet BancGroup, Inc.; Marshall National Bank and
Trust Company/Mercantile Bankshares Corporation; Peoples Bank of Virginia/F&M
National Corporation; The Bank of Alexandria/F&M National Corporation; and
Rappahannock Bancshares, Inc./Union Bankshares Corporation. Carson Medlin
considered, among other factors, the earnings, capital level, asset size and
quality of assets of the acquired financial institutions. Carson Medlin compared
the transaction prices to the then recently reported annual earnings, stated
book values, total assets and core deposits.
Carson Medlin calculated a range of purchase prices as a percentage of
stated book value for the Comparable Transactions from a low of 185% to a high
of 440%, with a mean of 299%. These transactions indicated a range of values for
each share of VHB Stock from $36.31 per share to $86.37 per share, with a mean
of $58.69 per share (based on VHB's stated book value of $19.63 per share at
March 31, 1998). The value of the transaction was approximately $42.55 per share
of VHB Stock (based on the price of SNFC's Stock on April 15, 1998).
<PAGE>
Carson Medlin calculated a range of purchase prices as a multiple of
earnings for the Comparable Transactions from a low of 14.0 times to a high of
40.1 times, with a mean of 23.4 times. These transactions indicated a range of
values for each share of VHB Stock from $27.44 per share to $78.60 per share,
with a mean of $45.86 per share (based on VHB's earnings per common share for
the year ended December 31, 1997 of $1.96). The value of the transaction was
approximately $42.55 per share of VHB Stock.
Carson Medlin calculated the core deposit premiums for the Comparable
Transactions and found a range of values from a low of 10.1% to a high of 37.9%,
with a mean of 25.4%. The premium on VHB's core deposits implied by the terms of
the Agreement was 13.2%.
Finally, Carson Medlin calculated a range of purchase prices as a
percentage of total assets for the Comparable Transactions from a low of 19.0%
to a high of 41.9%, with a mean of 29.4%. The aggregate consideration as a
percentage of total assets implied by the terms of the Merger was approximately
19.7%.
Industry Comparative Analysis. In connection with rendering its
opinion, Carson Medlin compared selected operating results of SNFC and VHB to
those of 50 publicly-traded community commercial banks in Alabama, Florida,
Georgia, Mississippi, North Carolina, South Carolina, Virginia and West Virginia
(the "SIBR Banks") as contained in the Southeastern Independent Bank Review(TM),
a proprietary research publication prepared by Carson Medlin quarterly since
1991. The SIBR Banks range in asset size from approximately $124.5 million to
$2.5 billion and in shareholders' equity from approximately $13 million to $248
million. Carson Medlin considers this group of financial institutions to be
generally comparable to SNFC and VHB. Carson Medlin compared, among other
factors, the profitability, capitalization, and asset quality of SNFC and VHB to
those of the SIBR Banks. Carson Medlin noted that for the year ended December
31, 1997: (i) SNFC and VHB had returns on average assets (ROA) of 1.54% and
1.00%, respectively compared to 1.25% on average for the SIBR Banks; (ii) SNFC
and VHB had returns on average equity (ROE) of 11.9% and 10.6%, respectively
compared to 12.5% on average for the SIBR Banks; (iii) SNFC and VHB had common
equity to total assets of 13.01% and 9.48%, respectively compared to 9.93% on
average for the SIBR Banks; and (iv) SNFC and VHB had non-performing assets
ratios (defined as loans 90 days past due, nonaccrual loans and other real
estate to total loans and other real estate) of 0.43% and 1.37%, respectively
compared to 0.92% on average for the SIBR Banks.
No company or transaction used in the preceding Industry Comparative or
Comparable Transaction Analyses is identical to SNFC, VHB or the Merger.
Accordingly, evaluating the results of these analyses necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of SNFC, VHB and other factors that could affect the
value of the companies to which they are being compared. Mathematical analysis
(such as determining the average or median) is not, in itself, a meaningful
method of using comparable industry or transaction data.
Contribution Analysis. Carson Medlin reviewed the relative
contributions in terms of various balance sheet items, net income and market
capitalization to be made by SNFC and VHB to the combined institution based on
(i) balance sheet data at March 31, 1998, (ii) income statement data for the
year ended December 31, 1997, and (iii) estimated net income for the year ending
December 31, 1998. The income statement and balance sheet components analyzed
included total assets, loans (net of unearned income and the allowance for loan
and lease losses), total deposits, shareholders' equity, and net income. This
analysis showed that, while SNFC's shareholders would own approximately 73.8% of
the aggregate outstanding shares of the combined institution based on the
Exchange Ratio, SNFC is contributing 69.5% of total assets, 68.3% of total net
loans (net of unearned income and the allowance for loan and lease losses),
68.2% of total deposits, 76.4% of shareholders' equity, 78.2% of 1997 net income
and 75.9% of estimated 1998 net income. For some of the financial components,
SNFC is contributing a higher proportion than the percentage of ownership that
SNFC's shareholders are receiving in the Merger; for other components, SNFC is
contributing less than its shareholders are receiving.
<PAGE>
Dilution Analysis. Carson Medlin analyzed the impact on SNFC, on a pro
forma basis, of consolidating the results of operations of SNFC and VHB in
future periods. In particular, Carson Medlin compared SNFC's results of future
operations on the basis of a combination with VHB to the results of SNFC's
future operations on a stand alone basis. Carson Medlin estimated, based on the
Exchange Ratio and consummation of the Merger in 1998, that as a result of the
Merger, SNFC's 1998 per share earnings (including anticipated merger costs)
would be diluted by less than 9% and that the Merger would be accretive to 1999
earnings and each year thereafter. Carson Medlin estimated that, as a result of
the Merger, dilution to SNFC's stated book value per share would initially be
approximately 4.3%, and that such dilution would decline by approximately 0.6%
in the second year and at an increasing rate thereafter. Carson Medlin considers
the magnitude and duration of such impact on the results of SNFC's operations to
be typical of, and within the range of acceptable industry standards for,
transactions such as the Merger.
The opinion expressed by Carson Medlin was based upon market, economic
and other relevant considerations as they existed. Carson Medlin confirmed the
appropriateness of its reliance on the analyses used to render its opinion dated
July _, 1998, by performing procedures to update certain of such analyses and by
reviewing assumptions on which such analyses were based and the factors
considered in connection therewith. Events occurring after the date of issuance
of the opinion, including but not limited to, changes affecting the securities
markets, the results of operations or material changes in the assets or
liabilities of SNFC or VHB could materially affect the assumptions used in
preparing the opinion.
Effective Time of the Merger
Subject to the conditions to the obligations of the parties to effect
the Merger, the Effective Time will occur on the date and at the time that the
Articles of Merger relating to the Merger become effective with the State
Corporation Commission of Virginia. Unless otherwise agreed upon by SNFC and
VHB, the Effective Time is expected to occur on the first day of the month
following the month or quarter after approval of the Merger by the shareholders
of VHB and shareholders of SNFC and the effective date (including expiration of
all applicable waiting periods) of all required approvals of any regulatory
authority having jurisdiction over the Merger.
No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that other conditions precedent to the
Merger can or will be satisfied. VHB and SNFC anticipate that all conditions to
consummation of the Merger will be satisfied so that the Merger can be
consummated during 1998. Delays in the consummation of the Merger could occur,
however.
The Board of Directors of either VHB or SNFC generally may terminate
the Agreement if the Merger is not consummated by March 31, 1999, unless the
failure to consummate by that date is the result of a breach of the Agreement by
the party seeking termination. See "--Conditions to Consummation of the Merger"
and "--Waiver, Amendment, and Termination."
<PAGE>
Distribution of Holding Company Stock Certificates
Promptly after the Effective Time, SNFC will cause SBT, acting in its
capacity as Exchange Agent, to mail letters of transmittal, together with
instructions for the exchange of the Certificates representing shares of VHB
Stock (subject to the Exchange Ratio) and SNFC Stock for certificates
representing shares of Holding Company Stock, to the former shareholders of VHB
and SNFC.
VHB and SNFC shareholders should not send in their certificates until
they receive the letter of transmittal and instructions.
Upon surrender to the Exchange Agent of certificates for VHB Stock,
together with a properly completed letter of transmittal, there will be issued
and mailed to each holder of VHB Stock surrendering such items a certificate or
certificates representing the number of shares of Holding Company Stock to which
such holder is entitled, if any, and a check for the amount to be paid in lieu
of any fractional share (without interest), together with all undelivered
dividends or distributions in respect of such shares (without interest thereon).
In no event will VHB, SNFC, the Holding Company or the Exchange Agent be liable
to any holder of VHB Stock for any Holding Company Stock or dividends thereon or
cash delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat, or similar law. After the Effective Time, to the
extent permitted by law, VHB shareholders of record as of the Effective Time
will be entitled to vote at any meeting of Holding Company shareholders the
number of whole shares of Holding Company Stock into which their shares of VHB
Stock have been converted, regardless of whether such shareholders have
surrendered their VHB Stock certificates. Whenever a dividend or other
distribution is declared by SNFC on Holding Company Stock, the record date for
which is at or after the Effective Time, the declaration will include dividends
or other distributions on all shares of Holding Company Stock issuable pursuant
to the Agreement, but no dividend or other distribution payable after the
Effective Time with respect to Holding Company Stock will be paid to the holder
of any unsurrendered VHB Stock certificate until the holder duly surrenders such
certificate. Upon surrender of such VHB Stock certificate, however, both the
Holding Company Stock certificate, together with all undelivered dividends or
other distributions (without interest) and any undelivered cash payments to be
paid in lieu of fractional shares (without interest), will be delivered and paid
with respect to each share represented by such certificate.
After the Effective Time, there will be no transfers of shares of VHB
Stock on VHB's stock transfer books. If Certificates representing shares of VHB
Stock are presented for transfer after the Effective Time, they will be canceled
and exchanged for the shares of Holding Company Stock and a check for the amount
due in lieu of fractional shares and undelivered dividends, if any, deliverable
in respect thereof.
After the Effective Time, there will be no transfers of shares of SNFC
Stock on SNFC's stock transfer books. If Certificates representing shares of
SNFC Stock are presented for transfer after the Effective Time, they will be
canceled and exchanged for the shares of Holding Company Stock and a check for
the amount due in lieu of fractional shares and undelivered dividends, if any,
deliverable in respect thereof.
Conditions to Consummation of the Merger
Consummation of the Merger is subject to various conditions, including
(i) receipt of the approval of the Agreement by the shareholders of VHB as
required by Virginia law and SNFC shareholders as required by Virginia Law and
NASDAQ rules, (ii) the receipt of certain regulatory approvals required for
consummation of the Merger without material, adverse condition; (iii) the
absence of any order or any action by any court or regulatory authority
enjoining or prohibiting the consummation of the Merger; (iv) the Registration
Statement's being declared effective and not subject to a stop order or
threatened stop order by the SEC or any state securities commissionner; (v)
receipt of letter from Yount, Hyde & Barbour, P.C. to the effect that the Merger
will qualify for "pooling-of-interests" accounting treatment; (vi) receipt of a
favorable opinion of Mays & Valentine, L.L.P. that the Merger will constitute a
"reorganization" under Section 368 of the Code and the exchange of VHB Stock for
Holding Company Stock will not result in taxable gain or loss to VHB
shareholders, except to the extent of any cash received; (vii) receipt of the
fairness opinions of Carson Medlin and Crestar Securities; and (viii)
satisfaction of certain other conditions, including the receipt of agreements of
affiliates of VHB, certain legal opinions and various certificates from the
officers of VHB and SNFC and the accuracy of all representations and warranties,
the performance of agreements and compliance with covenants made in the
Agreement. See "--Regulatory Approvals" and "--Waiver, Amendment, and
Termination".
<PAGE>
No assurance can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the party
permitted to do so. In the event the Merger is not consummated by March 31,
1999, the Agreement may be terminated and the Merger abandoned by the Board of
Directors of either VHB or SNFC, unless the failure to consummate the Merger is
caused by a breach of the Agreement by the terminating party. See "--Waiver,
Amendment, and Termination."
The Merger may not be consummated until the requisite regulatory
approvals are obtained. Applications for the approvals described below have been
submitted to the appropriate regulatory agencies. The Merger transaction
requires the separate prior approval of the Federal Reserve, FDIC and the
Virginia State Corporation Commission (the "Commission").
In evaluating the Merger, the Federal Reserve must consider, among
other factors, the financial and managerial resources and future prospects of
SNFC, SBT and VHB and the convenience and needs of the communities to be served.
The relevant statutes prohibit the Federal Reserve from approving the Merger if
(i) it would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any
part of the United States or (ii) its effect in any section of the country may
be to substantially lessen competition or to tend to create a monopoly, or (iii)
it would be a restraint of trade in any other manner, unless the Federal Reserve
finds that the anticompetitive effects of the Merger 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 Merger may not be
consummated until 30 days (which the FDIC may reduce with the concurrence of the
Attorney General of the United States to 15 days) following the date of the
Federal Reserve approval, during which time the United States Department of
Justice may challenge the transaction on antitrust grounds. The commencement of
any antitrust action would stay the effectiveness of the approval of the
agencies, unless a court of competent jurisdiction specifically orders
otherwise. The Federal Reserve is expected to approve the Merger in 1998.
The FDIC approval will consist of approving the interim bank, VHIB, for
deposit insurance and the Merger, applying factors similar to those applied by
the Federal Reserve. FDIC approval is expected in 1998.
The Merger also is subject to the approval of the Commission. In its
evaluation, the Commission will take into account considerations similar to
those applied by the Federal Reserve. The Commission is expected to approve the
Merger in 1998.
<PAGE>
There can be no assurance that such regulatory approvals will be
obtained or as to the timing of any such approvals. There also can be no
assurance that any such approvals will not impose conditions or be restricted in
a manner (including requirements relating to the raising of additional capital
or the disposition of assets) which in the reasonable judgment of the Board of
Directors of either SNFC or VHB would so materially adversely impact the
economic or business benefits of the transactions contemplated by the Agreement
as to make the consummation of the Merger inadvisable. The Agreement and the
Merger may be terminated if such a condition is imposed. See "Waiver, Amendment,
and Termination."
VHB and SNFC are not aware of any material governmental approvals or
actions that are required for consummation of the Merger, except as described
above. Should any other approval or action be required, it is contemplated that
such approval or action would be sought.
Waiver, Amendment, and Termination
To the extent permitted by applicable law, VHB and SNFC, with the
approval of their respective Boards of Directors, may amend the Agreement by
written agreement at any time before or after shareholder approval of the
Agreement has been obtained; provided, however, that after the VHB Special
Meeting, no amendment may alter the conversion of and payment for shares of VHB
Stock without the requisite approval of the holders of the issued and
outstanding shares of VHB Stock entitled to vote thereon. In addition, prior to
or at the Effective Time, either VHB or SNFC, or both, acting through their
respective Boards of Directors or chief executive officers or other authorized
officers may waive any default in the performance of any term of the Agreement
by the other party, may waive or extend the time for the compliance or
fulfillment by the other party of any and all of its obligations under the
Agreement, and may waive any of the conditions precedent to the obligations of
such party under the Agreement, except any condition which, if not satisfied,
would result in the violation of any applicable law or governmental regulation.
No such waiver will be effective unless written and executed by a duly
authorized officer of VHB or SNFC, as the case may be. In the event that the
condition precedent requiring a favorable tax opinion from Mays & Valentine,
L.L.P. is waived, the Boards of Directors of both VHB and SNFC will resolicit
the approval of their respective shareholders with respect to the Merger.
Notwithstanding approval of the Agreement by the shareholders of VHB
and SNFC, the Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time: (i) by mutual consent of the Boards of Directors of
VHB and SNFC; or (ii) by the Board of Directors of VHB or SNFC, unless waived by
the non-breaching party, (a) in the event of any material inaccuracy of any
representation or warranty of the other party contained in the Agreement or the
non-performance by the other party in any material respect of any obligation
contained in the Agreement; (b) if: (i) the shareholders of VHB or SNFC fail to
approve the Agreement and the transactions contemplated thereby; (ii) any
approval or consent of any regulatory authority required for consummation of the
Merger has been denied; (iii) the registration statement relating to the Merger
has not been declared effective or is subject to a stop order or any threatened
stop order of the SEC or any state securities commissioner; (iv) a tax opinion
is not received from SNFC's counsel to the effect that the Merger will be
recognized as a reorganization so that the exchange of VHB Stock for Holding
Company Stock will not result in taxable gain or loss to the shareholders of
VHB, except to the extent of any cash received; (v) a letter is from SNFC's
accountants to the effect that the Merger will qualify for pooling-of-interests
accounting treatment is not received; (vi) either VHB or SNFC is subject to any
order, decree or injunction of a court or agency of competent jurisdiction that
enjoins or prohibits the consummation of the Merger; (vii) VHB or SNFC does not
receive a written opinion satisfactory to the other party to the effect that the
terms of the Merger are fair, from a financial point of view, to the
shareholders of VHB and SNFC; or (viii) the Merger is not consummated by March
31, 1999.
<PAGE>
If the Merger is terminated as described above, the Agreement will
become void and have no effect, except that certain provisions of the Agreement,
including those relating to the obligations to share certain expenses, maintain
the confidentiality of certain information obtained, and return all documents
obtained from the other party under the Agreement, will survive such
termination. In addition, termination of the Agreement under certain
circumstances will not relieve any breaching party from liability for any
intentional breach of a representation, warranty, covenant, or agreement giving
rise to such termination. See "--Expenses and Fees" and "--Option Agreement."
Conduct of Business Pending the Merger
Pursuant to the Agreement, VHB and SNFC have agreed that, except as
otherwise expressly contemplated in the Agreement, each party will (a) operate
its business substantially as operated prior to entering the Agreement and only
in the ordinary course, and, consistent with such operation; and (b) use its
best efforts to preserve intact its relationships with persons having business
dealings with it.
In addition, VHB and SNFC have agreed that, except as expressly
contemplated or permitted by the Agreement, each party will not agree or commit
to do any of the following without the prior written consent of the other: (i)
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, or purchase, redeem or otherwise
acquire any of its outstanding shares of capital stock; (ii) voluntarily make
any changes in the composition of its officers, directors or other key
management personnel; (iii) make any change in the compensation or title of any
officer, director or key management employee or make any change in the
compensation or title of any other employee, other than permitted by current
employment policies in the ordinary course of business, any of which changes
shall be reported promptly to the other party; (iv) 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 (except with respect to SNFC's 1998 Incentive
Stock Plan as approved by SNFC shareholders at its 1998 Annual Meeting); (v)
incur any obligation or liability, make any pledge, or encumber any of its
assets, nor dispose of any of its assets in any other manner, except in the
ordinary course of its business and for adequate value, or as otherwise
specifically permitted in the Agreement; (vi) issue or contract to issue any
shares of common stock, options for shares of common stock, or securities
exchangeable for or convertible into such shares; (vii) knowingly waive any
right to substantial value; (viii) enter into material transactions otherwise
than in the ordinary course of its business; (ix) alter, amend or repeal its
Articles of Incorporation or Bylaws, except as set forth in the Agreement; (x)
propose or take any other action that would make any representation or warranty
untrue.
<PAGE>
VHB and SNFC have agreed to consult and receive the approval of the
other during the term of the Agreement concerning the declaration and payment of
any dividends in respect of VHB Stock and SNFC Stock and the record dates and
payment dates, except for such payments consistent with the respective party's
consistently applied dividend policies.
In addition, VHB and SNFC have specifically agreed not to directly or
indirectly solicit or initiate discussions or negotiations with any other person
regarding any merger or similar transaction involving SNFC or VHB, enter into
any agreement with any other person for a business combination transaction,
equity investment, or sale of significant amount of assets, or furnish
information in support of such a transaction (except where failure to do any of
the above would constitute a breach of fiduciary or legal obligations of the
Board of Directors of VHB or SNFC, unless and until the Agreement is terminated
or as mutually agreed by SNFC and VHB in writing.
Management and Operations After the Merger
The current directors and officers of VHB and SBT will continue to hold the
same positions after consummation of the Merger as they held prior to the
Merger. Under the Agreement, the number of directors on the Board of the Holding
Company shall be set at eight members effective as of the consummation of the
Merger. Five such members shall be appointed by SNFC and three members shall be
appointed by VHB. VHB has recommended William B. Young, Thomas F. Williams, Jr.
and H. Wayne Parrish, all of whom are currently directors of VHB, to fill the
additional directorships. In addition, under the Agreement, William B. Young
will become the Chairman of the Board and Chief Executive Officer to serve until
December 31, 2000, at which time, the Board of Directors of the Holding Company
will appoint O. R. Barham, Jr. as Mr. Young's successor. Until December 31,
2000, Mr. Barham will serve as President of the Holding Company. Jeffrey W.
Farrar will become Senior Vice President and Chief Financial Officer of the
Holding Company and Edward V. Allison, Jr. will become Senior Vice President and
Secretary of the Holding Company. Mr. Barham will continue to serve as President
and Chief Executive Officer of SBT. Messrs. Young and Allison will continue to
serve as Chief Executive Officer and President of VHB respectively, after
consummation of the Merger. See "--Interests of Certain Persons in the Merger."
See "Information about VHB" for additional information regarding Messrs. Young,
Allison, Williams and Parrish. Information concerning the management of SNFC and
SBT is incorporated herein by reference to SNFC's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1997. See "Documents Incorporated by
Reference."
VHB and SBT will operate under the holding company structure. The
Holding Company, VHB and SBT will continue to be governed by the laws of the
State of Virginia and operate in accordance with its Articles of Incorporation
and Bylaws as in effect on the date of the Agreement until otherwise amended or
repealed after the Effective Time.
Interests of Certain Persons in the Merger
General. Certain members of VHB management and of the VHB Board of
Directors have interests in the Merger that are in addition to any interests
they may have as shareholders of VHB generally. These interests include, among
other things, provisions in the Agreement relating to director and officer
insurance coverage for VHB directors and officers, and certain severance and
other employee benefits, as described below.
Insurance. The Agreement provides that SNFC will maintain in effect for
a period of seven years after the Effective Time director and officer liability
insurance of at least $3 million for those directors and officers of SNFC, SBT,
and VHB who become or remain directors and officers of the Holding Company, SBT,
and VHB with respect to claims arising from events that occur prior to the
Effective Time.
Holding Company Directorships. Under the Agreement, VHB has the right to
fill three directorships on the Board of Directors of the Holding Company. Under
the Agreement, SNFC has the right to elect to the Holding Company Board five of
the candidates to fill the remaining directorships. VHB has recommended William
B. Young, Thomas F. Williams, Jr. and H. Wayne Parrish, all of whom are
currently directors of VHB, to fill the directorships. The Board of Directors of
SNFC have appointed Messrs. Taylor E. Gore, O. R. Barham, Jr., Marshall D.
Gayheart, Jr., Gregory L. Fisher and W. Robert Jebson, Jr., subject to
consummation of the Merger. Any increase or decrease in the number of directors
after the Effective Time shall be apportioned among the remaining directors so
as to maintain, as nearly as possible, the ratio of SNFC appointed directors to
VHB appointed directors at five-to-three, respectively. The terms of the members
of the Board of Directors of the Holding Company after the Effective Time will
be staggered three year terms with one of the appointees of VHB serving in each
of three classes.
<PAGE>
VHB Executive Arrangements. William B. Young serves as Chairman of the
Board of Directors and Chief Executive Officer of VHB and Edward V. Allison, Jr.
serves as President of VHB under the Agreement, the base annual salaries of Mr.
Young and Mr. Allison are fixed at $165,000 and $100,000, respectively. Mr.
Allison's salary is subject to annual merit increases.
Under the Agreement, Mr. Young will be appointed to the offices of Chairman
of the Board and Chief Executive Officer of the Holding Company. Mr. Allison
will be appointed to the offices of Senior Vice President and Secretary of the
Holding Company. Messrs. Young and Allison will continue as Chief Executive
Officer and President of VHB, respectively. At the Effective Time, the
employment agreements between VHB and each of Messrs. Young and Allison will
become obligations of VHB.
The Agreement provides that while Mr. Young is Chairman of the Holding
Company, his combined salary for service to the Holding Company and VHB will be
$165,000 per year. Following such term, Mr. Young will be offered a non-employee
consulting position at $75,000 per year for a two-year period.
If Messrs. Young's and Allison's employment contracts are terminated
without "cause," as defined in the contract, VHB must pay all compensation
(which includes salary and/or consulting fee, as applicable) due under the
terminated contract for a period not to exceed one year following the
termination. The employment contracts also contain a provision that any
successor to all or substantially all of the business and/or assets of VHB
expressly assume this employment contract. Mr. Young's annual salary and
subsequent consulting fee is fixed. In addition, Mr. Young is not eligible for
merit raises, participation in stock option plans or bonus plans given or
maintained by the Holding Company or either VHB or SBT. Mr. Allison's employment
contract contains certain additional provisions regarding retirement and death
benefits.
Other Matters Relating to VHB Employee Benefit Plans
The Agreement provides that, after the Effective Time, SNFC and VHB
will continue to provide employee benefits to their respective employees under
their existing employee benefit plans.
Option Agreement
In addition to the Agreement, VHB and SNFC have entered into an option
agreements each dated as of April 18, 1998 (the "Option Agreements"), pursuant
to which VHB has granted to SNFC and SNFC has granted to VHB, respectively
options to purchase under certain conditions 19.9% of the issued and outstanding
common stock of the optionee at an exercise price of $40.00 in cash per share
with respect to VHB Stock and $35.00 in cash per share with respect to SNFC
Stock (the "Lock-Up Options").
<PAGE>
The Lock-Up Options are exercisable only if: (i) an offer to acquire
VHB has been received by VHB, or solicited by VHB, from a person or entity other
than SNFC, and (ii) VHB and such person or entity have entered into an agreement
concerning any merger, sale of substantial assets, tender offer, sale of shares
of stock or similar transaction involving VHB. The Lock-Up Option may be
exercised by SNFC on a date that is the earlier of (i) the consummation of the
Merger, (ii) the termination of the Merger Agreement in accordance with the
terms thereof or (iii) September 30, 1998. Neither party's right to exercise the
Lock-Up Option has not been triggered as of the date of this Proxy Statement.
Copies of the Option Agreement for VHB to acquire SNFC Stock is set
forth as Appendix C to this Prospectus and a copy of the Option Agreement for
SNFC to acquire VHB Stock is set forth as Appendix D to this Prospectus. The
description herein is qualified in its entirety by references to the actual
terms of the Option Agreements, which are incorporated herein by reference.
The Option Agreements were entered into as a condition to the parties
entering into the Agreement and are intended to increase the probability that
the Merger will be consummated. Exercise of the Option Agreements may tend to
make the acquisition of a controlling interest in VHB or SNFC more expensive to
any prospective acquiror other than to VHB or SNFC even if such an acquisition
would be beneficial to VHB's or SNFC's shareholders. The existence of the Option
Agreements is intended to make it less likely that a prospective acquiror will
seek a business combination with VHB or SNFC prior to the Effective Date.
Shareholders' Rights Plan.
Prior to the Effective Date of the Merger, the Board of Directors of
SNFC is permitted to adopt and approve a shareholders' rights plan which grants
certain rights to acquire preferred stock of the Holding Company in the event of
the occurrence of a transaction that is likely to result in a future change of
control. The shareholders' rights plan is designed to have anti-takeover effects
and may inhibit the ability of a third party to acquire control of the Holding
Company. These rights are to be granted on the same basis with respect to SNFC
Stock as to the shares of Holding Company Stock that will be issued to VHB
shareholders pursuant to the Merger. Any amendment proposing to change the
rights to be granted or any other material terms of the plan prior to the
Effective Date shall require the concurrence of a majority of the Board of
Directors of VHB.
Certain Federal Income Tax Consequences.
The following is a summary of certain anticipated federal income tax
consequences of the merger to VHB shareholders. This summary is based on the
federal income tax laws as now in effect and as currently interpreted; it does
not take into account possible changes to such laws or interpretations,
including amendments to applicable statutes or regulations or changes in
judicial or administrative rulings, some of which may have retroactive effect.
This summary does not purport to address all aspects of the possible federal
income tax consequences of the merger and is not intended as tax advice to any
person. In particular, and without limiting the foregoing, this summary does not
address the federal income tax consequences of the merger to VHB shareholders in
light of their particular circumstances or status (for example, as foreign
persons, tax-exempt entities, dealers in securities, insurance companies, and
corporations, among others). Nor does this summary address any consequences of
the merger under any state, local, estate, or foreign tax laws. VHB
shareholders, therefore, are urged to consult their own tax advisors as to the
specific tax consequences to them of the merger, including tax return reporting
requirements, the application and effect of federal, foreign, state, local, and
other tax laws, and the implications of any proposed changes in the tax laws.
<PAGE>
The Merger is intended to constitute a "reorganization" within the
meaning of section 368(a) of the Code, with VHB and SNFC Bank each intended to
qualify as a "party to a reorganization" under section 368(b) of the Code, in
which case the following tax consequences will generally result (subject to the
limitations and qualifications referred to herein): (a) no gain or loss will be
recognized by the VHB shareholders upon the receipt of Holding Company Stock
solely in exchange for their shares of VHB Stock; (b) the basis of the Holding
Company Stock to be received by VHB shareholders will be the same as the basis
of the VHB Stock surrendered in the exchange; (c) the holding period of the
Holding Company Stock to be received by VHB shareholders will include the
holding period of the VHB Stock surrendered in exchange therefor, provided that
the VHB Stock was held as a capital asset on the date of the exchange; and (d)
the payment of cash to VHB shareholders in lieu of issuing fractional share
interests in SNFC will be treated for federal income tax purposes as if the
fractional shares were distributed as part of the exchange and then were
redeemed by SNFC. These cash payments will be treated as having been received as
a distribution in full payment in exchange for the stock redeemed as provided in
section 302(a) of the Code. If the redemption meets one of the four tests set
forth in section 302, any gain or loss recognized will be a capital gain or
loss. If none of the four tests provided in section 302 is met, the redemption
will be treated as payment of a dividend.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service ("IRS"). Instead, Mays & Valentine,
L.L.P. will render an opinion concerning certain federal income tax consequences
of the proposed Merger under federal income tax law. It is such firm's opinion
that, based upon the assumption the Merger is consummated in accordance with
Virginia law and in conformity with the representations made by the management
of VHB and SNFC, (1) the transaction will constitute a "reorganization" within
the meaning of section 368(a) of the Code, and (2) no gain or loss will be
recognized by the shareholders of VHB who receive solely Holding Company Stock
in exchange for their shares of VHB Stock ("Tax Opinion"). The Tax Opinion
addresses the federal tax consequences of the Merger under Virginia law, but
does not address any other state, local, or other tax consequences of the
Merger. The Tax Opinion does not bind the IRS nor preclude the IRS from adopting
a contrary position. In addition, the Tax Opinion will be subject to certain
assumptions and qualifications and will be based on the truth and accuracy of
certain representations made by the management of VHB and SNFC, as to, among
other things, the fact that there is no plan or intention by any of the
shareholders of VHB who own one percent (1%) or more of the outstanding VHB
Stock, and to the best of the knowledge of the management of VHB, the remaining
VHB shareholders have no plan or intention, to sell, exchange, or otherwise
dispose of a number of shares of Holding Company Stock that they will receive in
the Merger that will reduce on the part of the VHB shareholders such
shareholders' ownership of Holding Company Stock to a number of shares having an
aggregate value as of the date of the Merger of less than 50% of the aggregate
value of all of the stock of VHB outstanding immediately prior to the Merger.
A successful IRS challenge to the "reorganization" status of the Merger
would result in a VHB shareholder recognizing gain or loss with respect to each
share of VHB Stock surrendered equal to the difference between the shareholder's
basis in such share and the fair market value, as of the Effective Time of the
Merger, of the Holding Company Stock received in exchange therefor. In such
event, a VHB shareholder's aggregate basis in the Holding Company Stock received
would equal its fair market value and his or her holding period for such stock
would begin the day after the Merger.
Accounting Treatment
It is anticipated that the Merger will be accounted for as a
pooling-of-interests. Under the pooling-of interests method of accounting, the
recorded amounts of the assets and liabilities of VHB will be carried forward at
their previously recorded amounts, and prior period financial statements will be
restated for all periods as though VHB and SNFC had been combined at the
beginning of the earliest period presented.
<PAGE>
In order for the Merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding VHB Stock must be
exchanged for Holding Company Stock with substantially similar terms. There are
certain other criteria that must be satisfied in order for the Merger to qualify
as a pooling-of-interests, some of which criteria cannot be satisfied until
after the Effective Time. In addition, it is a condition to closing that each
party receive assurances from Yount, Hyde & Barbour, P.C., in form and content
satisfactory to such party, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment.
For information concerning certain conditions to be imposed on the
exchange of VHB Stock for Holding Company Stock in the Merger by affiliates of
VHB and certain restrictions to be imposed on the transferability of the Holding
Company Stock received by those affiliates in the Merger in order, among other
things, to ensure the availability of pooling-of-interests accounting treatment,
see "--Resales of Holding Company Stock."
Expenses and Fees
The Agreement provides, in general, that each of the parties will bear
and pay its own costs and expenses in connection with the transactions
contemplated by the Agreement, including filing, registration and application
fees, printing fees, and fees and expenses of its own financial or other
consultants, investment bankers, accountants, and legal counsel, except that
each party will pay one-half of (i) the SEC and Blue Sky filing fees incurred in
connection with the Registration Statement and this Proxy Statement/Prospectus
and (ii) the printing and distribution costs incurred in connection with the
printing and distribution of the Registration Statement and this Proxy
Statement/Prospectus.
Resales of Holding Company Stock
Holding Company Stock issued to shareholders of VHB in connection with
the Merger will be registered under the Securities Act. All shares of Holding
Company Stock received by holders of VHB Stock will be freely transferable upon
consummation of the Merger by those persons who are not "Affiliates" of VHB for
purposes of Rule 145 under the Securities Act. Affiliates also would be
permitted to resell Holding Company Stock received in the Merger pursuant to an
effective registration statement under the Securities Act or an available
exemption from the Securities Act registration requirements. To the knowledge of
VHB and SNFC, the only persons who may be deemed to be Affiliates of VHB subject
to these restrictions are the currently executive officers and directors of VHB,
who have been advised of these restrictions.
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the Merger, holders of VHB Stock will be exchanging
their shares of VHB Stock for shares of Holding Company Stock. SNFC is a
Virginia corporation governed by the VSCA and the Holding Company's Articles of
Incorporation and Bylaws. Certain differences deemed material by VHB and the
Holding Company exist between the rights of VHB shareholders and those of the
Holding Company shareholders. The differences are summarized below. The
following discussion is necessarily general; it is not intended to be a complete
statement of all differences affecting the rights of shareholders and their
respective entities, and it is qualified in its entirety by reference to the
VSCA as well as to the SNFC's Articles and Bylaws and VHB's Articles of
Incorporation and Bylaws.
<PAGE>
Anti-takeover Provisions Generally
The provisions of the SNFC's Articles of Incorporation and Bylaws
described below under the headings "--Authorized Capital Stock," "--Classified
Board of Directors and Absence of Cumulative Voting," "--Removal of Directors,"
"--Special Meeting of Shareholders," "--Shareholder Nominations and Proposals,"
and "--Business Combinations" are referred to herein as the "Protective
Provisions." In general, the Protective Provisions make it more likely that the
Holding Company's Board of Directors will play a central role if any group or
person attempts to acquire control of the Holding Company, so that the Board can
further the interests of the Holding Company and its shareholders as appropriate
under the circumstances. For example, if the Board determines that a sale of
control of the Holding Company is in the best interests of the Holding Company
and its shareholders, the Protective Provisions enhance the Board's ability to
maximize the value to be received by the shareholders upon such a sale.
Although SNFC's management believes the Protective Provisions are
beneficial to the Holding Company's shareholders, the Protective Provisions also
may tend to discourage some takeover bids. As a result, the Holding Company's
shareholders may be deprived of opportunities to sell some or all of their
shares at prices that represent a premium over prevailing market prices. On the
other hand, defeating undesirable acquisition offers can be a very expensive and
time-consuming process. To the extent that the Protective Provisions discourage
undesirable proposals, the Holding Company may be able to avoid those
expenditures of time and money.
The Protective Provisions also may discourage open market purchases by
a potential acquirer. Such purchases may increase the market price of Holding
Company Stock temporarily, enabling shareholders to sell their shares at a price
higher than that which otherwise would prevail. In addition, the Protective
Provisions may decrease the market price of Holding Company Stock by making the
stock less attractive to persons who invest in securities in anticipation of
price increases from potential acquisition attempts. The Protective Provisions
also may make it more difficult and time consuming for a potential acquirer to
obtain control of Holding Company through replacing the Board of Directors and
management. Furthermore, the Protective Provisions may make it more difficult
for Holding Company's shareholders to replace the Board of Directors or
management, even if a majority of the shareholders believe such replacement is
in the best interests of Holding Company. As a result, the Protective Provisions
may tend to perpetuate the incumbent Board of Directors and management of
Holding Company.
Authorized Capital Stock
SNFC. SNFC's Articles of Incorporation authorize issuance of up to
3,000,000 shares of Holding Company Stock, of which 1,504,749 shares were issued
and outstanding as of July __, 1998 and 1,000,000 shares of preferred stock, no
par value ("Preferred Stock"). SNFC's Board of Directors may authorize the
issuance of additional shares of Holding Company Stock without further action by
the Holding Company shareholders, unless such action is required in a particular
case by applicable laws or regulations or by any stock exchange upon which the
Holding Company capital stock may be listed. The Holding Company shareholders do
not and will not have the preemptive right to purchase or subscribe to any
unissued authorized shares of Holding Company Stock or any option or warrant for
the purchase thereof. Further, SNFC's Board of Directors is authorized by the
Articles of Incorporation, without shareholder approval, to designate
preferences, limitations and related rights for part or all of the Preferred
Stock in such series as may be determined by the Board of Directors.
