As filed with the Securities and Exchange Commission on January 11, 2000.
Registration No. 333-________ and Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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SOUTHERN FINANCIAL BANCORP, INC. SOUTHERN FINANCIAL CAPITAL TRUST I
(Exact Name of Registrant as Specified In Its Charter) (Exact Name of Registrant as Specified In Its Charter)
Virginia Delaware
(State or Other Jurisdiction of Incorporation or Organization) (State or Other Jurisdiction of Incorporation or Organization)
6022 6022
(Primary Standard Industrial Classification Code Number) (Primary Standard Industrial Classification Code Number)
54-1779978 Applied For
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
37 East Main Street c/o Southern Financial Bancorp, Inc.
Warrenton, VA 20186 37 East Main Street
(540) 349-3900 Warrenton, VA 20186
(540) 349-3900
(Address, Including Zip Code, and Telephone Number, Including (Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices) Area Code, of Registrant's Principal Executive Offices)
</TABLE>
Georgia S. Derrico
37 East Main Street
Warrenton, VA 20186
(540) 349-3900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies of Communications to:
Wayne A. Whitham, Jr., Esquire
R. Brian Ball, Esquire
Williams, Mullen, Clark & Dobbins
1021 East Cary Street, 16th Floor
Richmond, VA 23219
(804) 643-1991
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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(c)
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. |_|__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Securities Amount Proposed Maximum Proposed Maximum Amount of
To Be Registered To Be Registered Offering Price Per Unit Aggregate Offering Registration Fee
Price
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Junior Subordinated Debt Securities of $13,800,000 $10.00 $13,800,000 N/A
Southern Financial Bancorp, Inc. (1)(2)
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Capital Securities of Southern Financial 1,380,000 $10.00 $13,800,000 $3,644
Capital Trust I (2)
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Guarantee of Southern Financial Bancorp, N/A N/A N/A N/A
Inc. as to the Capital Securities (2)(3)
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TOTAL $13,800,000 (4) 100% $13,800,000 $3,644
====================================================================================================================================
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(1) Junior Subordinated Debt Securities to be purchased by Southern Financial
Capital Trust I with the proceeds of the sale of the Capital Securities. No
separate consideration will be received from purchasers of Capital
Securities for the Junior Subordinated Debt Securities.
(2) This Registration Statement is deemed to cover $13,800,000 aggregate
principal amount of Junior Subordinated Debt Securities, the rights of
holders of such debt securities under the related Indenture, the rights of
holders of the Capital Securities under the Amended and Restated
Declaration of Trust of Southern Financial Capital Trust I, and the rights
of holders of the Capital Securities under the Guarantee of Southern
Financial Bancorp, Inc., which taken together fully and unconditionally
guarantee the obligations of Southern Financial Capital Trust I under the
Capital Securities.
<PAGE>
(3) No separate consideration will be received for the guarantee of Southern
Financial Bancorp, Inc.
(4) Such amounts represent the aggregate liquidation amount of Capital
Securities to be issued hereunder and $13,800,000 aggregate principal
amount of Junior Subordinated Debt Securities to be issued hereunder.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
Subject to Completion - January 11, 2000
Prospectus
January __, 2000
Southern Financial Capital Trust I
1,200,000 $______ Capital Securities
(Due ______ 15, 2030)
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The Trust: The Offering:
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o The trust's only assets will be the ___% junior o The trust is offering 1,200,000 capital
subordinated debt securities of Southern Financial securities, which will represent preferred interests
Bancorp, Inc., which mature on ____ 15, 2030. in its assets.
o Southern Financial Bancorp, Inc. will own all of the o Best efforts offering: The underwriter is not
trust's common securities, which will represent common required to sell any specific number or dollar amount
interests in the trust's assets. of capital securities, but will use its best efforts
to sell the capital securities offered.
o Southern Financial Bancorp, Inc. owns and operates
Southern Financial Bank. o The trust plans to use the proceeds from this
offering to purchase the ____% junior subordinated
o Southern Financial Capital Trust I debt securities of Southern Financial Bancorp, Inc.
c/o Southern Financial Bancorp, Inc.
37 E. Main Street o Cash distributions of $______ per year will be
Warrenton, VA 20186 paid quarterly on the capital securities each year
(540) 349-3900 beginning on ______15,2000.
Proposed Symbol and Market o Closing: February __, 2000
o No public market exists for the capital securities.
The trust has applied to list the capital securities
on the NASDAQ National Market under the symbol
"SFFBP".
Per Share Total
-------------------------------------------
Public offering price and proceeds to the trust: $10.00 $12,000,000
</TABLE>
Southern Financial Bancorp, Inc. will pay the underwriter, McKinnon &
Company, Inc., $____ for each capital security sold, or a total of $________ if
all of the capital securities are sold, and the expenses of the offering. If the
trust exercises its right to increase the size of the offering by up to $1.8
million, Southern Financial Bancorp, Inc. will pay the underwriter additional
compensation.
This investment involves risk. See "Risk Factors" beginning on Page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
These securities are not deposits or other obligations of a bank and
are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
McKinnon & Company, Inc.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
[MAP OF SOUTHERN FINANCIAL BANK BRANCH LOCATIONS]
<PAGE>
TABLE OF CONTENTS
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Page
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Where You Can Find More Information......................................................................................1
Prospectus Summary.......................................................................................................2
Recent Developments......................................................................................................7
Ratio of Earnings to Fixed Charges.......................................................................................8
Summary Financial Information............................................................................................9
Risk Factors............................................................................................................10
Use of Proceeds.........................................................................................................13
Southern Financial Capital Trust I......................................................................................13
Selected Historical Financial Information...............................................................................15
Capitalization..........................................................................................................16
Accounting Treatment....................................................................................................17
Regulatory Treatment....................................................................................................17
Business................................................................................................................17
Management's Discussion and Analysis....................................................................................32
Management..............................................................................................................45
Description of Capital Securities.......................................................................................53
Description of Junior Subordinated Debt Securities......................................................................68
Description of Guarantee................................................................................................76
Relationship among the Capital Securities, the Junior Subordinated Debt Securities and the Guarantee....................79
United States Federal Income Tax Consequences...........................................................................81
ERISA Considerations....................................................................................................84
Forward Looking Statements..............................................................................................85
Underwriting............................................................................................................86
Validity of Securities..................................................................................................86
Accountants.............................................................................................................87
Index of Significant Terms..............................................................................................88
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Southern Financial Bancorp, Inc., which we will refer to as we, us or
our, files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document that we file at the Commission's public reference room facility
located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at 7 World Trade Center, 13th Floor, Suite 1300,
New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330
for further information on the public reference room. The Commission maintains
an Internet site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, including
Southern Financial Bancorp, Inc., that file documents with the Commission
electronically through the Commission's electronic data gathering, analysis and
retrieval system known as EDGAR. Our common stock is traded on the Nasdaq
National Market under the symbol "SFFB." Our reports, proxy and information
statements may also be reviewed at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington D.C. 20006.
This prospectus is part of a registration statement filed by Southern
Financial Capital Trust I which we will refer to as the trust and Southern
Financial Bancorp, Inc. with the Commission. Because the rules and regulations
of the Commission allow us to omit certain portions of the registration
statement from this prospectus, this prospectus does not contain all the
information contained in the registration statement. You may review the
registration statement and the exhibits filed with the registration statement
for further information regarding us, the trust and the capital securities being
sold by this prospectus. The registration statement and its exhibits may be
inspected at the public reference facilities of the Commission at the addresses
mentioned above.
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. Neither Southern Financial
Bancorp, Inc. nor the trust is making an offer of the capital securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or any supplement is accurate as of any date
other than the date on the front of those documents because our financial
condition and results may have changed since that date.
Please refer to page 88 for an index of significant terms used in this
prospectus.
<PAGE>
Prospectus Summary
This summary highlights some of the more detailed information appearing
elsewhere in this prospectus and in the documents we have incorporated by
reference.
Southern Financial Bancorp, Inc.
Southern Financial Bancorp, Inc., a Virginia corporation, is
headquartered in Warrenton, Virginia. We own Southern Financial Bank, a
Virginia-chartered commercial bank. We conduct virtually all of our business
through Southern Financial Bank.
Southern Financial Bank dates to 1986, when Georgia S. Derrico formed
Southern Financial Federal Savings Bank, a Warrenton, Virginia-based thrift. In
December 1995, we converted the thrift to a commercial bank.
Both Ms. Derrico, our Chairman and chief executive officer, and her
husband, R. Roderick Porter, our President and chief operating officer, were
former senior officers with Chemical Bank in New York. Five of our current top
officers had extensive senior banking experience together at Chemical Bank in
the 1970's and 80's before the merger of Chemical and Manufacturers Hanover
Corporation and Chemical's subsequent merger with Chase Manhattan Corp.
Over our fourteen year existence, we have become the second largest
independent bank with offices exclusively in northern Virginia. At September 30,
1999, we had $287.7 million in assets, $157.2 million in loans, and $21.3
million in equity. On October 1, 1999 we acquired a bank based in Vienna,
Virginia that had $128.1 million in total assets and four banking offices.
Our market area is a semi-circle of Virginia counties immediately south
and west of Washington, D.C. Please refer to the map on the inside front cover
of this prospectus. Our market area includes a large concentration of
telecommunications and internet firms, as well as government and defense
industry contractors, primarily in Fairfax County. Fairfax County's population
exceeds 900,000 and rapid population and economic growth has spread west to
Loudoun and Fauquier Counties and south to Stafford, Spotsylvania and Prince
William Counties.
Our customers include individuals and small and medium sized
businesses. However, we specialize in loans and other banking services to small
and medium sized businesses. A large percentage of our loans to businesses are
made through Small Business Administration programs. The Small Business
Administration is a U.S. Government agency that finances the expansion of small
businesses in cooperation with banks and other lenders. The great majority of
our income is interest on loans and investments.
-2-
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Our focus on small and medium sized businesses includes our 70%
ownership of a corporation named Southern WebTech.com, Inc. It is developing
computer software for Southern Financial Bank. The software, which also may be
sold to other banks, will allow the bank customers of Southern WebTech to
provide on-line banking services to small and medium sized businesses. Southern
WebTech also provides data processing systems to banks involved in international
trade. Most of Southern WebTech's products are in the development stage and we
do not expect it to have any significant immediate impact on our profits. The
President of Southern WebTech was formally a senior officer with American
Express, Connecticut Bank and Trust and Chemical Bank.
We are a legal entity separate and distinct from Southern Financial
Bank. Our right, and thus your right, to receive any of the assets of Southern
Financial Bank is subject to the claims of creditors of Southern Financial Bank.
Our principal source of revenues is dividends from Southern Financial Bank.
Because we own a bank, Southern Financial Bank, we are known as a bank
holding company. As a bank holding company, we are registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956, as amended. Our executive offices and mailing address are 37 E. Main
Street, Warrenton, VA 20186 and our telephone number is (540) 349-3900.
-3-
<PAGE>
Southern Financial Capital Trust I
We formed the trust under Delaware law on December 28, 1999. We and the
trustees of the trust will sign an agreement, which will contain the terms and
conditions for the trust to issue and sell its capital securities, as well as
its common securities. This agreement is called the amended and restated
declaration of trust and it also governs the duties of the trustees.
The trust exists solely to:
o sell the capital securities and the common securities;
o use the money it receives from the sale of the capital
securities and common securities to purchase our junior
subordinated debt securities, which will be the only assets of
the trust; and
o engage in other activities that are related to these purposes.
We will purchase all of the common securities of the trust. The common
securities will entitle us to receive 3% of the trust's cash distributions. The
capital securities will entitle you and the other owners to the remaining 97% of
the trust's cash distributions. If we default on the junior subordinated debt
securities, we will not receive cash distributions on the common securities
until you have received your cash distributions on the capital securities.
The trust has a term of approximately 40 years, but may be dissolved
earlier if the capital securities are paid off. We have appointed the following
trustees to conduct the trust's business and affairs:
o Wilmington Trust Company is the property trustee and the
Delaware trustee;
o Two individuals who are employees and officers of Southern
Financial Bancorp, Inc., Georgia S. Derrico and R. Roderick
Porter are the administrative trustees;
As the sole holder of the common securities, we can replace or remove
any of the trustees, unless we default on the junior subordinated debt
securities. A default, for example, would include failing to make required
payments on the junior subordinated debt securities. If we default and do not
cure our default, the property trustee and the Delaware trustee can only be
replaced and removed by the holders of at least a majority of the capital
securities. As owner of all of the trust's common securities, only we can remove
or replace the administrative trustees.
The trust has no separate financial statements. The statements would
not be meaningful to you because the trust has no independent operations. The
trust exists solely for the reasons summarized above.
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<PAGE>
The Offering
Securities Offered............. The trust is offering for sale 1,200,000
capital securities. The trust has the right
to increase the number of capital securities
offered for sale to 1,380,000.
Offering Price................. The offering price is $10.00 for each
Capital Security.
Distributions.................. You will be entitled to receive cash
distributions of $______ per year on each
capital security. Distributions will be
payable quarterly on the 15th day of
January, April, July and October of each
year, beginning on _____ 15, 2000. Your
first cash distribution will be less than
the regular quarterly amount because you are
buying your capital securities after
_________15, 2000.
Interest Payments
Could be Deferred.............. We have the right to defer interest payments
on the junior subordinated debt securities
for up to 20 consecutive quarters. If we pay
all deferred interest at the end of an
interest deferral period, we can begin a new
interest deferral period at any time. No
interest deferral period may last beyond
______ 15, 2030. We may not defer interest
payments if we have defaulted on the junior
subordinated debt securities. However,
electing to defer interest payments, by
itself, is not a default.
Cash Distributions
Could be Deferred.............. If we defer interest payments on the junior
subordinated debt securities, the trust will
also defer cash distributions on your
capital securities. During any period when
cash distributions are deferred, your right
to receive cash distributions will
accumulate. You also will accumulate the
right to receive additional distributions at
____% per year, compounded quarterly, on any
deferred distributions. You will also be
required to pay income taxes on deferred
distributions even if you are a cash basis
taxpayer.
Our Obligations................ We are unconditionally obligated to pay
distributions and all other amounts on the
capital securities. However, this does not
mean that we may not exercise our right, as
described above, to defer interest payments
on the junior subordinated debt securities.
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<PAGE>
Ranking of Capital
Securities..................... If we default, payments to you on the
capital securities will be made before any
payments to us on the common securities.
Otherwise, payments on the capital
securities and common securities will be
made pro rata.
Ranking of Junior
Subordinated Debt
Securities..................... The junior subordinated debt securities will
be unsecured and subordinate to all our
senior debt. This means that there will be
no collateral for our obligations to you. It
also means that if we default, all of our
senior debt will be paid before you are
paid. Although we currently have no senior
debt, any debts we incur in the future are
likely to be senior debt. There is no limit
on the amount of senior debt that we may
incur. We will guarantee that you will
receive cash distributions if the trust has
the funds available to pay you. Our
guarantee also will be unsecured and
subordinate to all senior debt. In addition,
the junior subordinated debt securities
and the guarantee will be subordinate to all
existing and future liabilities of our
subsidiaries, including Southern Financial
Bank's deposit liabilities.
Repayment of
Capital Securities............. The trust must pay you $10.00 per capital
security, plus accrued distributions, when
the junior subordinated debt securities are
paid-off at or before maturity. The stated
maturity of the junior subordinated debt
securities is _______ 15, 2030.
We have the right at any time on or after
_____15, 2005 to pay-off the junior
subordinated debt securities. We also have
the right at any time before _____ 15, 2005
to pay-off the junior subordinated debt
securities if any of three things happen. We
can pay-off the junior subordinated debt
securities before_____ 15, 2005 if tax law
changes prevent us from deducting interest
payments or if changes in banking
regulations prevent us from counting the
trust's assets as capital. A change in the
Investment Company Act of 1940 that requires
the trust to register under that law also
would permit us to pay-off the junior
subordinated debt securities before______
15, 2005.
We must pay a premium to the trust if we
pay-off the junior subordinated debt
securities before_____ 15, 2015. As a holder
of capital securities, you will receive your
share of any premium we pay to the trust.
-6-
<PAGE>
Limited Voting Rights.......... You will have no voting rights, except in
limited circumstances.
No Rating...................... We do not expect the capital securities to
be rated by any rating service. None of the
other securities that we issue are so rated.
ERISA Considerations........... Please carefully consider the information
set forth in "ERISA Considerations", which
begins on page 84.
Use of Proceeds................ The trust will use all of the proceeds from
the sale of the common securities and
capital securities to purchase the junior
subordinated debt securities from us. We
intend to use the net proceeds from the sale
of the junior subordinated debt securities
for general corporate purposes, including
making advances to Southern Financial Bank
to support its continued growth. Pending any
such application by us, we may invest the
net proceeds in interest-bearing assets.
Proposed Nasdaq National
Market Symbol.................. We have applied to have the capital
securities approved for quotation on the
Nasdaq National Market Symbol under the
symbol "SFFBP".
Risk Factors................... An investment in the capital securities
involves a number of risks. Some of these
risks relate to the capital securities and
other risks relate to us. We urge you to
carefully consider the information contained
in "Risk Factors" set forth on page 10 of
this prospectus, as well as the other
information contained in this prospectus and
in the documents which are incorporated by
reference in this prospectus, before you buy
any capital securities.
RECENT DEVELOPMENTS
On October 1, 1999 we acquired The Horizon Bank of Virginia. Horizon
and its operations were merged into Southern Financial Bank. Horizon had four
banking offices, all in Fairfax County, Virginia. If Horizon had been combined
with us on September 30, 1999, we would have had total assets of $415.8 million,
deposits of $355.1 million and stockholders' equity of $29.8 million. If
Horizon's operations had been combined with ours for the nine months ended
September 30, 1999, our net income would have been $1.2 million. For additional
information please refer to the Unaudited Pro-Forma Condensed Financial
Statements that begins on Page F-65.
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<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our consolidated ratios of earnings to
fixed charges for each of the five-year periods ended December 31, 1998 and for
the nine months ended September 30, 1999. For purposes of computing these
ratios, earnings represent net income, plus total taxes based on income, plus
fixed charges. Fixed charges include interest expense, the estimated interest
component of net rental expense and amortization of debt expense.
<TABLE>
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Nine
Months Six Months Year
Ended Ended Ended
Sept. 30, Years Ended December 31 December 31, June 30,
--------- ----------------------- ------------ --------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
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Ratio of Earnings to Fixed Charges
Excluding interest on deposits 8.54x 14.86x 10.66x 5.16x 7.05x 4.06x
Including interest on deposits 1.41x 1.37x 1.36x 1.18x 1.32x 1.36x
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The following consolidated summary contains selected financial data for Southern
Financial Bancorp, Inc. and its subsidiaries for the periods and at the dates
indicated. You should also read the detailed information and the financial
statements included elsewhere in this prospectus.
<TABLE>
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Six Months
Ended Year Ended
Nine Months Ended Sept 30 Years Ended December 31, December 31, June 30,
(unaudited)
1999 1998 1998 1997 1996 1995 1995
-------------------------- ------------------------------------- --------------------------
(Dollars in thousands, except per share data)
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Income Statement Data:
Gross interest income $ 15,177 $ 13,867 $ 18,731 $ 17,005 $ 14,615 $ 6,731 $ 11,027
Gross interest expense 7,702 7,584 10,205 9,043 7,776 3,629 5,931
Net interest income 7,475 6,283 8,526 7,962 6,839 3,101 5,095
Provision for possible loan losses 925 675 975 880 695 150 60
Net interest income after provision
for loan losses 6,550 5,608 7,551 7,082 6,144 2,951 5,035
Non-interest income 2,329 1,595 2,347 1,728 1,186 514 814
Non-interest expense 5,683 4,469 6,155 5,582 5,907 2,316 3,716
Income before income taxes 3,196 2,734 3,743 3,228 1,423 1,150 2,134
Income taxes 945 772 1,084 1,022 469 414 833
Net income 2,251 1,962 2,659 2,206 954 735 1,301
Per Share Data:
Net income, basic $ 1.40 $ 1.22 $ 1.66 $ 1.39 $ 0.61 $ 0.48 $ 0.85
Net income, diluted 1.34 1.14 1.55 1.33 0.59 0.46 0.85
Cash dividends 0.35 0.27 0.37 0.28 0.24 0.12 0.20
Book value at period end 13.07 12.51 12.87 11.47 10.32 10.05 9.82
Tangible book value at period end 12.87 12.41 12.73 11.47 10.32 10.05 9.82
Period-End Balance Sheet Data:
Total assets $ 287,713 $ 251,117 $ 258,843 $ 226,598 $ 190,809 $ 164,801 $ 157,201
Total loans(net of unearned income) 157,213 127,467 131,645 128,958 108,287 104,251 92,080
Total deposits 236,853 226,610 231,926 202,200 164,279 143,814 137,680
Long-term debt 5,000 - - - 2,000 - -
Stockholders' equity 21,334 20,338 20,923 18,543 16,401 15,775 15,173
Performance Ratios:
Return on average assets 1.10% 1.10% 1.09% 1.05% 0.52% 0.91% 0.90%
Return on average stockholders'
equity 13.93% 13.51% 13.52% 12.70% 5.91% 9.50% 8.95%
Average stockholders' equity to average
total assets 7.87% 8.11% 8.07% 8.27% 8.80% 9.58% 10.06%
Efficiency ratio 57.97% 56.73% 56.61% 57.61% 73.61% 64.05% 62.88%
Net interest margin 3.83% 3.67% 3.66% 3.92% 3.93% 3.98% 3.60%
Asset Quality Ratios:
Net charge-offs to average loans 0.50% 0.42% 0.75% 0.29% 0.36% 0.03% 0.01%
Allowance to period-end loans 1.42% 1.68% 1.53% 1.56% 1.37% 1.13% 1.13%
Allowance to nonperforming loans 366.61% 406.17% 103.43% 140.97% 91.86% 201.35% 1957.41%
Nonaccrual loans to loans 0.39% 0.41% 1.48% 1.10% 1.49% 0.56% 0.06%
Nonperforming assets to loans and
foreclosed properties 1.70% 0.59% 1.54% 1.24% 1.79% 0.90% 0.47%
Capital Ratios:
Risk-based capital ratios
Tier 1 capital 11.86% 14.35% 13.40% 13.90% 15.40% 14.80% N/A
Total capital 13.06% 15.71% 14.80% 15.30% 16.60% 15.90% N/A
Leverage capital ratio 8.13% 8.23% 8.00% 8.10% 8.70% 9.60% N/A
Total equity to total assets 7.42% 8.10% 8.08% 8.18% 8.60% 9.57% 9.65%
</TABLE>
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<PAGE>
Risk Factors
An investment in the capital securities involves a number of risks. Some of
these risks relate to the capital securities and others relate to us. Please
carefully consider the following information, together with the other
information in this prospectus and in the documents that are incorporated by
reference in this prospectus before you buy any capital securities.
Risks Related To The Capital Securities
Our Obligations Are Unsecured and Subordinated
General Concerns. Our obligations under the junior subordinated debt
securities and the guarantee are unsecured and subordinate to all of our present
and future senior debt. This means that there will be no collateral for our
obligations to you. It also means that if we default, all of our senior debt
will be paid before you are paid. As of September 30, 1999 we had no senior
debt. However, any debts we incur in the future are likely to be senior debt.
There is no limit to our ability or Southern Financial Bank's ability to incur
additional debts, including senior debt. For additional information, please
refer to "Description of Junior Subordinated Debt Securities - What Does
Subordination Mean to You?", which begins on page 75.
The ability of the trust to make payments on the capital securities
depends solely upon our making payments on the junior subordinated debt
securities as and when required. If we default on our obligation to make
required payments on the junior subordinated debt securities, the trust will not
have sufficient funds to make cash distributions to you. You will not be able to
rely upon the guarantee for payment of these amounts. Instead, you or the
property trustee may sue us directly for payment under the junior subordinated
debt securities.
Our right, and thus your right, to receive any assets of Southern
Financial Bank is subject to the claims of Southern Financial Bank's creditors,
including depositors. At September 30, 1999 Southern Financial Bank, had total
liabilities, including deposits, of $266.4 million. Because the junior
subordinated debt securities will be subordinated to all existing and future
liabilities of our subsidiaries, including Southern Financial Bank's deposit
liabilities, you should look only to our assets, and not assets of our
subsidiaries, for payments on the junior subordinated debt securities.
There are Limits on our Sources of Funds. Because we own Southern
Financial Bank, we are regulated by the Board of Governors of the Federal
Reserve System. The Federal Reserve also regulates Southern Financial Bank.
Almost all of our consolidated assets are owned by Southern Financial Bank. We
will rely almost entirely on dividends from Southern Financial Bank to satisfy
our obligations to pay principal and interest on the junior subordinated debt
securities. There are legal limits on the amount of dividends that a bank such
as Southern Financial Bank is permitted to pay. We cannot assure you that
Southern Financial Bank will be able to pay dividends at past levels, or at all,
in the future. For additional information, please refer to "Description of
Guarantee - General", which begins on page 77.
The Deferral of Distributions Has Adverse Tax and Market Price
Consequences
General Concerns. As long as we do not default on the junior
subordinated debt securities, we have the right to defer interest payments on
the junior subordinated debt securities for up to 20 consecutive quarters. If we
pay all deferred interest at the end of an interest deferral period, we can
begin a new interest deferral period at any time. No interest deferral period
may last beyond ______15, 2030. If we defer interest payments on the junior
subordinated debt securities, the trust will defer cash distributions on the
capital securities until we resume interest payments. For additional
information, please refer to "Description of Capital Securities -
Distributions", which begins on page 53.
-10-
<PAGE>
Some Possible Adverse Tax Consequences. If the trust defers
distributions on the capital securities, generally you will be required to pay
income taxes on the deferred distribution and accrue interest income even if you
are a cash basis taxpayer. That is, you must include the deferred interest in
your gross income for U.S. federal income tax purposes regardless of whether you
receive cash distributions. You will not receive the cash related to any accrued
and unpaid interest from the trust if you sell your capital securities before
all deferred distributions have been brought current. Deferred distributions
that are included in your gross income will increase your tax basis in the
capital securities. If you sell your capital securities before all deferred
distributions have been brought current, your increased tax basis will decrease
the amount of any capital gain or will create a capital loss or increase the
amount of any capital loss that you realize on the sale. A capital loss, except
in certain limited circumstances, cannot be applied to offset ordinary income.
Possible Market Price Decline. We have no current intention of
exercising our right to defer interest payments on the junior subordinated debt
securities. However, if we exercise this right in the future, the market price
of the capital securities is likely to be adversely affected. If you sell your
capital securities during a time when distributions have been deferred, you may
not receive the same return on your investment as someone else who continues to
hold the capital securities.
You Have Limited Rights Against Us
If we default on our obligation to pay principal or interest on the
junior subordinated debt securities, the trust will not have sufficient funds to
make payments on the capital securities. You would not be able to rely on the
guarantee for payment. Instead, if we default in the payment of the principal or
interest on the junior subordinated debt securities, then you may sue us
directly to enforce payment. Except as described in this prospectus, you will
not be able to exercise directly any other remedy available to holders of junior
subordinated debt securities. For additional information, please refer to
"Description of Junior Subordinated Debt Securities - Enforcement of Rights by
Holders of Capital Securities", which begins on page 74.
We May Cause an Early Redemption of the Capital Securities in Certain
Events
At any time that certain special events occur and are continuing, we
have the right to redeem the junior subordinated debt securities. Within 90 days
of a redemption of the junior subordinated debt securities, the capital
securities and the common securities also must be redeemed. For additional
information, please refer to "Description of Capital Securities - Events That
Will Cause Redemption of Capital Securities", which begins on page 55.
We Can Liquidate the Trust and Distribute the Junior Subordinated Debt
Securities to You
We will have the right at any time to terminate the trust and cause the
junior subordinated debt securities to be distributed to you. Under current
United States federal income tax law, a distribution of junior subordinated debt
securities would not be a taxable event to you. If, however, the trust is
characterized for United States federal income tax purposes as an association
taxable as a corporation at the time of dissolution of the trust, the
distribution of the junior subordinated debt securities may be a taxable event
to you. For additional information, please refer to a "Description of Capital
Securities - Liquidation of the Trust and Distribution of Junior Subordinated
Debt Securities", which begins on page 59.
We give no assurance about the market prices for capital securities or
junior subordinated debt securities that may be distributed in exchange for
capital securities if a liquidation of the trust occurs. Accordingly, the
capital securities or the junior subordinated debt securities may trade at a
discount to the price that you pay to purchase the capital securities. Because
you may receive junior subordinated debt securities on a termination of the
trust, you are also making an investment decision about the junior subordinated
debt securities and should carefully review all the information regarding the
junior subordinated debt securities in this prospectus.
-11-
<PAGE>
You Have Limited Voting Rights
As a holder of capital securities, you will have limited voting rights.
These voting rights will relate only to the modification of the capital
securities, the termination of the trust, and the exercise of the trust's rights
as a holder of the junior subordinated debt securities. In general, only we can
replace or remove any of the trustees. We and the trustees may modify the
amended and restated declaration of trust without your consent in order to
ensure that the trust will not be classified as an association taxable as a
corporation or to enable the trust to qualify as a grantor trust, in each case
for federal income tax purposes, or to ensure that the trust will not be
required to register as an "investment company" under the Investment Company Act
of 1940, as amended, even if such action adversely affects your interests. You
will have no voting rights on any matters submitted to a vote of our
stockholders. For additional information, please refer to "Description of
Capital Securities - Voting Rights of Capital Securities; Amendment of the
Declaration", which begins on page 63.
Absence of Public Market for the Capital Securities
There is no existing market for the capital securities. We can give no
assurance about the liquidity of any markets that may develop for the capital
securities, your ability to sell your capital securities or at what price you
will be able to sell your capital securities. Future trading prices of the
capital securities will depend on many factors including, among other things,
prevailing interest rates, our operating results and the market for similar
securities. The underwriter has informed us that it intends to make a market in
the capital securities. However, the underwriter is not obligated to do so and
any such market making activity may be terminated at any time without notice to
the holders of the capital securities.
Risks Related To Us
Risks of Rapid Growth
It is our intention to expand our asset base. In particular, we hope to
use the funds raised in this offering to support anticipated increases in our
deposits and loans. Additional capital also would increase our legal lending
limit under federal law, which in turn would allow us to compete more actively
in our market area for larger loans. Our ability to manage growth successfully
will depend on our ability to maintain cost controls and asset quality while
attracting additional loans and deposits, as well as on factors beyond our
control, such as economic conditions and interest rate trends. If we grow too
quickly and are not able to control costs and maintain asset quality, growth
could materially adversely affect our financial performance.
Our Dependence on Senior Management
Our future performance will depend largely on the contributions of a
few senior executive officers of Southern Financial Bank, including Georgia S.
Derrico, the Chairman and chief executive officer and R. Roderick Porter, the
President, and chief operating officer. The loss of the services of one or more
of those individuals could have a material adverse effect on our business and
development.
-12-
<PAGE>
The Credit Risks of Being a Lender
There are certain risks inherent in making all loans, including risks
of interest rate changes over the time period in which loans may be repaid,
risks resulting from changes in economic and industry conditions, risks inherent
in dealing with individual borrowers, and, in the case of a loan backed by
collateral, risks resulting from uncertainties about the future value of the
collateral. Southern Financial Bank maintains an allowance for loan losses based
on, among other things, historical experience, an evaluation of economic
conditions, and regular reviews of delinquencies and loan portfolio quality. We
cannot assure you that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required. Additions to the allowance for loan losses would
result in a decrease in our net income and, possibly, our capital.
Potential Adverse Impact of Changes in Interest Rates
Our profitability depends to a large extent on our net interest income.
Net interest income is the difference between interest income on our loans and
other interest-earning assets and interest expense on our deposits and other
interest-bearing liabilities. Our net interest income will tend to increase in a
climate of declining interest rates. We, like most financial institution holding
companies, will continue to be affected by changes in general interest rate
levels and other economic factors beyond our control.
We are Subject to Strict Regulatory Capital Requirements
We and Southern Financial Bank are subject to regulatory capital
requirements. At September 30, 1999, we and Southern Financial Bank satisfied
applicable regulatory capital requirements. If we or Southern Financial Bank
fell below the minimum capital requirements, bank regulatory agencies likely
would take regulatory action against us or Southern Financial Bank. Such actions
could prohibit principal and interest payments on the junior subordinated debt
securities. We give no assurance that either we or Southern Financial Bank will
continue to be able to meet our respective minimum capital requirements.
USE OF PROCEEDS
The trust will use all of the proceeds from the sale of the common
securities and capital securities to purchase the junior subordinated debt
securities. We intend to apply the net proceeds from the sale of the junior
subordinated debt securities to our general funds to be used for general
corporate purposes, including, from time to time, making advances to Southern
Financial Bank to support its continued growth. Pending any such application by
us, the net proceeds may be invested in interest-bearing assets.
SOUTHERN FINANCIAL CAPITAL TRUST I
We formed the trust under Delaware law on December 28, 1999. Wilmington
Trust Company is the Delaware trustee and the property trustee. Georgia S.
Derrico and R. Roderick Porter, officers of Southern Financial Bancorp, Inc.,
are the administrative trustees.
The trust exists for the exclusive purposes of:
o issuing and selling the common securities and capital
securities;
o using the proceeds from the sale of the common securities and
capital securities to purchase the junior subordinated debt
securities; and
o engaging in other activities that are related to these
purposes.
-13-
<PAGE>
The junior subordinated debt securities will be the sole assets of the
trust, and payments under the junior subordinated debt securities will be the
sole revenues of the trust. All of the common securities will be owned by us.
The common securities will rank equally, and payments will be made thereon pro
rata, with the capital securities, except if there is a Debenture Event of
Default (or an event that, with notice or the passage of time, would become such
an Event of Default) or an Event of Default under the Declaration, our rights as
holder of the common securities to payment in respect of distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the capital securities.
We will acquire common securities in an aggregate liquidation amount
equal to 3% of the total capital of the trust. The trust has a term of
approximately 40 years, but may terminate earlier as provided in the
declaration. The trust's business and affairs are conducted by its trustees,
each appointed by us as holder of the common securities.
Wilmington Trust Company, as property trustee, will act as sole
indenture trustee under the declaration. Wilmington Trust Company will also act
as trustee under the guarantee agreement and the indenture. The holder of the
common securities, or the holders of a majority in liquidation amount of the
capital securities if an Event of Default under the Declaration resulting from a
Debenture Event of Default has occurred and is continuing, will be entitled to
appoint, remove or replace the property trustee and/or Delaware trustee. In no
event will the holders of the capital securities have the right to vote to
appoint, remove or replace the administrative trustees; such voting rights are
ours exclusively. The duties and obligations of each trustee are governed by the
Declaration. Pursuant to the expense provisions under the Indenture, we, as
obligor on the junior subordinated debt securities, will pay all fees and
expenses related to the trust and the offering of the capital securities and
will pay, directly or indirectly, all ongoing costs, expenses and liabilities of
the trust. The address and telephone number of the principal executive office of
the trust is c/o:
Southern Financial Bank
37 E. Main Street
Warrenton, VA 20186
Attention: David deGive
(540) 349-3900
-14-
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following consolidated summary sets forth selected financial data
for Southern Financial Bancorp, Inc. and its subsidiaries for the periods and at
the dates indicated. You should read the detailed information and the financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Nine Months Ended Sept 30, Years Ended December 31, December 31, June 30,
(unaudited)
1999 1998 1998 1997 1996 1995 1995
------------------------- ------------------------------------- ---------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Gross interest income $ 15,177 $ 13,867 $ 18,731 $ 17,005 $ 14,615 $ 6,731 $ 11,027
Gross interest expense 7,702 7,584 10,205 9,043 7,776 3,629 5,931
Net interest income 7,475 6,283 8,526 7,962 6,839 3,101 5,095
Provision for possible loan
losses 925 675 975 880 695 150 60
Net interest income after provision
for loan losses 6,550 5,608 7,551 7,082 6,144 2,951 5,035
Non-interest income 2,329 1,595 2,347 1,728 1,186 514 814
Non-interest expense 5,683 4,469 6,155 5,582 5,907 2,316 3,716
Income before income taxes 3,196 2,734 3,743 3,228 1,423 1,150 2,134
Income taxes 945 772 1,084 1,022 469 414 833
Net income 2,251 1,962 2,659 2,206 954 735 1,301
Per Share Data:
Net income, basic $ 1.40 $ 1.22 $ 1.66 $ 1.39 $ 0.61 $ 0.48 $ 0.85
Net income, diluted 1.34 1.14 1.55 1.33 0.59 0.46 0.85
Cash dividends 0.35 0.27 0.37 0.28 0.24 0.12 0.20
Book value at period end 13.07 12.51 12.87 11.47 10.32 10.05 9.82
Tangible book value at period end 12.87 12.41 12.73 11.47 10.32 10.05 9.82
Period-End Balance Sheet Data:
Total assets $ 287,713 $ 251,117 $ 258,843 $ 226,598 $ 190,809 $ 164,801 $ 157,201
Total loans (net of unearned income) 157,213 127,467 131,645 128,958 108,287 104,251 92,080
Total deposits 236,853 226,610 231,926 202,200 164,279 143,814 137,680
Long-term debt 5,000 - - - 2,000 - -
Stockholders' equity 21,334 20,338 20,923 18,543 16,401 15,775 15,173
Performance Ratios:
Return on average assets 1.10% 1.10% 1.09% 1.05% 0.52% 0.91% 0.90%
Return on average stockholders'
equity 13.93% 13.51% 13.52% 12.70% 5.91% 9.50% 8.95%
Average stockholders' equity to average
total assets 7.87% 8.11% 8.07% 8.27% 8.80% 9.58% 10.06%
Efficiency ratio 57.97% 56.73% 56.61% 57.61% 73.61% 64.05% 62.88%
Net interest margin 3.83% 3.67% 3.66% 3.92% 3.93% 3.98% 3.60%
Asset Quality Ratios:
Net charge-offs to average loans 0.50% 0.42% 0.75% 0.29% 0.36% 0.03% 0.01%
Allowance to period-end loans 1.42% 1.68% 1.53% 1.56% 1.37% 1.13% 1.13%
Allowance to nonperforming loans 366.61% 406.17% 103.43% 140.97% 91.86% 201.35% 1957.41%
Nonaccrual loans to loans 0.39% 0.41% 1.48% 1.10% 1.49% 0.56% 0.06%
Nonperforming assets to loans and
foreclosed properties 1.70% 0.59% 1.54% 1.24% 1.79% 0.90% 0.47%
Capital Ratios:
Risk-based capital ratios
Tier 1 capital 11.86% 14.35% 13.40% 13.90% 15.40% 14.80% N/A
Total capital 13.06% 15.71% 14.80% 15.30% 16.60% 15.90% N/A
Leverage capital ratio 8.13% 8.23% 8.00% 8.10% 8.70% 9.60% N/A
Total equity to total assets 7.42% 8.10% 8.08% 8.18% 8.60% 9.57% 9.65%
</TABLE>
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<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization at
September 30, 1999. This table is based on, and is qualified in its entirety by,
our historical consolidated financial statements, including the related notes
thereto, which are included in documents incorporated by reference herein, and
should be read in conjunction therewith.
September 30,
1999
-----------------------
(amounts in thousands)
Long-term debt (1) $5,000
Capitalized lease obligations -
Stockholders' equity:
6% cumulative convertible preferred
stock, $.01 par value, 500,000 shares
authorized, 13,621 shares outstanding -
Common stock, $.01 par value, 5,000,000
shares authorized, 1,610,673 shares
outstanding 16
Capital in excess of par value 15,724
Retained earnings 7,158
Accumulated other comprehensive
income (loss) (1,093)
Treasury stock, at cost (471)
Total stockholders' equity 21,334
Total capitalization $26,334
(1) Federal Home Loan Bank Advances
Consolidated capital ratios:
Equity to assets 7.42%
Tier I capital 11.86%
Total capital 13.06%
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<PAGE>
ACCOUNTING TREATMENT
The financial statements of the trust will be consolidated into our
consolidated financial statements, with the capital securities treated as debt
and shown in our consolidated balance sheet as "long term debt." The
distributions payable on the capital securities will be treated as interest
expense in the consolidated statements of income. Our financial statement
footnotes will reflect that the sole asset of the trust will be the amount of
the junior subordinated debt securities maturing on____ 15, 2030. All future
reports we file under the Securities Exchange Act of 1934 will present
information regarding the trust and any other similar trusts in the manner
described above.
REGULATORY TREATMENT
As a registered bank holding company, we are required by the Federal
Reserve to maintain certain levels of capital for bank regulatory purposes. We
expect that the capital securities will be treated as "Tier 1 Capital" for such
purposes; provided that the capital securities can only comprise 25% of our Tier
1 Capital. Based on our pro forma Tier 1 Capital at September 30, 1999,
approximately $10.2 million of the capital securities would be initially
included in Tier 1 Capital. To the extent that the capital securities are not
included in our Tier 1 Capital, they will be included in our Tier 2 Capital.
BUSINESS
General
Southern Financial is incorporated in Virginia. On December 1, 1995,
Southern Financial acquired all of the outstanding shares of Southern Financial
Bank. Southern Financial Bank, formerly Southern Financial Federal Savings Bank,
converted from a savings bank to a state chartered commercial bank effective
December 1, 1995. The only material activity of Southern Financial is to own and
control all of the capital stock of Southern Financial Bank. References to
Southern Financial include the activities of Southern Financial Bank.
Headquartered in Warrenton, Virginia, Southern Financial serves the
retail and commercial financial market as a deposit and loan specialist from 17
full service offices located in Warrenton, Herndon, Middleburg, Winchester,
Leesburg, Fairfax, Sterling, Woodbridge, Manassas and Fredericksburg, Virginia.
Southern Financial's defined market area forms a semi-circle to the west of the
metropolitan Washington, D.C. area roughly centered on Warrenton. The counties
included in the defined market area where Southern Financial currently operates
branches include: Loudoun, Fauquier, Fairfax, Frederick and Prince William and
the cities of Fredericksburg and Winchester. Other counties in the defined
market area include: Spotsylvania, Culpeper, Rappahanock, Clarke and the three
counties in the West Virginia panhandle.
The inner ring of the semi-circle that comprises Southern Financial's
market area is the bedroom community for the close-in greater metropolitan
Washington commercial centers that have grown up in northern Virginia in the
past 30 years. As the economy of the metropolitan Washington area has
diversified away from its concentration in government and government-related
employment, the Dulles corridor has developed into a major center for
communication and high-tech activities. In the process, Reston, Herndon, Tysons
Corner and Fairfax have become important employment centers in their own right
much as Stamford, Connecticut and White Plains, New York have done outside
Manhattan. As a consequence, the commutable radius has pushed west out to
Loudoun and Fauquier Counties and south and southwest to Stafford, Spotsylvania
and Prince William Counties. The branch locations in these areas situate
Southern Financial to take advantage of the rapid economic growth of these
communities.
-17-
<PAGE>
The principal business of Southern Financial is the acquisition of
deposits from the general public through its home and branch offices and use of
these deposits to fund its loan and investment portfolios. Southern Financial
seeks to be a full service community bank which provides a wide variety of
financial services to its middle market corporate clients as well as to its
retail clients. Southern Financial is an active commercial lender that often
lends in conjunction with the SBA 7(a) and 504 loan programs. In addition,
Southern Financial is an active residential construction lender and offers its
retail clients permanent residential mortgage loan alternatives. Southern
Financial also invests funds in mortgage-backed securities, securities issued by
agencies of the Federal Government, obligations of counties and municipalities
and corporate obligations.
The principal sources of funds for Southern Financial's lending and
investment activities are deposits, amortization and repayment of loans,
proceeds from the sales of loans, prepayments from mortgage-backed securities,
repayments of maturing investment securities, Federal Home Loan Bank advances
and other borrowed money.
Principal sources of revenue are interest and fees on loans and
investment securities and gains from the sale of loans, as well as fee income
derived from the maintenance of deposit accounts. Southern Financial's principal
expenses include interest paid on deposits and advances from the Federal Home
Loan Bank and other borrowings, and operating expenses.
Lending Activities
Our lending focus and the composition of our loan portfolio have
changed dramatically since June 30, 1995. The growth of our loan portfolio and
the change in its composition reflects our growth strategy and the conversion of
Southern Financial Bank from a savings association to a commercial bank. On June
30, 1995, residential mortgage loans represented 43% of gross loans. By
September 30, 1999, residential mortgage loans had declined to 15% of gross
loans. In contrast, commercial business loans and non-residential mortgage loans
were 31% and 9% of gross loans at June 30, 1995. By September 30, 1999 they had
grown to 54% and 20%, respectively, of gross loans.
Today, the principal lending activity of Southern Financial is the
origination of commercial mortgage and non-mortgage loans to small and
medium-sized businesses, including loans through various lending programs of the
SBA. Southern Financial is a Preferred Lender in the Richmond District of SBA
and a Certified Lender in the Washington, D.C. District of SBA.
Southern Financial also makes residential mortgage loans, consumer
loans and construction loans.
Commercial Real Estate Lending
At September 30, 1999, commercial real estate loans totaled $97.3
million, of which $86.0 million were permanent loans and $11.2 million were
construction loans. Of Southern Financial's permanent commercial real estate
loans, $44.8 million were made under the SBA 7(a) and 504 loan programs. The SBA
7(a) and 504 loan programs are economic development programs. The SBA in
cooperation with banks and other lending institutions, finances the expansion of
small businesses.
The 504 loan program is used to finance long-term fixed assets,
primarily real estate and large/heavy equipment. The 504 loan program is an
economic development program designed to create new jobs or retain existing
jobs. The credit structure of the 504 loan program gives borrowers access to 90%
financing for the project. Fifty percent is provided by the financial
institution (in the form of a first lien position) and 40% is provided by the
certified development company (the 504 representative) with a second lien
position. The borrower provides the remaining 10% of the funds required for the
project. Of Southern Financial's $86.0 million in permanent commercial real
estate loans at September 30, 1999, $41.6 million were 504 loans. During the
nine months ended September 30, 1999, Southern Financial originated $6.3 million
in loans under the 504 loan program.
-18-
<PAGE>
SBA 7(a) loans may be used for the purchase of real estate,
construction, renovation or leasehold improvements, as well as machinery,
equipment, furniture, fixtures, inventory, and in some instances, working
capital and debt refinance. Start-up businesses are eligible. The SBA guarantees
up to 80% of the loan balance under the 7(a) program. At September 30, 1999,
Southern Financial had $3.2 million in SBA 7(a) permanent commercial real estate
loans.
Southern Financial also offers an extensive array of commercial real
estate loans outside of SBA programs. These loans, which totaled $41.2 million
at September 30, 1999, serve both the investor and owner occupied facility
market. These loans are secured by real estate with loan-to-values averaging
less than 70%.
Southern Financial is involved in financing the construction phase of
small business projects prior to the project being approved by the SBA. To a
lesser extent, Southern Financial also provides commercial construction
financing for projects outside of the SBA programs.
Commercial Business Lending
In general, commercial business loans involve somewhat more credit risk
than do residential mortgage loans and real estate backed commercial loans and,
therefore, usually yield a higher return to Southern Financial. The increased
credit risk for commercial business loans is due to the type of collateral
securing these loans. The increased risk also derives from the expectation that
commercial loans generally will be serviced principally from the business
operations conducted, and such operations may not be successful and, hence, may
lead to default on the loan. Historical trends have shown these types of loans
to have higher delinquencies than mortgage loans. Therefore, Southern Financial
utilizes the SBA 7(a) loan program to reduce the inherent risk associated with
this type of lending. At September 30, 1999, Southern Financial had $32.9
million in commercial business loans, which represent 20% of Southern
Financial's total loans receivable. Of our $32.9 million in commercial business
loans, 43.3% ($14.3 million) are SBA 7(a) loans. During the nine months ended
September 30, 1999, Southern Financial originated and closed $10.0 million in
loans under the SBA 7(a) loan program and sold $5.8 million on the secondary
market.
Residential Lending
Southern Financial makes fixed and adjustable rate, first mortgage
loans with terms up to 30 years. It offers second mortgages in conjunction with
its own first mortgages or those of other lenders. Southern Financial makes
construction loans and permanent loans on individual single family residences
and on other residential properties. Construction loans generally have interest
rates of prime plus one to two percent and fees of one to three points,
loan-to-value ratios of 80% or less based on current appraisals and terms of
generally nine months or less. In the case of conventional loans, Southern
Financial typically lends up to 80% of the appraised value of single-family
residences. Southern Financial requires private mortgage insurance for loans
exceeding 80% of the appraised value.
Residential mortgage loans are secured by single-family homes. At
September 30, 1999, loans secured by residential property, both permanent and
construction, totaled $27.7 million, which represented approximately 17% of
total loans receivable. Approximately 15% of the total loans receivable
consisted of loans secured by permanent mortgages on one-to-four family
residential property.
Consumer Lending
Southern Financial offers various types of secured and unsecured
consumer loans. These loans are offered as a convenience to its customer base
since these products are not the focus of Southern Financial's lending
activities. At September 30, 1999, Southern Financial had $2.4 million in
consumer loans which represents 2.0% of the total loans receivable.
-19-
<PAGE>
Income from Lending Activities
Interest on loans, gains on sale of loans, and loan fees and service
charges amounted to approximately 64% of Southern Financial's total revenue for
the year ended December 31, 1998. Income from loan origination fees and other
fees are sources of income which vary with the volume and type of loans and
commitments made and with competitive and economic conditions.
Loan Portfolio Composition
The following table sets forth the composition of Southern Financial's
loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1999 1998
----------------------------- ----------------------------
Amount Percent Amount Percent
(amounts in thousands)
<S> <C> <C> <C> <C>
Mortgage:
Residential $ 23,933 15% $ 26,623 20%
Nonresidential 86,017 54% 63,799 49%
Construction:
Residential 3,729 2% 4,710 4%
Nonresidential 11,244 7% 8,189 6%
----------------------------- ----------------------------
Total Mortgage 124,923 78% 103,321 79%
----------------------------- ----------------------------
Nonmortgage:
Business 32,899 20% 24,660 19%
Consumer 2,417 2% 2,416 2%
----------------------------- ----------------------------
Total Nonmortgage 35,316 22% 27,076 21%
----------------------------- ----------------------------
Gross Loans 160,239 100% 130,397 100%
Less:
Deferred Fees 764 757
Allowance for Loan Losses 2,262 2,173
----------- -----------
Total Loans Receivable, Net $ 157,213 $ 127,467
=========== ==========
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
At December 31, At June 30,
1998 1997 1996 1995 1995
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage:
Residential $ 26,046 19% $ 30,421 24% $ 35,033 32% $ 37,583 35% $ 40,123 43%
Nonresidential 64,890 48% 57,160 43% 46,549 42% 36,742 35% 29,216 31%
Construction:
Residential 5,185 4% 6,534 5% 5,616 5% 8,516 8% 8,460 9%
Nonresidential 11,214 8% 13,161 10% 7,510 7% 11,029 10% 5,941 6%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Mortgage 107,335 80% 107,276 82% 94,708 86% 93,870 88% 83,740 89%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Nonmortgage:
Business 24,773 18% 21,253 16% 12,198 11% 9,265 9% 7,601 9%
Consumer 2,425 2% 3,093 2% 3,294 3% 2,761 3% 2,238 2%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Nonmortgage 27,198 20% 24,346 18% 15,492 14% 12,026 12% 9,839 11%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross Loans 134,533 100% 131,622 100% 110,200 100% 105,896 100% 93,579 100%
Less:
Deferred Fees 837 627 412 455 442
Allowance for Loan Losses 2,051 2,037 1,501 1,190 1,057
-------- -------- -------- -------- --------
Total Loans Receivable, Net $131,645 $128,958 $108,287 $104,251 $ 92,080
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the scheduled maturity of selected loans
as of September 30, 1999:
<TABLE>
<CAPTION>
Over 1 Year
Through 5 Years Over 5 years
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------------- ------------- ------------- ------------- ------------- -------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Construction:
Residential $ 3,729 - - - - $ 3,729
Nonresidential 11,244 - - - - 11,244
Business 15,837 2,952 4,116 4,450 5,544 32,899
------------- ------------- ------------- ------------- ------------- -------------
Total $ 30,810 $ 2,952 $ 4,116 $ 4,450 $ 5,544 $ 47,872
============= ============= ============= ============= ============= =============
</TABLE>
Loan Underwriting Policies
Because future loan losses are so closely intertwined with its
associated underwriting policy, Southern Financial has instituted what it
believes is a stringent loan underwriting policy. Its underwriting guidelines
are tailored for particular credit types, including lines of credit, revolving
credit facilities, demand loans, term loans, equipment loans and leases, real
estate loans, SBA loans, stand-by letters of credit and unsecured loans.