<PAGE>
Subject to the payment of cash in lieu of fractional shares, 533,716
shares of Holding Company Stock will be issued in connection with the Merger.
Based on the number of shares of Holding Company Stock outstanding on the SNFC
Record Date, it is anticipated that, following the consummation of the Merger, a
total of approximately 2,038,465shares of Holding Company Stock will be
outstanding.
The authority to issue additional shares of Holding Company Stock and
shares of Preferred Stock provides the flexibility necessary to meet the Holding
Company's future needs without the delay resulting from seeking shareholder
approval. The authorized but unissued shares of Holding Company Stock will be
issuable from time to time for any corporate purpose, including, without
limitation, stock splits, stock dividends, employee benefit and compensation
plans, acquisitions, and public or private sales for cash as a means of raising
capital. Such shares could be used to dilute the stock ownership of persons
seeking to obtain control of the Holding Company. The sale of a substantial
number of shares of Holding Company Stock to persons who have an understanding
with the Holding Company concerning the voting of such shares, or the
distribution or declaration of a dividend of shares of Holding Company Stock (or
the right to receive Holding Company Stock) to Holding Company shareholders, may
have the effect of discouraging or increasing the cost of unsolicited attempts
to acquire control of the Holding Company. The authority to issue Preferred
Stock also gives the Holding Company flexibility in the structuring and
financing of acquisitions and other financial activities, in addition to the
ability to deter hostile takeover attempts by assigning certain rights and
preferences to the Preferred Stock that could adversely affect the voting power
of the holders of Holding Company Stock.
VHB. VHB's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of VHB Stock, of which 464,101 shares were issued and
outstanding as of the VHB Record Date. VHB's Board of Directors may authorize
the issuance of additional authorized shares of VHB Stock without further action
by VHB's shareholders, unless such action is required in a particular case by
applicable laws or regulations or by any stock exchange upon which VHB's capital
stock may be listed. VHB's shareholders do not have preemptive rights to
purchase or subscribe to any unissued unauthorized shares of VHB Stock. VHB does
not have an authorized class of preferred stock.
Amendment of Articles of Incorporation and Bylaws
SNFC. The Articles of Incorporation of SNFC provide that an amendment
to the Articles requires approval by more than two-thirds of all the votes
entitled to be cast provided the amendment has been approved and recommended by
at least two-thirds of the directors in office at the time of such approval and
recommendation. If the amendment is not approved and recommended by at least
two-thirds of the directors, then the amendment shall be approved by the vote of
more than 80% of all votes entitled to be cast.
Subject to certain restrictions set forth below, either the Board of
Directors or the shareholders of SNFC may amend SNFC's Bylaws. The Board of
Directors may amend or repeal the Bylaws and adopt new Bylaws except that: (i) a
bylaw adopted or amended by the shareholders may not be amended or repealed by
the Board of Directors if the Articles of Incorporation reserve this power
exclusively to the shareholders or (ii) a bylaw adopted or amended by the Board
of Directors that changes the quorum or voting requirement applicable to
meetings of the Board of Directors must meet the quorum requirement and be
adopted by the vote required to take action under the quorum and voting
requirement then in effect, or (iii) a bylaw that fixes a greater quorum or
voting requirement for the Board of Directors may be amended or repealed only by
the shareholders if originally adopted by the stockholders and either by the
shareholders or Board of directors if originally adopted by the directors. The
shareholders of SNFC generally may adopt, amend, or repeal the Bylaws upon the
affirmative vote of a plurality of the shareholders voting on the matter for
which a quorum is present.
<PAGE>
VHB. The Articles of Incorporation of VHB do not contain any provisions
governing amendments to the Articles. Under Virginia law, the Articles may be
amended by action of the Board of Directors of VHB and without shareholder
action only for certain enumerated revisions. Any other amendment must be
approved by two-thirds of the shares entitled to vote on the amendment.
The Board of Directors of VHB may alter, amend or repeal VHB's Bylaws
and adopt new Bylaws, without shareholder approval. The Bylaws provide that the
shareholders may alter, amend or repeal, or adopt new Bylaws at any special
meeting if duly called for that purposes, or at any annual meeting, by the
affirmative vote of two-thirds of the shares represented and entitled to vote.
In addition, Virginia law provides that no bylaw adopted or amended by
shareholders shall be altered or repealed by the Board of Directors if the
shareholders expressly provide that the Board of Directors may not amend or
repeal that bylaw.
Classified Board of Directors and Absence of Cumulative Voting
SNFC. The Articles of SNFC provide that SNFC's Board of Directors shall
consist of not less than 4 nor more than 25 directors divided into three
classes, with each class to be as nearly equal in number as possible. The
directors in each class serve three-year terms of office. The number of persons
comprising the SNFC Board of Directors is currently set at 10. The effect of
SNFC's having a classified Board of Directors is that only approximately
one-third of the members of the Board are elected each year, which effectively
requires two annual meetings for SNFC's shareholders to change a majority of the
members of the Board. The purpose of dividing SNFC's Board of Directors into
classes is to facilitate continuity and stability of leadership of SNFC by
ensuring that experienced personnel familiar with SNFC will be represented on
SNFC's Board at all times, and to permit SNFC's management to plan for the
future for a reasonable time. By potentially delaying the time within which an
acquirer could obtain working control of the Board, however, this provision may
discourage some potential mergers, tender offers, or takeover attempts.
Pursuant to the Articles, each shareholder generally is entitled to one
vote for each share of Holding Company Stock held and is not entitled to
cumulative votes in the election of directors.
VHB. The Bylaws of VHB provide that VHB's Board of Directors shall
consist of not less than five nor more than 25 individuals, the exact number of
directors to be elected being determined by the Board of Directors. Currently,
the Board of Directors of VHB has set the number of directors at six. The Bylaws
of VHB provide that each member of VHB's Board of Directors hold office for one
year, and until their successors are elected and qualified. Pursuant to the
Articles, each shareholder is entitled to one vote for each share of VHB Stock
held and is not entitled to cumulate votes in the election of directors.
Removal of Directors
SNFC. SNFC's Articles provide that a director may be removed only "for
cause" and with the affirmative vote of at least two-thirds of the outstanding
shares entitled to vote. The term of a director appointed to fill a vacancy
expires at the end of the term of such director's predecessor in office.
<PAGE>
VHB. VHB's Articles of Incorporation do not expressly provide for the
removal of directors. Pursuant to Virginia law, shareholders may remove one or
more directors with or without cause by a majority of the votes represented and
entitled to be cast at a meeting called for such purpose, unless the Articles
provide that directors may be removed only with cause.
Elimination of Liability of Directors and Officers
The VSCA 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 (i)
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
(ii) 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 VSCA 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.
SNFC. The Articles of Incorporation of SNFC provide that to the full
extent that the VSCA permits the limitation or elimination of the liability of
directors or officers, a director or officer of SNFC shall not be liable to SNFC
or its shareholders for monetary damages.
VHB. The Articles of Incorporation of VHB provide that to the full
extent that the VSCA permits the limitation or elimination of the liability of
directors or officers, a director or officer of VHB shall not be liable to VHB
or its shareholders for monetary damages.
Indemnification
SNFC. The Articles of Incorporation of SNFC provide that, to the full
extent permitted by the VSCA, SNFC is required to indemnify a director or
officer of SNFC who is or was a party to any proceeding by reason of the fact
that he is or was such a director or officer, except in relation to matters as
to which such director or officer shall have been finally adjudged liable by
reason of willful misconduct or a knowing violation of criminal law in the
performance of his or her duty as a director or officer. The Board of Directors
of SNFC is empowered, by majority vote of a quorum of disinterested directors,
to contract in advance to indemnify any director or officer.
VHB. Similar to SNFC, the Articles of Incorporation of VHB provide
that, to the full extent permitted by the VSCA and any other applicable law, VHB
is required to indemnify a director or officer of VHB who is or was a party to
any proceeding by reason of the fact that he is or was such a director or
officer or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. The Board of Directors of VHB
is empowered, by majority vote of a quorum of disinterested directors, to
contract in advance to indemnify any director or officer.
Special Meeting of Shareholders
SNFC. SNFC's Bylaws provide that special meetings of shareholders may
be called only by the Chairman of the Board of Directors, President, Secretary
or the Board of Directors. Holders of Holding Company Stock do not have the
right to call a special meeting or to require that SNFC's Board of Directors
call such a meeting. As a result, this provision, together with the restriction
on the removal of directors, would prevent a substantial shareholder from
compelling shareholder consideration of any proposal (such as a proposal for a
Business Combination) over the opposition of SNFC's Board of Directors by
calling a special meeting of shareholders at which such shareholder could
replace the entire Board of Directors with nominees who were in favor of such
proposal.
<PAGE>
VHB. VHB's Bylaws provide that special meetings of shareholders may be
called by the Chairman of the Board of Directors, the President, and the Board
of Directors, or at the written request of the holders of not less than
two-thirds of the issued and outstanding shares of VHB.
Constituency and Shareholder Provisions
SNFC. Neither SNFC's Articles of Incorporation nor its Bylaws contain
any constituency or shareholder provision.
VHB. VHB's Articles of Incorporation provide that, in considering the
advisability of VHB entering into any combination, merger or other affiliation
with another corporation, the Board of Directors shall weigh all relevant
factors, including the effects such affiliation would have on VHB's
shareholders, depositors, employees, customers and public. This constituency
provision of the Articles of Incorporation of VHB may discourage or make more
difficult certain acquisition proposals and, therefore, may adversely affect the
ability of shareholders to benefit from certain transactions opposed by the VHB
Board of Directors. The constituency provision would permit the VHB Board of
Directors to take into account the effects of an acquisition proposal on a broad
number of constituencies and to consider any potential adverse effects in
determining whether to accept or reject such proposal.
Shareholder Nominations and Proposals
SNFC. SNFC's Bylaws provide for a manner in which shareholders may
nominate individuals for election to the Board of Directors. Any shareholder of
SNFC may make nominations of individuals for election to the Board of Directors,
provided that such shareholder is entitled to vote with respect to such matter
and such shareholder gives at least 90 days written notice of such nomination
and complies with the other requirements set forth in the Bylaws. The SNFC
Articles and Bylaws do not contain any provisions regarding shareholder
proposals.
VHB. VHB's Bylaws provide that any shareholder of VHB may make
nominations of individuals for election to the Board of Directors, provided that
such shareholder is entitled to vote with respect to such matter and such
shareholder gives at least 21 days notice of such nomination and complies with
the other requirements set forth in the Bylaws. The VHB Articles of
Incorporation and Bylaws do not contain any provisions regarding shareholder
proposals.
Business Combinations
SNFC. The Articles of Incorporation of SNFC provide that any merger,
share exchange or sale of all or substantially all of the corporation's assets
shall be approved only upon the affirmative vote of more than two-thirds of the
outstanding shares of SNFC. The requirement of a supermajority vote of
shareholders to approve certain business transactions may discourage a change in
control of SNFC by allowing a minority of SNFC's shareholders to prevent a
transaction favored by the majority of the shareholders. The primary purpose of
the supermajority vote requirement, however, is to encourage negotiations with
SNFC's management by groups or corporations interested in acquiring control of
SNFC and to reduce the danger of a forced merger or sale of assets.
<PAGE>
VHB. In addition to the constituency provision discussed above, VHB's
Articles of Incorporation require the affirmative vote of two-thirds of the
shares issued, outstanding and entitled to vote to approve any merger, share
exchange, any issuance of shares that results in the acquisition of control of
VHB by another, sale of all or substantially all of VHB's assets, adoption of a
plan of liquidation or dissolution prepared by another, any proposal in the
nature of a reclassification or reorganization that would increase the
proportionate voting rights of another, or any similar transaction.
State Anti-Takeover Statutes. Virginia has two anti-takeover statutes in
force, the Affiliated Transactions Statute and the Control Share Acquisitions
Statute.
Affiliated Transactions. The VSCA contains provisions governing
"affiliated transactions" (including, among other various transactions, mergers,
share exchanges, sales, leases, or other dispositions of material assets,
issuances of securities, dissolutions, and similar transactions) with an
"interested shareholder" (generally the beneficial owner of more than 10% of any
class of the corporation's outstanding voting shares). During the three years
following the date a shareholder becomes an interested shareholder, any
affiliated transaction with the interested shareholder must be approved by both
a majority of the "disinterested directors" (those directors who were directors
before the interested shareholder became an interested shareholder or who were
recommended for election by a majority of disinterested directors) and by the
affirmative vote of the holders of two-thirds of the corporation's voting shares
other than shares beneficially owned by the interested shareholder. The
foregoing requirements do not apply to affiliated transactions if, among other
things, a majority of the disinterested directors approve the interested
shareholder's acquisition of voting shares making such a person an interested
shareholder prior to such acquisition. Beginning three years after the
shareholder becomes an interested shareholder, the corporation may engage in an
affiliated transaction with the interested shareholder if (i) the transaction is
approved by the holders of two-thirds of the corporation's voting shares, other
than shares beneficially owned by the interested shareholder, (ii) the
affiliated transaction has been approved by a majority of the disinterested
directors, or (iii) subject to certain additional requirements, in the
affiliated transaction the holders of each class or series of voting shares will
receive consideration meeting specified fair price and other requirements
designed to ensure that all shareholders receive fair and equivalent
consideration, regardless of when they tendered their shares.
Control Share Acquisitions. Under the VSCA's control share acquisitions
law, voting rights of shares of stock of a Virginia corporation acquired by an
acquiring person at ownership levels of 20%, 33 1/3%, and 50% of the outstanding
shares may, under certain circumstances, be denied unless conferred by a special
shareholder vote of a majority of the outstanding shares entitled to vote for
directors, other than shares held by the acquiring person and officers and
directors of the corporation or, among other exceptions, such acquisition of
shares is made pursuant to a merger agreement with the corporation or the
corporation's articles of incorporation or by-laws permit the acquisition of
such shares prior to the acquiring person's acquisition thereof. If authorized
in the corporation's articles of incorporation or by-laws, the statute also
permits the corporation to redeem the acquired shares at the average per share
price paid for them if the voting rights are not approved or if the acquiring
person does not file a "control share acquisition statement" with the
corporation within sixty days of the last acquisition of such shares. If voting
rights are approved for control shares comprising more than fifty percent of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value".
<PAGE>
The provisions of the Affiliated Transactions Statute and the Control
Share Acquisition Statute are only applicable to public corporations that have
more than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisitions Statute.
Neither SNFC nor VHB has opted-out of the statute.
Dissenters' Rights of Appraisal
SNFC. Under the VSCA, a shareholder is generally entitled to dissent
from, and obtain payment of the fair value of his shares in the event of certain
enumerated fundamental corporation actions. However, because Holding Company
Stock is quoted on the NASDAQ market and the Articles of Incorporation of SNFC
do not provide for any additional dissenters' right, under the VSCA,
shareholders of SNFC have no dissenter's rights in the Merger.
VHB. Under the VSCA, a VHB shareholder is not entitled to dissent from,
and obtain fair payment of the value of his shares in the Merger.
VHB's Articles of Incorporation and Bylaws do not provide for any
additional dissenters' rights.
Dividends
SNFC. SNFC's shareholders are entitled to receive dividends as declared
by the Board of Directors in accordance with (sec) 13.1-653 of the Virginia
Stock Corporation Act. Generally, distributions are made out of surplus, or if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
Section 6.1-56 of the Virginia Banking Code generally allows SNFC's
subsidiary depository institution to pay cash dividends to SNFC only out of the
subsidiary depository institution's net undivided profits after providing for
all expenses, losses, interest and taxes accrued, or due by such depository
institution. Further, no dividend can be declared that impairs the paid-in
capital of the depository institution. Substantially all of the funds available
for the payment of dividends by SNFC are derived from its subsidiary depository
institution. There are various other statutory limitations on the ability of
SNFC's subsidiary depository institutions to pay dividends to SNFC. See "Certain
Regulatory Considerations--Payment of Dividends."
VHB. The ability of VHB to pay dividends is subject to statutory and
regulatory restrictions on the payment of cash dividends, including the
requirement under Virginia banking laws that cash dividends be paid only out of
undivided profits and only if the bank has surplus of a specified level as
discussed above. Federal bank regulatory authorities also have the general
authority to limit the dividends paid by insured banks if such payment may be
deemed to constitute an unsafe or unsound practice. See "Certain Regulatory
Considerations--Payment of Dividends."
INFORMATION ABOUT VHB
General
VHB is a Virginia-chartered commercial bank headquartered in
Spotsylvania County, Virginia, with three banking offices located in
Fredericksburg and Spotsylvania County. As of March 31, 1998, VHB had total
consolidated assets of approximately $100 million, total consolidated deposits
of approximately $90 million, and total consolidated shareholders' equity of
approximately $9 million. VHB offers a broad range of banking and
banking-related services.
<PAGE>
VHB was organized under the laws of the state of Virginia and commenced
operations in 1988. The principal executive office of VHB is located at 4700
Harrison Road, Fredericksburg, Virginia 22408, and its telephone number at such
address is (540) 898-1110.
Security Ownership of Management
At May 31, 1998, directors and executive officers of VHB beneficially
owned an aggregate of 81,895 shares of VHB Stock, which was 17.7% of the VHB
Stock then outstanding.
The following table sets forth the number of common stock owned
beneficially by each Director of the Bank and the amount of common stock owned
beneficially by all Executive Officers and Directors of the Bank as a group as
of February 27, 1998:
Number of Shares Percent
Name Beneficially Owned** of Class
- ---- -------------------- ---------
Mark S. Gardner 1,200 *
Christopher M. Hallberg 7,043 1.5
Jerry W. Leonard 34,973 7.5
H. Wayne Parrish 6,902 1.5
Thomas F. Williams, Jr. 10,891 2.4
William B. Young 12,786 2.8
Edward V. Allison, Jr. 8,100 1.8
TOTAL SHARES OWNED BY
DIRECTORS AND
EXECUTIVE OFFICERS 81,895 17.7
- -------------------
* Less than one percent
** This does not include the 200 qualifying shares held by each Director.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR VHB
General
VHB is an independent bank incorporated under the laws of the
Commonwealth of Virginia, Department of the State Corporation Commission, on
August 7, 1987. VHB was approved as a State Bank, is a member of the Federal
Reserve System and is insured by the Federal Deposit Insurance Corporation. The
initial business day for VHB was June 27, 1988. VHB, with a total of 56
employees, does not have any parent company. Virginia Heartland Service
Corporation is a wholly-owned subsidiary of VHB.
The present area and scope of VHB's activities include receiving demand
deposits, savings and other item deposits, individual retirement accounts, safe
deposit boxes, ATM and VISA(R) Check cards, simple interest installment loans
and commercial loans for its customers. VHB lends money on a secured or
unsecured basis to individuals, partnerships, corporations, or others and
renders services generally connected with commercial banking. VHB opened its
third office on July 7, 1997 at 5996 Plank Road, Fredericksburg, Va. The Branch
was constructed at a cost of $705,000, and consists of 2,500 square feet.
Approximately $34,000 of the expenses were incurred in 1998. This full service
office includes an automated teller machine. VHB provides all banking services,
which a community of this size would require.
The main thrust of VHB's lending activity is directed toward small
businesses and the consumer. At March 31, 1998, commercial and industrial loans
totaled $9.02 million, or 14.59%, of total loans of $61.78 million outstanding.
The loan portfolio dos not contain any concentration of loans to borrowers
engaged in the same or similarly activities. VHB's loans are, however, made
primarily to borrowers within Fredericksburg, Spotsylvania County, and the
Commonwealth of Virginia. Accordingly, the ability of VHB's borrowers to pay in
accordance with the terms of their loans, and demand for additional loans, may
be affected by economic conditions in those areas. The loss of any one or more
the VHB's deposits or loans from or to a single person or a few persons
(including federal state and local governments and agencies) would not have a
materially adverse effect of the business of VHB. No material portion of VHB's
business could be considered seasonal.
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment would have no material effect on
capital expenditures, earnings or the competitive position of VHB.
Summary of Earnings
Three months ended March 31, 1998 and 1997. Net income for the first
three months in 1998 was $216,000 or $.47 per share, an increase of $4,000, or
2.03%, over the $212,000, or $ .46 per share, earned in the first quarter of
1997. Average shares outstanding were 464,101 in each period. Return on equity,
the annualized percentage of net income to average stockholder's equity, was
9.79% for the first three months of 1998 compared to 10.19% for the same period
in 1997. Return on assets, the annualized percentage of net income to total
average assets, was .91% and .98% for the first three months of 1998 and 1997,
respectively.
Years ended December 31, 1997 and 1996. Net income for 1997 was
$906,000, or $1.96 per share, an increase of $55,000, or 6.59% over the
$850,000, or $1.84 per share, earned in 1996. Average shares outstanding were
464,101 in each year. Return on equity was 10.48% for 1997 compared to 10.61%
for 1996. Return on assets was 1.01% and 1.03% for 1997 and 1996, respectively.
<PAGE>
Interest Income and Expense
Three months ended March 31, 1998 and 1997. Net interest income was
$958,000 for the first quarter of 1998, an increase of $23,000, or 2.46%, over
the first quarter of 1997. Net interest margin was 4.35% and 4.64% for the first
quarter of 1998 and 1997, respectively. The increase in net interest income was
primarily the result of an increase in average earning assets (up $7.56 million
or 9.38%) offset by a $5.74 million (8.34%) increase in interest bearing
liabilities used to fund the growth in earning assets and a 32 basis point
decrease in the yield on average earning assets.
Years ended December 31, 1997 and 1996. Net interest income was $3.99
million for 1997, an increase of $328,000, or 8.94%, over 1996. The net interest
margin was 4.79% and 4.74% for 1997 and 1996, respectively. The increase in net
interest income was primarily the result of an increase in average earning
assets (up $5.98 million or 7.73%) and a 24 basis point decline in the rate on
average interest bearing liabilities, offset by a $4.66 million (7.07%) increase
in interest bearing liabilities and a 19 basis point decrease in the yield on
average earning assets.
<PAGE>
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
AVERAGE BALANCES AND YIELDS
(Dollars in Thousands)
Three Months Ended March 31
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------- --------- ------- ------------- --------- -------
<S> <C>
Assets
Federal funds sold $ 6,386 $ 85 5.32% $ 3,383 $ 49 5.79%
Securities (1) 20,397 302 5.92 20,157 298 5.91
Loans,net (2) 10.26
61,401 1,523 9.92 57,084 1,465
------------- --------- ---------- ---------
Total Interest Earning Assets 88,184 1,910 8.66 80,624 1,812 8.98
--------- ---------
Allowance for loan losses (643) (636)
Cash and due from banks 2,652 2,401
Premises and equipment, net 2,938 2,401
Other assets 1,924 1,749
------------- ----------
Total Assets $ 95,055 $ 86,539
============= ===========
Liabilities and Stockholders'
Equity
Money market checking
deposits $ 3,316 20 2.41 2,684 16 2.38
Savings deposits 16,991 136 3.20 15,558 124 3.19
Certificates of deposit 54,220 796 5.87 50,549 737 5.83
------------- --------- ---------- ---------
Total Interest Bearing
Liabilities 74,527 952 5.11 68,791 877 5.10
------------- --------- ---------- ---------
Demand deposits 10,645 8,723
Other liabilities 875 706
------------- -------------
Total Liabilities 86,047 78,220
Stockholders' Equity 9,008 8,319
------------- -------------
Total Liabilities and
Stockholders'Equity $ 95,055 $ 86,539
============= =============
Net Interest Income $ 958 $ 935
============= =========
Net Interest Spread 3.55% 3.88%
======= =======
Net Interest Margin 4.35% 4.64%
======= =======
</TABLE>
(1) Interest revenues are not adjusted to reflect the effects of tax-exempt
securities.
(2) Non-accrual loans are included in average loans. Interest on loans includes
fees of $91 thousand and $64 thousand for the three months ended March 31, 1998
and 1997, respectively, and $396 thousand and $315 thousand for the years ended
1997 and 1996,
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
AVERAGE BALANCES AND YIELDS
(Dollars in Thousands)
Year Ended December 31
-----------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------- --------- -------- ------------- --------- -------
<S> <C>
Assets
Federal funds sold $ 4,590 $ 258 5.62% $ 5,079 $ 271 5.34%
Securities (1) 19,238 1,143 5.94 17,206 997 5.79
Loans,net (2) 10.45 10.80
59,543 6,223 55,106 5,950
------------ --------- ------------- ---------
Total Interest Earning Assets 83,371 7,624 9.14 77,391 7,218 9.33
--------- ------------- ---------
Allowance for loan losses (630) (603)
Cash and due from banks 2,597 2,263
Premises and equipment, net 2,665 1,716
Other assets 1,831 1,862
------------- -------------
Total Assets $ 89,834 $ 82,629
============= =============
Liabilities and Stockholders'
Equity
Money market checking
deposits 3,244 80 2.47 1,926 47 2.44
Savings deposits 15,958 521 3.26 14,437 480 3.32
Certificates of deposit 51,304 3,029 5.90 49,488 3,025 6.11
------------- --------- ------------- ---------
Total Interest Bearing
Liabilities 70,506 3,630 5.15 65,851 3,552 5.39
------------- --------- ------------- ---------
Demand deposits 9,848 8,065
Other liabilities 831 692
------------- -------------
Total Liabilities 81,185 74,608
Stockholders' Equity 8,649 8,021
------------- -------------
Total Liabilities and
Stockholders'Equity $ 89,834 $ 82,629
============= =============
Net Interest Income $ 3,994 $ 3,666
============= =============
Net Interest Spread 3.99% 3.94%
======== =======
Net Interest Margin 4.79% 4.74%
======== =======
</TABLE>
(1) Interest revenues are not adjusted to reflect the effects of tax-exempt
securities.
(2) Non-accrual loans are included in average loans. Interest on loans includes
fees of $91 thousand and $64 thousand for the three months ended March 31, 1998
and 1997, respectively, and $396 thousand and $315 thousand for the years ended
1997 and 1996,
<PAGE>
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
RATE AND VOLUME VARIANCES
(Dollars in Thousands)
Three Months Ended March 31, Year Ended December 31 1997
1998
Increase (Decrease) Increase (Decrease)
Due to changes in: (1) Due to changes in:(1)
-------------------------------- -----------------------------
--------- --------- ----------- --------- --------- ---------
Volume Rate Total Volume Rate Total
--------- --------- ----------- --------- --------- ---------
<S> <C>
Interest Earning Assets
Federal funds sold $ 40 $ (4) $ 36 $ (27) $ 14 $ (13)
Securities 4 0 4 120 26 146
Loans,net 107 (49) 58 468 (195) 273
--------- --------- ----------- --------- --------- ---------
Total Interest Earning Assets 164 (66) 98 549 (143) 406
--------- --------- ----------- --------- --------- ---------
Interest Bearing Liabilities
Money market checking deposits 4 0 4 32 1 33
Savings deposits 11 1 12 50 (9) 41
Certificates of deposit 54 5 59 109 (105) 4
--------- --------- ----------- --------- --------- ---------
Total Interest Bearing
Liabilities 73 2 75 244 (166) 78
--------- --------- ----------- --------- --------- ---------
Change in Net Interest Income $ 92 $ (68) $ 23 $ 305 $ 23 $ 328
========= ========= =========== ========= ========= =========
</TABLE>
(1) Variances that result from the combined effects of changes in volumes and
rates are allocated to rate and volume variances based upon their relative
sizes.
Provision for Loan Losses
On a periodic basis, management determines the amount of the provision
for possible loan losses based upon its judgement as to the adequacy of the
allowance for possible loan losses. Considerations include the balance of the
allowance; the size, composition and quality of the loan portfolio; levels and
trends in identified problem assets; use of appraisals to estimate the value of
collateral; and management's judgement as to prevailing and anticipated economic
conditions.
Other Income and Expense
Three months ended March 31, 1998 and 1997. Other income of $79,000 in
the first quarter of 1998 was approximately $6,000, or 7.06% less than the
$85,000 recorded in the first quarter of 1997.
Other expense for the first quarter of 1998 of $657,000 increased
$29,000, or 4.62%, from the $628,000 recorded in the first quarter of 1997. The
increase was primarily the result of a $14,000, or 3.86%, increase in salaries
and employee benefits and a $16,000 increase in other occupancy expenses. The
costs of the new branch opened in 1997 contributed to increased operating
expense levels in the first quarter of 1998, compared to the first quarter of
1997.
<PAGE>
Years ended December 31, 1997 and 1996. Non-interest income of $314,000
was recorded in 1997, an increase of $47,000, or 17.60%, from the $268,000
recorded in 1996.
Other expense for 1997 totaled $2.60 million, up $421,000, or 19.33%,
from the $2.18 million recorded in 1996. Increases were recorded in each
category of noninterest expense. The largest increase was in salaries and
employee benefits, which increased $205,000, or 16.47%.The costs of new
branches and the mortgage company contributed to increased operating expenses in
1997.
Taxes on Income
Three months ended March 31, 1998 and 1997. The provision for income taxes
was $104,000 for the first quarter of 1998, compared to $110,000 for the first
quarter of 1997, a decrease of approximately $6,000, or 5.04%.
Years ended December 31, 1997 and 1996. The 1997 provision for income
taxes of $436,000 increased $22,000, or 5.42%, over the 1996 provision of
$414,000.
Financial Condition, Capital Resources and Liquidity
Loans. Total loans, net of unearned income but before deduction of the
allowance for loan losses, were $61.78 million at March 31, 1998, up $3.26
million or 5.57%, from March 31, 1997. At December 31, 1997, loans totaled
$60.67 million, up $3.69 million, or 6.48%, from year-end 1996.
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
LOAN PORTFOLIO COMPOSITION
(Dollars in Thousands)
March 31, December 31,
--------------------------- ----------------------------
1998 1997 1998 1997
--------------------------- -------------- -------------
<S> <C>
Real estate loans $ 47,775 $ 41,746 $ 47,515 $ 39,624
Commercial loans 9,015 8,962 7,716 8,755
Installment loans 4,966 7,535 5,426 8,317
Other loans 60 335 57 332
Total loans before deduction of
unearned income 61,816 58,578 60,714 57,028
Less unearned income (32) (52) (40) (48)
------------- ------------- -------------- -------------
Total loans 61,784 58,526 60,674 56,980
Less allowance for loan losses (619) (631) (649) (626)
------------- ------------- -------------- -------------
Net loans $ 61,165 $ 57,895 $ 60,025 $ 56,354
============= ============= ============== =============
</TABLE>
VIRGINIA HEARTLAND BANK
LOAN MATURITIES AND RATE SENSITIVITY
(Dollars in Thousands)
Information regarding the interest sensitivity of the loan portfolio at December
31, 1997 is presented below:
<TABLE>
<CAPTION>
One year After one but After
or less less than five five years Total
years
------------- ------------------ ------------- -------------
<S> <C>
Real estate loans $ 14,002 $ 21,312 $ 12,040 $ 47,354
Commercial loans 3,943 2,215 1,506 7,664
Installment loans 776 4,511 155 5,442
Other loans 18 14 20 52
------------- ------------- ------------- -------------
Total loans (1) (2) $ 18,739 $ 28,052 $ 13,721 $ 60,512
============= ============= ============= =============
</TABLE>
(1) Excluding nonaccrual loans and before deduction of unearned income or the
allowance for loan losses. Includes loans classified as impaired under FASB 114.
(2) All loans due after one year have fixed interest rates.
Credit Risk. VHB establishes an allowance for loan losses in an amount it
deems adequate to provide for losses in the loan portfolio. Management of VHB
assesses the adequacy of the allowance for loan losses based upon a number of
factors, including, among others, the size, composition and quality of the loan
portfolio; levels and trends in identified problem assets; use of appraisals to
estimate the value of collateral; and management's judgment as to prevailing and
anticipated economic conditions. The allowance for loan losses was $619,000, or
1% of total loans, at March 31, 1998. Total nonperforming loans at March 31,
1998 were $187,000, compared to $375,000 at December 31, 1997. At March 31,
1998, potential problem loans amounted to approximately $635 thousand. These
loans are subject to increased periodic management attention, and their status
is reviewed on a frequent basis. Of the potential problem loans identified at
March 31, 1998, approximately $546 thousand are secured by real estate with
appraised values that exceed the principal balances outstanding.
VIRGINIA HEARTLAND BANK
ANALYSIS OF CREDIT RISK
(Dollars in Thousands)
Activity in the allowance of loan losses is shown below for the indicated
periods.
<TABLE>
<CAPTION>
Three Months Ended March 31 Year Ended December 31
------------------------------ ------------------------------
1998 1997 1997 1996
------------- ------------- ------------- -------------
<S> <C>
Balance, beginning of period $ 649 $ 626 $ 626 $ 654
Provision for loan losses 60 70 366 490
Loan charge-offs:
Commercial 44 21 97 178
Installment 59 50 307 373
------------- ------------- ------------- -------------
Total charge-offs 103 71 404 551
------------- ------------- ------------- -------------
Loan recoveries
Commercial - - 8 1
Installment 13 6 53 32
------------- ------------- ------------- -------------
Total recoveries 13 6 61 33
------------- ------------- ------------- -------------
Net charge-offs 90 65 343 518
------------- ------------- ------------- -------------
Balance, end of period $ 619 $ 631 $ 649 $ 626
============= ============= ============= =============
Average loans $ 61,401 $ 57,084 $ 59,543 $ 55,106
Loans at end of period 61,784 58,526 60,674 56,980
Net charge-offs to average loans
(1) 0.59% 0.46% 0.58% 0.94%
Allowance to total loans at end of
period 1.00 1.08 1.07 1.10
The following table presents nonperforming assets at the indicated dates.
Non-accrual loans (2) (3) $ 133 $ 332 $ 203 $ 140
Loans 90 days past due 54 594 172 552
Restructured loans - - - -
------------- ------------- ------------- -------------
Total nonperforming loans 187 926 375 692
Other real estate owned, net 790 412 460 411
------------- ------------- ------------- -------------
Total nonperforming assets $ 977 $ 1,338 $ 835 $ 1,103
============= ============= ============= =============
Nonperforming loans to total
loans .30% 1.76% .62% 1.21%
Nonperforming assets to total
assets .98 1.51 .89 1.27
</TABLE>
(1) Percentages for the three month periods are annualized.
(2) For the three months ended March 31, 1998, gross interest income that would
have been recorded if non-accrual loans had been current and in accordance
with their original terms was $1 thousand while no interest actually was
recorded on such loans.
(3) It is VHB's policy to place loans on non-accrual status if interest
or principal is past due for 90 days.
<PAGE>
Investment Securities Investment securities totaled $20.04 million at
March 31, 1998, up $2.1 million, or 11.68% from March 31, 1997. At year end
1997, total investment securities were $21.04 million, up $3.56 million, or
20.34%, from year-end 1996. Average investment securities represented 23.13% and
25.00% of earning assets in the first quarter of 1998 and 1997, respectively,
and 23.08% and 22.23% of earning assets in the years 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
INVESTMENT SECURITIES: BALANCES, YIELDS AND MATURITIES
(Dollars in Thousands)
March 31,
1998
-------------------------------------------------------------------------------------
One year After one but After five but Over ten
or less less than five less than ten years (1) Total
years years
--------------- ------------------ -------------------------------- --------------
<S> <C>
U.S. Treasurty Securities
Amortized cost 5,497 $ 11,532 $ - $ - $ 17,029
Fair value 5,506 11,701 - - 17,207
Weighted average yield 6.09% 6.17% % % 6.15%
U.S. Agency Securities
Amortized cost $ - $ 2,012 $ - $ - $ 2,012
Fair value - 2,021 - - 2,021
Weighted average yield % 5.91% % % 5.91
State and Municipal Securities
Amortized cost $ 405 $ 250 $ 655
Fair value 415 255 670
Weighted average yield % 4.76% 5.30% % 4.97%
Other Secrurities (2) $ 345 $ 345
Amortized cost $ 345 $ 345
Fair value - -
Weighted average yield % % % % %
Total
Amortized cost $ 5,497 $ 13,949 $ 250 $ 345 $ 20,041
Fair value 5,506 14,137 255 - 19,898
Weighted average yield 6.09% 6.10% 5.30% - 5.98%
</TABLE>
(1) Includes other securities with no stated maturity. At March 31, 1998, no
security had a maturity of over ten years.
(2) Includes Federal Reserve Bank stock and Community Bankers' Bank stock, the
sale of which are subject to substantial restriction.
Deposits. Total deposits of $89.73 million at March 31, 1998, were
$10.47 million, or 13.21%, greater than at March 31, 1997. At December 31, 1997,
total deposits were $ 83.98 million, up $5.79 million, or 7.40%, over the $78.20
million total at December 31, 1996. At March 31, 1998, the categories of demand
deposits, savings and NOW accounts, and other time deposits (primarily
certificates of deposit) comprised 15.78%, 23.29%, and 60.93%, respectively, of
total deposits. Interest bearing deposits comprised all of VHB's interest
bearing liabilities during the first quarter of 1998 and the years 1997 and
1996.
<PAGE>
<TABLE>
<CAPTION>
VIRGINIA HEARTLAND BANK
DEPOSIT COMPOSITION AND RATES
(Dollars in Thousands)
March 31, December 31,
------------------------------------------------ -----------------------------------------------
1998 1997 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate Amount Rate
----------- ----------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C>
Non interest bearing demand
accounts $ 10,645 $ 8,723 $ 9,848 $ 8,065
----------- ---------- ---------- ----------
Interest bearing accounts:
Money Market 3,316 2.41% 2,684 2.38% 3,244 2.47% 1,926 2.44
Savings 16,991 3.20 15,558 3.19 15,958 3.26 14,437 3.32
Certificates of deposit 54,220 5.87 50,549 5.83 51,304 5.90 49,488 6.11
----------- ---------- -------- ----------
Total interest bearing 74,527 5.11 68,791 5.10 70,506 5.15 65,851 5.39
----------- ---------- -------- ----------
Total $ 85,172 $77,514 $ 80,354 $ 73,916
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Over three- Over Over
months six six - twelve
Maturities of Time Deposits of $100 thousand and More or less months twelve months Total
months
---------- ------------ ----------------------- ----------
<S> <C>
(Dollars in Thousands)
At March 31, 1998 $ 107 $ 3,657 $ 3,558 $ 1,570 $ 8,892
</TABLE>
<PAGE>
Capital Resources. At March 31, 1998, total stockholders' equity was
$9.11 million, or 9.10% of total assets, compared to $8.40 million, or 9.50% of
total asset at March 31, 1997. Total stockholders' equity was $8.90 million, or
9.48% percent of total assets, at year-end 1997, compared to $8.19 million, or
9.40%, at year-end 1996. Stockholders equity grew 8.34% from March 31 1997 to
March 31, 1998, and 8.50% from year-end 1996 to year-end 1997. The growth in
stockholders' equity was primarily the result of net income, less dividends on
common stock.
VHB is subject to various regulatory capital requirements. Failure to meet
minimum regulatory capital requirements can have direct, material effects on VHB
and its operations. At March 31, 1998, VHB was "well capitalized" for regulatory
purposes. See "Certain Regulatory Considerations-Capital Adequacy."
Liquidity. Liquidity is the ability to meet cash flow requirements as
they occur without adverse liquidation of longer-term assets. VHB's primary
sources of liquidity are short-term investments and federal funds sold. At March
31, 1998, federal funds sold totaled $11.14 million and investments classified
as available for sale were $345,000.
Asset Liability Management. Net interest income, the primary component
of VHB's net income, arises from the difference between the yield on interest
earning assets and the cost of interest bearing liabilities, and the relative
amounts of these assets and liabilities. VHB manages its interest-related assets
and liabilities by coordinating the levels of, or gap between, interest rate
sensitive assets and liabilities to minimize changes in net interest income
despite changes in market interest rates. This asset/liability policy is
intended to stabilize the long-run earnings power of VHB as it achieves its
growth objectives.
Effects of Inflation. The financial statements and related financial
data presented in this Proxy Statement have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the asset and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effect of
general levels of inflation.
<PAGE>
Properties. VHB's Main Office, located at 4700 Harrison Road
(Spotsylvania County) Fredericksburg, Virginia, consists of a one-story brick
building consisting of 5,000 square feet, which VHB renewed its lease for
another 10-year period beginning April 1, 1998 with an annual rental of $60,900
and an anticipated annual increase beginning April 1, 1999 of 3%. VHB's downtown
office is located at 1016 Charles Street, Fredericksburg, Virginia. It consists
of 3,500 square feet. VHB's office located at 5996 Plank Road, Fredericksburg,
Virginia was opened July 7, 1997 and consists of 2,500 square feet. The VHB's
Operations Center consists of a one-story cinder block building totaling 2,500
square feet and is located at 205 Wallace Lane, Spotsylvania County. VHB
incurred total expenses for development and improvement of approximately
$756,000 in 1997. The expenses associated with the opening of the office at 5996
Plank Road accounted for 89% of the total development and improvement expenses
in that year. The balance represents new furniture, computer and equipment
expenses. The total anticipated capital expenditures for 1998 are $138,000.
Directors and Executive Officers of VHB
<TABLE>
<CAPTION>
Term of Director
Directors Age Office Since Principal Occupation for Past 5 Years
- --------- --- ------ ----- -------------------------------------
<S> <C>
Mark S. Gardner 45 1 yr 1989 Partner, Gardner, Maupin & Sutton Law
Firm
Christopher M. Hallberg 48 1 yr 1988 Financial Planner & Real Estate
Investments
Jerry W. Leonard 64 1 yr 1988 Owner, Leonard Construction Co.-Building
Contractor
H. Wayne Parrish 54 1 yr 1988 President & General Manager, Allmans
Bar-B-Q;Real Estate Appraiser; President,
Telephone Answering Service of Fbg, Inc.
Thomas F. Williams, Jr. 59 1 yr 1988 Partner, Franklin, Williams & Cowan Law
Firm
William B. Young 60 1 yr 1988 CEO, Virginia Heartland Bank
</TABLE>
<TABLE>
<S> <C>
William B. Young 60 1 yr CEO
Edward V. Allison 59 1 yr President and Senior Loan Officer
</TABLE>
<PAGE>
Executive Compensation
The following tabulation sets forth the aggregate remuneration for
services in all capacities paid by VHB during 1997 to the Executive Officer of
VHB whose aggregate remuneration exceeded $100,000:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------ -------
<S> <C>
OTHER ALL
NAME AND SALARY ANNUAL RESTRICTED OTHER
PRINCIPAL AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION YEAR BENEFITS BONUS SATION AWARDS SARs PAYOUTS SATION
- -------- ---- -------- ------ ------ ---------- -------- ------- -------
WILLIAM B. YOUNG 1997 123,000 -0- -0- -0- -0- -0- -0-
CEO
</TABLE>
VHB has entered into employment agreements with Mr Young and Mr. Allison
in connection with the Merger. See The Merger--Management and Operations after
the Merger," and "-Interests of Certain Persons in the Merger."
VHB has entered into supplemental retirement agreements with VHB's
Chairman and President which provide benefits payable at age sixty and
sixty-five, respectively. At December 31, 1997, $363,000 has been accrued under
these contracts and this liability is reflected in the consolidated financial
statements. The supplemental retirement is to be paid to the Chairman and
President or their heirs over a period of fifteen years commencing with the
attainment of age sixty and sixty-five, respectively.
VHB is the owner and beneficiary of whole life insurance policies on the
lives of the above mentioned employees. If the Chairman or President die during
their employment, VHB shall pay to their designated beneficiaries or in the
absence thereof to their estates $75,000 and $60,000, respectively, per year
until the date at which the officer would have been sixty and sixty-five,
respectively, and thereafter $45,000 and $20,000, respectively, for fifteen
years. The policies had a net cash surrender value at December 31, 1997 of
$253,628.
In the event that this death benefit should become payable, such benefit
shall be in lieu of all supplemental retirement accruals provided to the date of
death.
VHB adopted a 401(K) Profit Sharing Thrift Plan in 1991. All permanent
employees with more than three months of service may participate. VHB may
contribute to the plan through either matching or discretionary contributions.
Matching contributions are 25% of each participant's deferred compensation not
to exceed 6% of the participant's compensation. The amount of discretionary
contributions will be determined by the Board. The discretionary contribution is
allocated among the participants in proportion to their compensation. During
1997, there were employee contributions of $64,000 and matching contributions by
VHB of $11,000 VHB accrued a discretionary contribution of $36,000.
Transactions and Relationships with Management
VHB has had in the past, and expects to have in the future, banking
transactions with directors and executive officers in the ordinary course of
business on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with other persons. See Note 13 to the VHB consolidated financial
statements for December 31, 1997 and 1996 and the years then ended. In the
opinion of management, these transactions do not and will not involve more than
the normal risk of collectibility or present other unfavorable features. VHB
leases its main office from Jerry W. Leonard, a director of VHB. Thomas F.
Williams, Jr., is a partner in the firm of Franklin, Williams & Cowan, which VHB
has retained during 1997 and 1998 as legal counsel.
<PAGE>
Legal Proceedings
In the normal course of business, VHB is subject to various pending and
threatened legal actions. The relief or damages sought in some of these actions
may be substantial. After reviewing pending and threatened actions with counsel,
management considers that the outcome of such actions will not have a material
adverse effect on VHB's financial position; however, VHB is not able to predict
whether the outcome of such actions may or may not have a material adverse
effect on results of operations in a particular future period as the timing and
the amount of any resolution of such actions and relationship to the future
results of operation are not known.
INFORMATION ABOUT SNFC
General
SNFC, a Virginia corporation, is a bank holding company registered with
the Federal Reserve under the BHC Act. SNFC owns all of the outstanding shares
of SBT, a Virginia banking corporation. SNFC, through SBT, offers a full range
of financial services through six banking offices located Culpeper County,
Virginia, and the counties of Madison, Orange, and Rockingham, Virginia. As of
March 31, 1998, SNFC had total consolidated assets of approximately $228
million, total consolidated deposits of approximately $193 million, and total
consolidated shareholders' equity of approximately $29 million.
SBT is a Virginia bank with deposits insured by the Bank Insurance Fund
of the FDIC. SBT's primary business is the granting of commercial business and
consumer loans, residential real estate loans, commercial real estate loans,
funded through solicitation of deposits. Significant business lines include
trust services, investment services, and a mortgage division. SBT offers a wide
range of banking services available to both individuals and to businesses
located in Culpeper County and the adjoining areas. Among such services are
those traditionally offered by banks including deposit accounts, such as
business and personal checking, savings accounts (including the interest-bearing
negotiable orders of withdrawal accounts (NOW Accounts)), time certificates of
deposit, money market accounts, travelers checks, issuance of drafts, note
collection, credit card services, safe deposit rental, some limited
international services, wire services, fiduciary services, ACH origination
transfers, and drive-up windows. SBT also operates two wholly-owned non-bank
subsidiaries: Second Service Company owns 12% of Bankers Title of
Fredericksburg, a title insurance company, in which SBT shares in the revenues
of the title company; SBT also owns a 50% interest in VHB Mortgage LLC, a
mortgage company serving the greater Fredericksburg, Virginia area in which VHB
owns the remaining 50%.
The principal executive offices of SNFC and SBT are located at 102
South Main Street, Culpeper, Virginia 22701, and its telephone number at such
address is (540) 825-4800. Additional information with respect to SNFC and SBT
is included in documents incorporated by reference in this Proxy Statement. See
"Available Information," "Documents Incorporated by Reference," and "Certain
Regulatory Considerations."
Security Ownership of Management
Information regarding the ownership of securities of SNFC by management
of SNFC is incorporated herein by reference to SNFC's Annual Report on Form 10-K
for the year ended December 31, 1997. At May 31, 1998, directors and executive
officers of SNFC beneficially owned an aggregate of 96,570 shares of Holding
Company Stock, which was 6.5% of the Holding Company Stock then outstanding. In
addition, at May 31, 1998, the SBT Trust Department held, as trustee for various
trust accounts, approximately 93,109 shares, or 6.2%, of the then outstanding
shares of Holding Company Stock.
<PAGE>
CERTAIN REGULATORY CONSIDERATIONS
The following discussion sets forth certain of the material elements of
the regulatory framework applicable to banks and bank holding companies and
provides certain specific information related to SNFC and VHB.
General
SNFC is a bank holding company registered with the Federal Reserve
under the BHC Act. As such, SNFC and its non-bank subsidiaries are subject to
the supervision, examination and reporting requirements of the BHC Act and the
regulations of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5.0% of the voting shares of the bank; (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (iii) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve
any acquisition, merger or consolidation that would result in a monopoly or
would be in furtherance of any combination or conspiracy to monopolize or
attempt to monopolize the business of banking in any part of the United States,
or the effect of which may be substantially to lessen competition or to tend to
create a monopoly in any section of the country, or that in any other manner
would be in restraint of trade, unless it finds the anticompetitive effects of
the proposed transaction are clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995 (Interstate
Banking Act), which became effective on September 29, 1996, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that SNFC and any other bank holding company located in Virginia
may now acquire a bank located in any other state, and any bank holding company
located outside Virginia may lawfully acquire any Virginia-based bank,
regardless of state law to the contrary, in either case subject to certain
deposit-percentage limitations, aging requirements, and other restrictions. The
Interstate Banking Act also generally provides that, after June 1, 1998,
national and state-chartered banks may branch interstate through acquisitions of
banks in other states. By adopting legislation prior to that date, a state has
the ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether. Virginia has enacted "opt in" legislation that permits interstate
branching in Virginia on a reciprocal basis through June 1, 1998, and on an
unlimited basis thereafter. Accordingly, the banking subsidiary of SNFC and VHB
are currently able to establish and operate branches in other states that have
also enacted "opt in" legislation.
<PAGE>
The BHC Act generally prohibits SNFC from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices.
For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. Despite prior approval, the
Federal Reserve has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company and is inconsistent with sound banking principles.
SBT and VHB are both members of the FDIC, and as such, their deposits
are insured by the FDIC to the maximum extent provided by law. SBT and VHB are
both subject to numerous state and federal statutes and regulations that affect
their business, activities, and operations. As a Virginia-chartered bank that is
a member of the Federal Reserve System, SBT is supervised and examined by the
Federal Reserve and the Commissioner. VHB, a Virginia-chartered bank and member
of the Federal Reserve System, is supervised and examined by the Federal Reserve
and the SCC. The federal banking agencies and the SCC regularly examine the
operations of SBT and VHB and are given authority to approve or disapprove
mergers, consolidations, the establishment of branches, and similar corporate
actions, and to prevent the commencement or continuation of unsafe or unsound
banking practices or other violations of law. The federal banking agencies and
the SCC regulate and monitor all areas of the operations of SBT and VHB,
including loans, mortgages, issuances of securities, capital adequacy, loss
reserves, and compliance with the Community Reinvestment Act of 1977, as amended
(the "CRA") and other laws and regulations. Interest and certain other charges
collected and contracted for by SBT and VHB are also subject to state usury laws
and certain federal laws concerning interest rates.
Community Reinvestment
VHB and SNFC are subject to the provisions of the CRA and the federal
banking agencies' implementing regulations. Under the CRA, all financial
institutions have a continuing and affirmative obligation consistent with their
safe and sound operation to help meet the credit needs for their entire
communities, including low- and moderate-income neighborhoods. Following their
most recent CRA compliance examinations, VHB and SBT each received an
"outstanding" CRA rating.
Payment of dividends
SNFC is a legal entity separate and distinct from its banking and other
subsidiaries. The principal source of cash flow of SNFC, including cash flow to
pay dividends to its shareholders, is dividends from SBT. There are statutory
and regulatory limitations on the payment of such dividends to SNFC, as well as
by SNFC and VHB to their shareholders.
<PAGE>
SNFC is not subject to any direct legal or regulatory restrictions on
dividends (other than the requirements under the VSCA that distributions may not
be made if, after giving them effect, the corporation would not be able to pay
its debts as they become due in the usual course of business or the
corporation's total assets would be less than its liabilities). SBT and VHB, as
Virginia-chartered banks, are subject to Virginia statutory and regulatory
restrictions on the payment of cash dividends, including the requirement that
cash dividends be paid only out of undivided profits and only if the bank has
surplus of a specified level. If a bank having capital stock of $15,000 or more
has surplus of less than 50% of its paid-in capital stock, no cash dividend may
be declared until the bank has transferred from undivided profits to surplus 25%
of its undivided profits or any lesser percentage sufficient to raise the bank's
surplus to an amount equal to 50% of its paid-in capital stock.
If, in the opinion of the federal banking regulator, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1992 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "--Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that as a matter of prudent banking, bank holding companies and insured
banks should generally only pay dividends out of current operating earnings.
The payment of dividends by SNFC and VHB may also be affected or limited by
other factors, such as the requirement to maintain adequate capital above
regulatory guidelines.
Capital Adequacy
SNFC, SBT and VHB are required to comply with the capital adequacy
standards established by the Federal Reserve. There are two basic measures of
capital adequacy for bank holding companies and their banking subsidiaries that
have been promulgated by the Federal Reserve and the FDIC: a risk-based measure
and a leverage measure. All applicable capital standards must be satisfied for a
bank holding company or a bank to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
<PAGE>
The risk-based capital guidelines establish a minimum ratio
("Risk-Based Capital Ratio") of total capital ("Total Capital") to risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) of 8.0%. At least half of Total Capital must comprise common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated and other
qualifying debt, other preferred stock, and a limited amount of loan loss
reserves ("Tier 2 Capital"). At March 31, 1998, SNFC's consolidated Total
Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital Ratio (i.e., the
ratio of Tier 1 Capital to risk-weighted assets) were 22.35% and 21.31%,
respectively, and VHB's Total Risk-Based Capital and Tier 1 Risk-Based Capital
Ratios were 12.64% and 11.92% , respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3.0% for bank holding companies that
meet certain specified criteria, including having the highest regulatory rating.
All other bank holding companies generally are required to maintain a Leverage
Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis points.
SNFC's and VHB's respective Leverage Ratios at March 31, 1998, were 13.15% and
9.59%. The guidelines also provide that bank holding companies 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. Furthermore, the Federal Reserve has
indicated that it will consider a "tangible Tier 1 Capital Leverage Ratio"
(deducting all intangibles) and other indicia of capital strength in evaluating
proposals for expansion or new activities.
The risk-based and leverage capital requirements adopted by the Federal
Reserve for SBT and VHB are substantially similar to those adopted by the
Federal Reserve for bank holding companies. Both SBT and VHB were in compliance
with applicable minimum capital requirements as of March 31, 1998. Neither SNFC,
SBT, nor VHB has been advised by any federal banking agency of any specific
minimum capital ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "--Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the federal banking agencies have, pursuant to FDICIA,
adopted an amendment to the risk-based capital standards that incorporates a
measure for market risk, would calculate the change in an institution's net
economic value attributable to increases and decreases in market interest rates
and would require banks with excessive interest rate risk exposure to hold
additional amounts of capital against such exposures. The effect of the
amendment is that any bank or bank holding company with significant exposure to
market risk must measure that risk using its own internal value at risk model
and hold a commensurate amount of capital. Compliance with the amended procedure
is required by January 1, 1998.
Support of Subsidiary Banks
Under Federal Reserve policy, SNFC is expected to act as a source of
financial strength for, and to commit resources to support, SBT. This support
may be required at times when, absent such Federal Reserve policy, SNFC may not
be inclined to provide it. In addition, any capital loans by a bank holding
company to any of its banking subsidiaries are subordinate in right of payment
to deposits and to certain other indebtedness of such banks. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a banking subsidiary
will be assumed by the bankruptcy trustee and entitled to a priority of payment.
In addition, the Federal Deposit Insurance Act provides that any financial
institution whose deposits are insured by the FDIC generally shall be liable for
any loss incurred by the FDIC in connection with the default of, or any
assistance provided by the FDIC to, a commonly controlled financial institution.
<PAGE>
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system the federal banking
regulators have established five capital categories (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized) and are required to take certain mandatory
supervisory actions, and are authorized to take other discretionary actions,
with respect to institutions in the three undercapitalized categories, the
severity of which will depend upon the capital category in which the institution
is placed. Generally, subject to a narrow exception, FDICIA requires the banking
regulator to appoint a receiver or conservator for an institution that is
critically undercapitalized.
Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) has a total Risk-Based Capital Ratio of 10%
or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater, and a Leverage
Ratio of 5.0% or greater and (ii) is not subject to any written agreement,
order, capital directive, or prompt corrective action directive issued by the
appropriate federal banking agency is deemed to be well capitalized. An
institution with a total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1
Risk-Based Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or
greater is considered to be adequately capitalized. A depository institution
that has a total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Risk-Based
Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0% is
considered to be undercapitalized. A depository institution that has a total
Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital Ratio of
less than 3.0%, or a Leverage Ratio of less than 3.0%. is considered to be
significantly undercapitalized, and an institution that has a tangible equity
capital to assets ratio equal to or less than 2.0% is deemed to be critically
undercapitalized. For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 Capital for purposes of the
risk-based capital standards, plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets with certain exceptions. A depository institution may be deemed to be in
a capitalization category that is lower than is indicated by its actual capital
position if it receives a less than satisfactory examination rating or if the
agency has determined, after notice and opportunity for a hearing, that the
institution is in an unsafe or unsound condition.
At March 31, 1998, both SBT and VHB had the requisite capital levels to
qualify as well capitalized under the regulations implementing the prompt
corrective action provisions of FDICIA.
FDIC Insurance Assessments
FDIC insurance premiums are based on an assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (i) well capitalized;
(ii) adequately capitalized; and (iii) undercapitalized. These three categories
are substantially similar to the prompt corrective action categories described
above, with the undercapitalized category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
the FDIC's consideration of a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator. The FDIC also considers information
that it determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital group and
supervisory subgroup to which it is assigned. Under the risk-based assessment
system there are nine assessment risk classifications (i.e., combinations of
capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates for members of both the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF") for the first half
of 1996, as they had been during 1995, ranged from 23 basis points (0.23% of
deposits) for an institution in the highest category (i.e., "well capitalized"
and "healthy") to 31 basis points (0.31% of deposits) for an institution in the
lowest category (i.e., "undercapitalized" and "substantial supervisory
concern"). These rates were established for both funds to achieve a designated
ratio of reserves to insured deposits (i.e., 1.25%) within a specified period of
time.
<PAGE>
Once the designated ratio for the BIF was reached during May 1996, the
FDIC was authorized to reduce the minimum assessment rate below 23 basis points
and to set future assessment rates at such levels that would maintain the BIF's
reserve ratio at the designated level. In August 1996, the FDIC adopted final
regulations reducing the assessment rates for BIF-member banks. Under the
revised schedule, BIF-insured banks, starting with the second half of 1996, paid
assessments ranging from 4 basis points to 31 basis points, with an average
assessment rate of 4.5 basis points. At the same time, the FDIC elected to
retain the pre-existing assessment rate of 23 to 31 basis points for SAIF
members for the foreseeable future given the undercapitalized nature of that
insurance fund. More recently, on November 14, 1996, the FDIC announced that,
beginning in 1997, it would further reduce the deposit insurance premiums for
BIF members in the highest capital and supervisory categories to $2,000 per
year, regardless of deposit size. Because the continued assessment of
BIF-insured institutions in accordance with the BIF rate schedule would have
resulted in a designated reserve ratio in excess of that regarded by the FDIC as
necessary, the FDIC has adopted a temporary adjustment to the BIF rate schedule.
The resulting adjusted rates, which are now in effect, range from 0 to 27 basis
points.
In September 1997, Congress enacted the Deposit Insurance Funds Act to
recapitalize the SAIF. The legislation required SAIF-insured depository
institutions to pay a one time assessment of $4.7 billion to the SAIF in order
to raise its coverage to the "designated reserve ratio" of 1.25% prescribed by
the FDIA. As a result, SAIF premiums were reduced beginning in 1998. The current
rate schedule is identical to that of BIF-insured institutions and ranges from 0
to 27 basis points. In addition, the legislation also requires BIF-insured
members to pay an assessment to the Financing Corporation (FICO). This
assessment, which is currently approximately 1.3 basis points, is separate and
apart from the BIF assessment. Under the FDIA, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.
Safety and Soundness Standards
The FDICIA requires the federal bank regulatory agencies to prescribe
standards, by regulations or guidelines, relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The
federal bank regulatory agencies have adopted a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended. The guidelines
establish operational and managerial standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees, and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholders. The federal
banking agencies determined that stock valuation standards were not appropriate.
In addition, the agencies adopted regulations that authorize, but do not
require, an agency to order an institution that has been given notice by an
agency that it is in violation of a safety and soundness standard to submit a
compliance plan. If, after being so notified, an institution fails to submit an
acceptable compliance plan, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized association is subject under the prompt
correction action provisions of FDICIA. See "--Prompt Corrective Action." If an
institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties. The
federal bank regulatory agencies also proposed guidelines for asset quality and
earnings standards, but have not yet adopted such standards.
<PAGE>
Depositor Preference
The Omnibus Budget Reconciliation Act of 1994 provides that deposits
and certain claims for administrative expenses and employee compensation against
an insured depository institution would be afforded a priority over other
general unsecured claims against such an institution in the "liquidation or
other resolution" of such an institution by any receiver.
Description of SNFC Capital Stock
SNFC is authorized to issue 3,000,000 shares of Holding Company Stock,
of which 1,504,749 shares were issued and outstanding as of [June 17, 1998]. The
shares of SNFC Stock are nonassessable. In the event of the liquidation of SNFC,
holders of SNFC Stock would be entitled to share ratably in any of the assets or
funds of SNFC that are available for distribution to SNFC shareholders after the
satisfaction of SNFC's liabilities (or after adequate provision is made
therefor) and after preferences of any outstanding preferred stock.
SNFC is authorized to issue 1,000,000 shares of preferred stock, no par
value. The Board of Directors is authorized, without shareholder approval, to
designate preferences, limitations and related rights for part or all of the
Preferred Stock in such series as may be determined by the Board of Directors.
No shares of Preferred Stock are currently issued and outstanding.
Holders of SNFC Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. The
ability of SNFC to pay dividends is affected by the ability of its subsidiary
depository institution to pay dividends, which is limited by applicable
regulatory requirements and capital guidelines. See "Certain Regulatory
Considerations--Payment of Dividends."
For a further description of SNFC Stock, see "Effect of the Merger on
Rights of Shareholders."
<PAGE>
Other Matters
As of the date of this Proxy Statement, the Boards of Directors of VHB
and SNFC know of no matters that will be presented for consideration at the VHB
Special Meeting or SNFC Special Meeting other than as described in this Proxy
Statement. However, if any other matters shall properly come before the VHB
Special Meeting or SNFC Special Meeting or any adjournments thereof and be voted
upon, the individuals named as proxies shall vote the shares represented by such
proxies as to any such matters in their discretion.
Experts
The consolidated financial statements of Second National Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and for each of
the years in the three-year period ended December 31, 1997, have been
incorporated by reference herein and in the Registration Statement in reliance
upon the report of Yount, Hyde & Barbour, P.C., independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of VHB as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, have been included herein in reliance upon the report of Bowling, Franklin
& Co., LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.
Opinions
The legality of the shares of Holding Company Stock to be issued in the
Merger and certain tax consequences of the transaction will be passed upon by
Mays & Valentine, L.L.P., Richmond, Virginia.
Certain legal matters relating to VHB will be passed upon by Kennedy,
Baris & Lundy, L.L.P.
No expert or counsel retained by SNFC or VHB had, or is to receive in
connection with the Merger, a substantial interest, direct or indirect, in SNFC
or VHB or is otherwise connected with SNFC or VHB.
<PAGE>
VIRGINIA HEARTLAND BANK
Index to Financial Statements
Consolidated Financial Statements for March 31, 1998 and 1997 ........... F-2
Consolidated Financial Statements for December 31, 1997 and 1996 ....... F-14
VIRGINIA HEARTLAND BANK
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT ACCOUNTANTS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Stockholders
Virginia Heartland Bank
Fredericksburg, Virginia
We have compiled the accompanying consolidated balance sheets of
Virginia Heartland Bank and its wholly owned subsidiary, Virginia Heartland
Service Corporation as of March 31, 1998 and 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial
statements information that is the representation of management. We have not
audited or reviewed the accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
Management has elected to omit substantially all of the
disclosures required by generally accepted accounting principles. If the omitted
disclosures were included in the financial statements, they might influence the
user's conclusions about the Bank's financial position, results of operations,
and cash flows. Accordingly these financial statements are not designed for
those who are not informed about such matters.
Certified Public Accountants
Fredericksburg, Virginia
May 27, 1998
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
<TABLE>
<CAPTION>
ASSETS
1998 1997
<S> <C>
Cash and due from banks $ 2 656 636 $ 2 705 772
Securities available for sale 345 254 248 504
Securities to be held to maturity 19 695 517 17 697 072
Federal funds sold 11 144 000 5 673 000
Loans 61 165 178 57 894 699
Properties and equipment 2 976 244 2 417 341
Other real estate owned 789 872 411 544
Deferred tax asset 253 681 253 892
Income earned not collected 670 965 643 664
Other assets 373 376 499 650
----------- -----------
Total Assets $100 070 723 $ 88 445 138
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Demand deposits $ 14 158 581 $ 9 228 305
Savings accounts and NOW deposits 20 894 213 19 188 127
Other time deposits 54 674 050 50 837 622
----------- -----------
Total Deposits $ 89 726 844 $ 79 254 054
--------------
Accrued interest on deposits 353 056 326 416
Supplemental retirement 370 276 354 948
Other liabilities 515 227 105 409
----------- -----------
Total Liabilities $ 90 965 403 $ 80 040 827
----------------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $5
Authorized, 1,000,000 shares
Issued, 464,101 shares $ 2 320 505 $ 2 320 505
Capital surplus 5 172 882 4 172 882
Retained earnings 1 611 933 1 910 924
------------ -----------
Total Stockholders' Equity $ 9 105 320 $ 8 404 311
-------------------------- ----------- -----------
Total Liabilities and Stockholders' Equity $100 070 723 $ 88 445 138
------------------------------------------ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
<TABLE>
<CAPTION>
1998 1997
<S> <C>
INTEREST INCOME:
Interest and fees on loans $ 1 523 707 $ 1 465 241
Interest on investment securities:
U.S. Treasury securities 263 515 237 356
Other securities 37 862 60 643
Interest on federal funds sold 84 755 48 893
---------- -----------------
Total Interest Income $ 1 909 839 $ 1 812 133
---------------------
INTEREST EXPENSE:
Interest on deposits 951 863 877 307
---------- ----------
Net Interest Income $ 957 976 $ 934 826
-------------------
PROVISION FOR LOAN LOSSES 60 000 70 000
- ------------------------- ---------- ----------
Net Interest Income After
Provision For Loan Losses $ 897 976 $ 864 826
------------------------- ---------- ----------
OTHER INCOME:
Service fees and other income $ 76 816 $ 84 899
Rental income 3 000
----------
Total Other Income $ 79 816 $ 84 899
------------------ ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits $ 376 571 $ 362 727
Related party rent expense 11 183 10 500
Other occupancy expenses, (Including depre-
ciation of $18,289 and $13,463) 61 745 46 030
Furniture and equipment expenses (Includ-
ing depreciation of $28,769 and $25,808) 49 383 43 269
Other operating expenses 158 421 165 466
---------- ----------
Total Other Expenses $ 657 303 $ 627 992
-------------------- ---------- ----------
Income Before Income Taxes $ 320 489 $ 321 733
--------------------------
PROVISION FOR INCOME TAXES 104 344 109 889
- -------------------------- ---------- ----------
Net Income $ 216 145 $ 211 844
---------- ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
<S> <C>
BALANCES, January 1, 1997 $ 2 320 505 $ 4 172 882 $ 1 699 080
- -------------------------
Net income 211 844
---------- ---------- ----------
BALANCES, March 31, 1997 $ 2 320 505 $ 4 172 882 $ 1 910 924
- ------------------------ ========== ========== ==========
BALANCES, January 1, 1998 $ 2 320 505 $ 5 172 882 $ 1 395 788
- -------------------------
Net income 216 145
---------- ---------- ----------
BALANCES, March 31, 1998 $ 2 320 505 $ 5 172 882 $ 1 611 933
- ------------------------ ========== ========== ==========
</TABLE>
*
See Notes to Consolidated Financial Statements.
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
<TABLE>
<CAPTION>
1998 1997
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 216 145 $ 211 844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 47 058 39 271
Provision for possible loan losses (29 813) 4 606
Amortization of bond discount and premium 319 20 259
(Increase) decrease in accrued income
receivable 137 114 161 477
(Increase) decrease in other assets 33 136 (77 496)
(Increase) decrease in deferred tax asset (19 124) (15 211)
Increase (decrease) in accrued interest
and other liabilities 370 102 1 981
----------- ----------
Net Cash Provided by Operating
Activities $ 754 937 $ 346 731
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold $ (7 108 000) $ 635 000
Proceeds from maturities of securities
to be held to maturity 1 000 000 4 000 000
Purchase of securities to be held to maturity (4 481 211)
Net increase in loans (1 439 610) (1 531 019)
Purchase of premises and equipment (199 204) (110 380)
(Increase) decrease in cash surrender value
of life insurance (12 245) (11 587)
----------- ----------
Net Cash Provided By (Used In)
Investing Activities $ (7 759 059) $(1 499 197)
-------------------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts $ 4 152 835 $ 911 703
Net increase in time deposits 1 591 618 146 051
----------- ----------
Net Cash Provided By Financing Activities $ 5 744 453 $ 1 057 754
----------------------------------------- ---------- ----------
</TABLE>
(Continued)
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
Page 2
<TABLE>
<CAPTION>
1998 1997
<S> <C>
Increase (Decrease) In Cash
and Due From Banks $ (1 259 669) $ (94 712)
------------------
CASH AND DUE FROM BANKS:
Beginning 3 916 305 2 800 484
------------ -----------
Ending $ 2 656 636 $ 2 705 772
============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Other real estate acquired in
settlement of loans $ 329 795 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 948 103 $ 887 874
=========== ===========
Income tax $ - $ -
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
NOTES TO FINANCIAL STATEMENTS CONSOLIDATED
Three Months Ended March 31, 1998 and 1997
(Unaudited - See Accountants' Compilation Report)
1. GENERAL
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do
not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, changes in
stockholders' equity and cash flows in conformity with generally accepted
accounting principles. However, the financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation. The results
of operations and cash flows for the three months ended March 31, 1998
and 1997 are not necessarily indicative of the results to be expected for
the full year. These financial statements should be read in conjunction
with the financial statements and notes thereto included in Virginia
Heartland Bank's annual report on Form 10-K for the year ended December
31, 1997.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Virginia Heartland Bank
and Virginia Heartland Service Corporation, which is a wholly owned
subsidiary. Material intercompany balances and transactions have been
eliminated.
3. INVESTMENTS
Investments as of March 31, 1998 and 1997 are summarized below:
1998 1997
(In Thousands of Dollars)
U.S. Treasury Securities $ 17 029 $ 17 040
U.S. Government Agencies 2 012
State & Political Securities 655 657
Federal Reserve Bank Stock 225 195
Other Securities 120 54
------- -------
Total $ 20 041 $ 17 946
----- ======= =======
<PAGE>
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Unaudited - See Accountants' Compilation Report)
Page 2
4. LOANS
The loan portfolio is composed of the following:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1998 1997
(In Thousands of Dollars)
<S> <C>
Real estate loans $ 47 775 $ 41 746
Commercial and industrial loans (Except
loans secured primarily by real estate) 9 015 8 962
Loans to individuals for household, family
and other personal expenditures 4 966 7 535
All other loans 60 335
------- -------
Total Loans $ 61 816 $ 58 578
-----------
Less allowance for loan losses 619 631
Unearned income on loans 32 52
------- -------
Net Loans $ 61 165 $ 57 895
--------- ======= =======
</TABLE>
The Bank had three loans in the non-accrual category as of March 31,
1998 totaling $23,568 and eight loans in the non-accrual category as of
March 31, 1997 totaling $332,254.
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three month periods
ended March 31, 1998 and 1997 are summarized as follows:
1998 1997
(In Thousands of Dollars)
Balance, January 1 $ 649 $ 626
------------------
Recoveries 13 6
Charge offs:
Installment loans (59) (50)
Commercial loans (44) (21)
Provision for loan losses 60 70
------ ------
Balance, March 31 $ 619 $ 631
----------------- ====== ======
<PAGE>
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Unaudited - See Accountants' Compilation Report)
Page 3
5. ALLOWANCE FOR LOAN LOSSES (Continued)
1998 1997
(In Thousands of Dollars)
Ratio of net charge-offs during the
period to average loans (60,758,056
and 56,448,479, respectively)
outstanding during the period .15% .15%
=== ===
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by
a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Charges in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term. However, the amount of the change
that is reasonably possible cannot be estimated.
6. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Earnings per share were based on the weighted average number of shares
outstanding and common stock equivalents. Warrants are common stock
equivalents which are included in the calculation of earnings per share
if the inclusion results in a dilution of three percent or more. The
number of additional shares considered outstanding as a result of the
potential exercise of the warrants is calculated using the Treasury Stock
Method. Earnings per share are computed by dividing net income for the
applicable period by the daily average share outstanding during the
period as follows:
March 31, 1998 March 31, 1997
Net income $216 145 $211 844
Average shares outstanding 464 101 464 101
Common stock equivalent - -
------- --------
Total Weighted Shares /464 101 /464 101
--------------------- -------- --------
Net Income Per Share $ .47 $ .46
-------------------- ======== ========
<PAGE>
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Unaudited - See Accountants' Compilation Report)
Page 4
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment included in the financial statements on
March 31, 1998 and 1997 were as follows:
1998 1997
(In Thousands of Dollars)
Furniture and equipment $ 1 098 $ 950
Bank building and leasehold improvements 2 840 1 896
Construction in progress 345
- ------
$ 3 938 $ 3 191
Less accumulated depreciation 962 774
------ ------
Undepreciated Cost $ 2 976 $ 2 417
------------------ ====== ======
VIRGINIA HEARTLAND BANK
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Virginia Heartland Bank
Fredericksburg, Virginia
We have audited the accompanying consolidated balance sheets of
Virginia Heartland Bank and its wholly owned subsidiary, Virginia Heartland
Service Corporation as of December 31, 1997 and 1996 and the related
consolidated statements of income, change in stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Virginia Heartland Bank and its wholly owned subsidiary, Virginia Heartland
Service Corporation as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Certified Public Accountants
Fredericksburg, Virginia
February 17, 1998
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C>
Cash and due from banks $ 3 916 305 $ 2 614 606
Securities available for sale (Fair value) 345 254 248 504
Securities to be held to maturity (Fair
value $20,860,356 and $17,284,138) 20 695 836 17 236 120
Federal funds sold 4 036 000 6 308 000
Loans 60 025 550 56 354 359
Properties and equipment 2 824 098 2 346 233
Other real estate owned 460 077 411 349
Deferred tax asset 234 557 238 681
Income earned not collected 808 079 805 141
Other assets 394 262 616 815
----------- -----------
Total Assets $ 93 740 018 $ 87 179 808
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Demand deposits $ 10 704 143 $ 8 979 649
Savings accounts and NOW deposits 20 195 816 18 525 080
Other time deposits 53 082 432 50 691 571
----------- -----------
Total Deposits $ 83 982 391 $ 78 196 300
--------------
Accrued interest on deposits 349 564 336 983
Supplemental retirement 363 237 337 287
Other liabilities 155 657 116 772
----------- -----------
Total Liabilities $ 84 850 849 $ 78 987 342
----------------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $5
Authorized, 1,000,000 shares
Issued, 464,101 shares $ 2 320 505 $ 2 320 505
Capital surplus 5 172 882 4 172 882
Retained earnings 1 395 782 1 699 079
----------- -----------
Total Stockholders' Equity $ 8 889 169 $ 8 192 466
-------------------------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 93 740 018 $ 87 179 808
----------------------------------------- =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C>
INTEREST INCOME:
Interest and fees on loans $ 6 222 770 $ 5 949 610
Interest on investment securities:
U.S. Treasury securities 1 045 484 647 306
Other securities 97 687 350 267
Interest on federal funds sold 257 633 270 992
---------- ----------
Total Interest Income $ 7 623 574 $ 7 218 175
---------------------
INTEREST EXPENSE:
Interest on deposits 3 629 800 3 552 595
---------- ----------
Net Interest Income $ 3 993 $ 3 665 580
-------------------
PROVISION FOR LOAN LOSSES 366 000 489 500
- ------------------------- ---------- ----------
Net Interest Income After
Provision For Loan Losses $ 3 627 774 $ 3 176 080
------------------------- ---------- ----------
OTHER INCOME:
Service fees and other income $ 342 777 $ 322 133
Gain (Loss) on sale of other real estate (28 669) (54 943)
----------- -----------
Total Other Income $ 314 108 $ 267 190
------------------ ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits $ 1 450 325 $ 1 245 274
Related party rent expense 42 000 42 000
Other occupancy expenses, (Including depre-
ciation of $60,931 and $52,046) 221 250 170 647
Furniture and equipment expenses (Includ-
ing depreciation of $119,166 and $108,654) 201 048 173 814
Other operating expenses 685 327 547 066
---------- ----------
Total Other Expenses $ 2 599 950 $ 2 178 801
-------------------- ---------- ----------
Income Before Income Taxes $ 1 341 932 $ 1 264 469
--------------------------
PROVISION FOR INCOME TAXES 436 384 413 964
- -------------------------- ---------- ----------
Net Income $ 905 548 $ 850 505
---------- ======== ==========
EARNINGS PER SHARE OF COMMON STOCK $ 1.96 $ 1.84
- ---------------------------------- ============ ==========
AVERAGE SHARES OUTSTANDING 464,101 464,101
-------------------------- =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
------ ------- ----------
<S> <C>
BALANCES, January 1, 1996 $ 2 320 505 $ 4 172 882 $ 1 057 419
- -------------------------
Dividends - $.45 per share (208 845)
Net income 850 505
---------- ---------- ----------
BALANCES, December 31, 1996 $ 2 320 505 $ 4 172 882 $ 1 699 079
- ---------------------------
Transfer to capital surplus 1 000 000 (1 000 000)
Dividends - $.45 per share (208 845)
Net income 905 548
----------- ---------- ----------
BALANCES, December 31, 1997 $ 2 320 505 $ 5 172 882 $ 1 395 782
- --------------------------- ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 905 548 $ 850 505
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 179 897 160 700
(Gain) loss on sale of other real estate 28 669 54 743
(Gain) loss on sale of other securities
held to maturity 200
(Gain) loss on sale of available for sale
securities 33 250
Provision for possible loan losses 22 255 (27 270)
Amortization of bond discount and premium 19 308 21 838
(Increase) decrease in accrued income
receivable (2 938) (63 043)
(Increase) decrease in other assets 308 658 (315 865)
(Increase) decrease in deferred tax asset 4 124 27 003
Increase (decrease) in accrued interest
and other liabilities 83 665 64 382
------------ -----------
Net Cash Provided by Operating
Activities $ 1 582 436 $ 773 193
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold $ 2 272 000 $ (1 513 000)
Proceeds from maturities of securities
to be held to maturity 6 500 000 7 488 601
Purchase of securities to be held to maturity (9 979 024) (10 310 731)
Purchase of securities available for sale (130 000) (10 600)
Net increase in loans (3 908 743) (2 862 318)
Purchase of premises and equipment (657 762) (1 332 115)
Proceeds from sale of other real estate 137 900 193 712
(Increase) decrease in cash surrender value
of life insurance (92 354) (82 578)
------------ -------------
Net Cash Provided By (Used In)
Investing Activities $ (5 857 983) $ (8 429 029)
-------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts $ 3 395 230 $ 2 064 149
Net increase in time deposits 2 390 861 5 903 578
Dividends paid (208 845) (208 845)
------------ -----------
Net Cash Provided By Financing Activities $ 5 577 246 $ 7 758 882
----------------------------------------- ----------- -----------
(Continued)
</TABLE>
<PAGE>
VIRGINIA HEARTLAND BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
Page 2
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C>
Increase In Cash and Due From Banks $ 1 301 699 $ 103 046
-----------------------------------
CASH AND DUE FROM BANKS:
Beginning 2 614 606 2 511 560
------------ -----------
Ending $ 3 916 305 $ 2 614 606
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Other real estate acquired in
settlement of loans $ 215 297 $ 530 720
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 3 617 487 $ 3 539 417
=========== ===========
Income tax $ 308 693 $ 489 277
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
VIRGINIA HEARTLAND BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Virginia Heartland Bank is an approved State Bank, a member of
the Federal Reserve System and is insured by the Federal Deposit
Insurance Corporation. The Bank has locations in Spotsylvania County
and the City of Fredericksburg. The Bank serves primarily small
businesses and individuals in the Fredericksburg, Virginia trade area.
Virginia Heartland Service Corporation is an investment holding
company.
Principles of Consolidation
The consolidated financial statements include Virginia Heartland
Bank and Virginia Heartland Service Corporation, which is a
wholly-owned subsidiary. Material intercompany balances and
transactions have been eliminated.
Use of Estimate
The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates
based on management's knowledge and experience. Due to their
prospective nature, actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of presentation in the statement of cash flows,
cash and cash equivalents are defined as those amounts included in the
balance sheet caption "Cash and Due from Banks".
Investment Securities
Securities to be Held to Maturity
Bonds, notes and debentures for which the Bank has the positive
intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest method
over the period to maturity.
Securities Available for Sale
Securities available for sale consist of bonds, notes,
debentures, and certain equity securities not classified as
trading securities nor as securities to be held to maturity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 2
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Investment Securities (Continued)
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and fees and an allowance for possible loan losses.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb potential losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to
the provision for loan losses. Because of uncertainties inherent
in the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may
change in the near term. However, the amount of the change that
is reasonably possible cannot be estimated.
Interest Income on Loans
Interest is accrued daily on the outstanding balances. Accrual
of interest is discontinued on a loan when management believes,
after considering collection efforts and other factors, that the
borrower's financial condition is such that collection of
interest is doubtful.
Loan Origination Fees and Costs
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate. The historical average holding period for such properties
is eighteen months.
Properties and Equipment
Bank leasehold improvements and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on
the straight-line basis. It is the Bank's policy to capitalize
additions and improvements and amortize the cost thereof over the
estimated useful life. Maintenance, repairs and renewals are expensed
as they are incurred.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable income
such as interest on state and municipal securities) and deferred taxes
on temporary differences between the amount of taxable income and
pre-tax financial income and between the tax bases of assets and
liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected
to be realized or settled as prescribed in FASB Statement No. 109,
"Accounting for Income Taxes". As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings Per Share
Earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during
the period.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Financial Instruments
Financial Accounting Standards No. 107 (FAS 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, 1997 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 bank'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 the fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by Virginia
Heartland Bank in estimating its fair value disclosures for financial
instruments:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheets for cash
and short term instruments approximates those assets' fair values.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Loans
The carrying value, reduced by the estimated inherent credit
losses, of variable rate loans and other loans with short-term
characteristics were considered fair values. The other loans' 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 value reported in the 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
non-interest bearing demand deposits, NOW, savings, and money market
deposits was, by definition, equal to the amount payable on demand as
of December 31, 1997. The fair value of certificates of deposit was
based on the discounted cash flows, calculated using the discounted
value of contractual cash flows, calculated using the discount rates
that equal the interest rates offered at the valuation date for
deposits of similar remaining maturities.
Supplemental Retirement
The carrying value reported in the balance sheets for supplemental
retirement approximates its fair value.
Other Real Estate Owned
Other real estate owned consists of property acquired through
default on loans (stated at the lower of cost or appraised value).
2. RESTRICTIONS ON CASH BALANCES
The Bank is required by the Federal Reserve Board and by state banking
laws to maintain certain minimum cash balances consisting of vault cash and
deposits in the Federal Reserve Bank or in other commercial banks. Such
restricted balances totaled $244,000 as of December 31, 1997.
Additionally, the Bank has chosen on December 31, 1997, to leave
$496,596 in its correspondent bank account with Community Bankers Bank in
order to offset processing fees.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6
3. INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the
consolidated balance sheets of the Bank and their approximate fair values
at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C>
Securities available for
sale -
December 31, 1997:
Equity securities: $ 345,254 $ - $ - $ 345,254
---------- ------ ------ ----------
December 31, 1996:
Equity securities $ 248,504 $ - $ - $ 248,504
---------- ------ ------ ----------
Securities to be held to
maturity -
December 31, 1997:
U.S. Government and
agency securities $20,040,630 $166,266 $ 13,379 $20,193,517
State and municipal
securities $ 655,206 $ 11,633 $ - $ 666,839
---------- ------- ------ ----------
$20,695,836 $177,899 $ 13,379 $20,860,356
========== ======= ======= ==========
Securities to be held to
maturity -
December 31, 1996:
U.S. Government and
agency securities $16,578,954 $ 88,995 $ 41,782 $16,626,167
State and municipal
securities $ 657,166 $ 5,834 $ 5,029 $ 657,971
---------- ------- ------- ----------
$17,236,120 $ 94,829 $ 46,811 $17,284,138
========== ======= ======= ==========
</TABLE>
Securities available for sale include Federal Reserve Bank stock of
$224,800 and $194,800 on December 31, 1997 and 1996, respectively. The
stock is carried at cost because its ownership is restricted and it lacks a
market. The stock can only be sold at par value to the Federal Reserve Bank
or other member institutions.
Securities carried at approximately $2,568,932 at December 31, 1997 and
$2,611,003 at December 31, 1996 were pledged to secure public deposits and
for other purposes required or permitted by law.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7
3. INVESTMENT SECURITIES (Continued):
Gross realized gains or losses on sales of available-for-sale securities
were $-0- and $(200) during the years ended December 31, 1997 and 1996,
respectively. The average cost method is used in determining cost when
calculating gains and losses.
The scheduled maturities of securities to be held to maturity at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C>
Due in one year or less $ 4,995,665 $ 5,006,875
Due from one to five years 15,450,171 15,601,287
Due from five to ten years 250,000 252,194
---------- ----------
Totals $20,695,836 $20,860,356
------ ========== ==========
</TABLE>
4. LOANS
Loans are stated at their face amount net of unearned income and allowances
for loan losses and can be classified as follows:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C>
Real estate loans $47,514,841 $39,624,074
Commercial and industrial loans (Except
loans secured primarily by real estate) 7,715,850 8,754,892
Loans to individuals for household, family
and other personal expenditures 5,426,116 8,317,364
All other loans 57,427 331,963
--------- ----------
Total Loans $60,714,234 $57,028,293
-----------
Less unearned income on loans 40,036 47,541
---------- ----------
Loans $60,674,198 $56,980,752
-----
Less allowance for loan losses 648,648 626,393
---------- ----------
Net Loans $60,025,550 $56,354,359
--------- ========== ==========
</TABLE>
Activity in the allowance for loan losses for the years ended December 31,
1997 and 1996 are summarized as follows: 1997 1996
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1 $ 626,392 $ 653,663
Additions charged (credited) to:
Provision for loan loss 366,000 489,500
Charge-offs (404,461) (550,137)
Recoveries 60,717 33,366
--------- ---------
Balance, December 31 $ 648,648 $ 626,392
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 8
4. LOANS (Continued)
Information regarding impaired loans, as required by FASB Statement No.
114, as amended by FASB Statement No. 118, as of and for the years ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Impaired loans for which an allowance
has been provided $ 680,666 $ 538,955
Impaired loans for which no allowance
has been provided - -
-------- ------
Total Impaired Loans $ 680,666 $ 538,955
-------------------- ========= =========
Allowance provided for impaired loans,
included in the allowance for loan
losses $ 178,964 $ 106,211
========= =========
Average balance in impaired loans $ 711,124 $1,284,667
========= =========
Interest income recognized $ 54,034 $ 64,343
========= =========
</TABLE>
Loans past due 90 days or more, non-accrual and restructured loans are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- --------------------------------
Loans 90 Loans 90
Days or Days or
More Non- More Non-
Past Due Accrual Past Due Accrual
----------- ----------- ----------- --------
<S> <C>
Installment loans $ 85,861 $ 9,873 $ 94,629 $
Commercial and all
other loans 86,124 193,489 456,480 139,999
------- ------- ------- -------
Totals $171,985 $203,362 $551,109 $139,999
------ ======= ======= ======= =======
Restructured loans $ - $ - $ - $ -
====== ====== ====== ====
</TABLE>
5. PROPERTIES AND EQUIPMENT
Properties and equipment included in the financial statements at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C>
Bank buildings $1,265,705 $ 727,281
Furniture and equipment 912,535 767,493
Leasehold improvements 911,239 824,691
Construction in progress 257,712
Software 175,780 161,020
Land 473,786 343,086
--------- ---------
$3,739,045 $3,081,283
Less accumulated depreciation 914,947 735,050
--------- ---------
Net Book Value $2,824,098 $2,346,233
-------------- ========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 9
5. PROPERTIES AND EQUIPMENT (Continued)
The Bank acquired property for $165,000 in Thornburg, Virginia on
February 2, 1998 as a future branch site.
6. INCOME TAXES
The Bank and the subsidiary filed a consolidated federal return on a
calendar year basis.
The Bank has deferred to future periods the income tax resulting from
timing differences between financial statement pre-tax income and taxable
income.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Income taxes currently payable $432,260 $386,961
-------- --------
Deferred federal income taxes:
Provision for possible loan losses $ 2,538 $ 35,694
Supplemental retirement (8,822) (21,904)
Prepaid insurance commissions 5,396 4,890
Prepaid loan fees 1,127 6,408
MACRS depreciation 3,885 1,915
--------- ---------
Total Deferred $ 4,124 $ 27,003
-------------- ---------- ---------
Income Tax Expense $436,384 $413,964
------------------ ======== ========
</TABLE>
The reasons for the differences between income tax expense and the
amount computed by applying the statutory income tax rates to income before
income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Computed "expected" tax expense $456,439 $430,063
Increase (decrease) in taxes resulting from:
Officers' life insurance (10,510) (9,409)
Meals and entertainment limitation 116 216
Disallowed interest to carry municipals 1,814 1,493
Municipal bond income (11,475) (8,399)
--------- --------
Income Tax Expense $436,384 $413,964
------------------ ======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 10
6. INCOME TAXES (Continued)
The components of the deferred income tax asset included in other
assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Deferred Tax Asset:
Allowance for loan losses $111,492 $114,031
Supplemental retirement 123,500 114,678
Prepaid insurance commission 14,957 20,352
Prepaid loan fees 1,967 3,094
--------- ---------
$251,916 $252,155
Deferred Tax Liability:
Accumulated depreciation 17,359 13,474
--------- ---------
Net Deferred Tax Asset $234,557 $238,681
---------------------- ======== ========
</TABLE>
7. DEPOSITS
The aggregate amount of short-term Jumbo Certificates of Deposits, each
with a minimum denomination of $100,000, was approximately $9,316,791 and
$7,839,246 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of Certificates of
Deposits are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1998 $29,335,488
1999 7,694,778
2000 11,972,656
2001 -
2002 and thereafter 4,079,510
-----------
Total $53,082,432
</TABLE>
8. LEASE OBLIGATIONS
The Bank rents its principal location from Director Jerry Leonard under
an operating lease with an initial expiration date of March 31, 1998. The
Bank has the option to renew the lease for two successive ten year periods.
The monthly rent during the initial lease period is $3,500.
The Bank exercised its renewal option for an additional ten year period
beginning April 1, 1998 and ending March 1, 2008. The initial annual rent
in the renewal period is $60,900 with increases of 3% per year for each
year of the renewal term commencing April 1, 1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 11
8. LEASE OBLIGATIONS (Continued)
The Bank leases a branch site on State Route 3 in Spotsylvania County.
The lease requires monthly lease payments of $2,892 during the first five
years, $3,167 during the next five years and $3,298 during the remaining
twenty years. Rent for 1997 and 1996 amounted to $76,700 and $53,567,
respectively.
Year Ended Minimum
December 31, Commitments
- ------------- -----------
1998 $ 90,875
1999 96,970
2000 98,838
2001 101,863
2002 106,044
Thereafter 1,322,980
----------
Total Minimum Future Rental Payments $1,817,570
9. SUPPLEMENTAL RETIREMENT
The Bank has entered into supplemental retirement agreements with the
Bank's Chairman and President which provide benefits payable at age sixty
and sixty-five, respectively. At December 31, 1997 and 1996, $363,237 and
$337,287 has been accrued under these contracts and this liability is
reflected in the consolidated financial statements. The supplemental
retirement is not deductible for income tax purposes until it is paid. The
supplemental retirement is to be paid to the Chairman and President or
their heirs over a period of fifteen years commencing with the attainment
of age sixty and sixty-five, respectively.
The Bank is the owner and beneficiary of whole life insurance policies
on the lives of the above mentioned employees. If the Chairman or President
die during their employment, the Bank shall pay to their designated
beneficiaries or in the absence thereof to their estates $75,000 and
$60,000, respectively, per year until the date at which the officer would
have been sixty and sixty-five, respectively and thereafter $45,000 and
$20,000, respectively, for fifteen years. The policies had a net cash
surrender value at December 31, 1997 or $253,628.
In the event that this death benefit should become payable, such
benefit shall be in lieu of all supplemental retirement accruals provided to the
date of death.
Supplemental retirement expense was $9,711 and $35,004 for 1997 and 1996,
respectively. Interest on supplemental retirement expense was $16,238 and
$29,417 for 1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 12
10. CONTINGENT LIABILITIES AND COMMITMENTS
The Bank's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are described
in Note 12 - Financial Instruments.
11. CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and standby letters of credit
have been granted to customers in the Bank's market areas. The
concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were
granted primarily to commercial borrowers.
The Bank maintains its cash balances at several financial
institutions. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At December 31, 1997 the
uninsured cash balance on their account with Community Bankers Bank
totaled $523,714.
12. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance sheet
risks 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, interest rate, or liquidity risk in
excess of the amounts recognized in the balance sheets. The contract
amounts of those instruments express the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
Commitments to Extend Credit
These commitments are legally binding agreements to lend to customers.
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 liquidity requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit assessment of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and existing income-producing
commercial properties.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 13
12. FINANCIAL INSTRUMENTS (Continued)
Standby Letters of Credit
These instruments are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. The
Bank held marketable securities as collateral supporting those
commitments. These commitments were fully collateralized.
The following is a summary of the carrying amounts and estimated fair
values of Virginia Heartland Bank's financial assets and liabilities at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C>
Financial assets:
Cash and due from banks and federal funds
sold $7,952,305 $7,952,305 $8,922,606 $8,922,606
Securities available for sale 345,254 345,254 248,504 248,504
Securities to be held to maturity 20,695,835 20,860,356 17,236,120 17,284,138
Loans receivable 60,025,550 60,797,613 56,354,359 57,402,066
Income earned not collected 808,079 808,079 805,141 805,141
Financial liabilities:
Deposit liabilities 83,982,391 81,853,628 78,196,300 76,747,023
Accrued interest on deposits 349,564 349,564 336,983 336,983
Supplemental retirement 363,237 363,237 337,287 337,287
Off-balance sheet instruments:
Standby letters of credit -- -- -- --
Revolving open and lines of credit -- -- -- --
Lines of credit -- -- -- --
Commercial real estate, construction and
land development -- -- -- --
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 14
12. FINANCIAL INSTRUMENTS (Continued)
At December 31, 1997 the Bank had loan commitments outstanding as
follows:
Standby letters of credit $ 1,867,703
Revolving open end lines of credit 2,488,096
Lines of credit 6,426,933
Commercial real estate, construction and land
development 9,558,207
-----------
Total $20,340,939
===========
The Bank does not anticipate any material losses as a result of these
commitments.
13. TRANSACTIONS WITH RELATED PARTIES
The Bank has entered into banking transactions with Directors, Principal
Officers and Associates of such persons on similar terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions of others.
An analysis of such loans is shown below:
Balance Loan Balance
1-1-97 New Loans Repayments 12-31-97
- --------- --------- ---------- --------
$152,719 $ -- $10,555 $142,164
======== =========== ======= ========
The Bank has deposits from related parties totaling $264,288 and $876,814
on December 31, 1997 and 1996, respectively.
14. RETAINED EARNINGS
Dividends which may be paid by the Bank are restricted. The approval of
the Board of the Federal Reserve Bank is required if the total of all
dividends declared by a state bank in any calendar year exceeds the Bank's
net profits, as defined, for that year combined with its retained net
profits for the two preceding calendar years. Under this formula, the Bank
can distribute in 1998, without prior regulatory approval, $1,338,363 plus
an additional amount equal to the Bank's retained net profits for 1998 up
to the date of any dividends declaration.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can intimate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 15
15. REGULATORY MATTERS (Continued)
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 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, 1997, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1997, the most recent notification from the office
of the Comptroller of the Currency categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action.
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 institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------ -----
(Dollars in Thousands)
<S> <C>
December 31, 1997:
Total Risk Based Capital (to
Risk Weighted Assets)
$9,471 15.50% $4,954 8.00% $6,192 10.00%
Tier I Capital (to Risk
Weighted Assets)
$8,890 14.55% $2,477 4.00% $3,715 6.00%
Tier I Capital (to Average
Assets) $8,890 9.91% $3,588 4.00% $4,486 5.00%
December 31, 1996:
Total Risk Based Capital (to
Risk Weighted Assets)
$8,819 17.13% $4,116 8.00% $5,146 10.00%
Tier I Capital (to Risk
Weighted Assets)
$8,192 15.92% $2,058 4.00% $3,088 6.00%
Tier I Capital (to Average
Assets) $8,192 9.92% $3,305 4.00% $4,131 5.00%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 16
16. PROFIT SHARING PLAN
Virginia Heartland Bank maintains a 401(k) Profit Sharing Thrift Plan
in which all permanent employees with more than three months of service
may participate. The Bank may contribute to the plan through either
matching or discretionary contributions.
Matching contributions are 25% of each participant's deferred
compensation not to exceed 6% of the participant's compensation. The
amount of discretionary contributions will be determined by the Board. The
discretionary contribution is allocated among the participants in
proportion to their compensation.
The Bank's contribution to the plan was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Matching contribution $10,663 $ 9,935
Discretionary contribution 36,000 34,000
-------- ------
Total Bank Contribution $46,663 $43,935
----------------------- ======= =======
</TABLE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
between
VIRGINIA HEARTLAND BANK
and
SECOND NATIONAL FINANCIAL CORPORATION
April 18, 1998
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of April 18, 1998, by and between VIRGINIA HEARTLAND BANK, a
Virginia banking corporation with its principal office located in
Fredericksburg, Virginia ("VHB"), and SECOND NATIONAL FINANCIAL CORPORATION, a
Virginia corporation with its principal office located in Culpeper, Virginia
("SNFC"), and the registered bank holding company which owns Second Bank & Trust
Company ("SB&T"), and VIRGINIA HEARTLAND INTERIM BANK, a Virginia chartered
interim bank to be formed as a wholly-owned subsidiary of SNFC with its
principal office to be located in Fredericksburg, Virginia ("VHIB"), which shall
become a party hereto by amendment following its formation and organization.
WITNESSETH:
WHEREAS, SNFC, SB&T AND VHB (the "Companies") desire to affiliate in a
merger of equals transaction, through a tax-free, stock-for-stock exchange, so
that one, newly named holding company will control both SB&T and VHB (together,
the "Banks).
WHEREAS, the Boards of Directors of the Companies each believe it is in
the best interests of their respective entity and its shareholders to affiliate
as provided herein and not in a transaction structured as an acquisition of one
by the other, and that the respective shareholder values of SNFC and VHB can be
maximized over time through this stock-for-stock affiliation.
WHEREAS, Boards of Directors of the Companies each believe that the
transactions contemplated in this Agreement are in the best interests of the
communities they serve and of their respective employees.
<PAGE>
WHEREAS, the Boards of Directors of the Companies each believe that the
competitive position of the Companies will be enhanced if SB&T and VHB operate
as independently chartered banks, responsive to their communities, with
directors and officers familiar with the needs of and opportunities in those
communities.
WHEREAS, the Boards of Directors of the Companies each believe that the
holding company after the affiliation should provide management and technical
assistance and support for recruitment, training and retention of skilled
officers and employees to the Banks in order to enable the combined organization
to operate more efficiently.
WHEREAS, the Boards of Directors of the Companies each believe that the
larger banking enterprise that will result from this merger will be more
diversified, better positioned, and more competitive than either company alone;
will be able to provide a wider and improved array of financial services to
consumers and businesses; and will be better positioned to meet the competitive
challenges arising from recent and expected changes in the banking industry.
WHEREAS, VHB and SNFC have agreed to the reorganization of their two
companies through a merger under Virginia law of VHB with and into VHIB, an
interim bank that will be organized under the laws of the Commonwealth of
Virginia for the purpose of facilitating the transactions contemplated herein.
WHEREAS, immediately prior to and effective upon the Effective Date of
the Merger, SNFC shall change its name to "Virginia Commonwealth Financial
Corporation" (referred to herein as the "Holding Company").
WHEREAS, at the Effective Date of the Merger, VHIB will change its name
to "Virginia Heartland Bank" and continue as a wholly-owned subsidiary of the
Holding Company.
<PAGE>
WHEREAS, the respective Boards of Directors of VHB and SNFC have
resolved unanimously 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 Merger and Related Matters
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Date as defined in Section 1.4 hereof, VHB shall become a
wholly-owned subsidiary of the Holding Company through the Merger of VHB with
and into VHIB, an interim Virginia state bank subsidiary of SNFC, formed solely
for the purpose of facilitating the Merger described herein, pursuant to Plan of
Merger, attached hereto as Exhibit A, in accordance with the provisions of
Section 13.1-716 of the Virginia Stock Corporation Act (the "Merger"). VHIB will
be referred to herein as the "Interim Bank" prior to the Merger and as the
"Resulting Bank" whenever reference is made to it as of the Effective Date or
thereafter. At the Effective Date, the Merger shall have the effect as provided
in Section 13.1-721 of the Virginia Stock Corporation Act.
1.2 Name and Continuing Operations. Pursuant to the terms of the Plan
of Merger, the Resulting Bank shall be renamed "Virginia Heartland Bank" on the
Effective Date. In addition, immediately prior to and effective upon the
Effective Date, SNFC shall amend its articles of incorporation to change its
name to "Virginia Commonwealth Financial Corporation" or, if such name is
determined by each of the Boards of Directors of the Companies to be
unadvisable, a name selected by the mutual agreement of VHB and SNFC, provided
that any such name shall not contain the name or any derivation of VHB, SB&T or
SNFC or of their individual locations. As of the Effective Date, the Holding
Company shall then serve as the parent bank holding company for the Resulting
Bank, and SNFC's current subsidiary bank, SB&T. The respective names and banking
offices of the Resulting Bank and SB&T (collectively, the "Banks") will not
change as a result of the Merger. The Holding Company shall be headquartered in
Culpeper, Virginia.
<PAGE>
1.3 Directors, Officers and Employees. (a) The directors, officers and
employees of VHB and SB&T will not change as a part of the Merger.
(b) As of the Effective Date, the number of directors on the
Board of the Holding Company shall be set automatically, without further action
at eight members. Five such members shall be appointed by SNFC and three members
shall be appointed by VHB, as determined by the respective Boards of Directors
of SNFC and VHB prior to mailing of the joint proxy materials related to
approval of the Reorganization. In the absence of action by the respective Board
of Directors to the contrary, or the death, retirement, disability or removal of
any of such persons from the Board of Directors of SNFC, VHB or SB&T prior to
the Effective Date, the directors of the Holding Company at the Effective Date,
and their respective terms of office, shall be as shown on Exhibit 1.3(b).
Any increase or decrease in the number of directors after the
Effective Date proposed by the Holding Company shall be approved by at least 75%
of the directors then in office and if the number of directors changes in
accordance therewith, any increase or decrease shall be apportioned among the
remaining directors so as to maintain, as nearly as possible, the ratio of SNFC
appointed directors to VHB appointed directors at five-to-three, respectively.
If, at any time during the five years following the Effective Date, any VHB or
SNFC nominee to the Holding Company Board is unable or declines to serve or a
vacancy otherwise occurs in respect of a position previously held by a VHB or
SNFC nominee, the remaining VHB or SNFC nominees shall be entitled to designate
a qualified candidate then serving as a director of VHB or SB&T, as the case may
be, for such vacancy, and such designated candidate(s) shall be recommended to
the Holding Company Board for appointment for any interim period and shall be
recommended to the shareholders for election at the next annual meeting of
shareholders of the Holding Company. The terms of the members of the Board of
Directors of the Holding Company shall be staggered three year terms with one of
the appointees of VHB serving in each of three classes. William B. Young, the
current chairman of VHB, shall be one of the VHB appointees, and he shall be
appointed for an initial two year term. O. R. Barham, Jr. shall be one of the
SNFC appointees, and he shall be appointed for an initial three year term.
<PAGE>
(c) At the Effective Date, the officers and directors of each
of the Banks shall be those persons who were officers and directors immediately
prior to the Effective Date, provided that persons who are directors of SB&T or
VHB who become directors of the Holding Company at the Effective Date pursuant
to section 1.3(b), other than the chief executive officers of each of the Banks
and one other director designated by each of the Banks, shall not serve on the
board of directors of either of the Banks. Until the Board of Directors of the
Holding Company determines that independent organization is not in the best
interests of the Banks and the Holding Company which in no event may occur
before December 31, 2000 unless necessary in order to comply with the
requirements of regulators having jurisdiction over the Holding Company or the
Banks or a majority of the Boards of Directors of the Banks agree, (i) each of
the Banks shall continue to exist as separately chartered commercial banks, and
(ii) the Board of Directors of each Bank shall be elected by the Holding Company
from persons nominated by the respective Board of Directors.
<PAGE>
(d) At the Effective Date, and without any action of the
boards, (i) Mr. Young shall become the Chairman of the Board and Chief Executive
Officer of the Holding Company and serve in those positions until December 31,
2000, at which time, the Holding Company Board shall appoint Mr. Barham as his
successor in such positions; (ii) Mr. Barham shall become the President of the
Holding Company and serve in that position until December 31, 2000, at which
time, the Holding Company Board shall select and appoint a successor to that
position; (iii) Jeffrey Farrar shall become a Senior Vice President and the
Chief Financial Officer of the Holding Company; and (iv) Edward V. Allison, Jr.
shall become a Senior Vice President and the Secretary of the Holding Company.
At the Effective Date, Mr. Barham shall continue as President and Chief
Executive Officer of SB&T, Mr. Young shall continue as Chief Executive Officer
of the Resulting Bank and Mr. Allison shall continue as President of the
Resulting Bank.
(e) (1) SNFC agrees to be bound by Mr. Barham's existing
employment agreement, and Mr. Barham agrees that the Affiliation does not (i)
constitute a breach of his existing employment agreement or (ii) provide him
with the option to leave the employment of SNFC or SB&T.
(2) VHB and SNFC agree that the employment agreements by and between
VHB and each of Messrs. Allison and Young and between SNFC and Mr. Farrar
attached hereto as Exhibits 1.3(e)(2)(a), 1.3(e)(2)(b) and 1.3(e)(2)(c),
respectively, shall become effective as obligations of the Resulting Bank in the
case of Messrs. Allison and Young and SNFC in the case of Mr. Farrar upon the
Effective Date.
(3) VHB and SNFC agree that while Mr. Young is Chairman of the Holding
Company under the terms of this Agreement his combined salary for service to the
Holding Company and to VHB shall be fixed at $165,000 per year, and following
such term for a period of two years, he shall be offered a non-employee
consulting position with the Holding Company at $75,000 per year. Mr. Young's
employment and consulting positions shall be subject to termination for cause
(as defined in Exhibit 1.3(e)(2)(b)), death and disability.
<PAGE>
1.4 The Closing and Effective Date. The closing of the transactions
contemplated by the Agreement and the Plan of Merger shall take place at the
principal offices of the Holding Company, in Culpeper, Virginia, or at such
other place as may be mutually agreed upon by the parties. The Merger shall
become effective at the date or time and date shown on the Certificate of Merger
issued by the State Corporation Commission of Virginia effecting the Merger (the
"Effective Date"). Unless otherwise agreed upon in writing by the chief
executive officers of SNFC and VHB, subject to the conditions and to the
obligations of the parties to effect the Merger as set forth in Article 6
hereof, 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 the Agreement to be delivered at or prior to consummation of the
Merger will be exchanged by the parties at the closing of the Merger (the
"Merger Closing"), which shall be held on the Effective Date. Prior to the
Merger Closing, the Resulting Bank and VHB shall execute and deliver to the
Virginia State Corporation Commission Articles of Merger containing a Plan of
Merger in substantially the form of Exhibit A hereto.
1.5 Amendment to SNFC Articles. Pursuant to the Plan of Merger, the
Articles of Incorporation of the Holding Company shall be in the form set forth
in Exhibit 1.5, and SNFC agrees to file articles of amendment to its articles of
incorporation, with such amendment to be effective immediately prior to or
simultaneous with the Merger, to cause its Articles of Incorporation to conform
to Exhibit 1.5.
<PAGE>
1.6 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 of the Board of Governors of the
Federal Reserve System ("FRB");
(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 of 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 Merger 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 Merger on
the operating performance of the parties to this Agreement; and
<PAGE>
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure letter that is delivered by that
party to the other party prior to or contemporaneously with the execution of
this Agreement and specifically designated as information "Previously Disclosed"
pursuant to this Agreement.
(d) the term "SNFC Option Agreement" shall mean the Option
Agreement dated as of even date herewith under which SNFC has an option to
purchase shares of VHB, which shall be executed immediately following execution
of this Agreement.
(e) the term "VHB Option Agreement" shall mean the Option
Agreement dated as of even date herewith under which VHB has an option to
purchase shares of SNFC, which shall be executed immediately following execution
of this Agreement.
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of and Payment for Shares. Upon, and by reason of, the
Merger becoming effective pursuant to the issuance of a Certificate of Merger by
the Virginia State Corporation Commission, the shareholders of VHB and SNFC, as
the case may be, shall be entitled to the following:
(a) Each share of common stock, par value $5.00 per share, of
VHB ("VHB Common Stock") issued and outstanding immediately prior to the
Effective Date shall, by operation of law, cease to be outstanding and shall be
converted into and exchanged for 1.15 shares (the "Exchange Ratio") of common
stock, par value $2.50 per share, of the Holding Company (the "Holding Company
Common Stock"). Each holder of a certificate representing any shares of VHB
Common Stock upon the surrender of his VHB stock certificates to the Holding
Company, 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 the Holding Company Common Stock that his
shares shall be converted into pursuant to the Exchange Ratio. Each such holder
of VHB 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, and only upon consent of VHB, SNFC changes the number of
shares of the SNFC Common Stock issued and outstanding prior to the Effective
Date as a result of any stock split, stock dividend, recapitalization or similar
transaction with respect to the outstanding the SNFC Common Stock and the record
date therefor shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted.
<PAGE>
(b) Shares of Interim Bank Common Stock issued and outstanding
shall, by virtue of the Merger, continue to be issued and outstanding shares
held by the Holding Company.
(c) Each share of common stock, par value $2.50 per share, of
SNFC ("SNFC Common Stock") issued and outstanding immediately prior to the
Effective Date will remain issued and outstanding share of the Holding Company.
Each holder of a certificate representing any shares of SNFC Common Stock upon
the surrender of his SNFC stock certificates to the Holding Company, 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 the Holding Company Common Stock that were outstanding in
his name immediately prior to the Effective Date. Each such holder of SNFC
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 upon
the surrender of such certificate in accordance with Section 2.2.
2.2 Manner of Exchange. (a) As promptly as practicable after the
Effective Date, SNFC shall cause SB&T, acting as the exchange agent ("Exchange
Agent"), to send to each former shareholder of record of VHB immediately prior
to the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of VHB Common Stock based upon the Exchange Ratio.
<PAGE>
(b) As promptly as practicable after the Effective Date, SNFC
shall cause the Exchange Agent to send to each shareholder of record of SNFC
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of SNFC Common Stock for certificates
representing an equal number of shares of the Holding Company Common Stock.
2.3 No Fractional Shares. No certificates or scrip for fractional
shares of the Holding Company Common Stock will be issued. In lieu thereof, the
Holding Company will pay the value of such fractional shares in cash on the
basis of the average of the closing prices of SNFC Common Stock as reported on
The National Association of Securities Dealers Automated Quotation System, Small
Cap Market for trades reported during the ten (10) trading days immediately
preceding the Effective Date.
2.4 Dividends. No dividend or other distribution payable to the holders
of record of VHB Common Stock or SNFC Common Stock at or as of any time after
the Effective Date shall be paid to the holder of any certificate representing
shares of such common stock issued and outstanding at the Effective Date until
such holder physically surrenders such certificate for exchange as provided in
Section 2.2 of this Agreement, promptly after which time all such dividends or
distributions shall be paid (without interest).
2.5 Rights of Dissenting Shareholders. Shareholders of VHB and SNFC who
object to the Merger will not be entitled to any dissenters' rights as a result
of the Merger.