-21-
<PAGE>
More specifically, it is Southern Financial's policy to encourage all
loan applicants for sound and lawful purposes, regardless of race, religion or
creed. Extensions of credit will be made if the criteria of
creditworthiness, likelihood of repayment and proximity to market areas served
indicate that such extensions of credit will provide acceptable profitability to
Southern Financial.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. All property valuations are performed by independent outside
appraisers who are reviewed by the Vice President of Real Estate Lending who
reports his findings annually to Southern Financial's board of directors.
It is Southern Financial's policy to retain a mortgage creating a valid
lien on real estate and to obtain a title insurance policy that insures the
property is free of encumbrances. Also required from the borrower is hazard
insurance, and flood insurance is required if the property is in a flood plain
as designated by the Department of Housing and Urban Development. Most borrowers
are also required to advance funds on a monthly basis from which Southern
Financial makes disbursements for items such as real estate taxes, private
mortgage insurance (required when the loan to value ratio exceeds 80%) and
hazard insurance.
The aggregate amount of loans that Southern Financial may make to one
borrower is limited to 15% of Southern Financial's unimpaired capital and
surplus. The maximum amount of loans that Southern Financial could have made to
one borrower as of September 30, 1999 was approximately $3.2 million based on
15% of its unimpaired capital and surplus. As of September 30, 1999, the largest
aggregate amount of such loans by Southern Financial to any one borrower was
$2.8 million.
Interest rates charged by Southern Financial are affected primarily by
competitive market factors. These factors include general economic conditions,
monetary policies of the Federal Reserve Bank, legislative tax policies and
government budgetary matters.
The Credit Committee of the Board consists of three outside members of
the board of directors and the Chief Executive Officer and is responsible for
the qualitative review of the loan portfolio and for assuring compliance with
all of the board's policies and procedures as well as all applicable state and
federal laws, rules and regulations.
Southern Financial has a standing credit committee comprised of
officers, in which the members have defined lending authorities as individuals
and in combination. These individual lending authorities are determined by the
Chief Executive Officer and approved by the Board based on the individual's
technical ability and must be agreed to by the Credit Committee. All authorities
are reviewed and approved by the full board of directors.
When a borrower fails to make a required payment, Southern Financial
attempts to cause the deficiency to be cured by contacting the borrower. After
17 days, a reminder notice is sent indicating that a late charge has been
levied. After 30 days delinquency, the borrower is contacted by phone and
responses are documented. After 90 days, if the loan has not been brought
current or an acceptable arrangement is not worked out with the borrower,
Southern Financial will institute measures to remedy the default, including
commencing foreclosure action with respect to mortgage loans and repossessions
of collateral in the case of consumer loans.
If foreclosure is effected, the property is sold at a public auction in
which Southern Financial may participate as a bidder. If Southern Financial is
the successful bidder, the acquired real estate property is then included in its
real estate owned account until it is sold. Such assets are carried at the lower
of cost or fair value net of estimated selling costs. To the extent there is a
decline in value, that amount is charged to operating expense.
-22-
<PAGE>
Past Due Loans and Nonperforming Assets
The following table sets forth information regarding past due loans and
nonperforming assets as of the periods indicated:
<TABLE>
<CAPTION>
At September 30, At December 31, At June 30,
---------------- --------------- -----------
1999 1998 1998 1997 1996 1995 1995
------------ ------------ ----------- ----------- ------------ ----------- -----------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Accruing Loans 90 Days
or More Delinquent
Residential $ 61 $ - $ - $ - $ - $ 878 $ 607
Nonresidential - 278 - - 28 - 196
Business 324 444 225 1 - - -
Consumer 11 11 11 - - 3 2
----------- ------------ ------------ ----------- ------------ ----------- -----------
Total 396 733 236 1 28 881 805
=========== ============ ============ =========== ============ =========== ===========
Nonperforming Loans
Residential 323 374 291 443 321 541 -
Nonresidential 294 161 1,033 1,002 1,257 - -
Business - - 659 - 49 - 39
Consumer - - - - 7 50 15
----------- ------------ ------------ ----------- ------------ ----------- -----------
Subtotal 617 535 1,983 1,445 1,634 591 54
----------- ------------ ------------ ----------- ------------ ----------- -----------
Real Estate Owned
Residential - 234 72 176 340 357 387
Nonresidential 2,124 - - - - - -
----------- ------------ ------------ ----------- ------------ ----------- -----------
Total Nonperforming Assets $ 2,741 $ 769 $ 2,055 $ 1,621 $ 1,974 $ 948 $ 441
=========== ============ ============ =========== ============ =========== ============
Nonperforming Assets
To Total Assets 0.95% 0.31% 0.91% 0.72% 1.03% 0.58% 0.28%
=========== ============ ============ =========== ============ =========== ===========
</TABLE>
Southern Financial's loss and delinquency experience on its residential
real estate loan portfolio has been limited by a number of factors, including
its underwriting standards. Whether Southern Financial's loss and delinquency
experience will increase significantly depends upon the value of the real estate
securing its loans, economic factors such as an increase in unemployment as well
as the overall economy of the region. As a result of economic conditions and
other factors beyond its control, Southern Financial's future loss and
delinquency experience cannot be accurately predicted. However, management has
provided an allowance for loan losses which it believes will be adequate to
absorb future losses.
At September 30, 1999, loans totaling $2.3 million were classified as
potential problem loans that are not reported in the table above. The loans are
subject to management attention and their classification is reviewed on a
quarterly basis. At September 30, 1999, all of the potential problem loans were
adequately secured in the opinion of management.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance at least quarterly.
As a result of that process, loans are categorized as to doubtful, substandard
and/or special mention. Each quarter the board of directors considers a review
of the loans in Southern Financial's portfolio, conducts an evaluation of the
credit quality and reviews the adequacy of the loan loss provision, recommending
changes as may from time to time be required. In establishing the appropriate
classification for specific assets, management takes into account, among other
factors, the estimated value of the
-23-
<PAGE>
underlying collateral, the borrower's ability to repay, the borrower's payment
history and the current delinquent status. The remaining loan portfolio is
evaluated for potential loss exposure by examining the growth and composition of
the portfolio, previous loss experience, current delinquency levels, industry
concentration and the general economic condition.
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio
in the normal course of business. However, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because those risks include general economic trends as well as
conditions affecting individual borrowers, management's judgement of the
allowance necessary is approximate. Southern Financial performs a detailed loan
review, including an assessment of the adequacy of the allowance for loan
losses. The allowance is also subject to regulatory examinations and
determination as to the adequacy of the allowance in comparison to peer
institutions identified by the regulatory agencies.
The following table summarizes activity in Southern Financial's
allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Six Months
Nine Months Ended Year Ended Ended Year Ended
September 30, December 31, December 31, June 30,
1999 1998 1998 1997 1996 1995 1995
--------- --------- --------- --------- --------- --------- ---------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at Beginning of Period $ 2,051 $ 2,037 $ 2,037 $ 1,501 $ 1,190 $ 1,057 $ 1,008
Provision for Losses 925 675 975 880 695 150 60
Charge-offs:
Residential - (141) (221) (65) (8) - -
Nonresidential (480) (261) (261) (200) (300) - -
Business (427) (142) (492) (77) (38) (16) -
Consumer (12) (3) (3) (27) (43) (1) (11)
--------- --------- --------- --------- --------- --------- ---------
Total Charge-offs (919) (547) (977) (369) (389) (17) (11)
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
Residential 1 - - 12 - - -
Nonresidential 200 - - - - - -
Business 4 5 13 6 3 - -
Consumer - 3 3 7 2 - -
--------- --------- --------- --------- --------- --------- ---------
Total Recoveries 205 8 16 25 5 - -
--------- --------- --------- --------- --------- --------- ---------
Net Charge-offs (714) (539) (961) (344) (384) (17) (11)
--------- --------- --------- --------- --------- --------- ---------
Allowance at End of Period $ 2,262 $ 2,173 $ 2,051 $ 2,037 $ 1,501 $ 1,190 $ 1,057
========= ========= ========= ========= ========= ========= =========
Loans at End of Period $ 159,475 $ 129,640 $ 133,696 $ 130,995 $ 109,788 $ 105,441 $ 93,137
Ratio of Allowance to Loans 1.42% 1.68% 1.53% 1.56% 1.37% 1.13% 1.13%
</TABLE>
-24-
<PAGE>
The following table summarizes the composition of the Allowance for
Loan Losses.
At September 30,
1999 1998
Amount Percent Amount Percent
------ ------- ------ -------
Mortgage: (amounts in thousands)
Residential $ 80 3.54% $ 105 4.85%
Nonresidential 834 36.87% 861 39.64%
Construction:
Residential 15 0.68% 19 0.88%
Nonresidential 46 2.04% 34 1.55%
Nonmortgage:
Business 637 28.15% 437 20.11%
Consumer 33 1.45% 38 1.73%
Unallocated 617 27.27% 679 31.24%
------ ------- ------ ------
Allowance for Loan Losses $2,262 100.00% $2,173 100.00%
====== ======= ====== ======
<TABLE>
<CAPTION>
At December 31, At June 30,
1998 1997 1996 1995 1995
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage:
Residential $ 68 3% $ 140 7% $ 152 10% $ 413 35% $ 79 7%
Nonresidential 751 37% 1,162 57% 708 47% 249 22% 188 19%
Construction:
Residential 21 1% 27 1% 23 2% 123 10% 254 24%
Nonresidential 46 2% 43 2% 131 9% 133 11% 227 21%
Nonmortgage:
Business 687 33% 438 22% 382 25% 219 18% 262 25%
Consumer 38 2% 41 2% 105 7% 53 4% 47 4%
Unallocated 440 21% 186 9% - -% - -% - -%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Allowance for Loan Losses $2,051 100% $2,037 100% $1,501 100% $1,190 100% $1,057 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Southern Financial has allocated the allowance according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within each of the above categories of loans. These figures are based
on gross loans. The allocation of the allowances as shown in the table above
should not be interpreted as an indication that loan losses in future years will
occur in the same proportions or that the allocation indicates future loan loss
trends. Furthermore, the portion allocated to each loan category is not the
total amount available for future losses that might occur within such categories
since the total allowance is a general allowance applicable to the entire
portfolio.
-25-
<PAGE>
Investment Activities
The following table sets forth the investment portfolio as of the
periods indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
(at estimated fair value)
FHLMC preferred stock $ - $ 3,827 $ 3,808 $ 3,866 $ 4,310
FHLMC MBS 7,741 12,035 11,996 - -
GNMA MBS 2,779 5,221 3,826 - -
FNMA MBS 16,892 16,359 29,671 782 903
Collateralized mortgage obligations 26,337 - 1,527 - -
Commercial MBS 23,025 2,007 18,044 - -
Obligations of counties and municipalities 3,625 4,780 3,234 - -
Corporate obligations 946 1,017 989 - -
U.S. Treasury securities 476 - - - -
U.S. Government agency obligations - - 949 - -
------- ------- ------- ------- -------
$81,821 $45,246 $74,044 $ 4,648 $ 5,213
======= ======= ======= ======= =======
Held-to-maturity securities:
(at amortized cost)
FHLMC MBS $ 3,064 $ 4,308 $ 4,091 $ 6,078 $ 7,300
GNMA MBS 18,230 31,263 24,305 42,471 27,388
FNMA MBS 5,249 21,448 6,780 27,075 21,982
Collateralized mortgage obligations - 1,387 1,015 4,203 6,547
Obligations of counties and municipalities 1,959 1,960 1,960 - -
U.S. Government agency obligations - - - 642 2,000
------- ------- ------- ------- -------
$28,502 $60,366 $38,151 $80,469 $65,217
======= ======= ======= ======= =======
</TABLE>
Source of Funds
Deposits
Deposit accounts have been the primary source of funds for use in
lending, making other investments, and for other general business purposes. In
addition to deposits, Southern Financial obtains funds from loan repayments,
maturing investments, loan sales, cash flows generated from operations and
Federal Home Loan Bank advances. Borrowings may be used as an alternative source
of lower costing funds or to fund the origination of certain assets.
-26-
<PAGE>
The following tables show the average balances and rates (presented on
a monthly average basis) for Southern Financial's deposits for the periods
indicated:
(amounts in thousands) September 30, 1999
Average Average
Balance Rate
Demand $ 22,263 0.00%
Interest checking 18,968 0.76%
Money market and savings 30,419 2.72%
Certificates of deposit 165,445 5.29%
---------
$237,095
Weighted average rate 4.10%
====
<TABLE>
<CAPTION>
Year Ended December 31,
(amounts in thousands) 1998 1997 1996
--------------------------- -------------------------- ---------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 16,315 0.00% $ 9,878 0.00% $ 6,658 0.00%
Interest checking 17,479 1.22% 15,720 1.18% 14,755 1.44%
Money market and savings 25,369 3.05% 22,834 3.33% 21,066 3.37%
Certificates of deposit 155,208 5.76% 135,863 5.71% 115,672 5.63%
-------------- -------------- --------------
Total $ 214,371 $ 184,295 $ 158,151
============== ============== ==============
Weighted average rate 4.63% 4.73% 4.70%
========== ========== ==========
</TABLE>
-27-
<PAGE>
The following table sets forth by time remaining until maturity
Southern Financial's certificates of deposit of $100,000 or more at September
30, 1999:
Time Deposits of
Maturity Period $100,000 or More
- --------------------------------------- ---------------------------
(amounts in thousands)
Three months or less $ 40,859
Over three months through twelve months 18,377
Over twelve months 3,574
---------------------------
Total $ 62,810
===========================
Borrowings
Borrowings consist of short-term and long term advances from the
Federal Home Loan Bank of Atlanta. The following table sets forth information
regarding Southern Financial's borrowings for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Ending Balance $ 27,000 $ - $ 3,500 $ 4,000 $ 8,500
Average Balance for the Period 10,458 3,807 4,907 5,979 6,077
Maximum Month-end Balance
During the Period 27,000 11,000 13,500 8,500 12,000
Average Interest Rate for the Period 5.35% 5.68% 5.50% 5.59% 5.63%
Weighted Average Interest Rate at
the End of the Period 5.86% - 5.15% 5.95% 6.57%
</TABLE>
Regulation
Set forth below is a brief description of certain laws and regulations
that relate to the regulation of Southern Financial. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
General
Southern Financial is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended. As such, Southern Financial is
supervised by the Board of Governors of the Federal Reserve System and is
required to file reports with the Federal Reserve and provide such additional
information as the Federal Reserve may require. Southern Financial is also
subject to Virginia laws regarding financial institution holding companies and
financial institutions, respectively, as administered by the Bureau of Financial
Institutions of the State Corporation Commission of Virginia. Southern Financial
is also affected by rules and regulations of the Federal Deposit Insurance
Corporation ("FDIC"). Southern Financial is a member of the Federal Reserve
System and the
-28-
<PAGE>
Federal Home Loan Bank of Atlanta. The various laws and regulations administered
by the regulatory agencies affect corporate practices, expansion of business,
and provisions of services. Also, monetary and fiscal policies of the United
States directly affect bank loans and deposits and thus may affect Southern
Financial's earnings. The future impact of these policies and of the continuing
regulatory changes in the financial services industry cannot be predicted.
FDIC Regulations
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), which
became law in December 1991, required each federal banking agency to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
non-traditional activities. In addition, pursuant to FDICIA, each federal
banking agency has promulgated regulations, specifying the levels at which a
financial institution would be considered "well capitalized", "adequately
capitalized", "under capitalized", "significantly under capitalized", or
"critically under capitalized", and to take certain mandatory and discretionary
supervisory actions based on the capital level of the institution.
Under the Federal Reserve's regulations implementing the prompt
corrective action provisions, an institution shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10% or more, has a Tier I
risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier I
risk-based ratio of 4% or more and a leverage capital ratio of 4% or more (3%
under certain circumstances) and does not meet the definition of "well
capitalized", (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier I risk-based capital ratio that is less than
4% or a leverage capital ratio that is less than 4% (3% in certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio
that is less than 3% or a leverage capital ratio that is less than 3% and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%. In addition, under certain
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). Immediately upon becoming undercapitalized, or upon failing
to submit or implement a capital plan as required, an institution shall become
subject to various regulatory restrictions.
FDICIA also contained the Truth in Savings Act, which requires certain
disclosures to be made in connection with deposit accounts offered to consumers.
The Federal Reserve has adopted regulations implementing the provisions of the
Truth in Savings Act.
In addition, significant provisions of FDICIA required federal banking
regulators to draft standards in a number of other important areas to assure
bank safety and soundness, including internal controls, information systems and
internal audit systems, credit underwriting, asset growth, compensation, loan
documentation and interest rate exposure. FDICIA also required the regulators to
establish maximum ratios of classified assets to capital, and minimum earnings
sufficient to absorb losses without impairing capital. The legislation also
contained other provisions which restricted the activities of state-chartered
banks, amended various consumer banking laws, limited the ability of "under
capitalized" banks to borrow from the Federal Reserve's discount window, and
required federal banking regulators to perform annual onsite bank examinations
and set standards for real estate lending.
Regulatory Capital Requirement
All depository institutions are required to maintain minimum levels of
regulatory capital. The federal bank regulatory agencies have established
substantially similar risked based and leverage capital standards for financial
institutions that they regulate. These regulatory agencies also may impose
capital requirements in excess of these standards on a case-by-case basis for
various reasons, including financial condition or actual or anticipated growth.
Under the risk-based capital requirements of these regulatory agencies, Southern
Financial and its bank subsidiary is
-29-
<PAGE>
required to maintain a minimum ratio of total capital to risk-weighted assets of
at least 8%. At least half of the total capital is required to be "Tier 1
capital," which consists principally of common and certain qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. The
remainder ("Tier 2 capital") consists of a limited amount of subordinated and
other qualifying debt (including certain hybrid capital instruments) and a
limited amount of the general loan loss allowance. Based upon the applicable
Federal Reserve regulations, at September 30, 1999, Southern Financial Bank was
considered to be "well capitalized."
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Deposit Insurance
The deposits of each of Southern Financial are currently insured to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC has implemented a risk-related assessment system for deposit insurance
premiums. All depository institutions have been assigned to one of nine risk
assessment classifications based on certain capital and supervisory measures.
Southern Financial's deposits are subject to the rates of the Savings
Associations Insurance Fund ("SAIF") since Southern Financial converted to a
commercial bank from a federal savings bank on December 1, 1995. Based on its
current risk classifications, Southern Financial pays the minimum SAIF
assessment and BIF assessment, respectively.
Federal Home Loan Bank System
Southern Financial is a member of the Federal Home Loan Bank System,
which consists of 12 district Federal Home Loan Banks with each subject to
supervision and regulation by the Federal Housing Finance Board. The Federal
Home Loan Banks provide a central credit facility for member institutions.
Southern Financial, as a member of the Federal Home Loan Bank of Atlanta, is
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount equal to at least 1% of the aggregate principal amount of
their unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of their advances (borrowings)
from the Federal Home Loan Bank of Atlanta, whichever is greater. At December
31, 1998, Southern Financial had an investment of $1.1 million in the stock of
the Federal Home Loan Bank of Atlanta and was in compliance with these
requirements.
Advances from the Federal Home Loan Bank of Atlanta are secured.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the Federal Home Loan Bank of Atlanta and the purpose of the borrowing.
At December 31, 1998, Southern Financial had $3.5 million outstanding in
borrowings from the Federal Home Loan Bank of Atlanta.
Federal Reserve System
The Federal Reserve Board of Governors requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. Because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of each of Southern
Financial.
-30-
<PAGE>
Competition
Southern Financial experiences substantial competition in attracting
and retaining savings deposits and in lending funds. The primary factors in
competing for savings deposits are convenient office locations and rates
offered. Direct competition for savings deposits comes from other commercial
banks and thrift institutions. Additional significant competition for savings
deposits comes from money market mutual funds and corporate and government
securities which may yield more attractive interest rates than insured
depository institutions are willing to pay. The primary factors in competing for
loans are interest rate and loan origination fees and the range of services
offered. Competition for origination of real estate loans normally comes from
other commercial banks, thrift institutions, mortgage bankers, mortgage brokers
and insurance companies.
Employees
At September 30, 1999, Southern Financial employed 99 full-time
equivalent persons. Management considers its relations with its employees to be
good. The employees are not covered by a collective bargaining agreement.
Offices and Other Material Properties
At December 31, 1999, Southern Financial conducted its business from
its main office in Warrenton, Virginia and 16 branch offices. The following
table sets forth certain information with respect to the offices of Southern
Financial as of December 31, 1999:
<TABLE>
<CAPTION>
Owned or Lease Expiration Date Facility
Office Location Leased Date Opened
--------------- ------ ---- ------
<S> <C> <C> <C>
Home Office:
37 E. Main Street Leased September February
Warrenton, VA 2003 1989
Branch Offices:
362 Elden Street Leased June April
Herndon, VA 2000 1986
101 W. Washington Street Leased June November
Middleburg, VA 2002 1987
33 W. Piccadilly Street Owned N/A November
Winchester, VA 1990
526 E. Market Street Leased June March
Leesburg, VA 2002 1992
4021 University Drive Owned N/A July
Fairfax, VA 1997
322 Lee Highway Leased August August
Warrenton, VA 2001 1994
2545 Q-18 Centreville Road Leased September April
Herndon, VA 2001 1995
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<PAGE>
Owned or Lease Expiration Date Facility
Office Location Leased Date Opened
--------------- ------ ---- ------
13542 Minnieville Road Leased December April
Woodbridge, VA 2003 1995
1095 Millwood Pike Owned N/A July
Winchester, VA 1996
46910 Community Plaza Leased May April
Sterling, VA 2008 1998
2062 Plank Road Leased September January
Fredericksburg, VA 2016 1999
10175 Hastings Drive Leased September March
Manassas, VA 2004 1999
8414 Lee Highway Owned N/A October
Merrifield, VA 22033 1990
527 Maple Avenue Leased February March
Vienna, VA 22180 2005 1995
9720 Lee Highway Leased June July
Fairfax, VA 22031 2006 1996
7857 Heritage Drive Leased April May
Annandale, VA 2008 1998
</TABLE>
Legal Proceedings
Southern Financial is not a party to, nor is any of their property the
subject of, any material pending legal proceedings incidental to its business
other than those arising in the ordinary course of business. Although the amount
of any ultimate liability with respect to such matters cannot be determined, in
the opinion of management, any such liability will not have a material adverse
effect on the consolidated financial position or results of operations of
Southern Financial.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Southern Financial's net income was $2.3 million for the nine months
ended September 30, 1999, compared to $2.0 million for the nine months ended
September 30, 1998, an increase of $289,000, or 14.7%. Diluted earnings per
share were $1.34 and $1.14 for the nine months ended September 30, 1999 and
1998, respectively. The weighted average number of diluted shares of common
stock outstanding were 1,684,557 and 1,715,787 for the same periods in 1999 and
1998, respectively.
Net income for the year ended December 31, 1998, was a record $2.7
million ($1.55 diluted earnings per share), an increase of 21% over earnings of
$2.2 million ($1.33 diluted earnings per share) for the year ended December 31,
1997. Total assets increased 14% to $258.8 million at December 31, 1998, from
$226.6 million at December 31, 1997. Total loans outstanding and loans held for
sale increased to $132.2 million from $130.4 million at December 31, 1997.
Investment securities rose from $85.2 million at December 31, 1997, to $112.6
million at
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<PAGE>
December 31, 1998, an increase of 32%. Deposits increased 15%, rising to $231.9
million at December 31, 1998, from $202.2 million at December 31, 1997. Since
December 31, 1997, the number of deposit accounts has increased from 22,319 to
23,382, or 5%.
Balance sheet. Total assets of Southern Financial at September 30, 1999
were $287.7 million, an increase of $28.9 million, or 11.2%, from total assets
of $258.8 million at December 31, 1998. Total liabilities increased by $28.5
million, or 12%, to $266.4 million at September 30, 1999 from $237.9 million at
December 31, 1998. The growth in total assets resulted primarily from an
increase of $25.6 million in loans receivable from December 31, 1998 to
September 30, 1999.
Total assets were $258.8 million at December 31, 1998, an increase of
$32.2 million, or 14.2%, from $226.6 million at December 31, 1997. This growth
was due to an increase in investment securities of $27.4 million, or 32.2%, to
$112.6 million at December 31, 1998 from $85.2 million at December 31, 1997, and
an increase in loans receivable of $2.7 million, or 2.1%, to $131.6 million at
December 31, 1998 from $129 million at December 31, 1997. Total liabilities
increased $29.9 million, or 14.4%, to $237.9 million at December 31, 1998 from
$208.1 million at December 31, 1997.
Loans. Total loans receivable increased by $25.6 million to $157.2
million at September 30, 1999 from $131.6 million at December 31, 1998, as new
loan originations more than offset loan sales and prepayments of residential
mortgage loans during the period. In this period Southern Financial sold the
guaranteed portion of some of the Small Business Administration (SBA) loans that
it held in portfolio. These sales totaled $5.8 million. Non-residential
permanent mortgage loans increased by $21.1 million to $86 million at September
30, 1999, from $64.9 million at December 31, 1998. Non-mortgage business loans
increased $8.1 million to $32.9 million at September 30, 1999, from $24.8
million at December 31, 1998. Residential construction loans decreased $1.5
million from $5.2 million at December 31, 1998, to $3.7 million at September 30,
1999. Residential permanent mortgage loans decreased $2.1 million from $26
million at December 31, 1998, to $23.9 million at September 30, 1999.
Loans receivable, net of deferred fees and allowance for losses, were
$131.6 million at December 31, 1998, an increase of $2.7 million, or 2.1%, from
$128.9 million at December 31, 1997. During the year ended December 31, 1998,
Southern Financial continued to emphasize loan originations connected with
various lending programs of the SBA. In addition, Southern Financial sold for
the first time the guaranteed portion of some of its SBA loans. These sales
totaled $8.2 million. Also during 1998, new mortgage loan originations did not
fully offset sales and prepayments of residential mortgage loans. As a result,
the growth in the loan portfolio occurred in non-mortgage business loans, which
increased by $3.5 million, and in loans secured by nonresidential
property, which increased by $7.7 million, or 13.5% over 1997. Residential
mortgage loans decreased from $30.4 million at December 31, 1997 to $26.0
million at December 31, 1998, a decrease of $4.4 million. The weighted average
interest rate on total loans receivable decreased to 9.01% at December 31, 1998
from 9.37% at December 31, 1997.