<PAGE>
ARTICLE 3
Representation and Warranties
3.1 Representations and Warranties of VHB. VHB represents and warrants to
SNFC as follows:
(a) Organization, Standing and Power. (1) VHB is a Virginia banking
corporation and a member of the FRB. VHB is duly organized, validly existing and
in good standing under the laws of the Commonwealth of Virginia, and 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; VHB has no
subsidiaries except as Previously Disclosed. VHB has the corporate power and
authority to execute and deliver this Agreement and perform the terms of this
Agreement and the Plan of Merger. VHB is regulated and examined by the Virginia
State Corporation Commission ("SCC") and the FRB, and except as Previously
Disclosed, it is in compliance in all material respects with all rules and
regulations promulgated thereunder and by any other relevant regulatory
authority.
(2) VHB is an "insured bank" as defined in the Federal Deposit
Insurance Act, and applicable regulations thereunder, and VHB's deposits are
insured to the fullest extent allowed by laws by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation.
(b) Authority. (1) The execution and delivery of this Agreement and the
consummation of the Merger have been duly and validly authorized by all
necessary corporate action on the part of VHB, except the approval of
shareholders. This Agreement represents the legal, valid, and binding
obligations of VHB, enforceable against VHB 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).
<PAGE>
(2) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, nor compliance by VHB with
any of the provisions hereof will (i) conflict with or result in a breach of any
provision of the Articles of Incorporation or Bylaws of VHB, (ii) except as
Previously Disclosed, constitute or result in the breach of any term, condition
or provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of VHB
pursuant to (A) any note, bond, mortgage, indenture, or (B) any material
license, agreement, lease, or other instrument or obligation, to which VHB 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 6.1(b) hereof, violate any order, writ, injunction, decree, statute,
rule or regulation applicable to VHB or any of its properties or assets.
(c) Capital Structure. The authorized capital stock of VHB
consists of (i) 1,000,000 shares of common stock, par value $5.00 per share, of
which 464,101 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 VHB is a party or otherwise bound, or of any registration or
qualification provisions of any federal or state securities laws. Except as
Previously Disclosed, there are no outstanding options, warrants or other rights
to subscribe for or purchase from VHB any capital stock of VHB or securities
convertible into or exchangeable for capital stock of VHB.
<PAGE>
(d) Financial Statements. Except as Previously Disclosed, its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, all
other documents filed or to be filed subsequent to December 31, 1997 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 "1934 Act"), in
the form filed with the FRB (in each such case, the "VHB Financial Statements"
which have been and will be prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
presented), 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 as of their respective dates; and each of the balance
sheets in or incorporated by reference into the VHB Financial Statements
(including the related notes and schedules thereto) fairly presents, if issued,
and will fairly present when issued, 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 VHB Financial Statements (including any related notes and schedules thereto)
fairly presents, if issued, and will fairly present, when issued, 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.
(e) Absence of Undisclosed Liabilities. At December 31, 1997,
VHB had no obligation or liability (contingent or otherwise) of any nature which
was not reflected in the VHB Financial Statements, except for those which in the
aggregate are immaterial or have been Previously Disclosed.
<PAGE>
(f) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of VHB's management, threatened or probable of
assertion against VHB, or against any property, asset, interest or right of VHB,
that are reasonably expected to have, either individually or in the aggregate, a
material adverse effect on the financial condition of VHB or that are reasonably
expected to threaten or impede the consummation of the Merger. VHB is not a
party to any agreement or instrument or subject to any judgment, order, writ,
injunction, decree or rule that might reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), business or prospects
of VHB. To the knowledge of VHB's management, except as Previously Disclosed,
VHB has complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their business (including
environmental laws, ordinances, requirements, regulations or orders).
(g) Regulatory Approvals. VHB 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).
(h) Labor Relations. VHB is not a party to or bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is it the subject of a proceeding
asserting that it has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel it to bargain with any
labor organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving it, pending or, to the best of its
knowledge, threatened, nor is it aware of any activity involving its employees
seeking to certify a collective bargaining unit or engaging in any other
organizational activity.
<PAGE>
(i) Tax Matters. VHB has filed all federal, state and local tax
returns and reports required to be filed, and all taxes shown by such returns to
be due and payable have been paid or are reflected as a liability in the VHB
Financial Statements or are being contested in good faith and have been
Previously Disclosed in writing to SNFC. Except to the extent that liabilities
therefor are specifically reflected in the VHB Financial Statements, there are
no federal, state or local tax liabilities of VHB other than liabilities that
have arisen since December 31, 1997, all of which have been properly accrued or
otherwise provided for on the books and records of VHB. Except as Previously
Disclosed in writing to SNFC, no tax return or report of VHB 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 VHB
by any taxing authority.
(j) Property. Except as disclosed or reserved against in the VHB
Financial Statements, VHB has good and marketable title, free and clear of all
material liens, encumbrances, charges, defaults or equities of whatever
character to all of the material properties and assets, tangible or intangible,
reflected in the VHB Financial Statements as being owned by VHB as of the dates
thereof. To the best knowledge of VHB, 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 VHB 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 VHB are
in good operating condition and in a state of good maintenance and repair, and
to the knowledge of VHB (i) comply in all material respects with applicable
zoning and other municipal laws and regulations, and (ii) there are no latent
defects therein.
<PAGE>
(k) Reports. Since January 1, 1995, VHB has filed all reports
and statements, together with any amendments required to be made with respect
thereto, that were required to be filed with the SCC and FRB, and, to the
knowledge of VHB, any other governmental or regulatory authority or agency
having jurisdiction over their operations.
(l) Employee Benefit Plans. VHB has delivered to SNFC prior to
the execution of this Agreement true and complete copies of all material
pension, retirement (including supplemental retirement), profit-sharing,
deferred compensation, stock option, bonus, vacation or other material incentive
plans or agreements, all material medical, dental or other health plans or
agreements, all life insurance plans or agreements and all other material
employee benefit or fringe benefit plans or agreements, 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 or within the last five years adopted, maintained by, sponsored in
whole or in part by, or contributed to by VHB or any of its affiliates for the
benefit of employees, directors, retirees or other beneficiaries eligible to
participate (collectively, the "VHB Benefit Plans"). Any of the VHB 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 "VHB ERISA Plan." No VHB
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA. (1) All VHB Benefit Plans are in compliance in all material
respects 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 (including, without limitation, applicable tax qualification,
reporting and disclosure, funding, fiduciary responsibility, and COBRA health
care continuation coverage requirements) the breach or violation of which could
result in a material liability to VHB or any of its affiliates on a consolidated
basis.
(2) No VHB ERISA Plan which is a defined benefit
pension plan subject to Part IV of Title I of ERISA or IRC Section 412 has any
"unfunded current liability," as that term is defined in Section 302(d)(8)(A) of
ERISA or IRC Section 412(a), and the present fair market value of the assets of
any such plan subject to Title IV of ERISA exceeds the plan's "benefit
liabilities," as that term is defined in Section 4001(a)(16) of ERISA, when
determined under actuarial factors that would apply if the plan was terminated
in accordance with all applicable legal requirements.
(3) Neither the execution nor delivery of this
Agreement nor the consummation of the transactions or events contemplated hereby
will (a) except as otherwise expressly provided in this Agreement, result in any
payment or the provision of any benefit (including, without limitation, an
increase in, acceleration of payment of or an acceleration of vesting of any
compensation, benefit or other right under any VHB Benefit Plan) to any current
or former employee, director or agent of VHB or any of its affiliates or (b)
result in the making by VHB or any of its affiliates of, or the imposition of
any excise tax under IRC Section 4999 on, any excess parachute payment (as
defined in IRC Section 280G).
(m) Investment Securities. Except for pledges to secure public and
trust deposits and obligations under agreements pursuant to which VHB has sold
securities subject to an obligation to repurchase, none of the investment
securities reflected in the VHB 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 except as their disposal may be affected by generally
accepted accounting principles applicable to the classification of securities.
With respect to any agreements pursuant to which VHB has purchased securities
subject to any agreement to resell, it has a valid, perfected first lien or
security interest in the government securities or other collateral securing such
agreement, and the value of such collateral equals or exceeds the amount of the
debt secured thereby.
<PAGE>
(n) 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 VHB has previously been furnished to SNFC 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 VHB. VHB is not in default with respect to any
provision contained in any such policy or binder and has not failed to give any
notice or present any claim under any such policy or binder in due and timely
fashion. VHB has not received notice of cancellation or non-renewal of any such
policy or binder. VHB has no knowledge of any inaccuracy in any application for
such policies or binders, any failure to pay premiums when due or any similar
state of facts or the occurrence of any event that is reasonably likely to form
the basis for any material claim against it not fully covered (except to the
extent of any applicable deductible) by the policies or binders referred to
above. VHB has not received notice from any of its insurance carriers that any
insurance premiums will be increased materially in the future or that any such
insurance coverage will not be available in the future on substantially the same
terms as now in effect.
(o) Absence of Certain Changes and Events. Since December 31, 1997,
there has not been any material adverse change in the condition (financial or
otherwise), aggregate assets or liabilities, cash flow, earnings or business of
VHB, and VHB has conducted its business only in the ordinary course consistent
with past practice.
<PAGE>
(p) Loans, OREO, and Allowance for Loan Losses. (1) Except as
Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the financial condition of VHB, to
VHB's knowledge each loan reflected as an Asset in the VHB 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.
(2) The classification on the books and records of VHB 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 VHB 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 VHB has not received any notice of denial of any such
claim.
(4) VHB 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 VHB is diligently pursuing such eviction or summary proceedings
or such rental arrangements. Except as Previously Disclosed, no legal proceeding
or quasi-legal proceeding is pending or, to the knowledge of VHB, threatened
concerning any OREO or any servicing activity or omission to provide a servicing
activity with respect to any of the OREO.
<PAGE>
(5) Except as Previously Disclosed, all loans made by any of the VHB to
facilitate the disposition of OREO are performing in accordance with their
terms.
(6) The allowance for possible loan losses shown on the VHB Financial
Statements was, and the allowance for possible loan losses shown on the
financial statements of VHB 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 VHB and other extensions of credit (including letters of
credit and commitments to make loans or extend credit) by VHB.
(q) Statements True and Correct. None of the information supplied or to
be supplied by VHB for inclusion in any other document to be filed with the SCC
and FRB or any other regulatory authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, 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.
(r) Environmental Matters.
(i) Except as Previously Disclosed, VHB is in
substantial compliance with all Environmental Laws (as defined below).VHB has
not received any communication alleging that VHB is not in such compliance and,
to the best knowledge of VHB, there are not present circumstances that would
prevent or interfere with the continuation of such compliance.
<PAGE>
(ii) VHB has not received notice of pending, and is not aware of any
threatened, legal, administrative, arbitral or other proceedings, asserting
Environmental Claims (as defined below) or other claims, causes of action or
governmental investigations of any nature, seeking to impose, or that could
result in the imposition of, any material liability arising under any
Environmental Laws upon (i) VHB, (ii) any person or entity whose liability for
any Environmental Claim (as defined below) VHB has or may have retained either
contractually or by operation of law, (iii) any real or personal property owned
or leased by VHB, or any real or personal property which VHB has been, or is,
judged to have managed or to have supervised or to have participated in the
management of, or (iv) any real or personal property in which VHB holds a
security interest securing a loan recorded on the books of VHB. VHB is not
subject to any agreement, order, judgment, decree or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
such liability.
(iii) With respect to all real and personal property owned or leased by
VHB, or all real and personal property which VHB has been, or is, judged to have
managed or to have supervised or to have participated in the management of, VHB
will promptly provide SNFC with access to copies of any environmental audits,
analyses and surveys that have been prepared relating to such properties (a list
of which will be included in the Disclosure Letter). To the best of VHB's
knowledge, VHB is in compliance in all material respects with all
recommendations contained in any such environmental audits, analyses and
surveys.
(iv) To the knowledge of VHB, there are no past or present actions,
activities, circumstances, conditions, events or incidents that could reasonably
form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Laws against VHB or against any person or entity
whose liability for any Environmental Claim VHB has or may have retained or
assumed either contractually or by operation of law.
<PAGE>
(v) For purposes of this Agreement, the following terms shall
have the following meanings:
(A) "Environmental Claim" means any written notice from any
governmental authority or third party alleging potential liability
(including, without limitation, potential liability for investigatory
costs, clean-up, governmental response costs, natural resources
damages, property damages, personal injuries or penalties) arising out
of , based upon, or resulting from the presence, or release into the
environment, of any Materials of Environmental Concern.
(B) "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.
(C) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum
products and any other materials regulated under Environmental Laws.
(s) Broker or Finder. Neither VHB nor any of its officers, directors or
employees has employed any broker, finder or financial advisor or incurred any
liability for any fees or commissions in connection with transactions
contemplated by this Agreement, except for Crestar Securities Corporation.
(t) Pooling of Interests Conditions. To the knowledge of VHB, there
have been no events or conditions to which it is subject that would prevent the
Merger from being accounted for as a pooling of interests.
(u) Year 2000 Issues. To its knowledge, VHB is in substantial
compliance with all federal regulatory requirements relating to Year 2000
issues. Except as Previously Disclosed, VHB is not aware of any material costs
to which it may be subject in connection with ensuring its computer systems or
those of its primary data processing providers are Year 2000 compliant.
<PAGE>
(v) Prospectus/Proxy Statement. At the time the Prospectus/Proxy
Statement is mailed to the shareholders of VHB for the solicitation of proxies
for the approvals referred to in Section 4.3 hereof and at all times subsequent
to such mailings up to and including the times of such approvals, such
Prospectus/Proxy Statement (including any supplements thereto), with respect to
all information set forth therein relating to VHB, this Agreement, the Merger
and all other transactions contemplated hereby that has been furnished in
writing by VHB expressly for inclusion therein, will:
(i) comply in all material respects with applicable provisions of
the Securities Act of 1933 (the "1933 Act"), the 1934 Act and the rules and
regulations under such Acts; and
(ii) not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not false or misleading, or
necessary to correct any statement in an earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading.
3.2 Representations and Warranties of SNFC. SNFC represents and
warrants to VHB as follows:
(a) Organization, Standing and Power. (1) SNFC is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia, and 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. SNFC has the corporate power and authority
to execute and deliver this Agreement and perform the terms of this Agreement
and the Plan of Merger. SNFC is duly registered as a bank holding company under
the Bank Holding Company Act of 1956 and is regulated and examined by the SCC
and the FRB, and except as Previously Disclosed, it is in compliance in all
material respects with all rules and regulations promulgated thereunder and by
any other relevant regulatory authority.
<PAGE>
(2) SNFC has Previously Disclosed to VHB 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 "SNFC Subsidiaries" and, collectively with
SNFC, the "SNFC Companies"). SNFC's only Subsidiary that is a bank is an
"insured bank" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder, the deposits of which are insured to the fullest extent
allowed by law by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation. All of the shares of capital stock of the SNFC Subsidiaries held by
SNFC are duly and validly issued, fully paid and nonassessable, and all such
shares are owned by SNFC or a SNFC 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 stockholder or in violation of any agreement or of any
registration or qualification provisions of federal or state securities laws.
Except as Previously Disclosed, none of the SNFC Companies owns any equity
securities of any other corporation or entity.
(b) Authority. (1) The execution and delivery of this
Agreement and the consummation of the Merger have been duly and validly
authorized by all necessary corporate action on the part of SNFC, except the
approval of shareholders of SNFC. This Agreement represents the legal, valid,
and binding obligations of SNFC, enforceable against SNFC 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).
<PAGE>
(2) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, nor compliance by SNFC
with any of the provisions hereof will (i) conflict with or result in a breach
of any provision of the Articles of Incorporation or Bylaws of SNFC, (ii) except
as Previously Disclosed in writing to VHB, 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 SNFC 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 SNFC 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 6.1(b) hereof, violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
any of the SNFC Companies or any of their properties or assets.
(c) Capital Structure. The authorized capital stock of SNFC
consists of: 3,000,000 shares of common stock, par value $2.50 per share, of
which 1,502,744 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 SNFC is a party or otherwise bound, or of any registration or
qualification provisions of any federal or state securities laws; and 1,000,000
shares of preferred stock, no par value per share, of which none are issued and
outstanding, except that issuance of such shares may occur pursuant to Section
4.11 of this Agreement pursuant to a shareholders' rights plan to be adopted by
SNFC prior to the Effective Date. Except as Previously Disclosed, and except for
issuance under a SNFC shareholder rights plan, there are no outstanding options,
warrants or other rights to subscribe for or purchase from SNFC any capital
stock of SNFC or securities convertible into or exchangeable for capital stock
of SNFC.
<PAGE>
(d) Financial Statements. Except as Previously Disclosed, its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, all
other documents filed or to be filed subsequent to December 31, 1997 under
Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act, in the form filed with the
SEC (in each such case, the "SNFC Financial Statements" which have been and will
be prepared in conformity with generally accepted account principles applied on
a consistent basis during the periods presented), 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 SNFC
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 SNFC 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.
<PAGE>
(e) Absence of Undisclosed Liabilities. At December 31, 1997,
none of the SNFC Companies had any obligation or liability (contingent or
otherwise) of any nature which were not reflected in the SNFC Financial
Statements, except for those which in the aggregate are immaterial or have been
Previously Disclosed.
(f) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of SNFC's management, threatened or probable
of assertion against any of the SNFC 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 SNFC or that are reasonably expected to threaten or impede the
consummation of the Merger. None of the SNFC 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 SNFC
on a consolidated basis. To the knowledge of SNFC, except as Previously
Disclosed, the SNFC 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).
(g) Regulatory Approvals. SNFC 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).
<PAGE>
(h) Labor Relations. None of the SNFC 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 it has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
(i) Tax Matters. The SNFC 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 SNFC Financial Statements or are being contested in good faith
and have been Previously Disclosed in writing to VHB. Except to the extent that
liabilities therefor are specifically reflected in the SNFC Financial
Statements, there are no federal, state or local tax liabilities of SNFC other
than liabilities that have arisen since December 31, 1997, all of which have
been properly accrued or otherwise provided for on the books and records of
SNFC. Except as Previously Disclosed in writing to VHB, no tax return or report
of SNFC 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 SNFC Companies by any taxing authority.
<PAGE>
(j) Property. Except as disclosed or reserved against in the
SNFC Financial Statements, the SNFC 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 SNFC Financial Statements as being
owned by the SNFC Companies as of the dates thereof. To the best knowledge of
SNFC, all buildings, and all fixtures, equipment, and other property and assets
which are material to the business of SNFC on a consolidated basis, held under
leases or subleases by the SNFC 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 SNFC Companies
are in good operating condition and in a state of good maintenance and repair,
and to the best knowledge of SNFC (i) comply in all material respects with
applicable zoning and other municipal laws and regulations, and (ii) there are
no latent defects therein.
(k) Reports. Since January 1, 1995, the SNFC 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 SEC, the SCC,
the FRB, and, to the knowledge of the SNFC Companies, any other governmental or
regula tory authority or agency having jurisdiction over their operations.
<PAGE>
(l) Employee Benefit Plans. SNFC has delivered to VHB prior to
the execution of this Agreement true and complete copies of all material
pension, retirement (including supplemental retirement), profit-sharing,
deferred compensation, stock option, bonus, vacation or other material incentive
plans or agreements, all material medical, dental or other health plans or
agreements, all life insurance plans or agreements and all other material
employee benefit or fringe benefit plans or agreements, 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 or within the last five years adopted, maintained by, sponsored in
whole or in part by, or contributed to by SNFC or any of its affiliates for the
benefit of employees, directors, retirees or other beneficiaries eligible to
participate (collectively, the "SNFC Benefit Plans"). Any of the SNFC 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 "SNFC ERISA Plan." No SNFC
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(1) All SNFC 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 (including, without
limitation, applicable tax qualification, reporting and disclosure, funding,
fiduciary responsibility, and COBRA health care continuation coverage
requirements) the breach or violation of which could result in a material
liability to SNFC or any of its affiliates on a consolidated basis.
(2) No SNFC ERISA Plan which is a defined benefit
pension plan subject to Part IV of Title I of ERISA or IRC Section 412 has any
"unfunded current liability," as that term is defined in Section 302(d)(8)(A) of
ERISA or IRC Section 412(a), and the present fair market value of the assets of
any such plan subject to Title IV of ERISA 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.
<PAGE>
(3) Neither the execution nor delivery of this
Agreement nor the consummation of the transactions or events contemplated hereby
will (a) except as otherwise expressly provided in this Agreement, result in any
payment or the provision of any benefit (including, without limitation, an
increase in, acceleration of payment of or an acceleration of vesting of any
compensation, benefit or other right under any SNFC Benefit Plan) to any current
or former employee, director or agent of SNFC or any of its affiliates or (b)
result in the making by SNFC or any of its affiliates of, or the imposition of
any excise tax under IRC Section 4999 on, any excess parachute payment (as
defined in IRC Section 280G).
(m) Investment Securities. Except for pledges to secure public
and trust deposits and obligations under agreements pursuant to which SNFC has
sold securities subject to an obligation to repurchase, none of the investment
securities reflected in the SNFC Financial Statements is subject to any
restriction, contractual, statutory, or otherwise, which would impair materially
the ability of the holder of such investment to dispose freely of any such
investment at any time. With respect to any agreements pursuant to which SNFC
has purchased securities subject to any agreement to resell, it has a valid,
perfected first lien or security interest in the government securities or other
collateral securing such agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(n) 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 SNFC has previously been furnished to VHB 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 SNFC. SNFC is 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. SNFC has not received notice of cancellation or non-renewal of any such
policy or binder. SNFC has no knowledge of any inaccuracy in any application for
such policies or binders, any failure to pay premiums when due or any similar
state of facts or the occurrence of any event that is reasonably likely to form
the basis for any material claim against it not fully covered (except to the
extent of any applicable deductible) by the policies or binders referred to
above. SNFC has not received notice from any of its insurance carriers that any
insurance premiums will be increased materially in the future or that any such
insurance coverage will not be available in the future on substantially the same
terms as now in effect.
<PAGE>
(o) Absence of Certain Changes and Events. Since December 31,
1997, there has not been any material adverse change in the condition (financial
or otherwise), aggregate assets or liabilities, cash flow, earnings or business
of SNFC, and SNFC has conducted its business only in the ordinary course
consistent with past practice.
(p) Loans, OREO, and Allowance for Loan Losses.
(1) Except as Previously Disclosed, and
except for matters which individually or in the aggregate, do not materially
adversely affect the Merger or the financial condition of SNFC, to SNFC's
knowledge each loan reflected as an Asset in the SNFC 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.
(2) The classification on the books and
records of SB&T 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 SNFC 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 SB&T has not received any
notice of denial of any such claim.
<PAGE>
(4) SB&T 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 SB&T is diligently pursuing such eviction
of summary proceedings or such rental arrangements. Except as Previously
Disclosed, no legal proceeding or quasi-legal proceeding is pending or, to the
knowledge of SNFC, threatened concerning any OREO or any servicing activity or
omission to provide a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all
loans made by any of the SNFC Companies to facilitate the disposition of OREO
are performing in accordance with their terms.
(6) The allowance for possible loan losses
shown on the SNFC Financial Statements was, and the allowance for possible loan
losses shown on the financial statements of SNFC 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 SNFC and other extensions of
credit (including letters of credit and commitments to make loans or extend
credit) by SNFC.
<PAGE>
(q) Statements True and Correct. None of the information
supplied or to be supplied by SNFC for inclusion in any other document to be
filed with the SCC and FRB or any other regulatory authority in connection with
the transactions contemplated hereby, will, at the respective time such
documents are filed, 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.
(r) Environmental Matters.
i) Except as Previously Disclosed, each of
the SNFC Companies is in substantial compliance with all Environmental Laws.
None of the SNFC Companies has received any communication alleging that any of
the SNFC Companies is not in such compliance and, to the best knowledge of SNFC,
there are not present circumstances that would prevent or interfere with the
continuation of such compliance.
ii) None of the SNFC Companies has received
notice of pending, and are not aware of any threatened, legal, administrative,
arbitral or other proceedings, asserting Environmental Claims or other claims,
causes of action or governmental investigations of any nature, seeking to
impose, or that could result in the imposition of, any material liability
arising under any Environmental Laws upon (i) such SNFC Company, (ii) any person
or entity whose liability for any Environmental Claim such SNFC Company has or
may have retained either contractually or by operation of law, (iii) any real or
personal property owned or leased by such SNFC Company, or any real or personal
property which such SNFC Company has been, or is, judged to have managed or to
have supervised or to have participated in the management of, or (iv) any real
or personal property in which such SNFC Company holds a security interest
securing a loan recorded on the books of such SNFC Company. No SNFC Company 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
<PAGE>
iii) With respect to all real and
personal property owned or leased by any SNFC Company, or all real and personal
property which such SNFC Company has been, or is, judged to have managed or to
have supervised or to have participated in the management of, such SNFC Company
will promptly provide VHB with access to copies of any environmental audits,
analyses and surveys that have been prepared relating to such properties (a list
of which will be included in the Disclosure Letter). To the best of SNFC's
knowledge, each SNFC Company is in compliance in all material respects with all
recommendations contained in any such environmental audits, analyses and
surveys.
(iv) To the knowledge of SNFC, there are
no past or present actions, activities, circumstances, conditions, events or
incidents that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws against any
SNFC Company or against any person or entity whose liability for any
Environmental Claim such SNFC Company has or may have retained or assumed either
contractually or by operation of law.
(s) Broker or Finder. Neither SNFC nor any of its officers,
directors or employees has employed any broker, finder or financial advisor or
incurred any liability for any fees or commissions in connection with
transactions contemplated by this Agreement, except for The Carson Medlin
Company.
(t) Pooling of Interests Conditions. To its knowledge, there
have been no events or conditions to which it is subject that would prevent the
Merger from being accounted for as a pooling of interests.
<PAGE>
(u) Year 2000 Issues. To its knowledge, SNFC is in substantial
compliance with all federal regulatory requirements relating to Year 2000
issues. Except as Previously Disclosed, SNFC is not aware of any material costs
to which it may be subject in connection with ensuring its computer systems or
those of its primary data processing providers are Year 2000 compliant.
(v) Prospectus/Proxy Statement. At the time the
Prospectus/Proxy Statement is mailed to the shareholders of SNFC for the
solicitation of proxies for the approvals referred to in Section 4.3 hereof and
at all times subsequent to such mailings up to and including the times of such
approvals, such Prospectus/Proxy Statement (including any supplements thereto),
with respect to all information set forth therein relating to SNFC, this
Agreement, the Merger and all other transactions contemplated hereby that has
been furnished in writing by SNFC expressly for inclusion therein, will:
(1) comply in all material respects with applicable
provisions of the 1933 Act, the 1934 Act and the rules and regulations under
such Acts; and
(2) not contain any statement which, at the time and in light
of the circumstances under which it is made, is false or misleading with respect
to any material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not false or
misleading, or necessary to correct any statement in an earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter which has become false or misleading.
<PAGE>
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties. VHB will keep SNFC and SNFC will
keep VHB advised of all material developments relevant to their respective
businesses prior to consummation of the Merger. Prior to the Effective Date,
VHB, on the one hand, and SNFC, 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 party 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 business of the other.
4.2 Confidentiality. Between the date of this Agreement and the
Effective Date, VHB and SNFC each will use their best efforts to 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 Merger is not consummated, each party will return or destroy as much of such
written information as may reasonably be requested.
<PAGE>
4.3 Proxy Statement and Shareholders' Meetings. The Board of Directors
of VHB and SNFC will duly call and will hold a meeting of their respective
shareholders as soon as practicable for the purpose of approving the Merger, and
in the case of SNFC, the amendments to its Articles of Incorporation pursuant to
this Agreement, and, in connection therewith, subject to the fiduciary duties of
the respective Boards of Directors (as advised in writing by its counsel), shall
use their best efforts to solicit and obtain votes for approval by their
respective shareholders, and each member of the Boards of Directors who voted as
a director in favor of the Merger shall vote all shares of Common Stock under
his control (and not held in a fiduciary capacity) in favor of the Merger. For
the purposes of (i) registering SNFC common stock to be issued to holders of VHB
common stock in connection with the Merger with the SEC and with applicable
state securities authorities, and (ii) holding the Shareholders Meetings, the
Parties shall cooperate in the preparation of an appropriate registration
statement (such registration statement, together with all and any amendments and
supplements thereto, being herein referred to as the "Registration Statement"),
including a prospectus/proxy statement satisfying all applicable requirements of
applicable state laws, and of the 1933 Act and the 1934 Act and the rules and
regulations thereunder (such prospectus/proxy statement in the form mailed to
the VHB and SNFC shareholders, together with any and all amendments or
supplements thereto, being herein referred to as the "Prospectus/Proxy
Statement"). SNFC shall promptly file the Registration Statement and the
Prospectus/Proxy Statement with the SEC and applicable state securities
agencies. SNFC shall use all reasonable efforts to cause the Registration
Statement and the Prospectus/Proxy Statement to become effective under the 1933
Act and applicable state securities laws at the earliest practicable date.
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 Joint Proxy
Statement made in reliance upon, and in conformity with, written information
concerning another party furnished by such other party specifically for use in
the Joint Proxy Statement.
<PAGE>
4.4 Operation of the Business of VHB and SNFC. VHB and SNFC each agree
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, VHB and SNFC each agree that it will
not, without the prior written consent of the other:
(a) Except with respect to SNFC's shareholders' rights plan to
be adopted in accordance with Section 4.11 hereof, 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;
(b) Voluntarily make any changesin the composition of its officers,
directors or other key management personnel;
(c) Make any change in the compensation or title of any officer,
director or key management employee or make any change in the compensation or
title of any other employee, other than permitted by current employment policies
in the ordinary course of business, any of which changes shall be reported
promptly to the other party;
(d) Enter into any bonus, incentive compensation, stock option,
deferred compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment or consulting agreement
(except with respect to SNFC's 1998 Incentive Stock Plan as approved by
shareholders at its 1998 Annual Meeting);
<PAGE>
(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 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) Issue or contract to issue any shares of common stock, options for
shares of common stock, or securities exchangeable for or convertible into such
shares;
(g) Knowingly waive any right to substantial value;
(h) Enter into material transactions otherwise than in the ordinary
course of its business;
(i) Alter, amend or repeal its Articles of Incorporation or Bylaws,
except as otherwise set forth herein;
(j) Propose or take any other action which would make any
representation or warranty in Section 3.1 or 3.2 hereof untrue.
4.5 No Solicitation. Unless mutually agreed by the parties in writing,
unless and until this Agreement shall have been terminated pursuant to its
terms, neither VHB nor SNFC, nor any of their respective officers, directors,
representatives or agents shall, directly or indirectly, (i) encourage, solicit
or initiate discussions or negotiations (with any person other than the other
party to this transaction) concerning any merger, share exchange, sale of
substantial assets, tender offer, sale of shares of capital stock or similar
transaction involving VHB or SNFC, (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 (except where the
failure to do any of the above would, on the advice of counsel, constitute a
breach of fiduciary or legal obligations of the Board of Directors of either VHB
or SNFC to their respective shareholders). VHB and SNFC will promptly
communicate to the other party hereto the terms of any proposal which it may
receive in respect to any of the foregoing transactions.
<PAGE>
4.6 Dividends. VHB and SNFC agree to consult and receive the approval
of the other during the term of this Agreement concerning the declaration and
payment of any dividends in respect of VHB Common Stock and SNFC Common Stock
and the record dates and payment dates relating thereto, except for such
payments consistent with the respective institution's consistently applied
dividend policies.
4.7 Regulatory Filings. SNFC and VHB shall prepare jointly all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Plan of Merger and submit the filings for approval with the
FRB and the SCC as soon as practicable after the date hereof. VHB and SNFC 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 Merger and shall not issue any such press release or make any such public
statement prior to such consultations except as may be required by law.
4.9 Notice of Breach. VHB and SNFC 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. VHB and SNFC shall each use their best
efforts to ensure that the Affiliation qualifies for pooling-of-interests
accounting treatment.
4.11 SNFC Shareholder Rights' Plan. Prior to the Effective Date, VHB
agrees that the Board of Directors of SNFC shall be permitted to adopt and
approve a shareholders' rights plan as described on Exhibit 4.11 which shall
grant rights on the same basis with respect to its outstanding shares of common
stock and the shares of common stock that shall be issued to VHB shareholders
pursuant to the Reorganization contemplated herein. Any amendment proposing to
change the rights to be granted or any other material terms of the plan prior to
the Effective Date shall require the concurrence of a majority of the Board of
Directors of VHB.
<PAGE>
4.12 Merger 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 Merger at the earliest possible
date, consistent with Section 1.4 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 VHB and SNFC shall use, and shall cause
each of their respective subsidiaries, if any, 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.
4.13 Stock Option Agreement. VHB shall grant SNFC an option and SNFC
shall grant VHB an option to acquire such number of shares of their respective
Common Stock that would equate to 19.9% of the issued and outstanding common
stock of the optionee, all in accordance with the SNFC Option Agreement and the
VHB Option Agreement.
<PAGE>
ARTICLE 5
Additional Agreements
5.1 Indemnification if Merger is Not Consummated.
(a) If the Merger is not consummated, subject to the
procedures set forth in Section 5.1 (b) below, (i) VHB agrees to indemnify and
hold harmless SNFC, the SNFC Companies, and its officers and directors, and (ii)
SNFC agrees to indemnify and hold harmless VHB and its officers, directors and
employees, against any losses, liabilities, claims, damages and expenses
(including but not limited to reasonable attorneys' fees and any and all
reasonable expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which the indemnified person may become subject, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any material misrepresentation or material breach
of warranty, covenant or agreement made or to be performed by the indemnifying
party pursuant to this Agreement, to the extent such loss, claim, liability,
damage or expense is not the result of the misconduct or negligence of the
indemnified person.
(b) A party seeking indemnification pursuant to Section 5.1(a)
shall give prompt notice to the party from whom such indemnification is sought
of the assertion of any claim, or the commencement of any action or proceeding,
in respect of which indemnity may be sought hereunder. The indemnified person
shall assist the indemnifying party in the defense of any such action or
proceeding. The indemnifying party shall have the right to, and shall at the
request of the indemnified person, assume the defense of any such action or
proceeding at its own expense. In any such action or proceeding, the indemnified
person shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at its own expense unless: (i) the indemnifying party
and the indemnified person shall have mutually agreed to the retention of such
counsel; or (ii) the named parties to any such suit, action or proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified person and, in the reasonable judgment of the indemnified person,
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. An indemnifying party
shall not be liable under Section 5.1(a) for any settlement effected without its
consent of any claim, litigation or proceeding in respect of which indemnity may
be sought hereunder. The indemnifying party may settle any claim without the
consent of the indemnified person, but only if the sole relief awarded is
monetary damages that are paid in full by the indemnifying party. An indemnified
person shall, subject to its reasonable business needs, use reasonable efforts
to minimize the indemnification sought from the indemnifying party hereunder.
Notwithstanding the foregoing, no investigation by an indemnified person at or
prior to the Closing shall relieve an indemnifying party of any liability
hereunder, unless the indemnified person seeks indemnity in respect of a
representation or warranty which it actually had reason to believe to be
incorrect as a result of its investigation prior to the Closing and the
indemnified person intentionally failed to bring such belief to the attention of
the indemnifying party prior to the Closing.
<PAGE>
5.2 Indemnification if Merger is Consummated.
(a) Each of the parties hereto acknowledges and agrees that if
the Merger is consummated, by operation of law, at the Effective Date, Resulting
Bank will assume any and all legally enforceable obligations of VHB to indemnify
and defend the directors and officers of VHB pursuant to, to the extent of, and
in accordance with the terms and conditions of any such obligations that VHB had
to indemnify and defend such persons in effect immediately prior to the
Effective Date, in connection with such persons' status or services as directors
and officers of VHB, whether by contractual right or by provision of VHB's
Articles of Incorporation or Bylaws or of federal or Virginia law, with respect
to any claim asserted or made prior to or at any time after the Effective Date,
and following the Effective Date, the Holding Company agrees to indemnify and
hold harmless such directors and officers to the extent of such obligations, to
the extent legally permitted to do so with respect to matters occurring on or
prior to the Effective Date. Without limiting the foregoing, in any case in
which corporate approval may be required to effectuate any indemnification, the
Holding Company 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 the Holding Company and the
indemnified party.
(b) At the Effective Date, the Holding Company shall have
arranged for those directors and officers of VHB and those directors and
officers of SNFC or SB&T who become or remain directors and officers of the
Holding Company or either of the Banks after the Effective Date to be covered
after the Effective Date as to future errors or omissions by SNFC's directors'
and officers' liability insurance policy. As to errors or omission prior to the
Effective Date, the Holding Company shall arrange for the directors and officers
of VHB, SNFC and SB&T to be covered in an amount not less then $3,000,000.00 by
(i) the Holding Company's directors' and officers' liability insurance policy,
(ii) a continuation as to such prior errors and omissions under the Companies'
respective existing directors' and officers' liability insurance policies, or
(iii) purchase of a new policy covering such prior errors and omissions, in any
case providing coverage during the period ending seven years after the Effective
Date. Notwithstanding any other provision of this Agreement to the contrary,
this Section 5.2 is for the benefit of those persons who were directors and
officers of VHB, SNFC and SB&T prior to the Effective Time, and any such person
may enforce this section or seek appropriate damages for its breach.
<PAGE>
ARTICLE 6
Conditions to the Merger
6.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each of VHB and SNFC to effect the Merger 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) Corporate Action and Other Approvals. All corporate action
necessary to authorize the execution, delivery and performance of this Agreement
and the Plan of Merger, the SNFC Option Agreement and the VHB Option Agreement,
and consummation of the transactions contemplated hereby and thereby shall have
been duly and validly taken, including without limitation the due approval by
the shareholders of VHB and SNFC of the Agreement and the Plan of Merger in
accordance with Virginia law and their respective charter documents.
(b) Regulatory Approvals. This Agreement and the Plan of
merger shall have been approved by the SCC, the FRB, 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 Merger in the reasonable opinion of the
Board of Directors of VHB or SNFC.