Investment securities. Investment securities available-for-sale
increased from $74.4 million at December 31, 1998, to $81.8 million at September
30, 1999. There were purchases of $33.5 million of investment securities, all of
which were designated as available-for-sale. There were repayments and
amortization of $17.7 million of investment securities available-for-sale during
the period. There were sales of $5.4 million of investment securities
available-for-sale during the nine months ended September 30, 1999.
Investment securities held-to-maturity decreased by $9.6 million to
$28.5 million at September 30, 1999, from $38.1 million at December 31, 1998.
This decrease resulted from repayments and amortization during the period.
The portfolio of investment securities at December 31, 1998 consisted
of $38.2 million in securities classified as held-to-maturity and $74.4 million
classified as available-for-sale. The portfolio of securities held-to-maturity
consisted of FNMA, GNMA and FHLMC mortgage-backed securities, collateralized
mortgage obligations, and
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<PAGE>
obligations of counties and municipalities. The investment securities classified
as available-for-sale consisted of FNMA, GNMA, and FHLMC mortgage-backed
securities, collateralized mortgage obligations, commercial mortgage-backed
securities, obligations of counties and municipalities, corporate debt
securities, and obligations of government-sponsored agencies. Southern Financial
reclassified $18.2 million of investment securities from held-to-maturity to
available-for-sale on October 1, 1998, in connection with the adoption of SFAS
133.
Liabilities. The increase in total assets was funded by an increase of
$23.5 million in advances from the Federal Home Loan Bank of Atlanta. Customer
deposits increased $4.9 million, or 2.1%, to $236.8 million at September 30,
1999 from $231.9 million at December 31, 1998. Deposits at December 31, 1998
were $231.9 million, an increase of $29.7 million, or 14.7%, over deposits of
$202.2 million at December 31, 1997. The weighted average interest rate for all
accounts decreased to 4.18% at December 31, 1998 from 4.79% at December 31,
1997. The increase in deposits reflects the April 1998 opening of a new branch
in Sterling, as well as growth in Southern Financial's customer base at all
branches.
Advances from the Federal Home Loan Bank of Atlanta totaled $3.5
million at December 31, 1998, a decrease of $.5 million from $4.0 million at
December 31, 1997.
Results of Operations
The operating results of Southern Financial depend primarily on its net
interest income, which is the difference between interest and dividend income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities such as deposits and borrowings. Operating results
are also affected by the level of its noninterest income, including income or
loss from the sale of loans and fees and service charges on deposit accounts,
and by the level of its operating expenses, including compensation, premises and
equipment, deposit insurance assessments and income taxes. The following tables
provide information regarding changes in interest income and interest expense,
as well as the underlying components of interest-earning assets and
interest-bearing liabilities.
The following table presents, for periods indicated, average balances
of and weighted average yields on interest-earning assets and average balances
of and weighted average effective rates paid on interest-bearing liabilities.
Calculations have been made utilizing month-end average balances for loans and
investment securities and daily average balances for borrowings and deposits,
and the effect of the interest rate swaps entered into during the nine months
ended September 30, 1999 is reflected in the average rate on deposits. Loan
balances do not include non-accrual loans. See additional details regarding the
interest rate swaps under the discussion of Southern Financial's quantitative
and qualitative disclosures about market risk.
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<PAGE>
Nine Months Ended September 30,
1999 1998
------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------- ---------------------
($ in thousands)
Interest-earning assets
Loans receivable $143,165 9.13% $127,689 9.72%
Investment securities 116,839 6.13% 100,569 6.08%
-------- ----- -------- -----
Total interest-earning
assets $260,004 7.78% 228,258 8.12%
-------- ----- -------- -----
Interest-bearing liabilities
Deposits 237,095 4.10% 210,253 4.72%
Borrowings 10,458 5.35% 3,807 5.68%
-------- ----- -------- -----
Total interest-bearing
liabilities $247,553 4.15% 214,060 4.74%
-------- ----- -------- -----
Average dollar difference
between interest-earning assets
and interest-bearing
liabilities $ 12,451 14,198
======== ========
Interest rate spread 3.63% 3.38%
===== =====
Interest margin 3.83% 3.67%
===== =====
-35-
<PAGE>
Average Balances, Yields and Rates
(in thousands)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31 December 31 December 31
1998 1997 1996
----------------------------------------------------------------------------
Average Average Average Average Average Average
balance yield/rate balance yield/rate balance yield/rate
------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable $128,602 9.61 % $118,809 9.74 % $ 106,254 9.70 %
Investments 105,072 6.06 % 83,900 6.48 % 67,910 6.35 %
------------------------------------------------------------------------
Total interest-earning assets $233,674 8.02 % 202,709 8.39 % $ 174,164 8.39 %
-------------------------------------------------------------------------
Interest-bearing liabilities
Deposits 214,370 4.63 % 184,296 4.73 % $ 158,151 4.70 %
Borrowings 4,907 5.50 % 5,979 5.59 % 6,077 5.63 %
------------------------------------------------------------------------
Total interest-bearing liabilities $219,277 4.65 % $190,275 4.76 % $ 164,228 4.73 %
-------------------------------------------------------------------------
Average dollar difference
between interest-earning assets
and interest-bearing liabilities $ 14,397 $ 12,434 $ 9,936
============ ============ ===========
Interest rate spread 3.37 % 3.63 % 3.66 %
========== ========== ==========
Interest margin 3.66 % 3.92 % 3.93 %
========== ========== ==========
</TABLE>
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to changes in volume (changes in volume
multiplied by old rate) and changes in rate (changes in rate multiplied by old
volume). The dollar changes in interest income and interest expense attributable
to changes in rate/volume (change in rate multiplied by change in volume) have
been allocated between rate and volume variances based on the percentage
relationship of such variances to each other. The effect of the interest rate
swaps entered into during the nine months ended September 30, 1999 is reflected
in interest expense on deposits.
Nine Months Ended
September 30, 1999
Compared to Nine Months Ended
September 30, 1998
-----------------------------------------
Volume Rate Total
-------- -------- --------
($ in thousands)
Interest income
Loans receivable $ 1,102 $ (578) $ 524
Investment securities 748 38 786
-------- -------- --------
Total interest income 1,850 (540) 1,310
-------- -------- --------
Interest expense
Deposits 891 (1,033) (142)
Borrowings 271 (11) 260
-------- -------- --------
Total interest expense 1,162 (1,044) 118
-------- -------- --------
Net interest income $ 688 $ 504 $ 1,192
======== ======== ========
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<PAGE>
Rate /Volume Analysis
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1998 Year ended December 31, 1997
compared compared
to year ended December 31, 1997 to year ended December 31, 1996
---------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans Receivable $ 954 $ (156) $ 798 $ 1,218 $ 42 $ 1,260
Investments 1,299 (371) 928 1,035 95 1,130
---------------------------------------------------------------------------------------------------
Total interest income 2,253 (527) 1,726 2,253 137 2,390
---------------------------------------------------------------------------------------------------
Interest expense
Deposits 1,411 (186) 1,225 1,229 47 1,276
Borrowings (59) (5) (64) (6) (2) (8)
---------------------------------------------------------------------------------------------------
Total interest expense 1,352 (191) 1,161 1,223 45 1,268
---------------------------------------------------------------------------------------------------
Net interest income $ 901 $ (336) $ 565 $ 1,030 $ 92 $ 1,122
---------------------------------------------------------------------------------------------------
</TABLE>
Comparison of the Nine Months Ended September 30, 1999
With the Nine Months Ended September 30, 1998
General. Southern Financial's net income was $2.3 million for the nine months
ended September 30, 1999, compared to $2 million for the nine months ended
September 30, 1998, an increase of $289 thousand, or 14.7%. Diluted earnings per
share were $1.34 and $1.14 for the nine months ended September 30, 1999 and
1998, respectively. The weighted average number of diluted shares of common
stock outstanding were 1,684,557 and 1,715,787 for the same periods in 1999 and
1998, respectively.
Net interest income. Net interest income before provision for loan losses for
the nine months ended September 30, 1999 was $7.5 million, an increase of $1.2
million, or 19%, from $6.3 million for the nine months ended September 30, 1998.
The increase resulted primarily from growth in average interest-earning assets,
as well as an increase in interest margin. Total interest-earning assets in the
nine months ended September 30, 1999 averaged $260 million as compared to $228.3
million for the same period in 1998. For the nine months ended September 30,
1999, the interest rate spread was 3.63%, an increase of 25 basis points from
3.38% for the nine months ended September 30, 1998. The yield on
interest-earning assets for the nine months ended September 30, 1999 was 7.78%,
a decrease of 34 basis points from the same period last year. The cost of
interest-bearing liabilities decreased by 59 basis points to 4.15% for the nine
months ended September 30, 1999 from 4.74% for the nine months ended September
30, 1998.
Total interest income. Total interest income increased by $1.3 million,
or 9.5%, to $15.2 million for the nine months ended September 30, 1999 from
$13.9 million for the nine months ended September 30, 1998. This increase was
due to an increase of $15.5 million in average loans receivable to $143.2
million for the nine months ended September 30, 1999 from $127.7 million for the
nine months ended September 30, 1998, in spite of a decrease in the average
yield on loans from 9.72% to 9.13% for the same periods. Average investment
securities increased by $16.3 million from $100.1 million in the nine months
ended September 30, 1998 to $116.8 million in the nine months ended September
30, 1999. The yield on average investment securities for the nine months ended
September 30, 1999 was 6.13%, an increase of five basis points from 6.08% for
the nine months ended September 30, 1998.
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<PAGE>
Total interest expense. Total interest expense increased by $119
thousand, or 1.6%, to $7.7 million for the nine months ended September 30, 1999
from $7.6 million for the nine months ended September 30, 1998. Customer
deposits averaged $237.1 million for the nine months ended September 30, 1999,
up $26.8 million from $210.3 million for the nine months ended September 30,
1998. The average effective rate paid on deposits decreased by 62 basis points
to 4.10% in the 1999 period from 4.72% in the 1998 period. Average borrowings
were $10.5 million for the nine months ended September 30, 1999, an increase of
$6.7 million from $3.8 million for the nine months ended September 30, 1998. The
average effective rate paid on borrowings decreased to 5.35% for the nine months
ended September 30, 1999 from 5.68% for the same period in 1998.
Provisions for loan losses. The provision for loan losses for the nine
months ended September 30, 1999 was $925 thousand, as compared to $675 thousand
for the nine months ended September 30, 1998. The provision for loan losses is a
current charge to earnings to increase the allowance for loan losses. Southern
Financial has established the allowance for loan losses to absorb the inherent
risk in lending after considering an evaluation of the loan portfolio, current
economic conditions, changes in the nature and volume of lending, past loan
experience and other relevant factors. The increase in the provision for loan
losses reflects the growth in the portfolio of non-residential mortgage loans
and business loans. It is the opinion of Southern Financial that the allowance
for loan losses at September 30, 1999 remains adequate. Although Southern
Financial believes that the allowance is adequate, there can be no assurances
that additions to such allowance will not be necessary in future periods, which
would adversely affect Southern Financial's results of operations. The allowance
for loan losses at September 30, 1999 was $2.3 million, or 1.42% of total loans
receivable, versus $2.05 million at December 31, 1998, which was 1.52% of total
loans receivable.
During the nine months ended September 30, 1999 charge-offs amounted to
$919 thousand compared to $547 thousand during the same period last year. These
charge-offs were related primarily to non-mortgage business loans and
nonresidential mortgage loans. Recoveries amounted to $205 thousand during the
nine months ended September 30, 1999, most of which was related to one
non-residential mortgage loan that was charged off in 1996.
Other income. Other income for the nine months ended September 30, 1999
was $2.3 million as compared to $1.6 million for the nine months ended September
30, 1998, an increase of $734 thousand, or 46%. Gain on sale of loans increased
by $380 thousand from $486 thousand during the nine months ended September 30,
1998, to $866 thousand for the nine months ended September 30, 1999. This
increase was primarily the result of the sale of the guaranteed portion of SBA
loans on which gains have been recognized. Fee income increased $159 thousand
during the nine months ended September 30, 1999, compared to the same period
last year, because of more income related to both loans and deposits. Other
income increased by $195 thousand during the nine months ended September 30,
1999, compared to the same period last year. This increase resulted from an
increase of $65 thousand in realized gain on the sale of investment securities
available-for sale and the unrealized gain on the ineffective portion of the
interest rate swaps in the amount of $139 thousand.
Other expenses. Other expense increased by $1.2 million, or 27%, to
$5.7 million for the nine months ended September 30, 1999 from $4.5 million for
the nine months ended September 30, 1998, primarily because of expenses related
to operating three new branches that have been open since April 1998. Employee
compensation and benefits increased by $749 thousand, or 35.5%, reflecting
normal wage increases for existing personnel and the cost of staffing the three
new branches. Expenses for premises and equipment increased by $199 thousand, or
24.6%, primarily because of the new branches. Advertising expense increased by
$57 thousand, or 45.6%, primarily because Southern Financial commenced its
internet banking promotion.
Comparison of the Year Ended December 31, 1998
With the Year Ended December 31, 1997
General. Southern Financial's net income for the year ended December
31, 1998 was $2.7 million, an increase of 20.5% over net income of $2.2 million
for the year ended December 31, 1997. The increase in net income
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<PAGE>
was primarily due to an increase in net interest income of 7.1% and an increase
of 35.8% in other income. Diluted earnings per share for the year ended December
31, 1998 was $1.55 as compared to $1.33 for the year ended December 31, 1997.
The weighted average number of diluted shares of common stock outstanding were
1,713,815 for the year ended December 31, 1998 and 1,657,706 for the year ended
December 31, 1997.
Net interest income. Net interest income before provision for loan
losses was $8.5 million for the year ended December 31, 1998, an increase of
7.1% over $8.0 million for the year ended December 31, 1997. This increase was
due to the growth in the average level of earning assets from $202.7 million to
$233.7 million. The interest rate spread decreased from 3.63% to 3.37% during
the year ended December 31, 1998, and the interest margin went from 3.92% to
3.66% during the same period.
Total interest income. Total interest income was $18.7 million for the
year ended December 31, 1998, an increase of 10.2% over $17.0 million for the
year ended December 31, 1997. This increase resulted from growth in
interest-earning assets. Average loans receivable increased by $9.8 million and
average investment securities increased by $21.2 million over 1997.
The yield on total interest-earning assets was 8.02% for the year ended
December 31, 1998, which decreased from 8.39% for 1997. For the year ended
December 31, 1998, the yield on average loans receivable was 9.61%, down from
9.74% for the year ended December 31, 1997, while the yield on average
investment securities decreased from 6.48% during 1997 to 6.06% for the year
ended December 31, 1998.
Total interest expense. Total interest expense for the year ended
December 31, 1998 was $10.2 million, an increase of 12.8% over $9.0 million for
the year ended December 31, 1997. This increase was due primarily to growth in
the average balance of deposits, which were $214.4 million for the year ended
December 31, 1998 compared to $184.3 million for the prior year. The average
effective rate paid on interest-bearing liabilities was 4.65% for the year ended
December 31, 1998, a decrease of 11 basis points from 4.76% for the year ended
December 31, 1997.
Provision for loan losses. The provision for loan losses amounted to
$975 thousand for the year ended December 31, 1998, an increase over the
provision of $880 thousand for the year ended December 31, 1997. The provision
for loan losses is a current charge to earnings to increase the allowance for
loan losses. Southern Financial has established the allowance for loan losses to
absorb the inherent risk in lending after considering an evaluation of the loan
portfolio, current economic conditions, changes in the nature and volume of
lending and past loan experience. During the year ended December 31, 1998,
Southern Financial's volume of nonresidential mortgages and commercial loans
increased. These loans tend to carry a higher risk classification. The increase
in the provision for loan losses reflects the growth in the portfolio as well as
the change in the type of loans. Southern Financial's opinion is that the
allowance for loan losses at December 31, 1998 remains adequate. Although
Southern Financial believes that the allowance is adequate, there can be no
assurances that additions to such allowance will not be necessary in future
periods, which would adversely affect Southern Financial's results of
operations. The allowance for loan losses at December 31, 1998 was $2.1 million,
or 1.52% of total loans receivable compared to $2.0 million, or 1.55% at
December 31, 1997.
Other income. Other income totaled $2.3 million for the year ended
December 31, 1998, an increase of 35.8%, from $1.7 million for the year ended
December 31, 1997. The increase was attributable to gain on sale of loans, which
increased by $605 thousand to $796 thousand for the year ended December 31, 1998
from $192 thousand for the prior year. This increase was primarily the result of
selling the guaranteed portion of SBA loans.
Other expenses. Other expenses for the year ended December 31, 1998
were $6.2 million, an increase of 10.3% from $5.6 million for the year ended
December 31, 1997.
-39-
<PAGE>
Employee compensation and benefits increased 15.4% to $2.9 million for
the year ended December 31, 1998 from $2.5 million for the prior year. The
increase reflects the cost of staffing the new branch opened in April 1998 and
normal wage increases for existing personnel.
Expenses for premises and equipment decreased $57 thousand during the
year ended December 31, 1998 compared to the prior year. This reduction of
expenses is primarily the result of moving the Fairfax branch to a location
owned by Southern Financial and eliminating the rent expense.
Advertising expense decreased 13.4% to $185 thousand for the year ended
December 31, 1998 from $214 thousand for the prior year as a result of a changed
marketing strategy.
Other expenses increased 28.8% to $1.1 million for the year ended
December 31, 1998 from $887 thousand for the prior year, reflecting higher
miscellaneous expenses.
Comparison of the Year Ended December 31, 1997
With the Year Ended December 31, 1996
General. Southern Financial's net income for the year ended December
31, 1997 was $2.2 million, an increase of 131.2% over net income of $954
thousand for the year ended December 31, 1996. The increase in net income was
primarily due to an increase in net interest income of 16.4%, a decline of 90.0%
in deposit insurance assessments, and an increase of 45.7% in other income.
Diluted earnings per share for the year ended December 31, 1997 were $1.33 as
compared to $0.59 for the year ended December 31, 1996. The weighted average
number of diluted shares of common stock outstanding were 1,657,706 for the year
ended December 31, 1997 and 1,621,958 for the year ended December 31, 1996. 1996
earnings per share data have been restated to conform with SFAS 128, "Earnings
per Share."
Net interest income. Net interest income before provision for loan
losses was $8.0 million for the year ended December 31, 1997, an increase of
16.4% over $6.8 million for the year ended December 31, 1996. This increase was
due to the growth in the average level of earning assets from $174.2 million to
$202.7 million. The interest rate spread decreased slightly from 3.66% to 3.63%
during the year ended December 31, 1997, and the interest margin went from 3.93%
to 3.92% during the same period.
Total interest income. Total interest income was $17.0 million for the
year ended December 31, 1997, an increase of 16.4% over $14.6 million for the
year ended December 31, 1996. This increase resulted from growth in
interest-earning assets, as well as a marginal improvement in mix. Average loans
receivable increased by $12.6 million and average investment securities
increased by $16.0 million over 1996.
The yield on total interest-earning assets was 8.39% for the year ended
December 31, 1997, which reflected no change compared to 1996. For the year
ended December 31, 1997, the yield on average loans receivable was 9.74%, up
from 9.70% for the year ended December 31, 1996, while the yield on average
investment securities increased from 6.35% during 1996 to 6.48% for the year
ended December 31, 1997. The greater increase in lower yielding investment
securities than in loans caused the overall average yield to remain flat as
compared to 1996.
Total interest expense. Total interest expense for the year ended
December 31, 1997 was $9.0 million, an increase of 16.3% over $7.8 million for
the year ended December 31, 1996. This increase was due primarily to growth in
the average balance of deposits, which were $184.3 million for the year ended
December 31, 1997 compared to $158.2 million for the prior year. The average
effective rate paid on interest-bearing liabilities was 4.76% for the year ended
December 31, 1997, an increase of only 3 basis points from 4.73% for the year
ended December 31, 1996.
-40-
<PAGE>
Provision for loan losses. The provision for loan losses amounted to
$880 thousand for the year ended December 31, 1997, an increase over the
provision of $695 thousand for the year ended December 31, 1996. During the year
ended December 31, 1997, Southern Financial's volume of nonresidential mortgages
and commercial loans increased. These loans tend to carry a higher risk
classification. The increase in the provision for loan losses reflects the
growth in the portfolio as well as the change in the type of loans. The
allowance for loan losses at December 31, 1997 was $2.0 million, or 1.55% of
total loans receivable compared to $1.5 million, or 1.37% at December 31, 1996.
Other income. Other income totaled $1.7 million for the year ended
December 31, 1997, an increase of 45.7%, from $1.2 million for the year ended
December 31, 1996. The increase was attributable primarily to fee income, which
increased by 52.3% to $1.4 million for the year ended December 31, 1997 from
$950 thousand for the prior year. Fee income, consisting primarily of
transaction fees on NOW accounts, increased due to increased volume in these
types of deposit accounts. Gain on sale of loans decreased 8.7% to $192 thousand
for the year ended December 31, 1997 from $210 thousand for the year ended
December 31, 1996, reflecting lower originations of residential loans held for
sale which decreased 20.0% to $8.4 million for the year ended December 31, 1997
from $10.5 million for the year ended December 31, 1996.
Other expenses. Other expenses for the year ended December 31, 1997
were $5.6 million, a decrease of 5.5% from $5.9 million for the year ended
December 31, 1996. There were increases in most expense categories, such as
employee compensation and benefits, premises and equipment, and advertising
during 1997, but they were more than offset by the significant decrease in
deposit insurance assessments.
Employee compensation and benefits increased 17.9% to $2.5 million for
the year ended December 31, 1997 from $2.1 million for the prior year. The
increase reflects the cost of staffing the new branch opened in July 1996 for a
full year, as well as increased staffing levels to accommodate growth in
Southern Financial's customer base and normal wage increases for existing
personnel.
Expenses for premises and equipment increased 15.6% to $1.8 million for
the year ended December 31, 1997 from $1.6 million for the year ended December
31, 1996. This increase is primarily the result of operating the Millwood branch
opened in June 1996 for a full year and the cost associated with relocating the
Fairfax branch during 1997. Data processing costs also increased $92 thousand
because of growth in the number of accounts and transaction volumes related to
customer deposits.
Deposit insurance assessments decreased from $1.1 million for the year
ended December 31, 1996 to $109 thousand for the year ended December 31, 1997.
The 1996 expense reflected a one-time assessment on thrifts and banks with
thrift deposits to recapitalize the Savings Association Insurance Fund.
Southern Financial's one-time assessment was $830 thousand.
Advertising expense increased 49.9% to $214 thousand for the year ended
December 31, 1997 from $143 thousand for the prior year because of an increased
reliance on advertising to expand Southern Financial's customer base.
Other expenses remained relatively constant during the year ended
December 31, 1997 compared to the prior year.
Asset/Liability Management
Southern Financial, like most other banks, is engaged primarily in the
business of investing funds obtained from deposits and borrowings into
interest-bearing loans and investments. Consequently, Southern Financial's
earnings depend to a significant extent on its net interest income, which is the
difference between (i) the interest income on loans and investments and (ii) the
interest expense on deposits and borrowing. Southern Financial, to the
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<PAGE>
extent that its interest-bearing liabilities do not reprice or mature at the
same time as its interest-bearing assets, is subject to interest rate risk and
corresponding fluctuations in its net interest income. Asset/liability
management policies have been employed in an effort to manage Southern
Financial's interest-earning assets and interest-bearing liabilities, thereby
controlling the volatility of net interest income, without having to incur
unacceptable levels of credit risk.
With respect to the residential mortgage loan portfolio, it is Southern
Financial's policy to keep in portfolio those mortgage loans which have an
adjustable interest rate and to sell most fixed rate mortgage loans originated
into the secondary market. In addition, commercial loans generally have rates
that are tied to the prime rate, the one-year CMT rate, or the three-year CMT
rate. Both of these policies help control Southern Financial's exposure to
rising interest rates.
In late 1998, the Asset/Liability Management Committee elected to
purchase and hold for sale fixed rate investment securities since the yield
spread between fixed rate and adjustable rate securities substantially favored
the former and the risk of substantial rises in interest rates was acceptably
low. At year end, Southern Financial held approximately $11.6 million in 15-year
fixed rate residential mortgage-backed securities, $18.2 million in fixed rate
commercial mortgage-backed securities, $4.2 million in fixed rate municipal and
corporate bonds, $1.5 million in fixed rate collaterized mortgage obligations,
and $3.9 million in FHLMC preferred stock.
During the first quarter of 1999, Southern Financial entered into four
swap agreements, each for a notional amount of $5 million, in which Southern
Financial agreed to pay a rate fixed for the period of the swap and receive 3
month LIBOR for the period of the swap. In addition, in the months of January
and February 1999 Southern Financial purchased $20 million of residential and
commercial CMO's. A sustained shift in interest rates could have an impact on
the market value of these securities. A rise in interest rates would decrease
their market value, and a decline in interest rates would increase their market
value.
As a result of entering into the swap agreements and purchasing the
CMO's, Southern Financial's interest sensitivity as reported in its Form 10K for
the year ended December 31, 1998 has changed. Southern Financial's interest rate
sensitivity is primarily monitored by management through the use of a model
which generates estimates of the change in Southern Financial's market value of
portfolio equity ("MVPE") over a range of interest rate scenarios. Such analysis
was prepared by a third party for Southern Financial. MVPE is the present value
of expected cash flows from assets, liabilities, and off-balance sheet contracts
using standard industry assumptions about estimated loan prepayment rates,
reinvestment rates, and deposit decay rates. The following table sets forth an
analysis of Southern Financial's interest rate risk as measured by the estimated
change in MVPE resulting from instantaneous and sustained parallel shifts in the
yield curve (plus or minus 300 basis points, measured in 100 basis point
increments) as of September 30, 1999.