(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 of the SEC or any state securities commissioner.
<PAGE>
(d) Tax Opinion. VHB and SNFC shall have received an opinion of SNFC's
counsel in form and substance satisfactory to VHB and SNFC to the effect that
the Merger will constitute a reorganization within the meaning of Section 368 of
the Code and that no gain or loss will be recognized by the shareholders of VHB
to the extent they receive Holding Company Common Stock solely in exchange for
their VHB Common Stock in the Merger.
(e) Accountant's Letter. VHB and SNFC shall have received
letters, dated as of the Effective Date, from Yount Hyde & Barbour, P.C.,
reasonably satisfactory in form and substance to each of VHB and SNFC, that the
Merger will qualify for pooling-of-interests accounting treatment.
(f) Opinions of Counsel. VHB shall have delivered to SNFC and
SNFC shall have delivered to VHB 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 VHB nor SNFC shall be subject
to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Merger.
(h) Investment Banking Letter. VHB and SNFC each shall have
received a written opinion in form and substance satisfactory to each of them in
their sole discretion from, in the case of VHB, Crestar Securities Corporation,
and in the case of SNFC, The Carson-Medlin Company, addressed to their
respective Board of Directors and dated the date the Joint Proxy Statement is
mailed to shareholders, to the effect that the terms of the Merger, including
the Exchange Ratio, are fair, from a financial point of view, to the
shareholders of VHB and SNFC, and neither of such opinions shall have been
withdrawn.
<PAGE>
6.2 Conditions to Obligations of SNFC. The obligations of SNFC to
effect the Merger shall be subject to the fulfillment or waiver at or prior to
the Effective Date of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of VHB set forth in Section 3.1 hereof shall be true and correct in
all material respects as of the date of this Agreement and as of the Effective
Date (as though made on and as of the Effective Date except to the extent such
representations and warranties are by their express provisions made as of a
specified date), and SNFC shall have received a certificate signed by the Chief
Executive Officer and Chief Financial Officer of VHB to that effect.
(b) Performance of Obligations. VHB shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and SNFC shall have received a
certificate signed by the Chief Executive Officer of VHB to that effect.
(c) Affiliate Letters. In connection with the execution
hereof, VHB shall use all reasonable efforts to obtain from each shareholder of
VHB who may be deemed by counsel for SNFC to be an "affiliate" of VHB within the
meaning of Rule 145 under the 1933 Act, an executed and delivered commitment and
undertaking, substantially in the form of Exhibit 6.2(c), to the effect that (1)
such shareholder will dispose of the shares of Holding Company Common Stock
received by him in connection with the Merger only in accordance with the
provisions of paragraph (d) of Rule 145 and in a manner that would not prevent
the Merger from qualifying for pooling-of-interests accounting treatment; (2)
such shareholders will not dispose of any such shares until SNFC has received an
opinion of counsel acceptable to it that such proposed disposition will not
violate the provisions of any applicable securities laws; and (3) the
certificates representing said shares may bear a legend referring to the
foregoing restrictions.
<PAGE>
6.3 Conditions to Obligations of VHB. The obligations of
VHB to effect the Merger shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. The representations and warranties
of SNFC set forth in Section 3.2 hereof shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective Date
(as though made on and as of the Effective Date except to the extent such
representations and warranties are by their express provisions made as of a
specified date), and VHB shall have received a certificate signed by the Chief
Executive Officer and Chief Financial Officer of SNFC to that effect.
(b) Performance of Obligations. SNFC shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and VHB shall have received a certificate
signed by the Chief Executive Officer of SNFC to that effect.
ARTICLE 7
Termination
7.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement and the Plan of
merger by the shareholders of VHB and SNFC, this Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Date:
(a) By the mutual consent of the Boards of Directors of each of
VHB and SNFC;
(b) By the respective Boards of Directors of VHB or SNFC if the
conditions set forth in Section 6.1 have not been met or waived by VHB and SNFC;
(c) By the Board of Directors of SNFC if the conditions
set forth in Section 6.2 have not been met or waived by SNFC;
(d) By the Board of Directors of VHB if the conditions
set forth in Section 6.3 have not been met or waived by VHB;
(e) By the respective Boards of Directors SNFC or VHB if the
Merger is not consummated by March 31, 1999. 7.2 Effect of Termination. In the
event of the termination and abandonment of this Agreement and the Merger
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, both
relating to confidentiality and Section 7.4, relating to expenses, shall survive
any such termination and abandonment and (ii) no party shall be relieved or
released from any liability arising out of an intentional breach of any
provision of this Agreement.
<PAGE>
7.3 Non-Survival of Representations, Warranties and Covenants. Except
for Article 1.2, 1.3, 1.5, 2.1, 2.2, 2.3, 5.1, 5.2, 7.4 and 8.8 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
SNFC or VHB (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 SNFC or VHB.
7.4 Expenses. (a) Unless otherwise agreed by the parties in writing,
each party shall bear and pay its own expenses incident to preparing, entering
into and carrying out this Agreement and to consummating the Merger, except that
VHB and SNFC shall divide equally all printing expense related to the Joint
Proxy Statement and the required regulatory filings at the SCC, including the
expense of establishing the Interim Bank, and all filing fees incurred in
connection with this Agreement, the Registration Statement and the Joint Proxy
Statement.
(b) Notwithstanding the foregoing, if this Agreement is
terminated by VHB or SNFC pursuant to Section 7.1(c) or 7.1(d) of this Agreement
because of the willful breach by the other of any representation, warranty,
covenant, undertaking, or restriction contained herein, if the terminating party
shall not have been in breach (in any material respect) of any representation,
warranty, covenant, undertaking, or restriction contained herein, then the
breaching party shall pay all costs and expenses specified in the exception to
Section 7.4(a) of this Agreement, plus costs of counsel, investment bankers, and
accountants of the terminating party up to a maximum of $100,000. Nothing
contained in this Section 7.4(b) shall constitute or shall be deemed to
constitute liquidated damages for the willful breach by a party of the terms of
this Agreement or otherwise limit the rights of the nonbreaching party.
<PAGE>
ARTICLE 8
General Provisions
8.1 Entire Agreement. This Agreement contains the entire agreement
among SNFC and VHB with respect to the Merger 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 shareholders referred to in
Section 6.1(a) hereof, except statutory requirements and requisite approvals of
shareholders and regulatory authorities. Any amendments after shareholder
approvals have been received shall not alter the consideration as set forth in
Section 2.1 hereof.
8.3 Descriptive Headings. Descriptive headings are for
convenience only and shall not control or affect the meaning or 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.
<PAGE>
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 SNFC:
O. R. Barham, Jr.
Second National Financial Corporation
South Main Street
P.O. Box 71
Culpeper, Virginia 22701
(Tel. 540-825-4800)
Copy to:
Fred W. Palmore, III, Esquire
Mays & Valentine, L.L.P.
1111 East Main Street
P.O. Box 1122
Richmond, Virginia 23218-1122
(Tel. 804-697-1396)
If to VHB:
William B. Young
Virginia Heartland Bank
4700 Harrison Road
P.O. Box 7267
Fredericksburg, Virginia 22408
(Tel. 540-891-6405)
Copy to:
David Baris, Esquire
Kennedy, Baris & Lundy, L.L.P.
Suite 300
4719 Hampden Lane
Bethesda, Maryland 20814
(Tel. 301-654-6040)
<PAGE>
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 Enforcement; Third Party Beneficiaries. This agreement is for the
benefit of the parties hereto, and, except as expressly stated herein, is not
intended to be for the benefit of, or be enforceable by, any other persons.
Notwithstanding anything herein to the contrary, if the Merger is consummated,
the obligations and agreements set forth in Sections 1.2, 1.3, 1.5, and 5.2 of
this Agreement may be enforced, including, without limitation, enforcement by
specific performance, after the Effective Date by any person who was a director
or officer of SNFC or VHB immediately prior to the Effective Date for the
benefit of shareholders of such companies at such time.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in counterparts by their duly authorized officers and
their corporate seals to be affixed hereto, all as of the dates first written
above.
SECOND NATIONAL FINANCIAL CORPORATION
Culpeper, Virginia
By:________________________
O. R. Barham, Jr.
President and Chief Executive Officer
ATTEST:
___________________________
_____________
Secretary
VIRGINIA HEARTLAND BANK
Fredericksburg, Virginia
By:_________________________
William B. Young
Chairman
ATTEST:
____________________________
_______________
Secretary
<PAGE>
TO BE ADDED BY ADDENDUM TO THE AGREEMENT
UPON FORMATION AND ORGANIZATION
VIRGINIA HEARTLAND INTERIM BANK
Fredericksburg, Virginia
By:____________________________
William B. Young
Chairman
ATTEST:
_______________________
_______________
Secretary
<PAGE>
EXHIBIT A
to the
Merger Agreement
PLAN AND AGREEMENT OF MERGER
BETWEEN
VIRGINIA HEARTLAND BANK
AND
VIRGINIA HEARTLAND INTERIM BANK
(Joined in by SECOND NATIONAL FINANCIAL CORPORATION)
Pursuant to this Plan of Merger ("Plan of Merger"), VIRGINIA HEARTLAND
BANK ("VHB"), a Virginia state bank, shall be merged with and into VIRGINIA
HEARTLAND INTERIM BANK, (the "Resulting Bank"), an interim Virginia state bank
in Fredericksburg, Virginia and established for the purpose of facilitating a
transaction as a result of which VHB will become a wholly-owned subsidiary of
SECOND NATIONAL FINANCIAL CORPORATION ("SNFC"), a Virginia corporation and
registered financial institution holding company, pursuant to a statutory Merger
under Section 13.1-716 of the Virginia Stock Corporation Act (the "Act"). SNFC
joins in this Agreement.
Article 1
The Merger and Related Matters
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Date as defined in Section 2.1 hereof, VHB shall become a
wholly-owned subsidiary of SNFC through the Merger of VHB with and into VHIB, an
interim Virginia state bank subsidiary of SNFC, formed solely for the purpose of
facilitating the Merger described herein, in accordance with the provisions of
Section 13.1-716 of the Virginia Stock Corporation Act (the "Merger"), and SNFC
would amend its articles of incorporation to change its name to Virginia
Commonwealth Financial Corporation (the "Holding Company"). VHIB will be
referred to herein as the "Interim Bank" prior to the Merger and as the
"Resulting Bank" whenever reference is made to it as of the Effective Date or
thereafter. At the Effective Date, the Merger shall have the effect as provided
in Section 13.1-721 of the Virginia Stock Corporation Act.
1.2 Name and Continuing Operations. Pursuant to the terms of the Plan of
Merger, the Resulting Bank shall be renamed "Virginia Heartland Bank" on the
Effective Date.
1.3 Directors, Officers and Employees. (a) The directors,
officers and employees of VHB will not change as a part of the Merger.
<PAGE>
Article 2
Terms of theMerger
2.1 The Merger. At the Effective Date, VHB shall be merged with and into
the Resulting Bank in accordance with the provisions of Article 12 of the Act
with the effect specified in Section 13.1-721 (the "Merger"). The Resulting Bank
shall be in the Merger, through the exchange of each outstanding share of common
of VHB for Common Stock of SNFC in accordance with Section 2.1 of this Plan of
Merger and the Agreement and Plan of Reorganization, dated April 18, 1998 (the
"Merger Agreement"). The Merger shall not be effective unless and until the
Merger receives necessary approval from the appropriate offices of the Board of
Governors of the Federal Reserve System ("FRB") and the State Corporation
Commission of the Commonwealth of Virginia ("SCC"), and all required notices
have been filed, necessary time has elapsed, and the FRB and SCC have advised
the parties that it will not disapprove the transaction.
2.2 Conversion of and Payment for Shares. Upon, and by reason of, the
Merger becoming effective pursuant to the issuance of a Certificate of Merger by
the Virginia State Corporation Commission, the shareholders of VHB and SNFC, as
the case may be, shall be entitled to the following:
(a) Each share of common stock, par value $5.00 per share, of VHB ("VHB
Common Stock") issued and outstanding immediately prior to the Effective Date
shall, by operation of law, cease to be outstanding and shall be converted into
and exchanged for 1.15 shares (the "Exchange Ratio") of common stock, par value
$2.50 per share, of the Holding Company (the "Holding Company Common Stock").
Each holder of a certificate representing any shares of VHB Common Stock upon
the surrender of his VHB stock certificates to the Holding Company, 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 the Holding Company Common Stock that his shares shall be
converted into pursuant to the Exchange Ratio. Each such holder of VHB 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 SNFC changes the number of shares of the SNFC Common Stock issued and
outstanding prior to the Effective Date as a result of any stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding the SNFC Common Stock and the record date therefor shall be prior to
the Effective Date, the Exchange Ratio shall be proportionately adjusted.
<PAGE>
(b) Shares of Interim Bank Common Stock issued and outstanding shall,
by virtue of the Merger, continue to be issued and outstanding shares held by
the Holding Company.
(c) Each share of common stock, par value $2.50 per share, of SNFC
("SNFC Common Stock") issued and outstanding immediately prior to the Effective
Date will be deemed an issued and outstanding share of the Holding Company. Each
holder of a certificate representing any shares of SNFC Common Stock upon the
surrender of his SNFC stock certificates to the Holding Company, 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 the Holding Company Common Stock that were outstanding in his name
immediately prior to the Effective Date. Each such holder of SNFC 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 upon the surrender
of such certificate in accordance with Section 2.2.
2.3 Manner of Exchange. (a) As promptly as practicable after the
Effective Date, SNFC shall cause SB&T, acting as the exchange agent ("Exchange
Agent"), to send to each former shareholder of record of VHB immediately prior
to the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of VHB Common Stock based upon the Exchange Ratio.
<PAGE>
(b) As promptly as practicable after the Effective Date, SNFC
shall cause the Exchange Agent to send to each shareholder of record of SNFC
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of SNFC Common Stock for certificates
representing an equal number of shares of the Holding Company Common Stock.
2.4 No Fractional Shares. No certificates or scrip for fractional
shares of the Holding Company Common Stock will be issued. In lieu thereof, the
Holding Company will pay the value of such fractional shares in cash on the
basis of the average of the closing prices of SNFC Common Stock as reported on
The National Association of Securities Dealers Automated Quotation System, Small
Cap Market for trades reported during the ten (10) trading days immediately
preceding the Effective Date.
2.5 Dividends. No dividend or other distribution payable to the holders
of record of VHB Common Stock or SNFC Common Stock at or as of any time after
the Effective Date shall be paid to the holder of any certificate representing
shares of such common stock issued and outstanding at the Effective Date until
such holder physically surrenders such certificate for exchange as provided in
Section 2.2 of this Agreement, promptly after which time all such dividends or
distributions shall be paid (without interest).
2.6 Rights of Dissenting Shareholders. Shareholders of VHB and SNFC who
object to the Merger will not be entitled to any dissenters' rights as a result
of the Merger.
Article 3
Amendment and Termination
This Plan of Merger may be amended at any time prior to the Effective
Date by the parties hereto as provided in Section 8.2 of the Merger Agreement
between the parties and may be terminated at any time prior to the Effective
Date by the parties hereto as provided in Article 7 of the Merger Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in counterparts by their duly authorized officers and
their corporate seals to be affixed hereto, all as of the dates first written
above.
VIRGINIA HEARTLAND BANK
Fredericksburg, Virginia
By:_______________________
Edward V. Allison, Jr.
President
VIRGINIA HEARTLAND INTERIM BANK
Fredericksburg, Virginia
By:__________________________
Edward V. Allison, Jr.
President
SECOND NATIONAL FINANCIAL CORPORATION
Culpeper, Virginia
By:____________________________
O. R. Barham, Jr.
President and Chief Executive Officer
<PAGE>
APPENDIX B
ARTICLES OF AMENDMENT
of the
ARTICLES OF INCORPORATION
of
SECOND NATIONAL FINANCIAL CORPORATION
The provisions of Article "I. Name" of the Articles of
Incorporation of Second National Financial Corporation shall be deleted in their
entirety and the following inserted in place thereof:
I. Name
The name of the Corporation is Virginia Commonwealth Financial
Corporation.
ZZZ
APPENDIX C
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of April 18, 1998 (the "Option
Agreement"), by and between SECOND NATIONAL FINANCIAL CORPORATION, a Virginia
corporation ("Second"), and VIRGINIA HEARTLAND BANK, a Virginia banking
corporation, ("Heartland").
WITNESSETH
WHEREAS, the Boards of Directors of the parties hereto approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") and have
adopted a related Agreement and Plan of Merger, dated as of the date hereof
(together referred to herein as the "Reorganization Agreements"), providing for
the affiliation of Heartland with Second under a holding company which has been
renamed United Community Financial Corporation (the "Reorganization"); and
WHEREAS, as a condition to and as consideration for Heartland's entry
into the Reorganization Agreement and to induce such entry, Second has agreed to
grant to Heartland the option set forth herein to acquire authorized but
unissued shares of Second Common Stock;
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. DEFINITIONS
Capitalized terms defined in the Reorganization Agreements and used
herein shall have the same meanings as in the Reorganization Agreements.
2. GRANT OF OPTION
Subject to the terms and conditions set forth herein, Second hereby
grants to Heartland an option (the "Option") to acquire up to 298,679 shares of
Second Common Stock at a price of $35.00 per share (the "Exercise Price") in
exchange for the consideration provided in Section 4 hereof; provided, however,
that in the event Second issues or agrees to issue any shares of Second Common
Stock (other than as permitted under the Reorganization Agreements) at a price
less than $35.00 per share (as adjusted pursuant to Section 6 hereof), the
Exercise Price shall be equal to such lesser price. Notwithstanding anything
else in this Option Agreement to the contrary, the number of shares of Second
Common Stock subject to the Option shall be reduced if and to the extent
necessary so that the number of shares for which this Option is exercisable
shall not exceed 19.9% of the issued and outstanding shares of Second Common
Stock, before giving effect to the exercise of the Option. The number of shares
of Second Common Stock that may be received upon the exercise of the Option is
subject to adjustment as set forth herein.
3. EXERCISE OF OPTION
(a) Subject to compliance with applicable law and regulation,
Heartland may exercise the Option, in whole or part, at any time or from time to
time if a Purchase Event (as defined below) shall have occurred and be
continuing.
(b) Second shall notify Heartland promptly in writing of the
occurrence of any transaction, offer or event giving rise to a Purchase Event.
If more than one of the transactions, offers or events giving rise to a Purchase
Event is undertaken or effected by the same person or occurs at the same time,
then all such transactions, offers and events shall give rise only to one
Purchase Event, which Purchase Event shall be deemed continuing for all purposes
hereof until all such transactions are terminated or abandoned by such person
and all such events have ceased or ended.
(c) In the event that Heartland wishes to exercise the Option,
it shall send Second a written notice (the date of which being herein referred
to as the "Notice Date") specifying (i) the total number of shares it will
acquire pursuant to such exercise, and (ii) a place and date not earlier than
three business days nor later than 60 business days from the Notice Date for the
closing of such transaction (the "Closing Date"); provided that if prior
notification to or approval of any federal or state regulatory agency is
required in connection with such acquisition, Heartland shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification period has
expired or been terminated or such approval has been obtained and any requisite
waiting period shall have passed.
(d) The Option shall expire and terminate, to the extent not
previously exercised, upon the earlier of: (i) the Effective Date of the
Reorganization; (ii) upon termination of the Reorganization Agreements in
accordance with the provisions thereof, other than a termination based upon,
following or in connection with either (A) a material breach by Second of a
Specified Covenant (as defined below) or (B)the failure of Second to obtain
shareholder approval of the Reorganization Agreements by the vote required under
applicable law (but in no event less than approval by 66.67% of all outstanding
shares of each class of stock), in the case that either (A) or (B) follow the
occurrence of a Purchase Event; or (iii) 12 months after termination of the
Reorganization Agreements based upon a material breach by Second of a Specified
Covenant or the failure of Second to obtain shareholder approval of the
Reorganization Agreements by the vote required under applicable law, in either
case following the occurrence of a Purchase Event. (but in no event less than
approval by 66.67% of all outstanding shares of each class of stock)
(e) As used herein, a "Purchase Event" shall mean any of the
following events or transactions occurring after the date hereof:
(1) Second, without having received Heartland's
prior written consent, shall have entered into an agreement with any person to
(i) acquire, merge or consolidate, or enter into any similar transaction, with
Second, (ii) purchase, lease or otherwise acquire all or substantially all of
the assets of Second or (iii) purchase or otherwise acquire securities
representing 10% or more of the voting power of Second;
(2) any person shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 15% or more of the
outstanding shares of Second Common Stock after the date hereof (the term
"beneficial ownership" for purposes of this Option Agreement having the meaning
assigned thereto in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder); or
(3) any person shall have made a bona fide
proposal to Second by public announcement or written communication that is or
becomes the subject of public disclosure to acquire Second by merger, share
exchange, consolidation, purchase of all or substantially all of its assets or
any other similar transaction, and following such bona fide proposal the
shareholders of Second vote not to approve the Reorganization Agreements.
(f) As used herein, "Specified Covenant" means any covenant or
agreement contained in the Reorganization Agreements.
4. PAYMENT AND DELIVERY OF CERTIFICATES
(a) At the Closing Date, Heartland, at its option, shall
tender to Second cash or readily marketable securities consisting exclusively of
U.S. Government and Agency securities (the "Securities") with an aggregate
market value (determined in the reasonable good faith judgment of Second) as of
the date of tender equal to or greater than the Exercise Price. Within a
reasonable period of time, not to exceed 60 days after the date of exercise,
Second shall refund to Heartland the excess, if any, of the aggregate market
value of the Securities tendered by Heartland over the exercise price. Heartland
shall effect the tender of the Securities by transferring on the Closing Date
such Securities to an account or accounts maintained on behalf of and designated
by Second.
(b) At such closing, simultaneously with the tender of the
Securities as provided in subsection (a), Second shall deliver to Heartland a
certificate or certificates representing the number of shares of Second Common
Stock exchanged for the Securities tendered by Heartland, and Heartland shall
deliver to Second a letter agreeing that Heartland will not offer to sell or
otherwise dispose of such shares in violation of applicable law or the
provisions of this Option Agreement.
(c) Certificates for Second Common Stock delivered at a
closing hereunder may be endorsed with a restrictive legend which shall read
substantially as follows:
"The transfer of the shares represented by this
Certificate is subject to certain provisions of an agreement
between the registered holder hereof and Second National
Financial Corporation ("Second") and to resale restrictions
arising under the Securities Act of 1933, as amended, a copy
of which agreement is on file at the principal office of
Second. A copy of such agreement will be provided to the
holder thereof without charge upon receipt by Second of a
written request."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Heartland shall have
delivered to Second a copy of a letter from the staff of the Securities and
Exchange Commission (the "Commission"), or an opinion of counsel, in form and
substance satisfactory to Second, to the effect that such legend is not required
for purposes of the Securities Act of 1933 (the "Securities Act").
5. REPRESENTATIONS
Second hereby represents, warrants and covenants to Heartland as
follows:
(a) Second shall at all times maintain sufficient authorized
but unissued shares of Second Common Stock so that the Option may be exercised
without authorization of additional shares of Second Common Stock.
(b) The shares to be issued upon due exercise, in whole or in
part, of the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and nonassessable.
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of any change in Second Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of Second Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement), the number of shares of Second Common Stock
subject to the Option shall be adjusted so that, after such issuance, it equals
19.9% of the number of shares of Second Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the Option.
Nothing contained in this Section 6 shall be deemed to authorize Second to
breach any provision of the Reorganization Agreements.
7. REGISTRATION RIGHTS
Second shall, if requested by Heartland, as expeditiously as possible
file a registration statement on a form of general use under the Securities Act
if necessary in order to permit the sale or other disposition of the shares of
Second Common Stock that are acquired upon exercise of the Option in accordance
with the intended method of sale or other disposition requested by Second.
Heartland shall provide all information reasonably requested by Second for
inclusion in any registration statement to be filed hereunder. Second will use
its best efforts to cause such registration statement first to become effective
and then to remain effective for such period not in excess of 270 days from the
date on which such registration statement first becomes effective as may be
reasonably necessary to effect such sales or other dispositions. The first
registration effected under this Section 7 shall be at Second's expense except
for underwriting commissions and the fees and disbursements of Heartland's
counsel attributable to the registration of such Second Common Stock. A second
registration statement may be requested hereunder at Second's expense. In no
event shall Second be required to effect more than two registrations hereunder.
The filing of any registration statement hereunder may be delayed for such
period of time as may reasonably be required to facilitate any public
distribution by Second of Second Common Stock. If requested by Second, in
connection with any such registration, Second will become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting
agreements. Upon receiving any request from Heartland or an assignee of
Heartland under this Section 7, Second agrees to send a copy thereof to
Heartland and to any assignee of Heartland known to Second, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies.
8. SEVERABILITY
If any term, provision, covenant or restriction contained in this
Option Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the full
number of shares of Second Common Stock provided in Section 2 hereof (as
adjusted pursuant to Section 6 hereof), it is the express intention of Second to
allow the holder to acquire or to require Second to repurchase such lesser
number of shares as may be permissible, without any amendment or modification
hereof.
9. MISCELLANEOUS
(a) Expenses. Except as otherwise provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided
herein, this Option Agreement contains the entire agreement between the parties
with respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The terms
and conditions of this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns.
Nothing in this Option Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective successors
and assigns, any rights, remedies, obligations or liabilities under or by reason
of this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any
of its rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of the other
party, except that Heartland may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation to any of its wholly-owned
subsidiaries.
(d) Notices. All notices or other communications that are
required or permitted hereunder shall be in writing and sufficient if delivered
in the manner and to the address provided for in or pursuant to Section 8.5 of
the Reorganization Agreement.
(e) Counterparts. This Option Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would
be an inadequate remedy for a breach of the provisions of this Option Agreement
by either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
SECOND NATIONAL FINANCIAL CORPORATION
Culpeper, Virginia
By:
O. R. Barham
President and Chief Executive Officer
ATTEST:
- ------------------------
Secretary
VIRGINIA HEARTLAND BANK
Fredericksburg, Virginia
By:
William B. Young
Chairman and Chief Executive Officer
ATTEST:
- ------------------------
Secretary
<PAGE>
APPENDIX D
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of April 18, 1998 (the "Option
Agreement"), by and between VIRGINIA HEARTLAND BANK, a Virginia banking
corporation, ("Heartland"), and SECOND NATIONAL FINANCIAL CORPORATION, a
Virginia corporation ("Second").
WITNESSETH
WHEREAS, the Boards of Directors of the parties hereto approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") and have
adopted a related Agreement and Plan of Merger, dated as of the date hereof
(together referred to herein as the "Reorganization Agreements"), providing for
the affiliation of Heartland with Second under a holding company which has been
renamed United Community Financial Corporation (the "Reorganization"); and
WHEREAS, as a condition to and as consideration for Second's entry into
the Reorganization Agreement and to induce such entry, Heartland has agreed to
grant to Second the option set forth herein to acquire authorized but unissued
shares of Heartland Common Stock;
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. DEFINITIONS
Capitalized terms defined in the Reorganization Agreements and used
herein shall have the same meanings as in the Reorganization Agreements.
2. GRANT OF OPTION
Subject to the terms and conditions set forth herein, Heartland hereby
grants to Second an option (the "Option") to acquire up to 92,357 shares of
Heartland Common Stock at a price of $40.00 per share (the "Exercise Price") in
exchange for the consideration provided in Section 4 hereof; provided, however,
that in the event Heartland issues or agrees to issue any shares of Heartland
Common Stock (other than as permitted under the Reorganization Agreements) at a
price less than $40.00 per share (as adjusted pursuant to Section 6 hereof), the
Exercise Price shall be equal to such lesser price. Notwithstanding anything
else in this Option Agreement to the contrary, the number of shares of Heartland
Common Stock subject to the Option shall be reduced if and to the extent
necessary so that the number of shares for which this Option is exercisable
shall not exceed 19.9% of the issued and outstanding shares of Heartland Common
Stock, before giving effect to the exercise of the Option. The number of shares
of Heartland Common Stock that may be received upon the exercise of the Option
is subject to adjustment as set forth herein.
3. EXERCISE OF OPTION
(a) Subject to compliance with applicable law and regulation,
Second may exercise the Option, in whole or part, at any time or from time to
time if a Purchase Event (as defined below) shall have occurred and be
continuing.
(b) Heartland shall notify Second promptly in writing of the
occurrence of any transaction, offer or event giving rise to a Purchase Event.
If more than one of the transactions, offers or events giving rise to a Purchase
Event is undertaken or effected by the same person or occurs at the same time,
then all such transactions, offers and events shall give rise only to one
Purchase Event, which Purchase Event shall be deemed continuing for all purposes
hereof until all such transactions are terminated or abandoned by such person
and all such events have ceased or ended.
(c) In the event that Second wishes to exercise the Option, it
shall send Heartland a written notice (the date of which being herein referred
to as the "Notice Date") specifying (i) the total number of shares it will
acquire pursuant to such exercise, and (ii) a place and date not earlier than
three business days nor later than 60 business days from the Notice Date for the
closing of such transaction (the "Closing Date"); provided that if prior
notification to or approval of any federal or state regulatory agency is
required in connection with such acquisition, Second shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification period has
expired or been terminated or such approval has been obtained and any requisite
waiting period shall have passed.
(d) The Option shall expire and terminate, to the extent not
previously exercised, upon the earlier of: (i) the Effective Date of the
Reorganization; (ii) upon termination of the Reorganization Agreements in
accordance with the provisions thereof, other than a termination based upon,
following or in connection with either (A) a material breach by Heartland of a
Specified Covenant (as defined below) or (B)the failure of Heartland to obtain
shareholder approval of the Reorganization Agreements by the vote required under
applicable law (but in no event less than approval by 66.67% of all outstanding
shares of each class of stock), in the case that either (A) or (B) follow the
occurrence of a Purchase Event; or (iii) 12 months after termination of the
Reorganization Agreements based upon a material breach by Heartland of a
Specified Covenant or the failure of Heartland to obtain shareholder approval of
the Reorganization Agreements by the vote required under applicable law, in
either case following the occurrence of a Purchase Event. (but in no event less
than approval by 66.67% of all outstanding shares of each class of stock)
(e) As used herein, a "Purchase Event" shall mean any of the
following events or transactions occurring after the date hereof:
(1) Heartland, without having received Second's
prior written consent, shall have entered into an agreement with any person to
(i) acquire, merge or consolidate, or enter into any similar transaction, with
Heartland, (ii) purchase, lease or otherwise acquire all or substantially all of
the assets of Heartland or (iii) purchase or otherwise acquire securities
representing 10% or more of the voting power of Heartland;
(2) any person shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 15% or more of the
outstanding shares of Heartland Common Stock after the date hereof (the term
"beneficial ownership" for purposes of this Option Agreement having the meaning
assigned thereto in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder); or
(3) any person shall have made a bona fide
proposal to Heartland by public announcement or written communication that is or
becomes the subject of public disclosure to acquire Heartland by merger, share
exchange, consolidation, purchase of all or substantially all of its assets or
any other similar transaction, and following such bona fide proposal the
shareholders of Heartland vote not to approve the Reorganization Agreements.
(f) As used herein, "Specified Covenant" means any covenant or
agreement contained in the Reorganization Agreements.
4. PAYMENT AND DELIVERY OF CERTIFICATES
(a) At the Closing Date, Second, at its option, shall tender
to Heartland cash or readily marketable securities consisting exclusively of
U.S. Government and Agency securities (the "Securities") with an aggregate
market value (determined in the reasonable good faith judgment of Second) as of
the date of tender equal to or greater than the Exercise Price. Within a
reasonable period of time, not to exceed 60 days after the date of exercise,
Heartland shall refund to Second the excess, if any, of the aggregate market
value of the Securities tendered by Second over the exercise price. Second shall
effect the tender of the Securities by transferring on the Closing Date such
Securities to an account or accounts maintained on behalf of and designated by
Heartland.
(b) At such closing, simultaneously with the tender of the
Securities as provided in subsection (a), Heartland shall deliver to Second a
certificate or certificates representing the number of shares of Heartland
Common Stock exchanged for the Securities tendered by Second, and Second shall
deliver to Heartland a letter agreeing that Second will not offer to sell or
otherwise dispose of such shares in violation of applicable law or the
provisions of this Option Agreement.
(c) Certificates for Heartland Common Stock delivered at a
closing hereunder may be endorsed with a restrictive legend which shall read
substantially as follows:
"The transfer of the shares represented by this
Certificate is subject to certain provisions of an agreement
between the registered holder hereof and Virginia Heartland
Bank ("Heartland") and to resale restrictions arising under
the Securities Act of 1933, as amended, a copy of which
agreement is on file at the principal office of Heartland. A
copy of such agreement will be provided to the holder thereof
without charge upon receipt by Heartland of a written
request."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Second shall have delivered
to Heartland a copy of a letter from the staff of the Securities and Exchange
Commission (the "Commission"), or an opinion of counsel, in form and substance
satisfactory to Heartland, to the effect that such legend is not required for
purposes of the Securities Act of 1933 (the "Securities Act").
5. REPRESENTATIONS
Heartland hereby represents, warrants and covenants to Second as
follows:
(a) Heartland shall at all times maintain sufficient
authorized but unissued shares of Heartland Common Stock so that the Option may
be exercised without authorization of additional shares of Heartland Common
Stock.
(b) The shares to be issued upon due exercise, in whole or in
part, of the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and nonassessable.
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of any change in Heartland Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of Heartland Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement), the number of shares of Heartland Common
Stock subject to the Option shall be adjusted so that, after such issuance, it
equals 19.9% of the number of shares of Heartland Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 6 shall be deemed to authorize
Heartland to breach any provision of the Reorganization Agreements.
7. REGISTRATION RIGHTS
Heartland shall, if requested by Second, as expeditiously as possible
file a registration statement on a form of general use under the Securities Act
if necessary in order to permit the sale or other disposition of the shares of
Heartland Common Stock that are acquired upon exercise of the Option in
accordance with the intended method of sale or other disposition requested by
Second. Second shall provide all information reasonably requested by Heartland
for inclusion in any registration statement to be filed hereunder. Heartland
will use its best efforts to cause such registration statement first to become
effective and then to remain effective for such period not in excess of 270 days
from the date on which such registration statement first becomes effective as
may be reasonably necessary to effect such sales or other dispositions. The
first registration effected under this Section 7 shall be at Heartland's expense
except for underwriting commissions and the fees and disbursements of Second's
counsel attributable to the registration of such Heartland Common Stock. A
Second registration statement may be requested hereunder at Second's expense. In
no event shall Heartland be required to effect more than two registrations
hereunder. The filing of any registration statement hereunder may be delayed for
such period of time as may reasonably be required to facilitate any public
distribution by Heartland of Heartland Common Stock. If requested by Second, in
connection with any such registration, Heartland will become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting
agreements. Upon receiving any request from Second or an assignee of Second
under this Section 7, Heartland agrees to send a copy thereof to Second and to
any assignee of Second known to Heartland, in each case by promptly mailing the
same, postage prepaid, to the address of record of the persons entitled to
receive such copies.
8. SEVERABILITY
If any term, provision, covenant or restriction contained in this
Option Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the full
number of shares of Heartland Common Stock provided in Section 2 hereof (as
adjusted pursuant to Section 6 hereof), it is the express intention of Heartland
to allow the holder to acquire or to require Heartland to repurchase such lesser
number of shares as may be permissible, without any amendment or modification
hereof.
9. MISCELLANEOUS
(a) Expenses. Except as otherwise provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided
herein, this Option Agreement contains the entire agreement between the parties
with respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The terms
and conditions of this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns.
Nothing in this Option Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective successors
and assigns, any rights, remedies, obligations or liabilities under or by reason
of this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any
of its rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of the other
party, except that Second may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation to any of its wholly-owned
subsidiaries.
(d) Notices. All notices or other communications that are
required or permitted hereunder shall be in writing and sufficient if delivered
in the manner and to the address provided for in or pursuant to Section 8.5 of
the Reorganization Agreement.
(e) Counterparts. This Option Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would
be an inadequate remedy for a breach of the provisions of this Option Agreement
by either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
SECOND NATIONAL FINANCIAL CORPORATION
Culpeper, Virginia
By:
O. R. Barham
President and Chief Executive Officer
ATTEST:
- -------------------------
Secretary
VIRGINIA HEARTLAND BANK
Fredericksburg, Virginia
By:
William B. Young
Chairman and Chief Executive Officer
ATTEST:
- -------------------------
Secretary
<PAGE>
APPENDIX E
[Letterhead of Crestar Securities Corporation]
FORM OF FAIRNESS OPINION
_________, 1998
Board of Directors
Virginia Heartland Bank
4700 Harrison Road
Fredericksburg, Virginia 22404
Gentlemen:
Virginia Heartland Bank ("VHB") and Second National Financial
Corporation ("SNFC"), the bank holding company for Second Bank and Trust,
Culpeper, Virginia, have entered into an Agreement and Plan of Reorganization
and a related Plan of Merger, dated as of April 18, 1998 (the "Agreement"),
pursuant to which VHB will merge with and into an interim, wholly-owned
subsidiary bank of SNFC (the "Merger"). The Agreement calls for the continued
operation of Virginia Heartland Bank and Second Bank and Trust as subsidiaries
of SNFC, which will change its name to Virginia Commonwealth Financial
Corporation (the "Holding Company") in connection with these transactions. Upon
consummation of the Merger, each share of Virginia Heartland Bank common stock
issued and outstanding will be exchanged for 1.15 shares (the "Exchange Ratio")
of Holding Company common stock, with cash being paid in lieu of issuing
fractional shares, and each share of SNFC common stock outstanding at the time
of the Merger will represent one share of Holding Company common stock after the
Merger.
Crestar Securities Corporation, as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements, and valuations for
estate, corporate and other purposes. Crestar Securities Corporation's
Investment Division has sold investment securities to VHB from time to time and
Crestar Bank's Financial Institutions Division has provided certain
correspondent banking services to VHB from time to time.
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange Ratio to the shareholders of VHB.
In arriving at its opinion, Crestar Securities reviewed and analyzed:
(i) the Agreement (ii) the Form S-4 Registration Statement filed with the
Securities and Exchange Commission in connection with the Merger; (iii) VHB's
annual report to shareholders, annual reports on Form 10-KSB, and annual Proxy
Statements to shareholders for the three years ended December 31, 1997; (iv)
VHB's unaudited financial statements for the three months ended March 31, 1998
and 1997; (v) other information related to VHB prepared by VHB's management,
including but not limited to asset quality, reserve adequacy, margin analysis,
interest rate sensitivity, internal controls, loan policies, regulatory matters
and legal matters; (vi) SNFC's annual reports to shareholders and audited
financial statements for the three years ended December 31, 1997; (vii) SNFC's
annual report on Form 10-K for the year ended December 31, 1997; (viii) SNFC's
unaudited financial statements for the three months ended March 31, 1998 and
1997; (ix) other information related to SNFC prepared by SNFC's management,
including but not limited to asset quality, reserve adequacy, margin analysis,
interest rate sensitivity, internal controls, loan policies, regulatory matters
and legal matters; (x) information regarding the trading market for the common
stocks of VHB and SNFC and the price range within which the respective stocks
have traded; (xi) the relationship of prices paid to relevant financial data
such as net worth, loans, deposits and earnings in certain bank and bank holding
company mergers and acquisitions in recent years; and (xii) such other financial
studies, analyses, inquiries, and other matters as Crestar Securities deemed
necessary. Crestar Securities has discussed with members of VHB's and SNFC's
senior management the background of the Merger, the reasons and basis for the
Merger, and the business and future prospects of VHB and SNFC individually and
as a combined entity. Crestar Securities also took into account its assessment
of general economic, market and financial conditions and its expertise in other
transactions, as well as its experience in securities valuations and knowledge
of the commercial banking industry generally.
In conducting our review and arriving at our opinion, we have relied
upon and assumed, without independent verification, the accuracy and
completeness of the financial and other information regarding VHB and SNFC
provided to us by or on behalf of VHB and SNFC or from public sources. We have
relied upon and assumed that the allowances for possible loan losses are
adequate and comply fully with applicable law, regulatory policy and sound
banking practice. Crestar Securities did not conduct a physical inspection of
the properties or facilities of VHB and SNFC nor did we make any independent
evaluation or appraisal of VHB's and SNFC's assets or liabilities. We also
assumed that, in the course of obtaining the necessary regulatory approvals for
the Merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger to either VHB or, on a pro
forma basis, to the Holding Company.
Our opinion is necessarily based on economic, financial market and industry
conditions as they exist and can be evaluated at the date hereof. Events
occurring after that date, could materially affect the assumptions and
conclusions contained in our opinion. We have not undertaken to reaffirm or
revise our opinion or otherwise comment upon any events occurring after the date
hereof.
Our opinion is directed to the Board of Directors of VHB and relates
only to the fairness, from a financial point of view, of the Exchange Ratio to
the shareholders of VHB and does not constitute a recommendation to any
shareholder of VHB as to how such shareholder should vote with respect to the
Merger.
Based on and subject to the foregoing, it is our opinion that, as of
the date hereof, the Exchange Ratio is fair, from a financial point of view, to
the shareholders of VHB.
Very truly yours,
CRESTAR SECURITIES CORPORATION
By: _____________________
Charles W. Byrd, Jr.
Managing Director
<PAGE>
APPENDIX F
Form of Opinion
The Carson Medlin Company
_____________, 1998
Board of Directors
Second National Financial Corporation
102 South Main Street
Culpeper, Virginia 22701
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the unaffiliated shareholders of Second National Financial Corporation
("SNFC") of the Exchange Ratio resulting from the terms of a certain proposed
Agreement and Plan of Reorganization and the related Plan of Merger, dated as of
April 18, 1998 (the "Agreement") by and between SNFC and Virginia Heartland Bank
("VHB") pursuant to which VHB will merge with and into SNFC (the "Merger").
Under the terms of the Agreement, each of the outstanding shares of VHB common
stock shall be converted into the right to receive 1.15 shares of SNFC common
stock. The foregoing summary of the Merger is qualified in its entirety by
reference to the Agreement.
The Carson Medlin Company is a National Association of Securities Dealers, Inc.
(NASD) member investment banking firm which specializes in the securities of
southeastern United States financial institutions. As part of our investment
banking activities, we are regularly engaged in the valuation of southeastern
United States financial institutions and transactions relating to their
securities. We regularly publish our research on independent community banks
regarding their financial and stock price performance. We are familiar with the
commercial banking industry in Virginia and the Southeast and the major
commercial banks operating in that market. We have been retained by SNFC in a
financial advisory capacity to render our opinion hereunder, for which we will
receive compensation.
In reaching our opinion, we have analyzed the respective financial positions,
both current and historical, of SNFC and VHB. We have reviewed: (i) the
Agreement; (ii) the annual reports to shareholders of SNFC, including audited
financial statements for the five years ended December 31, 1997; (iii) the Proxy
Statement of SNFC dated ____________ for the annual meeting of shareholders held
on _______; (iv) the annual report on Form 10-K of SNFC for the year ended
December 31, 1997; (v) the quarterly report on Form 10-Q of SNFC for the quarter
ended March 31, 1998; (vi) the Consolidated Report of Condition and Income as of
March 31, 1998; (vii) the Uniform Bank Performance Report for SNFC as of
December 31, 1997; (viii) the annual reports to shareholders of VHB, including
audited financial statements for the five years ended December 31, 1997; (ix)
the annual report on Form 10-KSB of VHB for the year ended December 31, 1997;
(x) the Proxy Statement of VHB dated April 3, 1998 for the annual meeting of
shareholders held on April 25, 1998; (xi) the quarterly report on Form 10-Q of
VHB for the quarter ended March 31, 1998; (xii) the Consolidated Report of
Condition and Income of VHB as of March 31, 1998; (xiii) the Uniform Bank
Performance Report for VHB as of December 31, 1997; (xiv) a preliminary copy of
this Joint Proxy Statement/Prospectus; and (xv) certain other financial and
operating information with respect to the business, operations and prospects of
SNFC and VHB. We also: (i) held discussions with members of the senior
management of SNFC and VHB regarding their respective historical and current
business operations, financial condition and future prospects; (ii) reviewed the
historical market prices and trading activity for the common stocks of SNFC and
VHB, to the extent available, and compared them with those of certain publicly
traded companies which we deemed to be relevant; (iii) compared the results of
operations of SNFC and VHB with those of certain banking companies which we
deemed to be relevant; (iv) compared the proposed financial terms of the Merger
with the financial terms, to the extent publicly available, of certain other
recent business combinations of commercial banking organizations; (v) analyzed
the pro forma financial impact of the Merger on SNFC; and (vi) conducted such
other studies, analyses, inquiries and examinations as we deemed appropriate.
We have relied upon and assumed, without independent verification, the accuracy
and completeness of all information provided to us. We have not performed or
considered any independent appraisal or evaluation of the assets of SNFC or VHB.
The opinion we express herein is necessarily based upon market, economic and
other relevant considerations as they exist and can be evaluated as of the date
of this letter.
Based upon the foregoing, it is our opinion that the Exchange Ratio provided for
in the Agreement is fair, from a financial point of view, to the unaffiliated
shareholders of Second National Financial Corporation.
Very truly yours,
THE CARSON MEDLIN COMPANY
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The laws of the Commonwealth of Virginia pursuant to which the Company
is incorporated permit it to indemnify its officers and directors against
certain liabilities with the approval of its shareholders. The articles of
incorporation of the Company, which have been approved by its shareholders,
provide for the indemnification of each director and officer (including former
directors and officers and each person who may have served at the request of the
Company as a director or officer of any other legal entity and, in all such
cases, his or her heirs, executors and administrators) against liabilities
(including expenses) reasonably incurred by him or her in connection with any
actual or threatened action, suit or proceeding to which he or she may be made
party by reason of his or her being or having been a director or officer of the
Company, except in relation to any action, suit or proceeding in which he or she
has been adjudged liable because of willful misconduct or a knowing violation of
the criminal law. In addition, the Company's articles of incorporation provide
the the Company shall limit or eliminate the liability of directors and officers
to the full extent permitted under Virginia law.
The Company has purchased officers' and directors' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company against certain losses resulting from
claims against them in their capacities as directors and officers to the extent
that such losses are not indemnified by the Company and (2) the Company to the
extent that it indemnifies such directors and officers for losses as permitted
under the laws of Virginia.
ITEM 21. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No. Description
- -------- -----------
2.1* Agreement and Plan of Reorganization and Merger, dated as of April
18, 1998, between Virginia Heartland Bank and Second National
Financial Corporation (included as Appendix A to the
Prospectus/Proxy Statement contained in Part I).
5.1 Opinion of Mays & Valentine, L.L.P. regarding the validity of the
shares of common stock of Second National Financial Corporation to
be issued in connection with the Merger.
8.1 Form of opinion of Mays & Valentine, L.L.P. regarding the federal
income tax consequences of the Merger.
10.1 Employment Agreement for William B. Young
10.2 Employment Agreement for Edward V. Allison, Jr.
10.3 Change of Control Agreement for Jeffrey W. Farrar
10.4 Lock-up Option Agreement for Virginia Heartland Bank (included as
Appendix C to the Prospectus/Proxy Statement contained in Part I).
10.5 Lock-up Option Agreement for Second National Financial Corporation
(included as Appendix D to the Prospectus/Proxy Statement contained
in Part I).
10.6 Employment Agreement of O. R. Barham, Jr.
13.1* Second National Financial Corporation Annual Report to Shareholders
for the fiscal year ended December 31, 1997 (incorporated by
reference to the Registrant's Form 10-K, as filing with the
Commission on March 30, 1998)
13.2* Second National Financial Corporation Quarterly Report to
Shareholders for the three-month period ended March 31, 1998
(incorporated by reference to the Registrant's Form 10-Q, as filed
with the Commission on May 14, 1998).
23.1 Consent of Yount, Hyde & Barbour, P.C., independent certified
public accountants for Second National Financial Corporation
23.2 Consent of Bowling, Franklin & Company, independent certified
public accountants for Virginia Heartland Bank.
23.3 Consent of Mays & Valentine, L.L.P. (included in Exhibit 5.1).
23.4 Consent of Kennedy, Baris & Lundy, L.L.P.
23.5 Consent of Crestar Securities Corporation
23.6 Consent of The Carson Medlin Company.
24.1 Powers of Attorney (included on the signature page hereof)
99.1 Form of proxy of Virginia Heartland Bank.
99.2 Form of proxy of Second National Financial Corporation
* Previously filed.
ITEM 22. UNDERTAKINGS.
A. 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. Notwithstanding the foregoing, any
increase or decrease in volume of securities
offered (if the total dollar value of securities
offered would not exceed that which was registered)
and any deviation from the low or high end of the
estimated maximum offering range may be reflected
in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price
represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(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 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.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. 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 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.
D. (1) 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 who 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 reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act 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.
E. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
F. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Culpeper,
State of Virginia, on June 19, 1998.
SECOND NATIONAL FINANCIAL CORPORATION
By: /s/ O. R. Barham, Jr.
---------------------------
O. R. Barham, Jr
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Taylor E. Gore* Chairman of the Board June 19, 1998
- -------------------
Taylor E. Gore
/s/ O. R. Barham, Jr. President, Chief Executive June 19, 1998
- ----------------------
O. R. Barham, Jr. Officer, and a Director
/s/ Lewis P. Armstrong* Director June 19, 1998
- -----------------------
Lewis P. Armstrong
/s/ Robert Y. Button, Jr.* Director June 19, 1998
- --------------------------
Robert Y. Button, Jr.
/s/ Gregory L. Fisher* Director June 19, 1998
- ----------------------
Gregory L. Fisher
/s/ Charles K. Gyory* Director June 19, 1998
- ---------------------
Charles K. Gyory
/s/ Marshall D. Gayheart* Director June 19, 1998
- -------------------------
Marshall D. Gayheart
/s/ W. Robert Jebson, Jr.* Director June 19, 1998
- --------------------------
W. Robert Jebson, Jr.
/s/ Harlean Smoot* Director June 19, 1998
- ------------------
Harlean Smoot
/s/ Jeffrey W. Farrar Secretary and June 19, 1998
- ---------------------
Jeffrey W. Farrar Chief Financial Officer
(Chief Accounting Officer)
*By: /s/ Jeffrey W. Farrar
--------------------------------------
Jeffrey W. Farrar, as Attorney-in-Fact
</TABLE>
EXHIBITS 5.1
Mays & Valentine, L.L.P. Letterhead
[FORM OF OPINION]
804/697-1265 04911.011
June 19, 1998
Second National Financial Corporation
102 South Main Street
Culpeper, Virginia 22701
Gentlemen:
We have participated in the preparation of the Registration
Statement under the Securities Act of 1933 on Form S-4, including Exhibits (the
"Registration Statement"), of Second National Financial Corporation ("Second")
relating to the registration of 533,716 shares of Second Common Stock, $2.50 par
value, to be issued by Second pursuant to the merger transaction by and between
Virginia Heartland Bank and Second (the "Merger") in accordance with the
Agreement and Plan of Reorganization and Plan of Merger made as of April 18,
1998.
We have been requested to furnish an opinion to be included as
an exhibit to the Registration Statement. In connection with the furnishing of
our opinion, we have examined, among other things, the Articles of Incorporation
and Bylaws of Second. We have also examined the Agreement and Plan of
Reorganization and Plan of Merger, the minutes of the proceedings of the Board
of Directors of Second, the Registration Statement, and such other records and
documents as we deem pertinent.
Based on the foregoing, with regard to the legality of the
issuance of the Second Common Stock being registered under the Registration
Statement, it is our opinion that:
1. Second has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Virginia, with full power and authority to carry on business in which it is now
and will be engaged.
2. The 533,716 shares of Second Common Stock being registered
under the Registration Statement pursuant to the Merger will, when issued, be
legally issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an exhibit to the Registration Statement
and to the reference to us under the caption "Opinions" in the Proxy Statement
contained therein.
Sincerely,
/s/ Mays & Valentine, L.L.P.
---------------------------------
EXHIBIT 8.1
Mays & Valentine, L.L.P. Letterhead
[FORM OF OPINION]
04911.011
September __, 1998
Second National Financial Corporation Virginia Heartland Bank
102 S. Main Street 4700 Harrison Road
P. O. Box 71 P. O. Box 7267
Culpeper, Virginia 22701-0071 Fredericksburg, Virginia 22408
Tax Opinion Regarding Merger of Virginia Heartland Bank
With and Into Virginia Heartland Interim Bank
Formed by Second Nation Financial Corporation
Gentlemen:
You have requested our opinion as to certain federal income
tax consequences with respect to the consummation of the proposed merger of
Virginia Heartland Bank, a Virginia banking corporation (the "Bank"), into
Virginia Heartland Interim Bank, a recently-organized interim Virginia banking
association (the "Interim Bank"), pursuant to the terms and conditions of the
Agreement and Plan of Reorganization and Plan of Merger, dated April 18, (the
"Agreement"), between the Bank and Second National Financial Corporation, a bank
holding company organized under the laws of Virginia (the "Holding Company").
I. The Transaction
Pursuant to the Agreement and subject to various regulatory
approvals, the Bank will be merged with and into the Interim Bank under the
charter of the latter and in accordance with the provisions of, and with the
effect provided in, the Virginia Stock Corporation Act, Sections 13.1-716 et
seq. (the "Merger"). The bank resulting from the Merger will be a wholly-owned
subsidiary of the Holding Company and will conduct its business in substantially
the same manner as the Bank had done before the Merger.
At the effective date of the Merger, each outstanding share of
common stock of the Bank ("Bank Stock") will be exchanged for and converted into
1.15 shares of common stock of the Holding Company ("Holding Company Stock").
Cash will be paid in lieu of fractional shares.
II. Examination
In connection with the preparation of this opinion, we have
examined such documents concerning the Merger as we have deemed necessary. We
have based our conclusions on the Internal Revenue Code of 1986 (the "Code") and
the regulations promulgated pursuant thereto, each as amended from time to time
and existing on the date hereof, as well as existing judicial and administrative
interpretations thereof.
As to various questions of fact material to our opinion, we
have relied upon the representations made in the Agreement and in the
Registration Statement on Form S-4 filed by the Holding Company and dated on or
about June 19, 1998, furnished to the shareholders of the Bank and the Holding
Company in connection with the solicitation of proxies to be used at the
shareholders' meetings called to approve the Agreement, as well as the
representations recited in Section III hereof.
III. Additional Representations
In connection with the proposed Merger, the following
additional representations have been made by officers of the Bank and the
Holding Company:
A. The exchange ratio of Holding Company Stock to outstanding
Bank Stock is the result of arm's length bargaining. Accordingly, the fair
market value of Holding Company Stock to be received by the Bank's shareholders
will be approximately equal to the fair market value of Bank Stock surrendered
in exchange therefor.
B. To the best knowledge of the management of the Bank, there
is no plan or intention on the part of the Bank's shareholders to sell or
otherwise dispose of Holding Company Stock to be received by them in the Merger
that will reduce their holdings thereof to a number of shares having in the
aggregate a fair market value of less than 50 percent of the fair market value
of all the Bank Stock held by Bank shareholders on the effective date of the
Merger. For purposes of this representation, shares of Bank Stock surrendered by
dissenters or exchanged for cash in lieu of fractional shares of Holding Company
Stock will be treated as outstanding Bank Stock on the effective date of the
Merger. Moreover, shares of Bank Stock and shares of Holding Company Stock held
by Bank shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the Merger will be considered in making this representation.
C. In the proposed Merger, the Bank will transfer to the
Interim Bank assets representing at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of the gross
assets held by the Bank immediately prior to the Merger. For purposes of this
representation, amounts paid by the Bank to dissenters, amounts paid by the Bank
to shareholders who receive cash or other property, Bank assets used to pay its
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by the Bank immediately preceding the Merger,
will be included as assets of the Bank held immediately prior to the Merger.
D. There is no plan or intention to sell or otherwise dispose
of any of the assets of the Bank to be transferred to the Interim Bank in the
proposed Merger, except for dispositions made in the ordinary course of
business.
E. Each party to the Merger will pay its own expenses, if any,
incurred in connection with the transaction.
F. After consummation of the Merger, the Interim Bank either
will continue the historic business of the Bank in substantially the same manner
as the Bank had done before the Merger, but as a wholly-owned subsidiary of the
Holding Company, or will use a significant portion of the historic business
assets of the Bank in a business.
G. There is no plan or intention for the Holding Company to
liquidate the Interim Bank, to merge the Interim Bank into another corporation,
or to sell or otherwise dispose of the stock in the Interim Bank, nor is there
any plan or intention for the Holding Company to redeem or otherwise acquire any
of its stock to be issued in the proposed transaction, although the Board of
Directors of the Holding Company has authorized the Holding Company to make
periodic repurchases of its stock in the open market, for various corporate
purposes, in the ordinary course of business from time to time.
H. There is no plan or intention for the Interim Bank to issue
additional shares of its stock that would result in Holding Company losing
control of Interim Bank within the meaning of Section 368(c)(1) of the Code.
I. The liabilities of the Bank to be assumed by the Interim
Bank in the proposed transaction were incurred in the ordinary course of
business and are associated with the assets to be transferred.
J. There is no intercorporate indebtedness existing between or
among the Holding Company, the Bank and the Interim Bank that was issued,
acquired, or will be settled at a discount.
K. The fair market value of the assets of the Bank to be
transferred to the Interim Bank will each equal or exceed the sum of the
liabilities to be assumed by the Interim Bank plus the amount of liabilities to
which the assets are subject.
L. No dividends or other distributions will be made with
respect to any Bank Stock before the proposed Merger, except for regular, normal
distributions.
M. None of the shares of Holding Company stock and no other
property received by a shareholder-employee in exchange for Bank Stock pursuant
to the Merger is compensation for services rendered. In addition, any
compensation paid to any shareholder-employee will be for services actually
rendered and bargained for at arm's length, or commensurate with a third party
arm's length negotiation.
N. No two arties to the Merger are investment companies as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
O. The Bank is not under the jurisdiction of a court in a
Title II or similar case within the meaning of Section 368(a)(3)(A) of the Code.
P. No Stock of the Interim Bank will be issued in the Merger.
Q. Cash paid to Bank shareholders in lieu of issuing
fractional shares will be paid solely for the purpose of saving the expense and
inconvenience of issuing fractional shares, will not be separately bargained for
consideration and will represent a mechanical rounding off of the number of
shares of Holding Company Stock to be issued to Bank shareholders.
IV. Opinion
Based upon the foregoing, and assuming no change in the laws
or facts underlying this transaction between the date of this opinion and the
date the Merger is completed, we are of the opinion that for federal income tax
purposes:
1. The Merger will constitute and qualify as a
reorganization within the meaning of the Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code, to which
the Bank, the Interim Bank and the Holding Company
will each be a party;
2. No gain or loss will be recognized by the
shareholders of the Bank who receive solely Holding
Company Stock in exchange for their shares of Bank
Stock;
This opinion is made in connection with the Merger and is
solely for the benefit of the Holding Company, the Interim Bank, the Bank and
the Bank's shareholders. It may not be relied upon in any other manner or by any
other person.
Very truly yours,
EXHIBIT 10.1
EMPLOYMENT AND CONSULTATION AGREEMENT
This Agreement is made and entered into this 18Th day of April, 1998,
by and between VIRGINIA HEARTLAND BANK, a Virginia Banking Corporation (herein
referred to as "Bank"), Party of the First Part, and William B. Young, (herein
referred to as "Young"), Party of the Second Part.
RECITAL
Young is currently Chief Executive Officer and Chairman of the Board of
Directors of Bank. Bank has simultaneously with the execution of this Employment
Agreement entered into Agreement and Plan of Reorganization and Plan and
Agreement of Merger with Second National Financial Corporation ("SNFC") (herein
collectively called Plan and Agreement"). Bank desires to continue to employ
Young as its Chief Executive Officer and Chairman of its Board of Directors.
Therefore, witnesseth this Agreement: That for and in consideration of
the mutual promises and undertaking and the benefits to ensure to the parties of
this Agreement, they agree as follows:
1. This Agreement shall take effect upon the effective date as defined
in the Plan and Agreement. Until the effective date, this Agreement shall have
no effect.
2. Bank employs Young on the terms and conditions hereafter stated to
perform the duties of Chief Executive Officer and Chairman of its Board of
Directors and to perform the duties of those officer with SNFC.
3. The term of this Agreement shall commence upon the implementation of
the Plan and Agreement as set forth in paragraph 1. and shall continue as
follows:
A. As Chief Executive Officer and Chairman of the Board of
SNFC until December 31, 2000 (such period from the
effective date through December 31, 2000 being referred to
herein as Young's "Term of Employment").
B. As CEO of Bank until December 31, 1999, and as Chairman of
the Board of Directors of Bank until December 31, 2000.
C. For the years 2001 and 2002, as a part time consultant
working approximately one thousand (1,000) hours per year
(such period being referred to herein as Young's "Term of
Consultation").
Young's employment with the Bank, either as Chief Executive Officer and
Chairman of the Board and Young's services as a consultant, without cause
prior to the aforesaid termination date of his employment, Bank shall pay
Young the balance of his salary or consulting fee (as applicable) for his
remaining term of employment and/or consultation that he is currently under,
but not exceeding his salary or consultation fee (as applicable) for one year.
For purposes of this Agreement, "cause" shall mean:
(i) Willful misconduct of Young in connection with the
performance of his duties, which Bank believes does,
or may result in, material harm to Bank.
(ii) Misappropriation of funds or property of Bank by
Young.
(iii) Dishonesty.
(iv) Failure of Young to perform the duties and
responsibilities required by this Agreement (other
than by reason of disability), or
(v) The conviction of Young of a felony or misdemeanor
involving moral turpitude.
4. Bank shall pay Young an annual salary as Chief Executive Officer
and Chairman of its Board of Directors of One Hundred Sixty five Thousand
Dollars ($165,000). Bank shall pay Young an annual fee as consultant for the
calendar years 2001 and 2002, of Seventy five Thousand Dollars ($75,000).
Bank and Young agree that Young's service as a consultant shall be that of an
independent contractor and not as a common law employee.
5. During the periods of Young's employment as Chief Executive Officer
and Chairman of the Board of Directors and as a consultant, Young shall not be
eligible for merit raises, participation in stock option programs or bonus plans
given or maintained by SNFC or either Virginia Heartland Bank or Second Bank of
Culpeper. During his term of employment, but not his term of consultation, Young
shall be eligible to participate in existing benefit plans of Bank, including,
but not limited to, the 401(K) and Profit Sharing Plans of Bank. This Agreement
shall have no effect on Young's vested retirement benefits under an Employment
Agreement of August 8, 1987 and amendment thereto of June 24, 1997.
6. Upon Young's voluntary termination of his employment prior to the
expiration of his term of employment as set forth in paragraph 3. A. hereof,
Young shall not directly or indirectly become affiliated as consultant,
employee, agent, member of Board of Directors or member of advisory Board of
Directors for any financial institution with offices located within the
Commonwealth of Virginia. Both Young and Bank agree that the Commonwealth of
Virginia is the anticipated service area of Bank. This covenant not to compete
shall continue for a period of two (2) years from the date Young voluntarily
terminates his employment with Bank.
7. If any provision of this Agreement or part hereof is determined to
be unenforceable for any reason whatsoever, it shall be severable from the
remainder of this Agreement and shall not invalidate or affect the other
provisions of this Agreement.
8. This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Virginia.
9. This Agreement may not be varied, altered, modified or in any way
amended, except by an instrument in writing executed by the parties hereto or
their legal representatives.
10. This Agreement shall be binding upon Young and on the Bank, its
successors and assigns, effective on the date set forth in paragraph number 1.
hereof. Bank will require any successor to all or substantially all of the
business and or assets of Bank to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that Bank would be
required to perform if no such succession had taken place.
11. This Agreement constitutes the entire Agreement of the parties
with respect to the matters addressed herein and its supercedes all other
Agreements and understandings, both written and oral, express or implies, with
respect to the subject matter of the Agreement.
Witness the following signatures and seals.
By: _________________________________(SEAL)
Thomas F. Williams, Jr.
Secretary
_________________________________(SEAL)
William B. Young
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Agreement is made and entered into this 18th day of April, 1998,
by the between VIRGINIA HEARTLAND BANK, A Virginia Banking Corporation, (herein
referred to as "Bank"), Party of the First Part, and EDWARD V. ALLISON, JR.,
(herein referred to as "Allison"), Party of the Second Part.
R E C I T A L
Allison is currently President of Bank. Bank has simultaneously with
the execution of this Employment Agreement entered into an Agreement and Plan of
Reorganization and Plan and Agreement of Merger with Second National Financial
Corporation ("SNFC") (herein collectively called "Plan and Agreement"). Bank
desires to continue to employ Allison as President of Bank.
Therefore, witnesseth this Agreement: That for and in consideration of
the mutual promises and undertakings and the benefits to ensure to the parties
of this Agreement, they agree as follows:
1. This Agreement shall take effect upon the effective date as defined
in the Plan and Agreement. Until the effective date, this Agreement shall have
no effect.
2. Bank employs Allison on the terms and conditions hereafter stated to
perform the duties of President and to perform the duties of President and to
perform the duties of senior Vice President and Secretary of SNFC.
3. The term of the employment shall commence upon the implementation of
the Plan and Agreement as set forth in paragraph 1, and shall continue until
December 31, 2003.
If during the term of Allison's employment Bank terminates his
employment or requests his resignation for any reason without case, Bank shall
nevertheless continue to pay Allison's annual salary for a period of one year
from the date of termination.
For purposes of this Agreement, "cause" shall mean:
(i) Willful misconduct of Allison in connection with the
performance of this duties, which Bank believes does, or may
result in, material harm to Bank.
(ii) Misappropriation of funds or property by Bank by
Allison.
(iii) Dishonesty.
(iv) Failure of Allison to perform on a full time basis
the duties and responsibilities required by his job (other
than by reason of disability), or
(v) The conviction of Allison of a felony or misdemeanor
involving moral turpitude.
4. Bank shall pay Allison an annual salary as President of One Hundred
Thousand Dollars ($100,000.00) payable in such increments as Bank shall decide.
Allison shall be eligible for annual salary review and adjustment.
5. If Allison dies during his employment with Bank, Bank shall pay to
Allison's designated beneficiary, or in the absence thereof to Allison's estate,
the sum of Sixty Thousand Dollars ($60,000.00) annually until the date Allison
would have been age sixty five (65) and thereafter Twenty Thousand Dollars
($20,000.00) annually for fifteen (15) years after the date Allison would have
been age sixty five (65). This death benefit shall be offset by the actuarial
value of the qualified and nonqualified retirement plan benefits provided to or
with respect to Allison as provided in paragraph 6, hereof.
<PAGE>
6. If Allison remains in the employment of Bank until age sixty-five
(65), Bank shall pay him upon his retirement Forty Five Thousand Dollars
($45,000.00) per year for fifteen (15) years. This retirement benefit shall
vest, both retroactively and actively, as follows:
June 28, 1997 30%
June 28, 1998 40%
June 28, 1999 50%
June 28, 2000 60%
June 28, 2001 70%
June 28, 2002 80%
June 28, 2003 90%
October 1, 2003 100%
If Allison should die after retirement, but before payments have been
made for fifteen (15) years, then the balance of the payments due shall be made
to Allison's designated beneficiary or in the absence of such designation, to
his estate. This retirement benefit shall be reduced by the actual value
determined in such manner as the Bank shall deem appropriate, but with the
interest assumption of 7.5% of all qualified retirement plan benefits and all
other non-qualified retirement plan benefits payable to Allison or his
beneficiaries under plans maintained by the Bank, SNFC or any affiliates
thereof.
7. Allison shall be eligible for continued participation in all Bank
benefits currently existing and those approved after the effective date of the
Plan and Agreement.
8. In the event Allison voluntarily terminates his employment prior to
the expiration of his term of employment, he shall not directly or indirectly
become affiliated as consultant, employee, agent, member of Board of Directors
or member of advisory Board of Directors for any financial institution with
offices located within the Commonwealth of Virginia. This covenant not to
compete shall continue for a period two (2) years from the date Allison's
affiliation with Bank terminates.
9. If any provision of this Agreement or part hereof is determined to
be unenforceable for any reason whatsoever, it shall be severable form the
remainder of this Agreement and shall not invalidate or affect the other
provision of this Agreement.
10. This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Virginia.
11. This Agreement may not be varied, altered, modified for in any
way amended, except by an instrument in writing executed by the parties hereto
or their legal representatives.
12. This Agreement shall be binding upon Allison and on the Bank, its
successors and assigns, effective on the date set forth in paragraph number 1,
hereof. Bank will require any successor to all or substantially all of the
business and or assets of Bank to assume expressly and agree to perform this
Agreement in the same manner and to same extent that Bank would be required to
perform if no such succession had taken place.
13. This Agreement constitutes the entire Agreement of the parties with
respect to the matters addressed herein and it supersedes all other Agreements
and understandings, both written and oral, express of implied, with respect to
the subject matter of the Agreement.
Witness the following signatures and seals.
VIRGINIA HEARTLAND BANK
A Virginia Corporation
By Thomas F. Williams, Jr. (SEAL)
Secretary
EDWARD V. ALLISON, JR. (SEAL)
EXHIBIT 10.3
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT, dated as of this 18th day
of April, 1998, by and among Second National Financial Corporation (the
"Company") and Jeffrey W. Farrar (the "Executive").
In consideration of the mutual covenants and agreements set
forth herein, the parties agree as follows:
1. Employment and Duties. The Executive is
the Senior Vice President and Chief Financial Officer of the Company and its
wholly owned subsidiary, Second Bank & Trust (the "Bank").
2. Term. The term of this Agreement shall be
deemed to have commenced on April 18, 1998 and continues through December 31,
2000, unless terminated or extended as hereinafter provided. This Agreement
shall be extended for additional one year periods following the original term
unless either party notifies the other in writing at least one hundred eighty
(180) days prior to the end of the original term, or the end of any additional
one-year term, that the Agreement shall not be extended beyond its current
term. Notwithstanding the foregoing, no extension (other than pursuant to
paragraph (i) of Section 3(a)) shall occur after a Change of Control.
connection with a Change of Control (as hereinafter defined), such base salary
shall at all times exceed that paid to any other employee of the Company and
its subsidiaries. The Executive and the Company agree to formulate and
finalize the terms of an incentive compensation program for the benefit of the
Executive not later than December 31, 1996.
3. Change of Control and Severance Benefits.
(a) In the event a Change of Control as
hereinafter defined occurs during the term of this Agreement, the Executive
may choose either of the following two alternatives, if written notice of
his choice is given to the Company within one hundred eighty (180) days after
such Change of Control (with alternative (i) becoming effective if no notice is
timely received by the Company):
(i) the term of this Agreement
as provided in Section 2 hereof shall continue for two (2) consecutive years
(24 months) after the Change of Control or the balance of the term of this
Agreement, whichever is greater; and in the event the Executive's employment
is terminated without Cause by the Company for reasons other than the
Executive's Disability, or the Executive resigns his employment with the
Company and all of its subsidiaries for Good Reason within one hundred eighty
(180) days after the occurrence of the Good Reason, during the term of this
Agreement, except as set forth in Sections 3(b) or 3(c) below, the Executive
shall receive as "Severance Benefits" the continuation for eighteen (18)
months following his cessation of employment of (A) his annual base salary
then in effect (but in no event less than his annual base salary in effect at
the Change of Control) and (B) all health and insurance plans as required by
federal law, and provided that the Executive's continued participation is
possible under the general terms and provisions of such plans and programs. If
the Company reasonably determines that maintaining such health and insurance
plans in full force and effect for the benefit of the Executive until eighteen
(18) months from the date of cessation of employment is not feasible, the
Company shall pay the Executive a lump sum equal to the estimated cost of
maintaining such plans for eighteen (18) months, or
(ii) the Executive may resign
his employment from the Company and, except as set forth in Section 3(b) below,
receive as "Severance Benefits" the continuation for the twenty-four (24)
months immediately following such Change of Control or the provision of
written notice under this Agreement, whichever is later, of his salary and
benefits then in effect and the vesting and immediate exercisability of any
stock options held by him at that time.
Except as set forth in Section 3(c) below in connection with Severance Benefits
provided pursuant to clause (i) of this Section 3(a), the Severance Benefits to
be provided by the Company under this provision shall be provided without regard
to whether the Executive becomes employed by another employer. In addition, the
Executive may elect to receive, at his sole option, the total Severance Benefits
due him at no discount, in one lump sum payment, payable immediately upon notice
to the Company within thirty (30) days after the Executive resigns or his
employment is terminated pursuant to this Section 3(a).
(b) Excess Parachute Payment Limitation
on Severance Benefits. Notwithstanding the foregoing provisions of Section 3(a),
the aggregate value of all Severance Benefits provided for under this
Agreement, when added to the value of all other payments or benefits payable
to or with respect to the Executive (even though not paid or provided pursuant
to this Agreement) which constitute "parachute payments" under IRC Section
280G shall be reduced to the extent necessary so that none of such benefits and
payments (whether or not paid or provided pursuant to this Agreement) constitute
"excess parachute payments" on which an excise tax is imposed pursuant to
IRC Section 4999. Any such reduction shall normally be effected first by
reducing taxable payments or benefits and then by reducing nontaxable
payments and benefits, with noncash payments or benefits being reduced before
cash payments or benefits in each such category, unless the Company and
Executive otherwise agree.
(c) Non-Competition. Notwithstanding
the foregoing provisions of Section 3(a), all Severance Benefits provided
pursuant to clause (i) of Section 3(a) otherwise continuing for periods after
the Executive's termination of employment shall cease to be paid, and the
Company shall have no further obligation due with respect thereto, in the
event the Executive engages in "Competition" or makes any "Unauthorized
Disclosure of Confidential Information." In addition, in exchange for the
Severance Benefits as provided herein pursuant to clause (i) of Section 3(a),
for the other provisions of this Agreement and for other valuable
consideration hereby acknowledged, the Executive agrees that he will not
engage in competition for a period of two (2) years after the Executive's
employment with the Company ceases for any reason, including the expiration or
nonrenewal of this Agreement. For purposes hereof:
(i) "Competition" means the Executive's
engaging, without the written consent of the Board of Directors of the Company
or a person authorized thereby, in an activity as an officer, a director, an
employee, a partner, a more than one percent shareholder or other owner, an
agent, a consultant, or in any other individual or representative capacity
within 50 miles of any branch office of the Company or any of its subsidiaries
(unless the Executive's duties, responsibilities and activities, including
supervisory activities, for or on behalf of such activity, are not related
in any way to such competitive activity) if it involves:
(A) engaging in or
entering into the business of any banking, lending or any other business
activity in which the Company or any of its affiliates is actively engaged
at the time the Executive's employment ceases, or
(B) soliciting or
contacting, either directly or indirectly, any of the customers or clients of
the Company or any of its affiliates for the purpose of competing with the
products or services provided by the Company or any of its affiliates, or
(C) employing or
soliciting for employment any employees of the Company or any of its affiliates
for the purpose of competing with the Company or any of its affiliates.
Notwithstanding the above, any
investment, activity or employment by or of the Executive in the Richmond
market area, including the Cities of Richmond and Petersburg and the
Counties of Hanover, Henrico, Goochland, Powhatan, Chesterfield, Prince
George, Charles City and New Kent, shall not constitute Competition.
(ii) "Unauthorized Disclosure of
Confidential Information" means the disclosure of information in violation of
Section 5 of this Agreement.