-42-
<PAGE>
Sensitivity of Market Value of Portfolio Equity
(amounts in thousands)
<TABLE>
<CAPTION>
Change in Market Value of Portfolio Equity Market Value of
Interest Rates Amount $ Change % Change Portfolio Equity as a % of
In Basis Points From Base From Total Portfolio
(Rate Shock) Base Assets Equity
Book Value
<S> <C> <C> <C> <C> <C>
Up 300 22,785 (6,519) -21.52% 7.42% 107.09%
Up 200 25,119 (4,185) -13.82% 8.73% 118.34%
Up 100 27,369 (1,935) -6.39% 9.52% 128.43%
Base 29,304 - 0.00% 10.19% 138.05%
Down 100 31,135 1,831 2.81% 10.83% 146.68%
Down 200 32,731 3,427 11.32% 11.38% 154.20%
Down 300 34,892 5,588 18.45% 12.13% 164.38%
</TABLE>
Southern Financial's interest rate sensitivity is also monitored by
management through the use of a model that generates estimates of the change in
the adjusted net interest income over a range of interest rate scenarios. Such
analysis was also prepared by a third party for Southern Financial as of
September 30, 1999. Net interest income represents the difference between income
on interest-earning assets and expense on interest-bearing liabilities including
the effect of the interest rate swaps. Net interest income also depends upon the
relative amounts of interest-earning assets and interest-bearing liabilities and
the interest rate earned or paid on them. In this regard, the model assumes that
the composition of Southern Financial's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities.
Sensitivity of Net Interest Income
(amounts in thousands)
Change in Adjusted Net
Interest Rates Interest Income Net Interest Margin
In Basis Points % Change % Change
(Rate Shock) Amount From Base Percent From Base
Up 300 8,837 -9.10% 3.07% -9.17%
Up 200 9,249 -4.87% 3.22% -4.73%
Up 100 9,616 -1.09% 3.34% -1.18%
Base 9,722 0.00% 3.38% 0.00%
Down 100 9,821 1.02% 3.41% 0.89%
Down 200 9,986 2.72% 3.47% 2.66%
Down 300 10,273 5.67% 3.57% 5.62%
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in MVPE and in Sensitivity of
Net Interest Income require certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. Accordingly, although the MVPE table and Sensitivity of Net Interest
Income table provide an indication of Southern Financial's
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<PAGE>
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on Southern Financial's worth and net interest income.
Liquidity and Capital Resources
Southern Financial's primary sources of funds are deposits, loan
repayments, proceeds from the sale of loans and investment securities,
repayments and maturities of investment securities, and borrowings from the
Federal Home Loan Bank of Atlanta under a credit availability in the amount of
$45 million. At September 30, 1999, Southern Financial had $9.4 million of
unfunded lines of credit and undisbursed construction loan funds of $5.4
million. Approved loan commitments were $14.7 million at September 30, 1999, and
Southern Financial had commitments from investors to purchase loans in the
amount of $520 thousand. It is anticipated that funding requirements for these
commitments can be met from the normal sources of funds.
Southern Financial is subject to regulations of the Federal Reserve
Board that impose certain minimum regulatory capital requirements. Under current
Federal Reserve Board regulations, these requirements are (a) leverage capital
of 4.0% of adjusted average total assets; (b) tier I capital of 4% of
risk-weighted assets; (c) tier I and II capital of 8% of risk-weighted assets.
At September 30, 1999, Southern Financial exceeded all regulatory capital
standards, which were as follows:
<TABLE>
<CAPTION>
ACTUAL CAPITAL REQUIRED CAPITAL EXCESS CAPITAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------- ------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage capital $ 22,395 8.13% $ 11,015 4.00% $ 11,380 4.13%
(to average assets)
Tier 1 capital 22,395 11.86% 7,554 4.00% 14,841 7.86%
(to risk-weighted assets)
Tier 1 and Tier 2 capital 24,657 13.06% 15,109 8.00% 9,548 5.06%
(to risk-weighted assets)
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related notes presented herein have been
prepared in accordance with generally accepted accounting principles. These
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of Southern Financial are monetary in nature.
As a result, interest rates have a more significant impact on Southern
Financial's performance than the effects of general levels of inflation.
Interest rates may not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, other expenses do
reflect general levels of inflation.
-44-
<PAGE>
MANAGEMENT
The Board of Directors
The Southern Financial board of directors currently is comprised of 12
members. The board of directors is divided into three classes. These directors
serve for the terms of their respective classes, which expire in 2000, 2001 and
2002. The following table sets forth the composition of the board of directors.
Class I Class II Class III
(Term Expiring in 2002) (Term Expiring in 2000) (Term Expiring in 2001)
Alfonso G. Finocchiaro John C. Belotti Fred L. Bollerer
Virginia Jenkins Neil J. Call Georgia S. Derrico
Michael P. Rucker David de Give John L. Marcellus, Jr.
Robert P. Warhurst R. Roderick Porter Richard E. Smith
____________________
The following paragraphs set forth certain information, as of December
1, 1999, for the 12 directors of Southern Financial. Unless otherwise indicated,
each director has held his or her current position for more than five years.
Class I
(Term Expiring in 2002)
Alfonso G. Finocchiaro, 67, was Executive Vice President, Regional
General Manager and CEO (Americas) of Banco Portugues do Atlantico from 1978 to
until his retirement in 1997. Mr. Finocchiaro has served as a director of
Southern Financial since April 1999.
Virginia Jenkins, 52, is the owner of V. Jenkins Interiors and Antiques
in Middleburg, Virginia. Ms. Jenkins has served as a director of Southern
Financial since 1988.
Michael P. Rucker, 59, is an executive with Caterpillar, Inc., a
manufacturing company in Peoria, Illinois and serves as Chairman of the Board of
George H. Rucker Realty Corp., a real estate development company in Fairfax,
Virginia. Mr. Rucker has served as a director of Southern Financial since 1991.
Robert P. Warhurst, 61, is President and co-owner of Merrifield Garden
Center in Merrifield and Fairfax, Virginia. Previously he was a founding
director of the former Horizon Bank of Virginia which merged to join Southern
Financial Bank on October 1, 1999.
Class II
(Term Expiring in 2000)
John C. Belotti, 63, is President and co-owner of Bee & H Electric
Company in Fairfax, Virginia. Previously he was a founding director of the
former Horizon Bank of Virginia, also serving as Vice Chairman of the Board
since 1998, which merged to join Southern Financial Bank on October 1, 1999.
Neil J. Call, 66, has been Executive Vice President of MacKenzie
Partners, Inc., a New York financial consulting company, since 1990. Mr. Call
has served as a director of Southern Financial since 1986.
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<PAGE>
David de Give, 56, has been Senior Vice President of Southern Financial
since 1992. Mr. de Give has served as a director of Southern Financial since
1986.
R. Roderick Porter, 54, has been President and Chief Operating Officer
of Southern Financial since April 1998. From 1994 to 1998, he was President of
FX Concepts, Ltd., an international money management firm in New York, New York.
Mr. Porter has served as a director of Southern Financial since 1986.
Class III
(Term Expiring in 2001)
Fred L. Bollerer, 57, has been President and Chief Executive Officer
of the Potomac Knowledge Way Project, a not for profit leadership organization
company in Herndon, Virginia, since January 1998. From 1993 to 1997, he was
President and Chief Executive Officer of Riggs Bank N.A. in Washington, D.C.
Mr. Bollerer has served as a director of Southern Financial since April 1999.
Georgia S. Derrico, 55, has been Chairman of the Board and Chief
Executive Officer of Southern Financial since 1986. Ms. Derrico has also served
as a director of Southern Financial since 1986.
John L. Marcellus, Jr., 77, is the retired President and Chairman of
the Board of Oneida, Ltd., a silverware manufacturing company in Oneida, New
York. Mr. Marcellus has served as a director of Southern Financial since 1986.
Richard E. Smith, 74, Retired Colonel U.S. Marine Corps, is CEO and
Chairman MANNA Financial Services, which he founded in 1961. Previously he was a
founding director and Chairman of the Board for the former Horizon Bank of
Virginia which merged to join Southern Financial on October 1, 1999. Mr. Smith,
a former director with Guaranty Bank & Trust Co. and Riggs National Bank of
Virginia is also owner of Reed Insurance Agency.
Board Committees
The Asset/Liability Management Committee has authority for policy
formulation and administration of Southern Financial's asset/liability
management policies. The Asset/Liability Management Committee, which consists of
Ms. Derrico and Messrs. Porter (Chairman), Belotti, Call, de Give, Finocchiaro
and Smith reports periodically to the board on the interest sensitivity of
Southern Financial, including an analysis of the duration of Southern
Financial's assets, liabilities and contingent liabilities as well as the
mortgage pipeline and a calculation of the duration of Southern Financial's
equity. The Asset/Liability Management Committee meets quarterly. The
Asset/Liability Management Committee frequently discusses policy issues by
teleconference.
The Credit Committee has authority and responsibility to oversee the
prudent operation of Southern Financial's lending function, including the
ongoing qualitative review of the loan portfolio. The Credit Committee, which
consists of Ms. Derrico and Messrs. Call (Chairman), Bollerer and Rucker, is
responsible for insuring the development and maintenance of sound credit
policies and procedures and an ongoing qualitative review of the loan portfolio.
The Credit Committee meets at least three times a year and frequently discusses
credit issues by teleconference.
The Audit Committee assists the board in fulfilling its fiduciary
responsibilities relating to corporate accounting and reporting practices of
Southern Financial. The Audit Committee consists of Messrs. Call (Chairman),
Bollerer, Finocchiaro and Marcellus and Ms. Jenkins and meets at least
quarterly.
The Compensation Committee reviews the performance of, and establishes
the compensation for, the executive officers of Southern Financial. Southern
Financial's executive compensation programs are designed to retain
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<PAGE>
and reward executives based upon (i) their individual performance and ability to
lead Southern Financial to achieving its goals and (ii) Southern Financial's
performance. The Compensation Committee consists of Messrs. Call, Finocchiaro
(Co-Chairman), Warhurst and Marcellus (Chairman) and Ms. Jenkins and meets twice
a year.
Executive Officers Who Are Not Directors
William H. Stevens, 55, joined Southern Financial in 1999 as Executive
Vice President , Risk Management. From 1991 to 1999, Mr. Stevens served as a
Senior Analyst in the Office of the Inspector General of The Federal Deposit
Insurance Corporation. Prior to that he was an Executive Vice President at Riggs
National Bank in Washington, DC where he managed the Bank's commercial real
estate and single family lending activities. Before that, Mr. Stevens was
President and COO of Anchor Mortgage Services and he was a Senior Vice President
at Chemical Bank from 1983 to 1987.
Jacqueline E. Fitterer, 36, joined Southern Financial in 1999 when the
former Horizon Bank of Virginia was merged to join with Southern Financial. Ms.
Fitterer began her career with Horizon Bank in 1990 as the manager of the loan
department, promoted to Assistant Vice President/Loan Manager in 1991, promoted
to Vice President/Loan Administrator in 1992 and promoted to her current
position, Senior Vice President/Loan Administrator in 1997.
David M. Goldman, 52, joined Southern Financial in 1999 when the
former Horizon Bank of Virginia was merged to join with Southern Financial. Mr.
Goldman began his career with Horizon Bank in 1990.
William H. Lagos, 49, joined Southern Financial in 1986 as Vice
President. In 1993, he was promoted to Senior Vice President of Operations; in
1996, he became Senior Vice President/Controller.
Linda W. Sandridge, 46, joined Southern Financial in 1987. In 1995,
she was promoted to Vice President/Commercial Lending; in 1997, she was promoted
to Senior Vice President/Commercial Lending.
Richard P. Steele, 52, joined Southern Financial in 1999 as Senior Vice
President, Special Projects. From 1993 to 1999, Mr. Steele was Senior Vice
President of FX Concepts, Inc., an international money management firm based in
New York. Prior to that, Mr. Steele was Director of Finance, Eli Lilly and
Company, Geneva from 1989 to 1993.
Laura L. Vergot, 41, joined Southern Financial in 1989. In 1997, she
was promoted to Senior Vice President/Branch Development. In 1999 she moved to
Senior Vice President Systems Administration and Human Resources.
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<PAGE>
Security Ownership of Management
The following table sets forth, based on information as of December 31,
1999, the beneficial ownership of Southern Financial common stock by each
director of Southern Financial and by each person named in the "Summary
Compensation Table" on page 50.
Number Percent
of Shares (1) of Class (%)
Southern Financial Directors: ------------- ------------
Fred L. Bollerer 2,000 *
Neil J. Call 39,378 (2) 1.5
David de Give 78,589 (3) 2.9
Georgia S. Derrico 240,515 (4) 9.1
Alfonso G. Finocchiaro 3,188 *
Virginia Jenkins 2,275 *
John L. Marcellus, Jr. 15,808 (5) *
R. Roderick Porter 240,515 (4) 9.1
Michael P. Rucker 80,396 (6) 3.0
John C. Belotti 27,300 1.0
Robert P. Warhurst 14,206 *
Richard E. Smith 29,000 1.1
All Directors and Executive Officers
as a group (19 persons) 580,801 21.9
------- ----
____________________
* Percentage of ownership will be less than one percent of the outstanding
shares of Southern Financial common stock.
(1) The amounts in this column include shares of Southern Financial common
stock with respect to which certain persons have the right to acquire
beneficial ownership within sixty days after December 31, 1998, pursuant
to Southern Financial's 1993 Stock Option and Incentive Plan, as amended:
Mr. de Give: 46,403 shares; Ms. Derrico: 97,176 shares; Mr. Porter:
25,000; and the directors and officers as a group: 195,381 shares.
(2) Includes 32,412 shares of Southern Financial common stock and 4,334 shares
of Southern Financial convertible preferred stock.
(3) Includes 2,395 shares owned by Mr. de Give's spouse over which she has
sole voting and investment power.
(4) Includes (a) 84,373 shares owned individually by Ms. Derrico over which
she has sole voting and investment power and 97,176 shares that Ms.
Derrico may acquire pursuant to the exercise of stock options; and (b)
23,404 shares of Southern Financial common stock and 4,039 shares of
Southern Financial convertible preferred stock owned individually by Mr.
Porter over which he has sole investment power. Mr. Porter holds an option
to acquire 25,000 shares of common stock. Ms. Derrico and Mr. Porter
disclaim beneficial ownership of each other's shares.
(5) Includes 13,427 shares of Southern Financial common stock and 2,221 shares
of Southern Financial convertible preferred stock.
(6) Includes 11,627 shares of Southern Financial common stock and 991 shares
of Southern Financial convertible preferred stock owned by Michael Rucker,
5,973 shares of Southern Financial common stock and 2,402 shares of
convertible preferred stock owned by Derek Rucker, 8,378 shares of
Southern Financial common stock owned by Lucy Jones, 5,025 shares of
Southern Financial common stock owned by Susan Jones Cooper, 4,832 shares
of Southern Financial common stock owned by David Dodrill and 37,755
shares of Southern Financial common stock owned by Rucker Realty Corp. and
persons associated with Rucker Realty Corp. Southern Financial makes no
representation as to whether any of these persons, individually or in any
combination, share voting or investment power with any other or with
Rucker Realty with respect to their shares.
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<PAGE>
Security Ownership of Certain Beneficial Owners
The following table sets forth, to the knowledge of Southern Financial
and based on information as of December 31, 1999, (i) the beneficial ownership
of each person who owns more than five percent of the outstanding shares of
Southern Financial common stock common stock.
------------------------------
Number Percent
of Shares (1) of Class (%)
------------- ------------
Georgia S. Derrico (2),(3) 240,515 9.1
R. Roderick Porter
2954 Burrland Lane
The Plains, Virginia 20171
Hovde Capital, L.L.C. (4) 145,800 5.44
Financial Institution Partners II, L.P.
1629 Colonial Parkway
Inverness, Illinois 60067
__________________________
(1) Except as otherwise indicated, includes shares held directly, as well as
shares held in retirement accounts or by certain family members or
corporations over which the named individuals may be deemed to have voting
or investment power.
(2) Georgia S. Derrico and R. Roderick Porter are married to each other.
(3) Includes (a) 84,373 shares owned individually by Ms. Derrico over which
she has sole voting and investment power and 97,176 shares that Ms.
Derrico may acquire pursuant to the exercise of stock options; and (b)
23,404 shares of Southern Financial common stock and 4,039 shares of
Southern Financial convertible preferred stock owned individually by Mr.
Porter over which he has sole investment power. Mr. Porter holds an option
to acquire 25,000 shares of Southern Financial common stock. Ms. Derrico
and Mr. Porter disclaim beneficial ownership of each other's shares.
(4) Hovde Capital, L.L.C. is the General Partner of Financial Institution
Partners II, L.P., which beneficially owns 145,800 shares. Hovde Capital,
L.L.C. and Financial Institution Partners II, L.P. may be deemed to have
shared voting and investment powers over all such shares.
Director Compensation
Each member of the board who was not an employee of Southern Financial
or any of its subsidiaries is paid (i) $500 for attendance at each board meeting
and (ii) $150 for attendance at each meeting of a committee of the board of
which he or she is a member. Directors are not compensated for meetings
conducted by teleconference. In addition, each director is paid an annual fee of
$4,000. Employee members of the board are not paid separately for their service
on the board or its committees.
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<PAGE>
Executive Officer Compensation
The following table presents information concerning the compensation of
Ms. Derrico and Messrs. Porter and Lagos. This table presents compensation for
services rendered in all capacities to Southern Financial by Ms. Derrico and
Messrs. Porter and Lagos in 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Underlying
Name and Other Annual Options All Other
Principal Position Year Salary Bonus Compensation(1) (#) Compensation(2)
- ------------------ ---- ------ ----- --------------- --- ---------------
<S> <C> <C> <C> <C> <C> <C>
Georgia S. Derrico 1999 $195,000 $240,000 - 10,000 $4,800
Chairman of the Board 1998 193,226 200,000 - 10,000 4,800
and Chief Executive 1997 175,000 175,000 - 10,000 4,500
Officer
R. Roderick Porter 1999 $175,000 $ 72,000 - 15,000 $4,800
President and Chief 1998 100,000 - - 10,000 2,505
Operating Officer
William H. Lagos 1999 $100,000 $ 26,000 - 5,000 $1,200
Senior Vice President 1998 91,589 25,000 - 5,000 1,200
and Controller 1997 87,125 12,500 - 8,000 2,913
</TABLE>
_____________________
(1) None of the named executive officers received Other Annual Compensation in
excess of the lesser of $50,000 or 10% of combined salary and bonus for
the years indicated.
(2) The amounts set forth in this column constitute contributions to Southern
Financial's 401k Plan.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth for the year ended December 31, 1999,
the grants of stock options to the executive officers named in the "Summary
Compensation Table."
Option Grants in Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Option Term
Individual Grants(1) -----------
--------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise or
Options Fiscal Year Base Price Expiration
Name Granted (#) (%)(2) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ------ --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Georgia S. Derrico 10,000 10.87 21.00 2/2/09 342,068 544,686
R. Roderick Porter 15,000 16.30 21.00 2/2/09 513,102 817,029
William H. Lagos 5,000 5.43 21.00 2/2/09 171,034 272,343
</TABLE>
________________________
(1) Stock options were awarded at the fair market value of the shares of
Southern Financial common stock at the date of award and are exercisable
after February 2, 2000.
(2) Options to purchase 92,000 shares of Southern Financial common stock were
granted to Southern Financial's employees during the year ended December
31, 1999.
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<PAGE>
Option Exercises in Last Fiscal Year
Set forth in the table below is information concerning each exercise of
stock option during the fiscal year ended December 31, 1999 by each of the named
executive officers and the year end value of unexercised options.
Aggregated Option Exercises in Year Ended December 31, 1999
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
at December 31, 1999 (#)(1) at December 31, 1999 ($)(2)
--------------------------- ---------------------------
Shares
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Georgia S. Derrico 4,840 34,848 87,176 10,000 368,786 --(3)
R. Roderick Porter -- -- 10,000 15,000 -- --(3)
William H. Lagos -- -- 21,802 5,000 35,924 --(3)
</TABLE>
_____________________
(1) Each of these Options relates to Southern Financial common stock.
(2) These values are based on $16.50, the closing price of Southern Financial
common stock on December 31, 1999.
(3) None of unexercisable options held by the named executive officers were
in-the-money as of December 31, 1999.
Employment Agreements
Southern Financial entered into an employment agreement with Ms.
Derrico in 1996 for a term of three years with automatic one-year extensions.
If, during the term of the employment agreement, there is a change in control of
Southern Financial and within 12 months thereafter Ms. Derrico's employment is
terminated for good reason (as provided in the employment agreement) or on
account of disability (as provided in the employment agreement), Ms. Derrico
shall be entitled to receive severance pay equal to three times the sum of her
annual base salary at its highest rate during the preceding 12 months and her
highest annual bonus during the three preceding calendar years. The term "change
in control" as used in Ms. Derrico's agreement shall refer generally to (i) the
acquisition of 25% or more of the voting securities of Southern Financial by any
"person" (within the definition of Section 13(d) of the Securities Exchange Act
of 1934, as amended), (ii) the acquisition of 10% or more of the voting
securities of Southern Financial by any such person if the board has made a
determination that such acquisition constitutes or will constitute control of
Southern Financial, (iii) the approval by Southern Financial's shareholders of
an agreement to merge or consolidate with another corporation if the directors
who constitute the board six months prior to such approval cease to constitute a
majority during the period therefrom and ending two years after such approval,
and (iv) the sale by Southern Financial of 80% or more of its assets to any such
person.
Southern Financial entered into an employment agreement with Mr. Lagos
in 1997 for a term of 18 months with automatic one-year extensions. If, during
the term of the employment agreement, Mr. Lagos' employment is terminated in
connection with or subsequent to a change of control of Southern Financial by
(i) Southern Financial other than for cause or as a result of Mr. Lagos' death,
disability or retirement, or (ii) Mr. Lagos for good reason (as provided in the
employment agreement), Mr. Lagos shall be entitled to receive severance pay
equal to 150% of the total cash compensation paid to him during the previous 12
months. The term "change in control" as used in his
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<PAGE>
agreement shall refer generally to (i) the acquisition of 40% or more of the
voting securities of Southern Financial by any "person" or "group" (within the
definition of Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended), (ii) a change in the composition of the board to less than a majority
of incumbent directors (as defined in the agreement), or (iii) the approval by
Southern Financial's shareholders of either a business combination with any
other person or group, other than a merger or consolidation that would result in
the Southern Financial common stock outstanding immediately prior thereto
representing at least 50% of the Southern Financial common stock of the
surviving entity outstanding immediately thereafter, or a plan of liquidation or
sale or disposition of all or substantially all of Southern Financial's assets.
Certain Relationships and Related Transactions
Georgia S. Derrico, Chairman of the Board and Chief Executive Officer
and a director of Southern Financial, and R. Roderick Porter, President and
Chief Operating Officer and a director of Southern Financial, are married to
each other.
DESCRIPTION OF CAPITAL SECURITIES
Under the amended and restated declaration of trust (the "declaration),
the trust will issue the capital securities and the common securities, which
will represent beneficial ownership interests in the trust. The declaration will
be qualified under the Trust Indenture Act of 1939 (the "Trust Indenture Act").
This summary of certain provisions of the capital securities, the common
securities and the declaration does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
declaration, including the definitions therein of certain terms. The form of the
declaration is available upon request from the trustees.
General
The capital securities will be limited to $12.0 million aggregate
liquidation amount at any one time outstanding. The trust reserves the right to
increase the aggregate liquidation amount by not more than $1.8 million. The
liquidation amount for each capital security is $10.00. The capital securities
will rank equally, and payments will be made thereon pro rata, with the common
securities except as described under "Subordination of Common Securities" on
page 60. Legal title to the junior subordinated debt securities will be held by
the property trustee on behalf of the trust in trust for the benefit of the
holders of the capital securities and common securities. The guarantee agreement
we will execute for the benefit of the holders of the capital securities (the
"guarantee agreement") will provide for the guarantee on a subordinated basis
with respect to the capital securities but will not guarantee payment of
distributions or amounts payable on redemption of the capital securities or on
liquidation of the trust when the trust does not have funds on hand available to
make such payments.
Distributions
The capital securities represent beneficial ownership interests in the
trust. Distributions on each capital security will be payable at _____% per
annum of the stated liquidation amount of $10. Distributions will be payable
quarterly in arrears on the 15th day of January, April, July and October of each
year to the holders of the capital securities at the close of business on the
business day immediately preceding such distribution date (each, a "record
date"). A "business day" shall mean any day other than a Saturday or a Sunday,
or a day on which banking institutions in Richmond, Virginia are authorized or
required by law or executive order to remain closed, or a day on which the
corporate trust office of the property trustee or the debenture trustee is
closed for business.
Distributions on the capital securities will be cumulative.
Distributions will accumulate from the issue date. The first distribution date
for the capital securities will be______ 15, 2000. The amount of distributions
payable for
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any period will be computed on the actual number of days elapsed in a year of
twelve 30-day months. If any date on which distributions are payable on the
capital securities is not a business day, payment of the distributions payable
on such date will be made on the next succeeding day that is a business day (and
without any additional distributions or other payments in respect to any such
delay) with the same force and effect as if made on the date such payment was
originally payable (each date on which distributions are payable in accordance
with the foregoing a "distribution date").
An agreement known as the junior subordinated indenture (the
"indenture") sets forth our obligations with respect to the junior subordinated
debt securities. It also contains the trust's rights as the holder of the junior
subordinated debt securities. So long as no Debenture Event of Default has
occurred and is continuing, we have the right under the indenture to defer the
payment of interest on the junior subordinated debt securities at any time or
from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each interest deferral period. However, no interest deferral
period may extend beyond the stated maturity of the junior subordinated debt
securities which is _____ 15, 2030. As a consequence of any such election,
quarterly distributions on the capital securities by the trust will be deferred
during any such interest deferral period. Distributions to which holders of the
capital securities are entitled will accumulate additional distributions thereon
at ____% per annum thereof, compounded quarterly from the relevant payment date
for such distributions during any interest deferral period, to the extent
permitted by applicable law. The term "distributions" as used herein shall
include any such additional distributions.
During any interest deferral period, we may not:
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect
to, any of our capital stock (which includes common and
preferred stock);
o make any payment of principal, interest or premium, if any, on
or repay, repurchase or redeem any debt securities we issue
that rank equally with or junior in interest to the junior
subordinated debt securities; or
o make any guarantee payments with respect to any guarantee by
us of the debt securities of any subsidiary we own if such
guarantee ranks equally with or junior in interest to the
junior subordinated debt securities.