(iii) All determinations regarding
whether the Executive has engaged in Competition or made an Unauthorized
Disclosure of Confidential Information under this Agreement shall be made by
the Board of the Directors of the Company reasonably and in good faith.
(iv) For purposes of this Agreement,
"customers" or "clients" of the Company or any of its affiliates means
individuals or entities to whom the Company or any of its affiliates has
provided banking, lending, or other similar financial services at any time
from January 1, 1997 through the date the Executive's employment with the
Company ceases.
(d) Change of Control Defined. For
purposes of this Agreement, a "Change of Control" shall mean:
(i) the acquisition by any
individual, entity or group (within the meaning of Section 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") of beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act), of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities; provided, however,
that the following acquisitions shall not constitute a Change of Control:
(A) any acquisition
directly from the Company (excluding an acquisition by virtue of the exercise of
a conversion privilege);
(B) any acquisition
by the Company;
(C) any acquisition
by any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company; or
(D) any acquisition
pursuant to a reorganization, merger or consolidation by any corporation
owned or proposed to be owned, directly or indirectly, by shareholders of
the Company if the shareholders' ownership of securities of the corporation
resulting from such transaction constitutes a majority of the ownership of
securities of the resulting entity and at least a majority of the members
of the Board of Directors of the corporation resulting from such
transaction were members of the Incumbent Board as defined in this Agreement
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation;
(E) any acquisition
resulting from negotiations that began on or before April 30, 1998; or
(ii) where individuals who, as
of the inception of this Agreement, constitute the Board of Directors of the
Company (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board of Directors; provided, however, that any individual
becoming a director subsequent to the effective date of this Agreement whose
election, or nomination for election by the shareholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a person
other than a member of the Board of Directors; or
(iii) the shareholders of the
Company approve, or the Company otherwise consummates,
(A) a merger,
statutory share exchange, or consolidation of the Company with any other
corporation, except as provided in subparagraph (i)(D) of this section;
provided however, that the approval by shareholders of the Company or any of
its predecessors of an agreement entered into on or before April 30, 1998
shall not constitute a Change of Control herein, or
(B) the sale or other
disposition of all or substantially all of the assets of the Company.
(e) Cause. For purposes of this
Agreement, "Cause" shall include but not be limited to:
(i) willful misconduct of the Executive
in connection with the performance of his duties which the Company believes does
or may result in material harm to the Company;
(ii) misappropriation of funds or
property of the Company by the Executive;
(iii) disloyalty or dishonesty;
(iv) the failure of the Executive to
perform any of the duties and responsibilities required by his job (other than
by reason of Disability); or
(v) the Executive's conviction of a
felony or misdemeanor involving moral turpitude.
(f) Good Reason. For purpose of this
Agreement, "Good Reason" shall mean:
(i) the continued assignment to the
Executive of duties inconsistent with the Executive's position, authority,
duties or responsibilities as contemplated by Section 1 hereof;
(ii) any action taken by the Company
which results in a substantial reduction in the status of the Executive,
including a diminution in his position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and/or inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(iii) the relocation of the Executive to
any other primary place of employment which might require him to move his
residence which, for this purpose, includes any reassignment to a place of
employment located more than 50 miles from the Executive's initially assigned
place of employment, without the Executive's express written consent to such
relocation;
(iv) any reduction in the
Executive's annual base salary in effect at the time of the Change of Control or
any uncompensated exclusion of Executive from participation (other than
an isolated, insubstantial or inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive) in any plans, programs or forms of compensation
or benefits that the Company or its subsidiaries provide to the class of
employees that includes the Executive, on a basis not less favorable than that
provided to such class of employees, provided however, a reasonable transition
period following any merger, statutory share exchange, consolidation or
acquisition or transaction involving the Company or any of its subsidiaries
shall be permitted in order to make appropriate adjustments in compliance
with this obligation,; or
Notwithstanding the above, "Good Reason" shall not include the removal of the
Executive as an officer of any subsidiary of the Company (including the Bank) in
order that he might concentrate his efforts on the Company.
4. Employment at Will and Other Termination of or
Resignation from Employment.
(a) At Will Employment. The Executive
and the Company acknowledge that the employment of the Executive by the Company
or the Bank is "at will," and the Executive's employment may be terminated by
either the Company or the Executive at any time except that the Company may not
terminate the employment of the Executive without Cause in connection with
or in contemplation of a Change of Control unless the Executive receives
the Severance Benefits described in paragraph (ii) of Section 3(a) hereof.
(b) Termination for Cause. If the
Executive's employment shall be terminated for Cause, this Agreement shall
terminate without further obligation to the Executive other than to pay to
the Executive his annual base salary through the date of termination. If
the Executive terminates his employment other than for Good Reason, this
Agreement shall terminate without further obligation to the Executive.
(c) Resignation Other Than for Good
Reason. Except as contained in any other written agreement or amendment of this
Agreement, if the Executive resigns or voluntarily leaves the employment of
the Company for other than for Good Reason or pursuant to paragraph 3(a)(iv),
this Agreement shall terminate without further obligation to the Executive.
(d) Death or Disability. The
Executive's employment under this Agreement shall cease automatically upon
the Executive's death. In the event of cessation of employment due to death of
the Executive after a Change of Control, his survivors, designees or estate
shall continue to receive, in addition to all other benefits accruing upon
death, full compensation hereunder for a period of three (3) months following
the month in which his death occurred. If the Company determines that the
Disability, as hereinafter defined, of the Executive has occurred, it may
terminate the Executive's employment and this Agreement upon thirty (30) days'
written notice provided that, within thirty (30) days after receipt of such
notice, the Executive shall not have returned to full-time performance of
his assigned duties. "Disability" shall mean the absence of the Executive from
his assigned duties with the Company on a full-time basis for the greater of
ninety (90) consecutive calendar days or the longest waiting period under any
long term disability insurance contract or program provided to him as an
employee as a result of incapacity due to mental or physical illness or
disability as determined by a physician selected by the Company. In the event of
the termination of the Executive's employment due to his Disability, this
Agreement shall terminate without further obligation to the Executive.
5. Confidentiality. The Executive recognizes
that as an employee of the Company he will have access to and may participate
in the origination of non-public, proprietary and confidential information
and that he owes a fiduciary duty to the Company. Confidential information may
include, but is not limited to, trade secrets, customer lists and information,
internal corporate planning, methods of marketing and operation, and other
data or information of or concerning the Company or its customers that is
not generally known to the public or in the banking industry. The Executive
agrees that he will never reveal any such confidential information, either
directly or indirectly, to any third party except as may be authorized in
writing specifically by the Company.
6. Severability. If any provision of this
Agreement, or part thereof, is determined to be unenforceable for any reason
whatsoever, it shall be severable from the remainder of this Agreement and
shall not invalidate or affect the other provisions of this Agreement, which
shall remain in full force and effect and shall be enforceable according to
their terms. No covenant shall be dependent upon any other covenant or
provision herein, each of which stands independently.
7. Modification. The parties expressly agree
that should a court find any provision of this Agreement, or part thereof,
to be unenforceable or unreasonable, the court may modify the provision, or
part thereof, in a manner which renders that provision reasonable, enforceable,
and in conformity with the public policy of Virginia.
8. Governing Law. This agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Virginia.
9. Notices. All written notices required by
this Agreement shall be deemed given when delivered personally or sent by
registered or certified mail, return receipt requested, to the parties at their
addresses set forth on the signature page of this Agreement. Each party may,
from time to time, designate a different address to which notices should be
sent.
10. Amendment. This Agreement may not be
varied, altered, modified or in any way amended except by an instrument in
writing executed by the parties hereto or their legal representatives.
11. Binding Effect. This Agreement shall be
binding upon the Executive and on the Company, its successors and assigns
effective on the date first above written subject to the approval by the Board
of Directors of the Company. The Company will require any successor to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
12. Entire Agreement. This Agreement
constitutes the entire agreement of the parties with respect to the matters
addressed herein and it supersedes all other prior agreements and
understandings, both written and oral, express or implied, with respect to the
subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written herein.
SECOND NATIONAL FINANCIAL CORPORATION
By__________________________________
Its________________________________
102 South Main Street
Culpeper, Virginia 22701
------------------------------------
JEFFREY W. FARRAR
"EXECUTIVE"
Address:
------------------------------------
------------------------------------
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 1st day of January, 1997, by
and among Second National Financial Corporation (the "Company") and O. R. (Ed)
Barham, Jr. (the "Executive").
In consideration of the mutual covenants and agreements set forth herein,
the parties agree as follows:
1. Employment and Duties. The Executive agrees to accept and perform the
managerial duties and responsibilities of President, Chief Executive Officer and
Director of the Company and its wholly owned subsidiary, Second Bank & Trust
(the "Bank"), and agrees to devote his time and attention on a full-time basis
to the discharge of such duties and responsibilities of an executive nature as
may be assigned him by the Board of Directors of the Company, the Bank, or their
respective designees. As President and Chief Executive Officer, the Executive
shall have general supervision over, responsibility for and control over the
other officers, agents and employees of the Company and its subsidiaries, shall
have the power to hire all employees of the Company and its subsidiaries other
than any officer or prospective officer whom the Board directs to be employed
with a written employment contract entered into or approved by the Board of
Directors of the Company (after notifying the Executive and providing him an
opportunity to comment) and other than the employee in charge of the internal
auditing function for the Company or any subsidiary (the "internal auditor"),
and shall have the power to discharge all employees of the Company and its
subsidiaries other than any officer with a written employment contract entered
into or approved by the Board of Directors of the Company and other than the
internal auditor. The Executive may accept any elective or appointed positions
or offices with any duly recognized associations or organizations whose
activities or purposes are closely related to the banking business or service to
which would generate good will for the Company and its subsidiaries.
2. Term. The term of employment of the Executive under of this Agreement
shall be deemed to have commenced on January 1, 1997 and continues through
December 31, 1999, unless terminated or extended as hereinafter provided. This
Agreement shall be extended for an additional year annually following the
original term unless either party notifies the other in writing at least ninety
(90) days prior to the end of the original term, or the end of any additional
one-year term, that the Agreement shall not be extended beyond its current term.
3. Salary. During the first year of this Agreement, the Company shall
pay the Executive an annual base salary not less than $135,000.00. Such base
salary shall be paid to the Executive in accordance with established payroll
practices of the Company. For each remaining year of this Agreement, and for
each year thereafter if this Agreement is extended, the Company agrees to review
the Executive's base salary and to consider implementing changes to such base
salary as it may deem appropriate; however, such base salary shall not be less
than $145,000 in the second year and $155,000 in the third year.
4. Benefits.
(a) During the term of this Agreement, the Executive shall be eligible for
participation in any plans, programs or forms of compensation or benefits that
the Company or its subsidiaries provide to the class of employees that includes
the Executive, on a basis not less favorable than that provided to such class of
employees, including, without limitation, group medical, disability and life
insurance, vacation and sick leave, and a retirement plan; provided however, a
reasonable transition period following any merger, statutory share exchange,
consolidation or acquisition or transaction involving the Company or any of its
subsidiaries shall be permitted in order to make appropriate adjustments in
compliance with this Section 4(a). The Company will offer the Executive a
supplemental retirement plan to ensure that the Executive may retire at age 65
at an appropriate percentage of base salary.
(b)The Company, in its discretion and pending shareholder approval, may
adopt an incentive stock option plan. If the Company adopts such a plan, the
Executive shall be eligible to participate to the extent and in the manner
provided by the Board of Directors of the Company in its sole discretion.
(c) The Executive shall be entitled to four weeks vacation annually without
loss of pay.
(d) The Company will pay the Executive's country club initiation fee and
dues on such basis as may be determined by the Board of Directors of the Company
from time to time.
(e) During the term of this Agreement, the Company shall provide the
Executive with an appropriate automobile as determined by the Board of Directors
of the Company.
5. Reimbursement of Expenses. The Company shall promptly reimburse the
Executive, upon presentation of adequate substantiation, including receipts, for
the reasonable travel, entertainment, lodging and other business expenses
incurred by the Executive, including, without limitation, those expenses
incurred by the Executive and his spouse in attending trade and professional
association conventions, meetings and other related functions. However, the
Company reserves the right to review these expenses periodically and determine,
in its sole discretion, whether future reimbursement of such expenses to the
Executive will continue without prior Board approval of the expenses.
6. Termination of Employment.
(a) Death or Disability. The Executive's employment under this Agreement
shall terminate automatically upon the Executive's death. In the event of
termination due to death of the Executive, his survivors, designees or estate
shall continue to receive, in addition to all other benefits accruing upon
death, full compensation hereunder for a period of three (3) months following
the month in which his death occurred. If the Company determines that the
Disability, as hereinafter defined, of the Executive has occurred, it may
terminate the Executive's employment and this Agreement upon thirty (30) days'
written notice provided that, within thirty (30) days after receipt of such
notice, the Executive shall not have returned to full-time performance of his
assigned duties. "Disability" shall mean the absence of the Executive from his
assigned duties with the Company on a full-time basis for the greater of ninety
(90) consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Company.
(b) Termination by Company With or Without Cause. The Company may
terminate the Executive's employment during the term of this Agreement, with or
without cause. For purposes of this Agreement, "cause" shall include but not be
limited to:
(i) willful misconduct of the Executive in connection with the
performance of his duties which the Company believes does or may result in
material harm to the Company;
(ii) misappropriation of funds or property of the Company by the
Executive;
(iii)disloyalty or dishonesty;
(iv) the failure of the Executive to perform any of the duties
and responsibilities required by his job (other than by reason of Disability);
or
(v) the Executive's conviction of a felony or misdemeanor
involving moral turpitude.
(c) Termination by Executive for Good Reason. The Executive may
terminate his employment for Good Reason. For purpose of this Agreement, "Good
Reason" shall mean:
(i) the continued assignment to the Executive of duties
inconsistent with the Executive's position, authority, duties or
responsibilities as contemplated by Section 1 hereof;
(ii) any action taken by the Company which results in a
substantial reduction in the status of the Executive, including a diminution in
his position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and/or inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the relocation of the Executive to any other primary place
of employment which might require him to move his residence which, for this
purpose, includes any reassignment to a place of employment located more than 50
miles from the Executive's initially assigned place of employment, without the
Executive's express written consent to such relocation;
(iv) any failure by the Company to comply substantially with the
provisions of Sections 3 and 4 hereof, other than an isolated, insubstantial or
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive; or
Notwithstanding the above, "Good Reason" shall not include the removal of the
Executive as an officer of any subsidiary of the Company (including the Bank) in
order that he might concentrate his efforts on the Company.
(d) Termination by Resignation. Except as contained in any other written
agreement or amendment of this Agreement, if the Executive resigns or
voluntarily leaves the employment of the Company, the Company's obligations to
the Executive under this Agreement shall terminate, and the Company shall have
no further liability to the Executive hereunder after the effective date of such
resignation except that the Executive shall not be denied any benefits due to
him under any plan subject to the provisions of ERISA or a plan under which he
has a vested interest.
(e) Disability. If payments under a long term disability policy or plan
shall cease due to discontinuance of the plan for failure for any reason of the
provider of such policy to continue to make payments, Company will provide the
benefits to Executive in accordance with the terms of such policy or plan as if
it were still in full force and effect. Notwithstanding the above, in no event
shall the Company's obligation under this subparagraph be for more than two
years.
7. Obligations of the Company Upon Termination.
(a) Without Cause; Good Reason. Except as set forth in Sections 7(b) and
7(c) below, if during the term of this Agreement, the Company shall terminate
the Executive's employment without Cause or the Executive shall terminate
employment for Good Reason, the Company will pay to the Executive in a lump sum
within thirty (30) days after the termination of employment the sum of the
Executive's annual base salary through the date of termination to the extent not
theretofore paid and the balance of the Executive's annual base salary for a
period of eighteen months from the date of termination of employment. In
addition, the Company shall maintain in full force and effect for the
Executive's continued benefit, until eighteen months from the date of
termination of employment, all health and insurance plans as required by federal
law, and provided that the Executive's continued participation is possible under
the general terms and provisions of such plans and programs. If the Company
reasonably determines that maintaining such health and insurance plans in full
force and effect for the benefit of the Employee until eighteen months from the
date of termination of employment is not feasible, the Company shall pay the
Employee a lump sum equal to the estimated cost of maintaining such plans for
eighteen months.
(b) Non-Competition. Notwithstanding the foregoing, all such payments
and benefits under Section 7(a) otherwise continuing for periods after the
Executive's termination of employment shall cease to be paid, and the Company
shall have no further obligation due with respect thereto, in the event the
Executive engages in "Competition" or makes any "Unauthorized Disclosure of
Confidential Information." In addition, in exchange for the payments on
termination as provided herein, other provisions of this Agreement and other
valuable consideration hereby acknowledged, the Executive agrees that he will
not engage in competition for a period of two (2) years after the Executive's
employment with the Company ceases for any reason, including the expiration or
nonrenewal of this Agreement. For purposes hereof:
(i) "Competition" means the Executive's engaging, without the
written consent of the Board of Directors of the Company or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or in
any other individual or representative capacity within 50 miles of any branch
office of the Company or any of its subsidiaries (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in or entering into the business of any
banking, lending or any other business activity in which the Company or any of
its affiliates is actively engaged at the time the Executive's employment
ceases, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Company or any of its
affiliates for the purpose of competing with the products or services provided
by the Company or any of its affiliates, or
(C) employing or soliciting for employment any employees
of the Company or any of its affiliates for the purpose of competing with the
Company or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information" means
the disclosure of information in violation of Section 9 of this Agreement.
(iii) All determinations regarding whether the Executive has
engaged in Competition or made an Unauthorized Disclosure of Confidential
Information under this Agreement shall be made by the Board of the Directors of
the Company reasonably and in good faith.
(iv) For purposes of this Agreement, "customers" or "clients" of
the Company or any of its affiliates means individuals or entities to whom the
Company or any of its affiliates has provided banking, lending, or other similar
financial services at any time from January 1, 1997 through the date the
Executive's employment with the Company ceases.
(c) Death or Disability. If the Executive's employment is terminated by
reason of death or disability in accordance with Section 6(a) hereof, this
Agreement shall terminate without further obligation to the Executive or his
legal representatives under this Agreement except as otherwise specified in
Section 6(a).
(d) Cause; Other Than for Good Reason. If the Executive's employment
shall be terminated for cause, this Agreement shall terminate without further
obligation to the Executive other than to pay to the Executive his annual base
salary through the date of termination. If the Executive terminates his
employment other than for Good Reason, this Agreement shall terminate without
further obligation to the Executive.
(e) Remedies. The Executive acknowledges that the restrictions set forth
in paragraph 7(b) of this Agreement are just, reasonable, and necessary to
protect the legitimate business interests of the Company. The Executive further
acknowledges that if he breaches or threatens to breach any provision of
paragraph 7(b), the Company's remedies at law will be inadequate, and the
Company will be irreparably harmed. Accordingly, the Company shall be entitled
to an injunction, both preliminary and permanent, restraining the Executive from
such breach or threatened breach, such injunctive relief not to preclude the
Company from pursuing all available legal and equitable remedies. In addition to
all other available remedies, if the Executive violates the provisions of
paragraph 7(b), the Executive shall pay all costs and fees, including attorneys'
fees, incurred by the Company in enforcing the provisions of that paragraph. If,
on the other hand, it is finally determined by a court of competent jurisdiction
that a breach or threatened breach did not occur under paragraph 7(b) of this
Agreement, the Company shall reimburse the Executive for reasonable legal fees
incurred to defend that claim.
8. Change of Control.
(a) Notwithstanding any other term or provision of this
Agreement, in the event of a Change of Control as hereinafter defined, the
Executive may choose either of the following two alternatives, if written notice
of his choice is given to the Company within ninety (90) days of such Change of
Control:
(i) the term of this Agreement as provided in Section 2
hereof shall be deemed to have commenced on the occurrence of the Change of
Control and shall continue for two (2) consecutive years (24 months) or the
balance of the term of this Agreement, whichever is greater; or
(ii) the Executive may resign his employment from the
Company, terminate this Agreement, and receive as severance benefits the
continuation for the 24 months immediately following such Change of Control or
the provision of written notice under this Agreement, whichever is later, of his
salary and benefits as provided in Sections 3 and 4(a) of this Agreement and the
vesting and immediate exercisability of any stock options as provided for in
Section 4(b), respectively, provided however, that the aggregate value of all
such severance benefits under this Agreement, when added to the value of all
other payments or benefits payable to or with respect to the Executive (even
though not paid or provided pursuant to this Agreement), which constitute
"parachute payments" under IRC Section 280G shall be reduced to the extent
necessary so that none of such benefits and payments (whether or not paid or
provided pursuant to this Agreement) constitute "excess parachute payments" on
which an excise tax is imposed pursuant to IRC Section 4999. Any such reduction
shall normally be effected first by reducing taxable payments or benefits and
then by reducing nontaxable payments and benefits, with noncash payments or
benefits being reduced before cash payments or benefits in each such category,
unless the Company and Executive otherwise agree. The severance benefits to be
provided by the Company under this provision shall be provided without regard to
whether the Executive becomes employed by another employer.
(b) Change of Control Defined.
For purposes of this Agreement, a "Change of
"Control" shall mean:
(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act), of securities of the Company
representing 20% or more of the combined voting power of the then outstanding
securities; provided, however, that the following acquisitions shall not
constitute a Change of Control:
(A) any acquisition directly from the Company (excluding
an acquisition by virtue of the exercise of a conversion privilege);
(B) any acquisition by the Company;
(C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; or
(D) any acquisition pursuant to a reorganization, merger
or consolidation by any corporation owned or proposed to be owned, directly or
indirectly, by shareholders of the Company if the shareholders' ownership of
securities of the corporation resulting from such transaction constitutes a
majority of the ownership of securities of the resulting entity and at least a
majority of the members of the Board of Directors of the corporation resulting
from such transaction were members of the Incumbent Board as defined in this
Agreement at the time of the execution of the initial agreement providing for
such reorganization, merger or consolidation;
(E) any acquisition resulting from negotiations that
began on or before June 30, 1997; or
(ii) where individuals who, as of the inception of this
Agreement, constitute the Board of Directors of the Company (the "Incumbent
Board") cease for any reason to constitute at least a majority of such Board of
Directors; provided, however, that any individual becoming a director subsequent
to the effective date of this Agreement whose election, or nomination for
election by the shareholders was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a person other than a member of the Board of Directors; or
(iii) the shareholders of the Company approve, or the Company
otherwise consummates,
(A) a merger, statutory share exchange, or consolidation
of the Company with any other corporation, except as provided in subparagraph
(i) D of this section; provided however, that the approval by shareholders of
the Company or any of its predecessors of an agreement entered into on or before
January 31, 1997 shall not constitute a Change of Control herein, or
(B) the sale or other disposition of all or
substantially all of the assets of the Company.
9. Confidentiality. The Executive recognizes that as an employee of the
Company he will have access to and may participate in the origination of
non-public, proprietary and confidential information and that he owes a
fiduciary duty to the Company. Confidential information may include, but is not
limited to, trade secrets, customer lists and information, internal corporate
planning, methods of marketing and operation, and other data or information of
or concerning the Company or its customers that is not generally known to the
public or in the banking industry. The Executive agrees that he will never
reveal any such confidential information, either directly or indirectly, to any
third party except as may be authorized in writing specifically by the Company.
10. Severability. If any provision of this Agreement, or part thereof,
is determined to be unenforceable for any reason whatsoever, it shall be
severable from the remainder of this Agreement and shall not invalidate or
affect the other provisions of this Agreement, which shall remain in full force
and effect and shall be enforceable according to their terms. No covenant shall
be dependent upon any other covenant or provision herein, each of which stands
independently.
11. Modification. The parties expressly agree that should a court find
any provision of this Agreement, or part thereof, to be unenforceable or
unreasonable, the court may modify the provision, or part thereof, in a manner
which renders that provision reasonable, enforceable, and in conformity with the
public policy of Virginia.
12. Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
13. Notices. All written notices required by this Agreement shall be
deemed given when delivered personally or sent by registered or certified mail,
return receipt requested, to the parties at their addresses set forth on the
signature page of this Agreement. Each party may, from time to time, designate a
different address to which notices should be sent.
14. Amendment. This Agreement may not be varied, altered, modified or in
any way amended except by an instrument in writing executed by the parties
hereto or their legal representatives.
15. Binding Effect. This Agreement shall be binding upon the Executive
and on the Company, its successors and assigns effective on the date first above
written subject to the approval by the Board of Directors of the Company. The
Company will require any successor to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
16. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the matters addressed herein and it supersedes all
other prior agreements and understandings, both written and oral, express or
implied, with respect to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written herein.
SECOND NATIONAL FINANCIAL CORPORATION
By________________________
Its_____________________
102 South Main Street
Culpeper, Virginia 22701
___________________________
O. R. (Ed) BARHAM, JR.
"EXECUTIVE"
Address:
____________________________
____________________________
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement of our
report, dated January 28, 1998, relating to the consolidated financial
statements of Second National Financial Corporation and subsidiaries, and to the
reference to our Firm under the caption "Experts" in the Prospectus.
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
June 19, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement (Form S-4)
of our report dated February 17, 1998 relating to the consolidated financial
statements of Virginia Heartland Bank for the years ended December 31, 1997 and
1996, and to the reference to our Firm under the caption "Experts" in the
Prospectus.
Bowling, Franklin & Co., LLP
Fredericksburg, Virginia
June 17, 1998
KENNEDY, BARIS & LUNDY L.L.P.
ATTORNEYS AT LAW
SUITE 300
4719 HAMPDEN LANE
BETHESDA, MD 20814
(301) 654-6040
FAX: (301) 654-1733
TEXAS OFFICE: WASHINGTON, DC OFFICE:
SUITE 1775 SEVENTH FLOOR
112 EAST PECAN STREET 1225 - 19TH STREET, NW
SAN ANTONIO, TX 78205 WASHINGTON, DC 20036
(210) 228-9500 (202) 835-0313
FAX: (210) 228-0781 FAX: (202) 835-0319
June 22, 1998
Board of Directors
Second National Financial Corporation
102 South Main Street
Culpeper, VA 22701
Gentlemen:
As counsel to Virginia Heartland Bank ("VHB") we have participated in
the preparation of the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, relating to the issuance of up to 533,716 shares of the common stock of
Second National Financial Corporation ("SNFC") in connection with the proposed
affiliation of VHB and SNFC.
We hereby consent to the reference to our firm contained in such
Registration Statement under the captions "Description of the Merger-Background
of and Reasons for the Merger" and "Opinions."
Very truly yours,
By: /s/ James I. Lundy, III
-----------------------------
James I. Lundy, III, Partner
EXHIBIT 23.5
[Letterhead of Crestar Securities Corporation]
Timothy P. Veith, Esquire
Mays & Valentine, L.L.P.
1111 East Main Street
P.O. Box 1122
Richmond, VA 23218-1122
Gentlemen:
We consent to the use, reference and summarization in the Registration
Statement on Form S-4 of our fairness opinion dated , 1998, rendered to the
Board of Virginia Heartland Bank in connection with its merger with Second
National Financial Corporation and to the use of our name, and the statements
with respect to us, appearing in the Registration Statement.
Sincerely,
June 17, 1998
CRESTAR SECURITIES CORPORATION
By: /S/ CHARLES W. BYRD, JR.
Charles W. Byrd, Jr.
Managing Director
EXHIBIT 23.6
CONSENT OF THE CARSON MEDLIN COMPANY
We hereby consent to the inclusion as Appendix F to the Joint Proxy
Statement/Prospectus of Virginia Heartland Bank and Second National Financial
Corporation constituting part of the Registration Statement on Form S-4 of our
letter to the Board of Directors of Second National Financial Corporation and to
the references made to such letter and to the firm in such Proxy
Statement/Prospectus. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
THE CARSON MEDLIN COMPANY
Raleigh, North Carolina
June 19, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
I, Taylor E. Gore, hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Taylor E. Gore
Signature
<PAGE>
POWER OF ATTORNEY
I, Gregory L. Fisher, hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Gregory L. Fisher
Signature
<PAGE>
POWER OF ATTORNEY
I, Charles K. Gyory, hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Charles K. Gyory
Signature
<PAGE>
POWER OF ATTORNEY
I, Marshall D. Gayheart, Jr., hereby constitute and appoint,
O. R. Barham, Jr. and Jeffrey W. Farrar, as my true and lawful
attorneys-in-fact, either of whom acting singly is hereby authorized for me and
in my name and on my behalf as a director and/or officer of Second National
Financial Corporation (the "Registrant"), to execute any and all instruments as
such attorneys, or either of them, may deem necessary or advisable to enable the
Registrant to comply with the Securities Act of 1933, as amended ("Act"), and
any rules, regulations, policies or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under the
Act. The authority granted hereby includes specifically, but is not limited to,
the authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Marshall D. Gayheart, Jr.
Signature
<PAGE>
POWER OF ATTORNEY
I, Robert Y. Button, Jr., hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Robert Y. Button, Jr.
Signature
<PAGE>
POWER OF ATTORNEY
I, O. R. Barham, Jr., hereby constitute and appoint, O. R. Barham, Jr. and
Jeffrey W. Farrar, as my true and lawful attorneys-in-fact, either of whom
acting singly is hereby authorized for me and in my name and on my behalf as a
director and/or officer of Second National Financial Corporation (the
"Registrant"), to execute any and all instruments as such attorneys, or either
of them, may deem necessary or advisable to enable the Registrant to comply with
the Securities Act of 1933, as amended ("Act"), and any rules, regulations,
policies or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the registration under the Act. The authority
granted hereby includes specifically, but is not limited to, the authority to
execute on my behalf any Registration Statement on Form S-4 relating to the
Registrant pursuant to the proposed Agreement and Plan of Reorganization between
the Registrant and Virginia Heartland Bank, dated April 18, 1998, and any and
all amendments to such Registration Statement, together with such other
supplements, statements, instruments and documents as such attorneys or attorney
deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ O. R. Barham, Jr.
Signature
<PAGE>
POWER OF ATTORNEY
I, Zelda H. Smoot, hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Zelda H. Smoot
Signature
<PAGE>
POWER OF ATTORNEY
I, W. Robert Jebson, Jr., hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ W. Robert Jebson, Jr.
Signature
<PAGE>
POWER OF ATTORNEY
I, Lewis P. Armstrong, hereby constitute and appoint, O. R.
Barham, Jr. and Jeffrey W. Farrar, as my true and lawful attorneys-in-fact,
either of whom acting singly is hereby authorized for me and in my name and on
my behalf as a director and/or officer of Second National Financial Corporation
(the "Registrant"), to execute any and all instruments as such attorneys, or
either of them, may deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended ("Act"), and any rules,
regulations, policies or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under the Act. The
authority granted hereby includes specifically, but is not limited to, the
authority to execute on my behalf any Registration Statement on Form S-4
relating to the Registrant pursuant to the proposed Agreement and Plan of
Reorganization between the Registrant and Virginia Heartland Bank, dated April
18, 1998, and any and all amendments to such Registration Statement, together
with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or
attorney shall do or cause to be done by the virtue hereof.
WITNESS the execution hereof this 11th day of June, 1998.
/s/ Lewis P. Armstrong
Signature
EXHIBIT 99.1
PROXY
VIRGINIA HEARTLAND BANK.
Special Meeting of Shareholders
Held September 9, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned Shareholder hereby constitutes and appoints Thomas F.
Williams, Jr. and H. Wayne Parrish, or either of them, proxies of the
undersigned, with full power of substitution, to vote the shares of common stock
of the undersigned at the Special Meeting of Shareholders of the Bank to be held
at the Main Office of the Bank located at 4700 Harrison Road, Fredericksburg,
Virginia on Wednesday, September 9, 1998 at 2:30 p.m.and at any adjournment of
adjournments thereof, with all powers the undersigned would possess if
personally present:
ITEM 1. MERGER. To consider and vote upon a proposal to approve an Agreement and
Plan of Reorganization and the related Plan of Merger, dated as of April 18,
1998 (the "Agreement"), between Virginia Heartland Bank and Second National
Financial Corporation ("SNFC"), the bank holding company for Second Bank and
Trust ("SBT"), Culpeper, Virginia, which contemplates a merger of equals
transaction. Pursuant to the Agreement, (i) Virginia Heartland Bank will merge
(the "Merger") with and into an interim Virginia state bank subsidiary of SNFC
that will ultimately be named Virginia Heartland Bank, (ii) each share of the
$5.00 par value common stock of Virginia Heartland Bank ("VHB Stock") issued and
outstanding at the effective time of the Merger will be exchanged for 1.15
shares of the $2.50 par value common stock of the Holding Company and cash in
lieu of any fractional share, all as more fully described in the accompanying
Joint Proxy Statement/Prospectus. The Agreement provides that SNFC will change
its name to Virginia Commonwealth Financial Corporation at the effective time of
the merger, and that, thereafter, Virginia Heartland Bank and SBT will operate
as separate bank subsidiaries of Virginia Commonwealth Financial Corporation.
The Agreement also contains provisions regarding the Boards of Directors and
Senior Management of the Holding Company. A copy of the Agreement is set forth
in Appendix A to the accompanying Joint Proxy Statement/Prospectus and is hereby
incorporated by reference herein.
_____FOR _____AGAINST _____ABSTAIN
ITEM 2: To take action upon such other matters as may properly come before the
meeting or any adjournment of adjournments thereof.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ON ITEM 1 LISTED ABOVE, AND YOUR
PROXY WILL BE VOTED FOR ITEM 1 IF NO SPECIFICATION IS MADE. IF ANY OTHER MATTERS
COME BEFORE THE MEETING, THIS PROXY BE VOTED WITH RESPECT THERETO IN THE
INTEREST OF THE COMPANY ACCORDING TO THE BEST JUDGMENT OF THE PERSON OR PERSONS
VOTING THE PROXY.
This proxy is revocable by you at any time prior to the voting of the
shares represented, by notifying the Secretary of the Company in writing before
such vote or by filing another proxy with the Secretary bearing a later date.
Shareholders who are present at the meeting may withdraw their proxy and vote in
person. When signing as attorney, executor, administrator, trustee or guardian,
please give your full title as such. Both joint holders should sign.
Dated ___________________, 1998 ___________________________________(SEAL)
Number of Shares ___________ ___________________________________(SEAL)
___________________________________(SEAL)
Return to:
Virginia Heartland Bank
P. O. 7267
Fredericksburg, Virginia 22404-7267
EXHIBIT 99.2
PROXY
SECOND NATIONAL FINANCIAL CORPORATION
Special Meeting of Shareholders
Held September 10, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned Shareholder hereby constitutes and appoints O. R.
Barham, Jr. and Taylor Gore, or either of them, proxies of the undersigned, with
full power of substitution, to vote the shares of common stock of the
undersigned at the Special Meeting of Shareholders of Second National Financial
Corporation ("SNFC") to be held at the Holiday Inn, Highway 29 Business,
Culpeper, Virginia on Thursday, September 10, 1998 at 4:00 p.m.and at any
adjournment of adjournments thereof, with all powers the undersigned would
possess if personally present:
ITEM 1. THE AFFILIATION. To consider and vote upon a proposal for SNFC to
affiliate with Virginia Heartland Bank ("VHB") pursuant to an Agreement and Plan
of Reorganization and the related Plan of Merger, dated as of April 18, 1998
(the "Agreement"), between VHB and SNFC. The Agreement contemplates a merger of
equals transaction pursuant to which (i) SNFC will amend its articles of
incorporation (the "Amendment") to change its name to "Virginia Commonwealth
Financial Corporation" (referred to on and after the effective date as the
"Holding Company"), (ii) VHB will merge (the "Merger") with and into a Virginia
chartered interim bank to be formed as a wholly-owned subsidiary of SNFC, and
(iii) each share of the $5.00 par value common stock of VHB ("VHB Stock") issued
and outstanding at the effective time of the Merger will be exchanged for 1.15
shares of the $2.50 par value common stock of Holding Company (the "Holding
Company Stock") and cash in lieu of any fractional share, all as more fully
described in the accompanying Joint Proxy Statement/Prospectus. The Agreement
provides that VHB and SBT, SNFC's current sole banking subsidiary, will operate
as separate bank subsidiaries of the Holding Company following the Merger. The
Agreement also contains provisions regarding the Boards of Directors and Senior
Management of the Holding Company. A copy of the Agreement and the Amendment are
set forth in Appendices A and B, respectively, to the accompanying Joint Proxy
Statement/Prospectus and are hereby incorporated by reference herein. Approval
of the Agreement will include approval of the Plan of Merger and will constitute
approval of the Amendment and the issuance of shares of the Holding Company
pursuant to the exchange ratio described above and in greater detail in the
enclosed Joint Proxy Statement/Prospectus.
_____FOR _____AGAINST _____ABSTAIN
ITEM 2: To take action upon such other matters as may properly come before the
meeting or any adjournment of adjournments thereof.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ON ITEM 1 LISTED ABOVE, AND YOUR
PROXY WILL BE VOTED FOR ITEM 1 IF NO SPECIFICATION IS MADE. IF ANY OTHER MATTERS
COME BEFORE THE MEETING, THIS PROXY BE VOTED WITH RESPECT THERETO IN THE
INTEREST OF THE COMPANY ACCORDING TO THE BEST JUDGMENT OF THE PERSON OR PERSONS
VOTING THE PROXY.
This proxy is revocable by you at any time prior to the voting of the
shares represented, by notifying the Secretary of the Company in writing before
such vote or by filing another proxy with the Secretary bearing a later date.
Shareholders who are present at the meeting may withdraw their proxy and vote in
person. When signing as attorney, executor, administrator, trustee or guardian,
please give your full title as such. Both joint holders should sign.
Dated ___________________, 1998 ___________________________________(SEAL)
Number of Shares ___________ ___________________________________(SEAL)
___________________________________(SEAL)
Return to:
Second National Financial Corporation
P. O. 71
Culpeper, Virginia 22701