However, during an interest deferral period, we may:
o pay dividends or make distributions in our own common stock;
o declare a dividend in connection with the implementation of a
stockholders' rights plan, issue stock under any such plan in
the future, or redeem or repurchase any such rights pursuant
thereto;
o make payments under the guarantee;
o purchase or acquire shares of our own common stock in
connection with the satisfaction by us of our obligations
under any employee benefit plan or any other contractual
obligation (other than a contractual obligation ranking
equally with or junior to the junior subordinated debt
securities);
o make a distribution as a result of a reclassification of our
capital stock or the exchange or conversion of one class or
series of our capital stock for another class or series of our
capital stock; or
o purchase fractional interests in shares of our stock pursuant
to the conversion or exchange provisions, of such capital
stock or the security being converted or exchanged.
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Prior to the termination of any interest deferral period, we may
further extend such interest deferral period. However, no interest deferral
period may exceed 20 consecutive quarterly periods or extend beyond _______ 15,
2030. Upon the termination of any interest deferral period and the payment of
all amounts then accrued and unpaid on the junior subordinated debt securities
(together with interest thereon accrued at _____% per annum, compounded
quarterly, to the extent permitted by applicable law), we may elect to begin a
new interest deferral period. No interest or other amounts shall be due and
payable during an interest deferral period, except at the end thereof.
We must give the property trustee, the administrative trustees and the
debenture trustee notice of our election of any such interest deferral period at
least three business days prior to the earlier of the date the distributions on
the capital securities would have been payable except for the election to begin
such interest deferral period or the date the administrative trustees are
required to give notice to any automated quotation system or to holders of such
capital securities of the record date or the date such distributions are
payable, but in any event not less than three business days prior to such record
date. The debenture trustee shall give notice of our election to begin or extend
an interest deferral period to the holders of the capital securities. There is
no limitation on the number of times that we may elect to begin an interest
deferral period.
We have no current intention of exercising our right to defer payments
of interest on the junior subordinated debt securities.
The revenue of the trust available for distribution to holders of the
capital securities will be limited to payments under the junior subordinated
debt securities. If we do not make interest payments on the junior subordinated
debt securities, the property trustee will not have funds available to pay
distributions on the capital securities. The payment of distributions (if and to
the extent the trust has funds legally available for the payment of such
distributions and cash sufficient to make such payments) is guaranteed by us on
a limited basis as set forth herein under "Description of Guarantee."
Events That Will Cause Redemption of Capital Securities
Upon the repayment or redemption, in whole or in part, of the junior
subordinated debt securities, whether at maturity or upon earlier redemption as
provided in the indenture, the proceeds from such repayment or redemption shall
be applied by the property trustee to redeem a Like Amount (as defined below) of
the common securities and capital securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "redemption price") equal to
the aggregate liquidation amount of such capital securities plus accumulated but
unpaid distributions thereon to the date of redemption (the "redemption date")
and the related amount of the premium, if any, paid by the us upon the
concurrent redemption of such junior subordinated debt securities. If less than
all the junior subordinated debt securities are to be repaid or redeemed on a
redemption date, then the proceeds from such repayment or redemption shall be
allocated to the redemption pro rata of the capital securities and the common
securities. The amount of premium, if any, paid by us upon the redemption of all
or any part of the junior subordinated debt securities to be repaid or redeemed
on a redemption date shall be allocated to the redemption pro rata of the
capital securities and the common securities.
We have the right to redeem the junior subordinated debt securities (i)
on or after____ 15, 2005, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event (each as defined below), in each case subject to
possible regulatory approval. A redemption of the junior subordinated debt
securities would cause a mandatory redemption of a Like Amount of the capital
securities and common securities at the redemption price.
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The redemption price, in the case of a redemption on or after ________
15, 2005, shall equal the following prices, expressed in percentages of the
liquidation amount (as defined below), together with accumulated distributions
to but excluding the date fixed for redemption, if redeemed during the 12-month
period beginning ______ 15:
Year redemption price
---- ----------------
2005 ___% ($ )
2006
2007
2008
2009
2010
2011
2012
2013
2014
and at 100% on or after ____15, 2015
The redemption price, in the case of a redemption prior to _______ 15,
2005 following a Tax Event, Investment Company Event or Capital Treatment Event,
will equal for each Capital Security the Make-Whole Amount for a corresponding
$10 principal amount of junior subordinated debt securities together with
accumulated distributions to but excluding the date fixed for redemption. The
"Make-Whole Amount" will be equal to the greater of (i) 100% of the principal
amount of such junior subordinated debt securities and (ii) as determined by a
Quotation Agent (as defined below), the sum of the present values of the
principal amount and premium payable as part of the redemption price with
respect to an optional redemption of such junior subordinated debt securities on
_______ 15, 2005 together with the present values of scheduled payments of
interest (not including the portion of any such payments of interest accrued as
of the redemption date) from the redemption date to _____15, 2005 (the
"Remaining Life"), in each case discounted to the redemption date on a quarterly
basis (assuming a 360-day year consisting of 30-day months) at the Adjusted
Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the Treasury Rate plus (i) 2.00% if such redemption date occurs on or before
April 15, 2001 or (ii) 1.25% if such redemption date occurs after April 15, 2001
"Treasury Rate" means:
o the yield, under the heading which represents the average for
the week immediately prior to the calculation date, appearing
in the most recently published statistical release designated
"H.15 (519)" or any successor publication which is published
weekly by the Federal Reserve and which establishes yields on
actively traded United States Treasury securities adjusted to
constant maturity under the caption "Treasury Constant
Maturities," for the maturity corresponding to the Remaining
Life (if no maturity is within three months before or after
the Remaining Life, yields for the two published maturities
most closely corresponding to the Remaining Life shall be
determined and the Treasury Rate shall be interpolated or
extrapolated from such yields on a straight-line basis,
rounding to the nearest month); or
o if such release (or any successor release) is not published
during the week preceding the calculation date or does not
contain such yields, the rate per annum equal to the
semi-annual equivalent yield to maturity of the Comparable
Treasury
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Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption
date. The Treasury Rate shall be calculated on the third
business day preceding the redemption date.
"Like Amount" means, with respect to a redemption of common securities
and capital securities, common securities and capital securities having a
liquidation amount (as defined below) equal to that portion of the principal
amount of junior subordinated debt securities to be contemporaneously redeemed
in accordance with the Junior Subordinated indenture, allocated to the common
securities and to the capital securities based upon the relative liquidation
amounts of such classes. With respect to a distribution of junior subordinated
debt securities to holders of common securities and capital securities in
connection with a dissolution or liquidation of the trust, "Like Amount" means
junior subordinated debt securities having a principal amount equal to the
liquidation amount of the common securities and capital securities of the holder
to whom such junior subordinated debt securities are distributed.
"Tax Event" means the receipt by the trust of an opinion of our counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance of
the capital securities, there is more than an insubstantial risk that:
o the trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with
respect to income received or accrued on the junior
subordinated debt securities;
o interest payable by us on the junior subordinated debt
securities is not, or within 90 days of the delivery of such
opinion, will not be, deductible, in whole or in part, for
United States federal income tax purposes; or
o the trust is, or will be within 90 days of the delivery of
such opinion, subject to more than a de minimis amount of
other taxes, duties or other governmental charges.
"Investment Company Event" means the receipt by the trust of an opinion
of our counsel experienced in such matters to the effect that, as a result of
the occurrence of a change in law or regulation or a written change (including
any announced prospective change) in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the trust is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act, which change or prospective change becomes effective or
would become effective, as the case may be, on or after the date of the issuance
of the capital securities.
"Capital Treatment Event" means the reasonable determination by us
that, as a result of the occurrence of any amendment to, or change (including
any announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such pronouncement, action or decision
is announced on or after the date of issuance of the capital securities, there
is more than an insubstantial risk that we will not be entitled to treat an
amount equal to the liquidation amount of the capital securities as "Tier I
Capital" (or the then equivalent thereof) for purposes of the risk-based capital
adequacy guidelines of the Federal Reserve, as then in effect and applicable us.
Payment of Additional Sums. If a Tax Event involving the payment of
taxes by the trust has occurred and is continuing and the trust is the holder of
all the junior subordinated debt securities, we will pay Additional Sums (as
defined below), if any, on the junior subordinated debt securities.
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"Additional Sums" means the additional amounts as may be necessary in
order that the amount of distributions then due and payable by the trust on the
outstanding capital securities and common securities of the trust will not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the trust has become subject as a result of a Tax Event.
Procedures for Redeeming Capital Securities
Common securities and capital securities shall be redeemed, if at all,
at the applicable redemption price with the proceeds from the contemporaneous
repayment or redemption of the junior subordinated debt securities. Redemptions
of the common securities and capital securities shall be made and the redemption
price shall be payable on each redemption date (as defined below) only to the
extent that the trust has funds on hand available for the payment of such
redemption price. See also "Subordination of Common Securities" on page 60.
If the trust gives a notice of redemption in respect of the capital
securities, then, by 12:00 noon, Richmond, Virginia time, on the date fixed for
redemption (the "redemption date"), to the extent funds are available, with
respect to the capital securities held in global form, the property trustee will
deposit irrevocably with DTC funds sufficient to pay the redemption price and
will give DTC irrevocable instructions and authority to pay the redemption price
to the holders of the capital securities. With respect to the capital securities
held in certificated form, the property trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the capital
securities funds sufficient to pay the redemption price and will give such
paying agent irrevocable instructions and authority to pay the redemption price
to the holders thereof upon surrender of their certificates evidencing the
capital securities. Notwithstanding the foregoing, distributions payable on or
prior to the redemption date shall be payable to the holders of the capital
securities on the relevant record dates for the related distribution dates.
If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of the holders of the
capital securities will cease, except the right of the holders of the capital
securities to receive the redemption price, but without interest on such
redemption price, and the capital securities will cease to be outstanding. In
the event that any date fixed for redemption of capital securities is not a
business day, then payment of the redemption price payable on such date will be
made on the next succeeding day which is a business day (and without any
interest or other payment in respect of any such delay), except that, if such
business day falls in the next calendar year, such payment will be made on the
immediately preceding business day. In the event that payment of the redemption
price is improperly withheld or refused and not paid either by the trust or by
us pursuant to the guarantee, distributions on capital securities will continue
to accrue at the then applicable rate, from the redemption date originally
established by the trust to the date such redemption price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the redemption price.
Subject to applicable law (including, without limitation, United States
federal securities laws), we or our subsidiaries may at any time and from time
to time purchase outstanding capital securities by tender in the open market or
by private agreement.
Notice of any redemption (other than at the stated maturity of the
junior subordinated debt securities) will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of common securities
and capital securities at its registered address. Unless we default in payment
of the redemption price on, or in the repayment of, the junior subordinated debt
securities, on and after the redemption date, distributions will cease to accrue
on the common securities and capital securities called for redemption.
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Liquidation of the Trust and Distribution of Junior Subordinated Debt Securities
We, as the holder of the outstanding common securities, will have the
right at any time (including, without limitation, upon the occurrence of a Tax
Event or Capital Treatment Event) to terminate the trust and cause a Like Amount
of the junior subordinated debt securities to be distributed to the holders of
the common securities and capital securities upon liquidation of the trust. Such
right to terminate is subject to prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
Upon liquidation of the trust and certain other events, the junior
subordinated debt securities may be distributed to holders of the capital
securities. Under current United States federal income tax law, a distribution
of junior subordinated debt securities upon the dissolution of the trust would
not be a taxable event to holders of the capital securities. If, however, the
trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of dissolution of the trust,
the distribution of the junior subordinated debt securities may constitute a
taxable event to holders of capital securities.
The trust shall automatically terminate upon the first to occur of:
o Our bankruptcy, dissolution or liquidation;
o the distribution of a Like Amount of the junior subordinated
debt securities to the holders of the common securities and
capital securities if we have given written direction to the
property trustee to terminate the trust (which direction is
optional and, except as described above, wholly within our
discretion);
o redemption of all of the common securities and capital
securities as described under "Events That Will Cause
Redemption of Capital Securities" above;
o expiration of the term of the trust; and
o the entry of an order for the dissolution of the trust by a
court of competent jurisdiction.
If an early termination occurs as described above, unless the common
securities and capital securities are redeemed, the trust shall be liquidated by
the trustees as expeditiously as the trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the trust as
provided by applicable law, to the holders of such common securities and capital
securities a Like Amount of the junior subordinated debt securities, unless such
distribution would not be practical, in which event such holders will be
entitled to receive out of the assets of the trust available for distribution to
holders, after satisfaction of liabilities to creditors of the trust as provided
by applicable law, an amount equal to, in the case of holders of capital
securities, the aggregate of the liquidation amount plus accumulated and unpaid
distributions thereon to the date of payment (such amount being the "liquidation
distribution ").
If the liquidation distribution can be paid only in part because the
trust has insufficient assets available to pay in full the aggregate liquidation
distribution, then the amounts payable directly by the trust on the capital
securities shall be paid on a pro rata basis. The holder(s) of the common
securities will be entitled to receive distributions upon any such liquidation
pro rata with the holders of the capital securities, except that if a Debenture
Event of Default (or an event that, with notice or passage of time, would become
such an Event of Default) or an Event of Default under the declaration has
occurred and is continuing, the capital securities shall have a priority over
the common securities with respect to any such distributions. If an early
termination occurs as the result of a court order, the junior subordinated debt
securities will be subject to optional redemption in whole (but not in part).
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If we elect not to redeem the junior subordinated debt securities prior
to maturity and the trust is not liquidated and the junior subordinated debt
securities are not distributed to holders of the common securities and capital
securities, the capital securities will remain outstanding until the repayment
of the junior subordinated debt securities at the stated maturity.
On and after the liquidation date is fixed for any distribution of
junior subordinated debt securities to holders of the common securities and
capital securities:
o the capital securities will no longer be deemed to be
outstanding;
o DTC or its nominee, as the record holder of the capital
securities, will receive a registered global certificate or
certificates representing the junior subordinated debt
securities to be delivered upon such distribution with respect
to capital securities held by DTC or its nominee; and
o any certificates representing capital securities not held by
DTC or its nominee will be deemed to represent junior
subordinated debt securities having a principal amount equal
to the liquidation amount of such capital securities and
bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid distributions on such capital
securities until such certificates are presented to the
administrative trustees or their agent for cancellation,
whereupon we will issue to such holder, and the debenture
trustee will authenticate, a certificate representing such
junior subordinated debt securities.
There can be no assurance as to the market prices for the capital
securities or the junior subordinated debt securities that may be distributed in
exchange for the common securities and capital securities if a dissolution and
liquidation of the trust were to occur. Accordingly, the capital securities that
an investor may purchase, or the junior subordinated debt securities that the
investor may receive on dissolution and liquidation of the trust, may trade at a
discount to the price that the investor paid to purchase the capital securities
offered hereby.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the capital
securities and common securities, as applicable, shall be made pro rata to the
holders of capital securities and common securities based on the liquidation
amount of the common securities and capital securities. However, if on any
distribution date or redemption date any Debenture Event of Default (or an event
that, with notice or passage of time, would become such an Event of Default) or
an Event of Default under the declaration shall have occurred and be continuing,
no payment of any distribution on, or redemption price of, any of the common
securities, and no other payment on account of the redemption, liquidation or
other acquisition of such common securities, shall be made unless payment in
full in cash of all accumulated and unpaid distributions on all of the
outstanding capital securities for all distribution periods terminating on or
prior thereto, or, in the case of payment of the redemption price, the full
amount of such redemption price on all of the outstanding capital securities,
shall have been made or provided for, and all funds available to the property
trustee shall first be applied to the payment in full in cash of all
distributions on, or the redemption price of, the capital securities then due
and payable.
In the case of any Event of Default under the declaration resulting
from a Debenture Event of Default, we as holder of the common securities will be
deemed to have waived any right to act with respect to any such Event of Default
under the declaration until the effect of all such Events of Default have been
cured, waived or otherwise eliminated. Until all such Events of Default under
the declaration have been so cured, waived or otherwise eliminated, the property
trustee shall act solely on behalf of the holders of such capital securities and
not on our behalf as holder of the common securities, and only the holders of
the capital securities will have the right to direct the property trustee to act
on their behalf.
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Events That Are a Default Under the Declaration
Any one of the following events constitutes an "Event of Default" under
the declaration (an "Event of Default") (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
o the occurrence of a Debenture Event of Default (as described
on page 73); or
o default by the trust in the payment of any distribution when
it becomes due and payable, and continuation of such default
for a period of 30 days; or
o default by the trust in the payment of any redemption price of
any common security or capital security when it becomes due
and payable; or
o default in the performance, or breach, in any material
respect, of any covenant or warranty of the trustees in the
declaration (other than a covenant or warranty, a default in
the performance of which or the breach of which is addressed
in the second and third points above), and continuation of
such default or breach for a period of 60 days after there has
been given, by registered or certified mail, to the defaulting
trustee or trustees by the holders of at least 25% in
aggregate liquidation amount of the outstanding capital
securities, a written notice specifying such default or breach
and requiring it to be remedied and stating that such notice
is a "notice of default" under the declaration; or
o the occurrence of certain events of bankruptcy or insolvency
with respect to the property trustee and our failure to
appoint a successor property trustee within 60 days thereof.
Within five business days after the occurrence of any Event of Default
actually known to the property trustee, the property trustee shall transmit
notice of such Event of Default to the holders of the capital securities, the
administrative trustees and to us, unless such Event of Default shall have been
cured or waived. We and the administrative trustees are required to file
annually with the property trustee a certificate as to whether or not they are
in compliance with all the conditions and covenants applicable to them under the
declaration.
If a Debenture Event of Default (or an event that with notice or the
passage of time, would become such an Event of Default) or an Event of Default
under the declaration has occurred and is continuing, the capital securities
shall have a preference over the common securities as described above.
Removal of Trustees
Unless a Debenture Event of Default shall have occurred and be
continuing, we may remove any trustee at any time. If a Debenture Event of
Default has occurred and is continuing, the property trustee and the Delaware
trustee may be removed at such time by the holders of a majority in liquidation
amount of the outstanding capital securities. In no event will the holders of
the capital securities have the right to vote to appoint, remove or replace the
administrative trustees, which voting rights are exclusively ours as the holder
of the common securities. No resignation or removal of a trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
declaration.
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Co-trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act or of any jurisdiction in which any part of the trust's
property may at the time be located, we, as the holder of the common securities,
and the administrative trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the property trustee, of all or any
part of such trust's property, or to act as separate trustee of any such
property, in either case with such powers as may be provided in the instrument
of appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the declaration. In case a Debenture Event of Default has occurred
and is continuing, the property trustee alone shall have power to make such
appointment.
Merger or Consolidation of Trustees
Any person into which the property trustee, the Delaware trustee or any
administrative trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such trustee shall be a party, or any
person succeeding to all or substantially all the corporate trust business of
such trustee, shall be the successor of such trustee under the declaration,
provided such person shall be otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The trust may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below or as otherwise set forth in the declaration.
The trust may, at our request, with the consent of the administrative
trustees but without the consent of the holders of the capital securities, the
property trustee or the Delaware trustee, merge with or into, consolidate,
amalgamate or be replaced by, or convey, transfer or lease its properties and
assets substantially as an entirety to, a trust organized as such under the laws
of any State. However, in connection with any transaction:
o such successor entity either must (a) expressly assume all of
the obligations of the trust with respect to the capital
securities or (b) substitute for the capital securities other
securities having substantially the same terms as the capital
securities (the "successor securities") so long as the
successor securities rank the same as the capital securities
rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise;
o we must appoint a trustee of such successor entity possessing
the same powers and duties as the property trustee as the
holder of the junior subordinated debt securities;
o the successor securities must be listed or traded, or any
successor securities will be listed or traded upon
notification of issuance, on any national securities exchange
or other organization on which the capital securities are then
listed or traded, if any;
o such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease may not adversely affect the
rights, preferences and privileges of the holders of the
capital securities (including any successor securities) in any
material respect;
o such successor entity must have a purpose identical and
limited to that of the trust;
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o prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, we must receive an
opinion from independent counsel to the trust experienced in
such matters to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and
privileges of the holders of the capital securities (including
any successor securities) in any material respect, and (b)
following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the trust
nor such successor entity will be required to register as an
investment company under the Investment Company Act of 1940
(the "Investment Company Act"); and
o we or any permitted successor or assignee must own all of the
common securities of such successor entity and guarantee the
obligations of such successor entity under the successor
securities at least to the extent provided by the guarantee.
The trust may not, however, except with the consent of holders of 100%
in liquidation amount of the common securities and capital securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it, if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the trust or the
successor entity to be classified as an association taxable as a corporation or
as other than a grantor trust for United States federal income tax purposes.
Voting Rights of Capital Securities; Amendment of the Declaration
Except as provided below and under "Description of Guarantee -
Amendments and Assignment" and as otherwise required by law and the declaration,
the holders of the capital securities will have no voting rights.
The declaration may be amended from time to time by us, the property
trustee and the administrative trustees, without the consent of the holders of
the capital securities, to:
o cure any ambiguity, correct or supplement any provision in the
declaration that may be inconsistent with any other provision,
or to make any other provisions with respect to matters or
questions arising under the declaration, which shall not be
inconsistent with the other provisions of the declaration, or
o modify, eliminate or add to any provisions of the declaration
to such extent as shall be necessary to ensure that the trust
will be classified for United States federal income tax
purposes as a grantor trust or as other than an association
taxable as a corporation at all times that any common
securities and capital securities are outstanding or to ensure
that the trust will not be required to register as an
"investment company" under the Investment Company Act.
However, amendment made under the first point above may not adversely
affect in any material respect the interests of any holder of common securities
and capital securities. Any amendments of the declaration shall become effective
when notice thereof is given to the holders of the common securities and capital
securities.
The declaration may otherwise be amended by the trustees and us with
the consent of holders representing not less than a majority (based upon
liquidation amounts) of the outstanding capital securities, and receipt by the
trustees of an opinion of counsel to the effect that such amendment or the
exercise of any power granted to the trustees in accordance with such amendment
will not cause the trust to be classified as an association taxable as a
corporation or affect the trust's status as a grantor trust for United States
federal income tax purposes or the trust's exemption from status as an
"investment company" under the Investment Company Act.
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However, without the consent of each holder of common securities and
capital securities, the declaration may not be amended to change the amount or
timing of any distribution on the common securities and capital securities or
otherwise adversely affect the amount of any distribution required to be made in
respect of the common securities and capital securities as of a specified date
or restrict the right of a holder of common securities and capital securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any junior subordinated debt securities are held by the
trust, the trustees shall not:
o direct the time, method and place of conducting any proceeding
for any remedy available to the debenture trustee, or
executing any trust or power conferred on the property trustee
with respect to the junior subordinated debt securities;
o waive any past default that is waivable under Section 5.13 of
the indenture;
o exercise any right to rescind or annul a declaration that the
principal of all the junior subordinated debt securities shall
be due and payable or
o consent to any amendment, modification or termination of the
indenture or the junior subordinated debt securities, where
such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in
aggregate liquidation amount of all outstanding capital
securities.
However, where a consent under the indenture would require the consent
of each holder of junior subordinated debt securities affected thereby, no such
consent shall be given by the property trustee without the prior consent of each
holder of the capital securities. The trustees shall not revoke any action
previously authorized or approved by a vote of the holders of the capital
securities except by subsequent vote of such holders. The property trustee shall
notify each holder of capital securities of any notice of default with respect
to the junior subordinated debt securities. In addition to obtaining the
foregoing approvals of such holders of the capital securities, prior to taking
any of the foregoing actions, the trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the trust will not be classified
as an association taxable as a corporation for United States federal income tax
purposes as a result of such action and such action would not cause the trust to
be classified as other than a grantor trust for United States federal income tax
purposes.
Any required approval of holders of capital securities may be given at
a meeting of such holders convened for such purpose or pursuant to written
consent. The property trustee will cause a notice of any meeting at which
holders of capital securities are entitled to vote, or of any matter upon which
action by written consent of such holders is to be taken, to be given to each
holder of record of capital securities in the manner set forth in the
declaration.
No vote or consent of the holders of capital securities will be
required for the trust to redeem and cancel the capital securities in accordance
with the declaration.
Notwithstanding that holders of the capital securities are entitled to
vote or consent under any of the circumstances described above, any of the
capital securities that are owned by us, the trustees or any affiliate of us or
any trustees, shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
Payment of Expenses and Taxes of the Trust
In the indenture, we, as borrower, have agreed to pay all debts,
expenses and other obligations of the trust (other than payments of
distributions, amounts payable upon redemption and the liquidation amount of the
common securities and capital securities). These expenses include costs and
expenses relating to the organization of the trust,
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the fees and expenses of the trustees, the costs and expenses of operating the
trust, costs of offering the capital securities, and all taxes and all costs and
expenses with respect to the foregoing (other than United States withholding
taxes) to which the trust might become subject. The foregoing obligations under
the indenture are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses and taxes are owed (a
"creditor") whether or not such creditor has received notice thereof. Any
creditor may enforce such obligations directly against us, and we have
irrevocably waived any right or remedy to require that any such creditor take
any action against the trust or any other person before proceeding against us.
We have also agreed in the indenture to execute such additional agreement(s) as
may be necessary or desirable to give full effect to the foregoing.
Form, Denomination, Book-Entry Procedures and Transfer of Capital Securities
The Depository Trust Company ("DTC") will act as securities depositary
for the capital securities issued by the trust. The capital securities will be
issued only as fully-registered securities registered in the name of Cede & Co.
(DTC's nominee). One or more fully-registered global capital securities
certificates, representing the total aggregate number of the capital securities,
will be issued to and deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("participants") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
participants and by the New York Stock Exchange, the American Stock Exchange,
Inc., and the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others, such as securities brokers and dealers,
banks and trust companies that clear transactions through or maintain a direct
or indirect custodial relationship with a participant either directly or
indirectly ("indirect participants"). The rules applicable to DTC and its
participants are on file with the Securities and Exchange Commission.
Purchases of capital securities under the DTC system must be made by or
through participants, which will receive a credit for the capital securities on
DTC's records. The ownership interest of each actual purchaser of each capital
security ("beneficial owner") is in turn to be recorded on the participants' and
indirect participants' records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the participants or indirect
participants through which the beneficial owners purchased capital securities.
Transfers of ownership interests in capital securities are to be accomplished by
entries made on the books of participants acting on behalf of beneficial owners.
Beneficial owners will not receive certificates representing their ownership
interests in capital securities, except in the event that use of the book-entry
system for capital securities is discontinued.
DTC has no knowledge of the actual beneficial owners of any such
capital securities. DTC's records reflect only the identity of the participants
to whose accounts such capital securities are credited, which may or may not be
the beneficial owners. The participants and indirect participants will remain
responsible for keeping account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
global capital security, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the capital securities represented
thereby for all purposes under the declaration and the capital securities. No
beneficial owner of an interest in a global capital
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security will be able to transfer that interest except in accordance with DTC's
applicable procedures, in addition to those provided for under the declaration.
DTC has advised us that it will take any action permitted to be taken
by a holder of capital securities (including presentation of capital securities
for exchange as described below) only at the direction of one or more
participants to whose account the interests in global capital securities are
credited and only in respect of such portion of the aggregate liquidation amount
of capital securities as to which such participant or participants has or have
given such direction. However, if there is an Event of Default, DTC will
exchange the global capital securities representing such capital securities for
certificated securities, which it will distribute to its participants.
Conveyance of notices and other communications by DTC to participants,
by participants to indirect participants, and by participants and indirect
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Redemption notices, if applicable, in respect of any capital securities
held in book-entry form will be sent to Cede & Co. If less than all of such
capital securities are being redeemed, DTC will determine the amount of the
interest of each participant to be redeemed in accordance with its procedures.
Although voting with respect to any of the capital securities is
limited, in those cases where a vote is required, neither DTC nor Cede & Co.
will itself consent or vote with respect to the capital securities. Under its
usual procedures, DTC would mail an omnibus proxy to the trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those participants to whose accounts the capital
securities are credited on the record date (identified in a listing attached to
the omnibus proxy).
Except as provided herein, a beneficial owner of an interest in a
global capital security will not be entitled to receive physical delivery of the
capital securities represented thereby. Accordingly, each beneficial owner must
rely on the procedures of DTC to exercise any rights under the capital
securities.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in global capital securities among
participants of DTC, DTC is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither Southern Financial Bancorp, Inc., the trust nor the trustees of the
trust will have any responsibility for the performance by DTC or its
participants or indirect participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as securities depositary with
respect to any of the capital securities at any time by giving notice to the
trust. Under such circumstances, in the event that a successor securities
depositary is not obtained, capital security certificates are required to be
printed and delivered. Additionally, the trust (with our consent) may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depositary). In that event, certificates for the capital securities
will be printed and delivered. In each of the above circumstances, we will
appoint a paying agent with respect to the capital securities.
The laws of some states require that certain persons take physical
delivery in certificated form of certain securities, such as the capital
securities, that they own. Consequently, the ability to transfer beneficial
interests in a global capital security to such persons will be limited to that
extent. Because DTC can act only on behalf of participants, which in turn act on
behalf of indirect participants and certain banks, the ability of a person
having beneficial interests in a global capital security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests.
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Except as described below, owners of beneficial interests in the global
capital securities will not be entitled to have capital securities registered in
their names, will not receive or be entitled to receive physical delivery of
capital securities in certificated form and will not be considered the
registered owners or holders thereof under the declaration for any purpose.
Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A global capital security is exchangeable for capital securities in
registered certificated form if:
o DTC notifies the trust that it is no longer willing or able to
properly discharge its responsibilities with respect to the
capital securities and we are unable to locate a qualified
successor, or has ceased to be a "clearing agency" registered
under the Exchange Act;
o the trust at its sole option elects to terminate the
book-entry system through DTC; or
o there shall have occurred and be continuing a Debenture Event
of Default.
How Payments Will Be Made on the Capital Securities
Distributions on capital securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit
participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by participants and
indirect participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of such
participants and indirect participants and not of DTC, the trust or us, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of distributions to DTC is the responsibility of the trust,
disbursement of such payments to participants is the responsibility of DTC, and
disbursement of such payments to the beneficial owners is the responsibility of
participants and indirect participants.
The paying agent shall initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to the
administrative trustees and us. The paying agent shall be permitted to resign as
paying agent upon 30 days' written notice to the property trustee, the
administrative trustees and us. In the event that the property trustee shall no
longer be the paying agent, the administrative trustees shall appoint a
successor (which shall be a bank or trust company acceptable to the
administrative trustees and us) to act as paying agent.
Wilmington Trust Company has informed the trust that so long as it
serves as paying agent for the capital securities, it anticipates that
information regarding distributions on the capital securities, including payment
date, record date and redemption information, will be made available through
Wilmington Trust Company at 1100 N. Market Street, Wilmington, Delaware,
Attention: Corporate Trust Administration.
Information About Registrar and Transfer Agent
The property trustee will act as registrar and transfer agent for the
capital securities.
Registration of transfers of the capital securities will be effected
without charge by or on behalf of the trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The trust will not be required to register or cause to be
registered the transfer or exchange of the capital securities after they have
been called for redemption.
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Information About the Property Trustee
The property trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the declaration and, during the existence of an Event
of Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the property trustee is under no obligation to exercise any of the
powers vested in it by the declaration at the request of any holder of common
securities and capital securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby. If
no Event of Default has occurred and is continuing and the property trustee is
required to decide between alternative causes of action, construe ambiguous
provisions in the declaration or is unsure of the application of any provision
of the declaration, and the matter is not one on which holders of the capital
securities or the common securities are entitled under the declaration to vote,
then the property trustee shall take such action as we direct and, if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the common securities and capital securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
Miscellaneous
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that the trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes or as other than a grantor trust
for United States federal income tax purposes, and so that the junior
subordinated debt securities will be treated as our indebtedness for United
States federal income tax purposes. In this connection, we and the
administrative trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the trust or the declaration, that
we and the administrative trustees determine in our discretion to be necessary
or desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the common securities and
capital securities.
Holders of the common securities and capital securities have no
preemptive or similar rights.
The trust may not borrow money or issue debt or mortgage or pledge any
of its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
The junior subordinated debt securities are to be issued as a separate
series under the indenture, as supplemented from time to time, between us and
Wilmington Trust Company, as trustee (the "debenture trustee"). The indenture
will be qualified under the Trust Indenture Act. This summary of certain terms
and provisions of the junior subordinated debt securities and the indenture does
not purport to be complete, and where reference is made to particular provisions
of the indenture, such provisions, including the definitions of certain terms,
some of which are not otherwise defined herein, are qualified in their entirety
by reference to all of the provisions of the indenture and those terms made a
part of the indenture by the Trust Indenture Act.
General
Concurrently with the issuance of the common securities and capital
securities, the trust will invest the proceeds thereof in junior subordinated
debt securities issued by us. The junior subordinated debt securities will bear
interest at ___% per annum of the principal amount thereof, payable quarterly in
arrears on the 15th day of January, April, July and October of each year (each,
an "interest payment date"), commencing ______ 15, 2000, to the person in whose
name each junior subordinated debt security is registered, subject to certain
exceptions, at the close of business on the business day next preceding such
interest payment date. It is anticipated that, until the liquidation of the
trust, each junior subordinated debt security will be held in the name of the
property trustee in trust for the benefit of the
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holders of the common securities and capital securities. The amount of interest
payable for any period will be computed on the basis of the actual number of
days elapsed in a year of twelve 30-day months. In the event that any date on
which interest is payable on the junior subordinated debt securities is not a
business day, then payment of the interest payable on such date will be made on
the next succeeding day that is a business day (and without any interest or
other payment in respect of any such delay), with the same force and effect as
if made on the date such payment was originally payable. Accrued interest that
is not paid on the applicable interest payment date will bear additional
interest on the amount thereof (to the extent permitted by law) at _____% per
annum thereof, compounded quarterly from the relevant interest payment date. The
term "interest" as used herein shall include quarterly payments, interest on
quarterly interest payments not paid on the applicable interest payment date and
Additional Sums, as applicable.
The junior subordinated debt securities will be issued as a series of
junior subordinated debt securities under the indenture. Unless previously
redeemed or repurchased, the junior subordinated debt securities will mature
on______ 15, 2030.
The junior subordinated debt securities will be unsecured and will rank
junior and be subordinate in right of payment to all senior debt. Because
Southern Financial Bancorp, Inc. is a bank holding company, our right to
participate in any distribution of assets of any subsidiary, including Southern
Financial Bank, upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the capital securities to benefit
indirectly from such distribution), is subject to the prior claims of creditors
of such subsidiary, except to the extent that we may be recognized as a creditor
of such subsidiary. Accordingly, the junior subordinated debt securities will be
subordinated to all senior debt and effectively subordinated to all existing and
future liabilities of our subsidiaries, and holders of junior subordinated debt
securities should look only to our assets for payments on the junior
subordinated debt securities. The indenture does not limit the incurrence or
issuance of other secured or unsecured debt, including senior debt, whether
under the indenture or any existing or other indenture that we may enter into in
the future or otherwise.
The junior subordinated debt securities will rank equally with all
other debentures issued under the indenture and will be unsecured and
subordinate and junior in right of payment to the extent and in the manner set
forth in the indenture to all our senior debt. As a holding company, we conduct
our operations principally through Southern Financial Bank and, therefore, our
principal source of cash, is receipt of dividends from Southern Financial Bank.
Southern Financial Bancorp, Inc. is a legal entity separate and distinct from
Southern Financial Bank. Southern Financial Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, Southern Financial Bancorp, Inc. and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent Southern Financial Bancorp, Inc. and such other affiliates
from borrowing from Southern Financial Bank unless the loans are secured by
various types of collateral. In addition, payment of dividends to Southern
Financial Bancorp, Inc. by Southern Financial Bank is subject to ongoing review
by banking regulators and is subject to various statutory limitations and in
certain circumstances requires approval by banking regulatory authorities.
Denominations, Registration and Transfer
The junior subordinated debt securities will be represented by one or
more global certificates registered in the name of Cede & Co. as the nominee of
DTC if, and only if, distributed to the holders of the common securities and
capital securities. Until such time, the junior subordinated debt securities
will be held in the name of the property trustee in trust for the benefit of the
holders of the common securities and capital securities. Should the junior
subordinated debt securities be distributed to holders of the common securities
and capital securities, beneficial interests in the junior subordinated debt
securities will be shown on, and transfers thereof will be effected only
through, records maintained by participants in DTC. Except as described below,
junior subordinated debt securities in certificated form will not be issued in
exchange for the global certificates.
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A global security shall be exchangeable for junior subordinated debt
securities registered in the names of persons other than Cede & Co. only if:
o DTC notifies us that it is unwilling or unable to continue as
a depositary for such global security and no successor
depositary shall have been appointed, or if at any time DTC
ceases to be a "clearing agency" registered under the Exchange
Act, at a time when DTC is required to be so registered to act
as such depositary;
o we in our sole discretion determine that such global security
shall be so exchangeable; or
o there shall have occurred and be continuing a debenture event
of default.
Any global security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for certificates registered in such names as DTC
shall direct. It is expected that such instructions will be based upon
directions received by DTC from its participants with respect to ownership of
beneficial interests in such global security.
Payments on junior subordinated debt securities represented by a global
security will be made to DTC, as the depositary for the junior subordinated debt
securities. In the event junior subordinated debt securities are issued in
certificated form, principal and interest will be payable, the transfer of the
junior subordinated debt securities will be registrable, and junior subordinated
debt securities will be exchangeable for junior subordinated debt securities of
other denominations of a like aggregate principal amount, at the corporate
office of the debenture trustee in Wilmington, Delaware, or at the offices of
any paying agent or transfer agent we appoint, provided that payment of interest
may be made at our option by check mailed to the address of the persons entitled
thereto or by wire transfer.
If the junior subordinated debt securities are distributed to the
holders of the common securities and capital securities upon the termination of
the trust, the form, denomination, book-entry and transfer procedures with
respect to the capital securities as described under "Description of Capital
Securities - Form, Denomination, Book-Entry Procedures and Transfer of Capital
Securities," shall apply to the junior subordinated debt securities.
How Payments Will Be Made on the Junior Subordinated Debt Securities
Payment of principal of and any interest on junior subordinated debt
securities will be made at the office of the debenture trustee in Wilmington,
Delaware or at the office of such paying agent or paying agents as we may
designate from time to time, except that at our option payment of any interest
may be made (except in the case of junior subordinated debt securities in global
form), by check mailed to the address of the person entitled thereto as such
address shall appear in the register for junior subordinated debt securities or
by wire transfer to an account specified by the person entitled thereto as
specified in such register, provided that proper transfer instructions have been
received by the relevant record date. Payment of any interest on any junior
subordinated debt security will be made to the person in whose name such junior
subordinated debt security is registered at the close of business on the record
date for such interest, except in the case of defaulted interest. We may at any
time designate additional paying agents or rescind the designation of any paying
agent; however the we will at all times be required to maintain a paying agent
in each place of payment for the junior subordinated debt securities.
Any moneys deposited with the debenture trustee or any paying agent, or
then held by us in trust, for the payment of the principal of or interest on any
junior subordinated debt security and remaining unclaimed for two years after
such principal or interest has become due and payable shall, at our request, be
repaid to us and the holder of such junior subordinated debt security shall
thereafter look, as a general unsecured creditor, only to us for payment
thereof.
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Our Option to Defer Interest Payments
So long as no Debenture Event of Default has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the junior subordinated debt securities at any time or from time to
time for a period not exceeding 20 consecutive quarterly periods with respect to
each interest deferral period, provided, that no interest deferral period may
extend beyond _____ 15, 2030. At the end of an interest deferral period, we must
pay all interest then accrued and unpaid on the junior subordinated debt
securities (together with interest thereon accrued at ____% per annum,
compounded quarterly from the relevant interest payment date, to the extent
permitted by applicable law). During an interest deferral period and for so long
as the junior subordinated debt securities remain outstanding, interest will
continue to accrue and holders of junior subordinated debt securities (and
holders of the capital securities while capital securities are outstanding) will
be required to accrue interest income (in the form of OID) for United States
federal income tax purposes.
With certain exceptions, during any interest deferral period, we may
not pay cash dividends on our capital stock or acquire shares of its capital
stock. Additionally, we may not make any payment on or repay, repurchase or
redeem any of our debt securities that rank equally with or junior in interest
to the junior subordinated debt securities or make any guarantee payments with
respect to any guarantee by us of the debt securities of any of our subsidiaries
if such guarantee ranks equally with or junior in interest to the junior
subordinated debt securities.
Our Option to Redeem the Junior Subordinated Debt Securities Before Maturity
The junior subordinated debt securities are redeemable prior to
maturity at our option on or after ___ 15, 2005, in whole at any time or in part
from time to time, or in whole, but not in part, at any time within 90 days
following the occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event (each as defined under "Description of
Capital Securities - Events That Will Cause Redemption of Capital Securities"),
in each case at the redemption price described below. The proceeds of any such
redemption will be used by the trust to redeem the capital securities.
The Federal Reserve's risk-based capital guidelines, which are subject
to change, currently provide that redemptions of permanent equity or other
capital instruments before stated maturity could have a significant impact on a
bank holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the junior subordinated debt securities by us prior
to ______ 15, 2030 would constitute the redemption of capital instruments under
the Federal Reserve's current risk-based capital guidelines and may be subject
to the prior approval of the Federal Reserve. The redemption of the junior
subordinated debt securities also could be subject to the additional prior
approval of the Federal Reserve under its current risk-based capital guidelines.
The redemption price for junior subordinated debt securities in the
case of a redemption on or after _____ 15, 2005 shall equal the following
prices, expressed in percentages of the principal amount, together with accrued
interest to but excluding the date fixed for redemption. If redeemed during the
12-month period beginning April 15:
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Year redemption price
---- ----------------
2005 _____% ($ )
2006
2007
2008
2009
2010
2011
2012
2013
2014
and at 100% on or after _____15, 2015
The redemption price for junior subordinated debt securities, in the
case of a redemption prior to_____ 15, 2005 following a Tax Event, Investment
Company Event or Capital Treatment Event as described above, will equal the
Make-Whole Amount (as defined under "Description of Capital Securities - Events
That Will Cause Redemption of Capital Securities"), together with accrued
interest to but excluding the date fixed for redemption.
Additional Sums We Might Have to Pay to the Trust
We have covenanted in the indenture that, if and for so long as the
trust is the holder of all junior subordinated debt securities and the trust is
required to pay any additional taxes, duties or other governmental charges as a
result of a Tax Event, we will pay as additional sums on the junior subordinated
debt securities such amounts as may be required so that the distributions
payable by the trust will not be reduced as a result of any such additional
taxes, duties or other governmental charges.
Interest on the Junior Subordinated Debt Securities
The junior subordinated debt securities shall bear interest at ______%
per annum, from the original date of issuance, payable quarterly in arrears on
the 15th day of January, April, July and October of each year, commencing _____
15, 2000, to the person in whose name such junior subordinated debt security is
registered, subject to certain exceptions, at the close of business on the
business day next preceding, such interest payment date. The term "interest" as
used herein, as such term relates to the junior subordinated debt securities,
includes any compounded interest or Additional Sums or any additional
distributions payable unless otherwise stated. In the event the junior
subordinated debt securities are not held solely in book-entry only form, we
will select relevant record dates, which shall be 15 days prior to the relevant
interest payment date.
The amount of interest payable for any period will be computed on the
basis of the actual number of days elapsed in a year of twelve 30-day months. In
the event that any date on which interest is payable on the junior subordinated
debt securities is not a business day, then payment of the interest payable on
such date will be made on the next succeeding day that is a business day (and
without any interest or other payment in respect of any such delay) with the
same force and effect as if made on such date.
How the Indenture Can Be Amended
From time to time we and the debenture trustee may, without the consent
of the holders of junior subordinated debt securities, amend, waive or
supplement the indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interest of the holders of junior
subordinated debt securities or the holders of the capital securities so long as
they remain
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outstanding) and maintaining the qualification of the indenture under the Trust
Indenture Act. The indenture contains provisions permitting us and the debenture
trustee, with the consent of the holders of not less than a majority in
principal amount of outstanding junior subordinated debt securities, to modify
the indenture in a manner affecting the rights of the holders of junior
subordinated debt securities; provided, however, that no such modification may,
without the consent of the holder of each outstanding junior subordinated debt
security so affected, change the stated maturity, or reduce the principal amount
of the junior subordinated debt securities, or reduce the rate or extend the
time of payment of interest thereon or reduce the percentage of principal amount
of junior subordinated debt securities, or have certain other effects as set
forth in the indenture.
In addition, we and the debenture trustee may execute, without the
consent of any holder of junior subordinated debt securities, any supplemental
indenture for the purpose of creating any other debentures.
What Is a Debenture Event of Default and What Are the Consequences?
The indenture provides that any one or more of the following described
events with respect to the junior subordinated debt securities that has occurred
and is continuing constitutes a "Debenture Event of Default":
o our failure for 30 days to pay any interest on the junior
subordinated debt securities when due (subject to the deferral
of any due date in the case of an interest deferral period);
or
o our failure to pay any principal on the junior subordinated
debt securities when due, whether at maturity, upon
redemption, by declaration of acceleration or otherwise; or
o our failure to observe or perform in any material respect
certain other covenants contained in the indenture for 90 days
after written notice to us from the debenture trustee or the
holders of at least 25% in aggregate outstanding principal
amount of the junior subordinated debt securities; or
o our bankruptcy, insolvency or reorganization; or
o the voluntary or involuntary dissolution, winding-up or
termination of the trust, except in connection with the
distribution of the junior subordinated debt securities to the
holder of common securities and capital securities in
liquidation of the trust, the redemption of all of the common
securities and capital securities of the trust, or certain
mergers, consolidations or amalgamations, each as permitted by
the declaration.
The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debt securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
debenture trustee. The debenture trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the junior subordinated debt
securities may declare the principal due and payable immediately upon a
Debenture Event of Default and, should the debenture trustee or such holders of
junior subordinated debt securities fail to make such declaration, the holders
of at least 25% in aggregate liquidation amount of the capital securities shall
have such right. The holders of a majority in aggregate outstanding principal
amount of the junior subordinated debt securities may annul such declaration and
waive the default if the default (other than the nonpayment of the principal of
the junior subordinated debt securities which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the debenture trustee. Should the holders of junior
subordinated debt securities fail to annul such declaration and waive such
default, the holders of a majority in aggregate liquidation amount of the
capital securities shall have such right.
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The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debt securities affected thereby may, on behalf of the
holders of all the junior subordinated debt securities, waive any past default,
except a default in the payment of principal of or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
debenture trustee) on the junior subordinated debt securities or a default in
respect of a covenant or provision which under the indenture cannot be modified
or amended without the consent of the holder of each outstanding junior
subordinated debt security. Should the holders of such junior subordinated debt
securities fail to annul such declaration and waive such default, the holders of
a majority in aggregate liquidation amount of the capital securities shall have
such right. We are required to file annually with the debenture trustee a
certificate as to whether or not we are in compliance with all the conditions
and covenants applicable to it under the indenture.
In case a Debenture Event of Default shall occur and be continuing, the
property trustee will have the right to declare the principal of and the
interest on the junior subordinated debt securities, and any other amounts
payable under the indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the junior subordinated debt
securities.
Enforcement of Rights by Holders of Capital Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to our failure to pay interest or principal on the junior
subordinated debt securities on the date such interest or principal is otherwise
payable, a holder of capital securities may institute a direct action against
us. We may not amend the indenture to remove the foregoing right to bring a
direct action against us without the prior written consent of the holders of all
of the capital securities. Notwithstanding any payments made to a holder of
capital securities by us in connection with a direct action against us, we shall
remain obligated to pay the principal of and interest on the junior subordinated
debt securities, and we shall be subrogated to the rights of the holder of such
capital securities with respect to payments on the capital securities to the
extent of any payments made by us to such holder in any direct action against
us.
The holders of the capital securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the junior subordinated debt securities unless there
shall have been an Event of Default under the declaration.
Consolidation, Merger, Sale of Assets and Other Transactions Involving Us
The indenture provides that we may not consolidate with or merge with
or into any other person or convey, transfer or lease its properties and assets
substantially as an entirety to any person, and no person shall consolidate with
or merge with or into us or convey, transfer or lease its properties and assets
substantially as an entirety to us, unless:
o in case we consolidate with or merge with or into another
person or convey or transfer our properties and assets
substantially as an entirety to any person, the successor
person is organized under the laws of the United States or any
state or the District of Columbia, and such successor person
expressly assumes our obligations on the junior subordinated
debt securities issued under the indenture;
o immediately after giving effect thereto, no Debenture Event of
Default, and no event which, after notice or lapse of time or
both, would become a Debenture Event of Default, shall have
occurred and be continuing;
o if at the time any capital securities are outstanding, such
transaction is permitted under the declaration and the
guarantee and does not give rise to any breach or violation of
the declaration or the guarantee; and
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o certain other conditions as prescribed in the indenture are
met.
The provisions of the indenture do not afford holders of the junior
subordinated debt securities protection in the event of a highly leveraged or
other transaction involving us that may adversely affect holders of the junior
subordinated debt securities.
What Does Subordination Mean to You?
In the indenture, we have covenanted and agreed that any junior
subordinated debt securities issued thereunder shall be subordinate and junior
in right of payment to all senior debt to the extent provided in the indenture.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding involving us, the holders of senior debt will first be
entitled to receive payment in full of principal of and interest, if any, on
such senior debt before the holders of junior subordinated debt securities, or
the property trustee on behalf of the holders, will be entitled to receive or
retain any payment or distribution in respect thereof.
In the event of the acceleration of the maturity of the junior
subordinated debt securities, the holders of all senior debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of the junior subordinates debt securities will be entitled to receive
or retain any payment in respect of the principal of or interest, if any, on the
junior subordinated debt securities.
If we default in the payment of any principal of or interest, if any,
on any, senior debt when the same becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration of acceleration or
otherwise, then, unless and until such default shall have been cured or waived
or shall have ceased to exist or all senior debt shall have been paid, no direct
or indirect payment (in cash, property, securities, by set-off or otherwise)
shall be made or agreed to be made for principal or interest, if any, on the
junior subordinated debt securities, or in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of the junior subordinated debt
securities.
"senior debt" means:
o the principal of, and premium, if any, and interest on all our
indebtedness for money borrowed, whether outstanding on the
date of execution of the indenture or thereafter created,
assumed or incurred, except indebtedness that is expressly
stated to rank junior to or equally with the junior
subordinated debt securities;
o all obligations (except those that are expressly stated to
rank junior to or equally with the junior subordinated debt
securities) to make payment pursuant to the terms of financial
instruments, such as,
(i) securities contracts and foreign currency exchange
contracts,
(ii) derivative instruments, such as swap agreements
(including interest rate and foreign exchange rate swap agreements),
cap agreements, floor agreements, collar agreements, interest rate
agreements, foreign exchange agreements, options, commodity futures
contracts and commodity options contracts, and
(iii) similar financial instruments;
o indebtedness or obligations of others of the kinds described
above for the payment of which we are is responsible or liable
as guarantor or otherwise, and
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o any deferrals, renewals or extensions of any such senior debt.
However, senior debt does not include
o any debt of ours which, when incurred and without respect to
any election under Section 1111 (b) of the United States
Bankruptcy Code of 1978, was without recourse to us,
o any debt of ours to any of our subsidiaries,
o debt to any of our employees,
o debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course
of business to the extent that payments made to the holders of
such debt by the holders of the junior subordinated debt
securities as a result of the subordination provisions of the
indenture would be greater than such payments otherwise would
have been as a result of any obligation of such holders of
such debt to pay amounts over to the obligees on such trade
accounts payable or accrued liabilities arising in the
ordinary course of business as a result of subordination
provisions to which such debt is subject,
o trade accounts payable or accrued liabilities arising in the
ordinary course of business and
o any other debt securities issued pursuant to the indenture.
The indenture places no limitation on the amount of senior debt that we
may incur. We expect from time to time to incur additional indebtedness
constituting senior debt. At September 30, 1998 we had no senior debt on an
unconsolidated basis. The indenture also places no limitation on the
indebtedness of our subsidiaries, which rank senior in right of payment to the
junior subordinated debt securities.
Governing Law
The indenture and the junior subordinated debt securities will be
governed by and construed in accordance with the laws of the State of Virginia.
Information About the Debenture Trustee
The debenture trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the debenture trustee is under no
obligation to exercise any of the powers vested in it by the indenture at the
request of any holder of junior subordinated debt securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The debenture trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the debenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF GUARANTEE
The guarantee will be executed and delivered by us concurrently with
the issuance by the trust of the common securities and capital securities for
the benefit of the holders from time to time of such common securities and
capital securities. Wilmington Trust Company will act as trustee (the "guarantee
trustee") under the guarantee agreement. The guarantee agreement will be
qualified under the Trust Indenture Act. This summary of certain provisions of
the guarantee does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of the
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guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act. The guarantee trustee will hold the guarantee for the benefit of
the holders of the common securities and capital securities.
General
We will irrevocably agree to pay in full on a subordinated basis, to
the extent set forth herein, the guarantee payments (as defined below) to the
holders of the common securities and capital securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the trust may
have or assert other than the defense of payment. The following payments with
respect to the common securities and capital securities, to the extent not paid
by or on behalf of the trust (the "guarantee payments"), will be subject to the
guarantee:
o any accrued and unpaid distributions required to be paid on
the common securities and capital securities, to the extent
that the trust has funds on hand available therefor at such
time,
o the redemption price with respect to common securities and
capital securities called for redemption, to the extent that
the trust has funds on hand available therefor at such time,
and
o upon a voluntary or involuntary dissolution, winding up or
liquidation of the trust (other than in connection with the
distribution of junior subordinated debt securities to the
holders of the common securities and capital securities or the
redemption of all of the capital securities) the lesser of the
liquidation distribution, to the extent the trust has funds
available therefor and the amount of assets of the trust
remaining available for distribution to holders of the common
securities and capital securities upon liquidation of the
trust after satisfaction of liabilities to creditors of the
trust as required by applicable law.
Our obligation to make a guarantee payment may be satisfied by direct
payment of the required amounts by us to the holders of the common securities
and capital securities or by causing the trust to pay such amounts to such
holders.
The guarantee will be an irrevocable guarantee on a subordinated basis
of the trust's obligations under the common securities and capital securities,
although it will apply only to the extent that the trust has funds sufficient to
make such payments, and is not a guarantee of collection. If we do not make
interest payments on the junior subordinated debt securities held by the trust,
the trust will not be able to pay distributions on the capital securities and
will not have funds legally available therefor.
The guarantee will rank subordinate and junior in right of payment to
all senior debt. As a holding company, we conduct our operations principally
through Southern Financial Bank and, therefore, our principal source of cash is
receipt of dividends from Southern Financial Bank. However, there are legal
limitations on the source and amount of dividends that a Virginia-chartered,
Federal Reserve member bank such as Southern Financial Bank is permitted to pay.
A Virginia-chartered bank may pay dividends only from net undivided profits.
Additionally, a dividend may not be paid if it would impair the paid-in capital
of the bank. In addition, prior approval of the Federal Reserve is required if
the total of all dividends declared by a member bank in any calendar year will
exceed the sum of that bank's net profits for that year and its retained net
profits for the preceding two calendar years, less any required transfers to
either surplus or any fund for the retirement of any preferred stock. At
September 30, 1999, Southern Financial Bank could have paid approximately $6.5
million in dividends to us without prior Federal Reserve approval. The payment
of dividends by Southern Financial Bank may also be affected by other factors,
such as requirements for the maintenance of adequate capital. In addition, the
Federal Reserve is authorized to determine, under certain circumstances relating
to the financial condition of Southern Financial Bank, whether the payment of
dividends would be an unsafe or unsound banking practice and to prohibit payment
thereof. The guarantee does not limit the incurrence or issuance of other
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secured or unsecured debt of by us, including senior debt, whether under the
indenture, any other indenture that we may enter into in the future or
otherwise.
Taken together, our obligations under the guarantee, the declaration,
the junior subordinated debt securities and the indenture, including our
obligation to pay the costs, expenses and other liabilities of the trust (other
than the trust's obligations to the holders of the common securities and capital
securities), provide, in the aggregate, a full, irrevocable and unconditional
guarantee of all of the trust's obligations under the capital securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the trust's obligations under the
capital securities.
Status of the Guarantee
The guarantee will constitute our unsecured obligation and will rank
subordinate and junior in right of payment to all senior debt in the same manner
as junior subordinated debt securities.
The guarantee will rank equally with all other guarantees issued by us
under the indenture. The guarantee will constitute a guarantee of payment and
not of collection (i.e., the guaranteed party may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against any other person or entity). The
guarantee will be held for the benefit of the holders of the common securities
and capital securities. The guarantee will not be discharged except by payment
of the guarantee payments in full to the extent not paid by the trust or upon
distribution to the holders of the common securities and capital securities of
the junior subordinated debt securities. The guarantee does not place a
limitation on the amount of additional senior debt that we may incur. We expect
from time to time to incur additional indebtedness constituting senior debt.
How the Guarantee Can Be Amended or Assigned
Except with respect to any changes that do not materially adversely
affect the rights of holders of the common securities and capital securities (in
which case no vote will be required), the guarantee may not be amended without
the prior approval of the holders of not less than a majority of the aggregate
liquidation amount of such outstanding capital securities. The manner of
obtaining any such approval will be as set forth under "Description of Capital
Securities -Voting Rights; Amendment of the Declaration." All guarantees and
agreements contained in the guarantee shall bind our successors, assigns,
receivers, trustees and representatives and shall inure to the benefit of the
holders of the capital securities then outstanding.
Your Rights If We Default
An event of default under the guarantee will occur upon our failure to
perform any of our payments or other obligations thereunder; provided, however,
that except with respect to a default in payment of any guarantee payment, we
shall have received notice of default and shall not have cured such default
within 60 days after receipt of such notice; and provided, further, that no
event of default under the guarantee shall occur unless an Event of Default
under the declaration or a Debenture Event of Default shall have occurred. The
holders of not less than a majority in aggregate liquidation amount of the
capital securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of the guarantee or to direct the exercise of any trust or power
conferred upon the guarantee trustee under the guarantee.
Any holder of the capital securities may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the trust, the guarantee trustee or any
other person or entity.
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We, as guarantor, are required to file annually with the guarantee
trustee a certificate as to whether or not we are in compliance with all the
conditions and covenants applicable to us under the guarantee.
Information About the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance
of a default by us in performance of the guarantee, undertakes to perform only
such duties as are specifically set forth in the guarantee and, after default
with respect to the guarantee, must exercise the same degree of care and skill
as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the guarantee trustee is under no obligation
to exercise any of the powers vested in it by the guarantee at the request of
any holder of the common securities and capital securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the common securities and capital
securities, upon full payment of the amounts payable upon liquidation of the
trust or upon distribution of junior subordinated debt securities to the holders
of the common securities and capital securities. The guarantee will continue to
be effective or will be reinstated, as the case may be, if at any time any
holder of the common securities and capital securities must restore payment of
any sums paid under the common securities and capital securities or the
guarantee.
Governing Law
The guarantee will be governed by and construed in accordance with the
laws of the State of Virginia.
RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
Our Full and Unconditional Guarantee
Payments of distributions and other amounts due on the capital
securities (to the extent the trust has funds available for the payment of such
distributions) are irrevocably guaranteed by us as and to the extent set forth
under "Description of Guarantee." Taken together, our obligations under the
junior subordinated debt securities, the indenture, the declaration and the
guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the capital
securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the trust's obligations under the
capital securities. If and to the extent that the we do not make payments on the
junior subordinated debt securities, the trust will not pay distributions or
other amounts due on the capital securities. The guarantee does not cover
payment of distributions when the trust does not have sufficient funds to pay
such distributions. In such event, the remedy of a holder of capital securities
is to institute a direct action against us. Our obligations under the guarantee
are subordinate and junior in right of payment to all senior debt.
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Why Our Payments on the Junior Subordinated Debt Securities Will be Sufficient
As long as payments of interest and other payments are made when due on
the junior subordinated debt securities, such payments will be sufficient to
cover distributions and other payments due on the capital securities, primarily
because:
o the aggregate principal amount or redemption price of the
junior subordinated debt securities will be equal to the sum
of the aggregate liquidation amount or redemption price, as
applicable, of the common securities and capital securities;
o the interest rate and interest and other payment dates on the
junior subordinated debt securities will match the
distribution rate and distribution and other payment dates for
the capital securities;
o we will pay for all costs, expenses and liabilities of the
trust except the trust's obligations to holders of common
securities and capital securities under such common securities
and capital securities; and
o the declaration further provides that the trust will not
engage in any activity that is not consistent with the limited
purposes thereof.
Notwithstanding anything to the contrary in the indenture, we have the
right to set off any payment we are otherwise required to make thereunder with
and to the extent we have theretofore made, or is concurrently on the date of
such payment making, any payment under the guarantee used to satisfy the related
payment of indebtedness under the indenture.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the guarantee trustee, the trust or any
other person or entity.
A default or event of default under any senior debt would not
constitute a default or Event of Default under the declaration. However, in the
event of payment defaults under, or acceleration of, senior debt, the
subordination provisions of the indenture provide that no payments may be made
in respect of the junior subordinated debt securities until such senior debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on junior subordinated debt securities would
constitute an Event of Default under the declaration.
The Purpose of the Trust Is Limited
The capital securities evidence a beneficial interest in the trust, and
the trust exists for the sole purpose of issuing the capital securities and
common securities, investing the proceeds of the common securities and capital
securities in junior subordinated debt securities and engaging in other
activities necessary or incidental thereto.
Your Rights Upon Termination of the Trust
Upon any voluntary or involuntary termination, winding-up or
liquidation of the trust involving the liquidation of the junior subordinated
debt securities, after satisfaction of the liabilities of creditors of the trust
as required by applicable law, the holders of the common securities and capital
securities will be entitled to receive, out of assets held by the trust, the
liquidation distribution in cash. Upon our voluntary or involuntary liquidation
or bankruptcy, the property trustee, as holder of the junior subordinated debt
securities, would be our subordinated creditor, subordinated
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in right of payment to all senior debt as set forth in the indenture, but
entitled to receive payment in full of principal and interest, before any of our
stockholders receive payments or distributions. Since we are the guarantor under
the guarantee and have agreed to pay for all costs, expenses and liabilities of
the trust (other than the trust's obligations to the holders of its common
securities and capital securities), the positions of a holder of capital
securities and a holder of junior subordinated debt securities relative to our
other creditors and to stockholders in the event of our liquidation or
bankruptcy are expected to be substantially the same.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of capital
securities. Unless otherwise stated, this summary addresses only the tax
consequences to a "U.S. holder" (as defined below) that acquires capital
securities on their original issue at their original offering price and does not
address the tax consequences to persons that may be subject to special treatment
under United States federal income tax law, such as banks, insurance companies,
thrift institutions, regulated investment companies, real estate investment
trusts, tax-exempt organizations, dealers in securities or currencies, persons
that hold capital securities as part of a position in a "straddle" or as part of
a "hedging", "conversion" or other integrated investment transaction for United
States federal income tax purposes, persons whose functional currency is not the
United States dollar or persons that do not hold capital securities as capital
assets. For purposes of this summary, a "U.S. holder" is a securityholder (as
defined below) who or that is an individual citizen or resident of the United
States, a domestic corporation or partnership organized under the laws of the
United States or any State thereof or the District of Columbia or an estate or
trust the income of which is subject to United States federal income taxation
regardless of source.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Williams Mullen Clark & Dobbins, tax counsel to us and
the trust. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time. Such changes may be applied retroactively in a manner that
could cause the tax consequences to vary substantially from the consequences
described below, possibly adversely affecting a beneficial owner of the capital
securities. The authorities on which this summary is based are subject to
various interpretations, and it is therefore possible that the United States
federal income tax treatment of the purchase, ownership and disposition of the
capital securities may differ from the treatment described below.
Prospective investors are advised to consult with their own tax
advisors in light of their own particular circumstances as to the federal tax
consequences of the purchase, ownership and disposition of the capital
securities, as well as the effect of any state, local or foreign tax laws.
Classification of the Junior Subordinated Debt Securities and the Trust
Under current law and assuming compliance with the terms of the
Declaration, the trust will not be classified as an association taxable as a
corporation for United States federal income tax purposes. Moreover, the trust
should be classified as a grantor trust, and if not so classified will be
classified as a partnership, for United States federal income tax purposes. As a
result, each beneficial owner of capital securities (a "securityholder") that is
a U.S. holder will be required to include in its gross income its pro rata share
of the interest income, including OID, paid or accrued with respect to the
junior subordinated debt securities, whether or not cash is actually distributed
to the securityholders. The junior subordinated debt securities will be
classified as indebtedness of Southern Financial Bancorp, Inc. for United States
federal income tax purposes.
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<PAGE>
Interest Income and Original Issue Discount
Under applicable Treasury Regulations, a "remote" contingency that
stated interest will not be timely paid will be ignored in determining whether a
debt instrument is issued with OID. We believe that the likelihood of our
exercising our option to defer payments of interest is remote. Based on the
foregoing, we believe that the junior subordinated debt securities will not be
considered to be issued with OID at the time of their original issuance.
Because the discount at which the junior subordinated debt securities
are being issued is less than 1/4 of 1 percent of the junior subordinated debt
securities stated redemption price at maturity times the number of complete
years to maturity of the junior subordinated debt securities, such discount will
constitute de minimis OID and will not be required to be taken into account on a
current basis. The following discussion assumes that unless and until we
exercise our option to defer interest on the junior subordinated debt
securities, the junior subordinated debt securities will not be treated as
issued with OID other than de minimis OID.
Under the Treasury Regulations, if we exercised our option to defer any
payment of interest, the junior subordinated debt securities would be treated as
reissued with OID, and, thereafter, all stated interest on the Junior
Subordinated Debentures would be treated as OID as long as the junior
subordinated debt securities remained outstanding. In such event, all of a U.S.
holder's taxable interest income with respect to the junior subordinated debt
securities would be accounted for as OID on an economic accrual basis regardless
of such U.S. holder's method of tax accounting, and actual distributions of
stated interest would not be reported separately as taxable income.
Consequently, a U.S. holder would be required to include OID in gross income
even though we would not make any actual cash payments during an interest
deferral period.
The Treasury Regulations have not been addressed in any rulings or
other interpretations by the IRS, and it is possible that the IRS could take the
position that the junior subordinated debt securities were issued with OID at
the time of their original issuance.
Because income on the capital securities will constitute interest or
OID, corporate U.S. holders will not be entitled to the dividends-received
deduction with respect to any income recognized with respect to the capital
securities. If any additional distributions are paid on the capital securities
it is possible that such additional distributions might constitute OID (whether
or not an interest deferral period has occurred).
Subsequent uses of the term "interest" in this summary shall include
income in the form of OID.
Distribution of the Junior Subordinated Debt Securities to Holders of Capital
Securities
Under current law, a distribution by the trust of the junior
subordinated debt securities, as described under the caption "Description of
Capital Securities - Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities," will be nontaxable and will result in a U.S.
holder receiving directly its pro rata share of the junior subordinated debt
securities previously held indirectly through the trust, with a holding period
and aggregate adjusted tax basis equal to the holding period and aggregate
adjusted tax basis such U.S. holder had in its capital securities immediately
before such distribution. If, however, the liquidation of the trust were to
occur because the trust were subject to United States federal income tax with
respect to income accrued or received on the junior subordinated debt
securities, the distribution of junior subordinated debt securities to U.S.
holders by the trust would be a taxable event to the trust and each U.S. holder,
and each U.S. holder would recognize gain or loss as if the U.S. holder had
exchanged its capital securities for the junior subordinated debt securities it
received upon the liquidation of the trust. A U.S. holder will include interest
in respect of the junior subordinated debt securities received from the trust in
the manner described above under "Interest Income and Original Issue Discount."
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<PAGE>
Sales or Redemption of the Capital Securities
Gain or loss will be recognized by a U.S. holder on a sale, exchange,
or other disposition of the capital securities (including a redemption for cash)
in an amount equal to the difference between the amount realized and the U.S.
holder's adjusted tax basis in the capital securities sold or so redeemed.
Assuming that we do not exercise our option to defer payment of interest on the
junior subordinated debt securities, a U.S. holder's adjusted tax basis in the
capital securities generally will be its initial purchase price. If the Junior
Subordinated Debentures are deemed to be issued with OID (as a result of our
deferral of any interest payment), a U.S. holder's adjusted tax basis in the
capital securities generally will be its initial purchase price, increased by
OID previously included in such U.S. holder's gross income to the date of
disposition and decreased by distributions or other payments received on the
capital securities other than payments of stated interest that are not treated
as OID. Gain or loss recognized by a U.S. holder on the capital securities
generally will be taxable as capital gain or loss (except to the extent any
amount realized is treated as a payment of accrued interest with respect to such
U.S. holder's pro rata share of the junior subordinated debt securities required
to be included in income) and generally will be long-term capital gain or loss
if the capital securities have been held for more than one year.
Should we exercise our option to defer any payment of interest on the
junior subordinated debt securities, the capital securities may trade at a price
that does not fully reflect the value of accrued but unpaid interest with
respect to the underlying junior subordinated debt securities. In the event of
such a deferral, a securityholder that disposes of its capital securities
between record dates for payments of distributions (and consequently does not
receive a distribution from the trust for the period prior to such disposition)
will nevertheless be required to include in income as ordinary income accrued
but unpaid interest on the junior subordinated debt securities through the date
of disposition and to add such amount to its adjusted tax basis in its capital
securities disposed of. Such U.S. holder will recognize a capital loss on the
disposition of its capital securities to the extent the selling price (which may
not fully reflect the value of accrued but unpaid interest) is less than the
U.S. holder's adjusted tax basis in the capital securities (which will include
accrued but unpaid interest). Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for United States federal
income tax purposes.
United States Alien Holders
For purposes of this discussion, a "United States alien holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a nonresident alien individual, a foreign
partnership or a nonresident fiduciary of a foreign estate or trust.
Under current United States federal income tax law, and subject to the
discussion of backup withholding below, payments by the trust or any of its
paying agents to any securityholder who or that is a United States alien holder
will not be subject to United States federal withholding tax; provided that:
o the securityholder does not actually or constructively own 10%
or more of the total combined voting power of all classes of
stock of Southern Financial Bancorp, Inc. entitled to vote;
o the securityholder is not a controlled foreign corporation
that is related to Southern Financial Bancorp, Inc. through
stock ownership; and
o either the securityholder certifies to the trust or its agent,
under penalties of perjury, that it is not a United States
holder and provides its name and address, or a securities
clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its
trade or business (a financial institution), holding the
capital security in such capacity, certifies to the trust or
its agent, under penalties of perjury, that such statement has
been received from the securityholder by
-83-
<PAGE>
it or by a financial institution holding such security for the
securityholder and furnishes the trust or its agent with a
copy thereof.
Additionally, a United States alien holder of a capital security will
not be subject to United States federal withholding tax on any gain realized
upon the sale or other disposition of a capital security.
Information Reporting to Securityholders
Generally, income on the capital securities will be reported to
securityholders on Forms 1099, which forms should be mailed to securityholders
by January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the capital securities
may be subject to a "backup" withholding tax of 31% unless the securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the securityholder's United States federal income
tax, provided the required information is furnished to the Internal Revenue
Service on a timely basis.
ERISA CONSIDERATIONS
ERISA pension plans, qualified retirement plans, and IRAs (collectively
referred to as retirement plans) are subject to certain transactional
restrictions under ERISA and/or the Internal Revenue Code. For example, a
fiduciary (generally, someone who has discretionary control over plan assets or
receives money for investment advice) is prohibited under these restrictions
from (1) engaging in transactions in its own interest or for its own account or
(2) from receiving consideration from any party dealing with a plan with regard
to its assets. In addition, a plan may not enter into purchase, sale, or loan
transaction with a disqualified person. A disqualified person includes, among
other things, a fiduciary, the plan sponsor, and any entity providing services
(for example, custodial or administrative services) to a plan. Violation of
these transactional restrictions can result in the imposition of federal excise
taxes, federal and state income tax on otherwise exempt retirement trusts, and
accelerated federal and state income tax on the otherwise deferred income
accounts of retirement plan participants.
In the usual case, when a retirement plan invests plan assets in a
security, the security purchased replaces the purchase money as a plan asset and
the purchase money becomes an asset of the entity who offered the security for
sale. Because of a concern that certain enterprises were in reality functioning
as investment managers to plans, but avoiding classification as a fiduciary
under ERISA through the device of issuing participation units in, for example,
limited partnerships, the Department of Labor issued regulations (the "plan
asset regulations") which provide that when certain equity interests (including
a beneficial interest in a trust as well as participation in a limited
partnership) are acquired by a plan, both the equity interest acquired in the
hands of the purchasing plan and the purchase money in the hands of the issuer
of the equity interest constitute plan assets. Since the issuer has
discretionary control over these assets, the issuer becomes a fiduciary under
ERISA with respect to the investing plan. As a result, unless an exception
applies, the trust's purchase of the junior subordinated debt securities from
Southern Financial Bancorp, Inc. with assets invested by retirement plans would
constitute an instance of the trust as a fiduciary dealing on its own account
and in its own interest with plan assets or receiving consideration from an
entity (Southern Financial Bancorp, Inc.) engaged in a transaction involving
plan assets. The plan asset regulations provide certain exemptions to its plan
asset characterization rules.
It appears that one of the exemptions provided by the plan asset
regulations, namely, the publicly-offered exemption, applies to junior
subordinated debt securities purchased by the trust as consequence of a
retirement plan's investment in capital securities with the result that the
purchase money or junior subordinated debt securities will not be deemed to be
plan assets in the hands of the trustee. Under the plan asset regulations, a
publicly-offered equity
-84-
<PAGE>
interest in a trust or other non-operating entity purchased by a plan does not
constitute a plan asset if the interest is freely transferable and widely held.
The plan asset regulations provide that a security is publicly-offered if it is
sold to a plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act of 1933 and the class
of securities of which such security is part is registered under the Securities
Exchange Act of 1934 within 120 days (or such later time as may be allowed by
the Securities and Exchange Commission) after the end of the fiscal year of the
issuer during which the offering of such securities to the public occurred. We
intend to cause the capital securities to be so registered under the Securities
Exchange Act of 1934. Further, although ultimately under the plan asset
regulations it is a question of fact, a security will generally be deemed to be
freely transferable if its purchase price is $25,000 or less at the time of the
public offering. If, in addition, the securities when offered initially to the
public will be held by 100 or more persons independent of the issuer or of one
another, they will generally be deemed to be widely held. It is anticipated that
with regard to these criteria provided by the plan asset regulations, the
capital securities at the time of being initially offered constitute securities
which are publicly-offered, widely held, and freely transferable. Retirement
plans should, nevertheless, consult with their own counsel regarding the
application of the plan asset regulations to the purchase of capital securities
from the trust.
If we or Southern Financial Bank provide any services to an investing
retirement plan, then it is a disqualified person with respect to that plan
irrespective of whether the trust qualifies under the publicly-offered
securities exemption to the plan asset regulations. Consequently, the purchase
of junior subordinated debt securities by the trust would be an indirect loan
made by the retirement plan to us and, as such, would constitute a prohibited
transaction under ERISA.
FORWARD LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this
prospectus may be "forward-looking statements." Statements which use words such
as "believes," "expects," "may," "will," "should," "projected," "contemplates"
or "anticipates" or the negative of those terms or other variations may be
forward-looking statements. These statements are subject to known and unknown
risks, uncertainties and other factors that could cause actual results to differ
materially from those contemplated by the statements.
Some important factors that may cause actual results to differ from
that projected in a forward-looking statement, include for example,
o our ability to implement our business strategy;
o a decline in economic condition in our market areas;
o a tightening in the difference between our cost of funds and
what we earn on the loans we make;
o changes in governmental regulations affecting our business.
There are several other factors spelled out in "Risk Factors" beginning
on page 10 of this prospectus.
-85-
<PAGE>
UNDERWRITING
The underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
underwriting agreement with the trust and us, to sell, as selling agent, on a
best efforts basis, up to $12.0 million (aggregate liquidation amount) of
capital securities. The trust has, however, reserved the right to increase the
aggregate liquidation amount by not more than $1.8 million. The underwriter is
not obligated to purchase the capital securities if they are not sold to the
public.
The underwriter has informed the trust and us that it proposes to sell
the capital securities as selling agent for the trust, subject to prior sale,
when, as and if issued by the trust, in part to the public at the public
offering price set forth on the cover page of this prospectus and, in part,
through certain selected dealers, who are members of the National Association of
Securities Dealers, Inc., to customers of such selected dealers at such public
offering price, for which each selected dealer will receive a commission of
$0.__, for each $10 of capital securities that it sells. The underwriter
reserves the right to reject any order for the purchase of capital securities
through it in whole or in part.
The public offering is not contingent upon the occurrence of any event
or the sale of a minimum or maximum number of capital securities. Funds received
by the underwriter from investors in the public offering will be deposited with
and held by the escrow agent in a non-interest bearing account until the closing
of the public offering. Closing is expected to occur on or about ________ __,
2000.
As the proceeds of the sale of the capital securities will ultimately
be used to purchase the junior subordinated debt securities, the underwriting
agreement provides that we will pay as compensation ("underwriter's
compensation") an amount directly to the underwriter of $0.__ per capital
security (or up to $_________ in the aggregate).
The underwriting agreement provides that we and the trust will
indemnify the underwriter against certain liabilities, including liabilities
under the Securities Act or contribute to payments the underwriter may be
required to make in respect thereof.
The capital securities are a new issue of securities with no
established trading market. The trust has applied to list the capital securities
on the NASDAQ National Market under the symbol "SFFBP." We and the trust have
been advised by the underwriter that it will make a market in the capital
securities. The underwriter, however, is not obligated to make a market in the
capital securities and it can discontinue any market making at any time without
notice. Neither we nor the trust can provide any assurance that an active
trading market for the capital securities will develop.
The underwriter provides or has provided investment banking services to
us from time to time in the ordinary course of business.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the capital
securities, the enforceability of the declaration and the formation of the trust
will be passed upon by Richards, Layton & Finger, special Delaware counsel to us
and the trust. The validity of the guarantee and the junior subordinated debt
securities, as well as certain matters relating to United States federal income
tax considerations, will be passed upon for us by Williams Mullen Clark &
Dobbins. Williams Mullen Clark & Dobbins will rely on the opinion of Richards,
Layton & Finger as to matters of Delaware law.
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<PAGE>
ACCOUNTANTS
The consolidated financial statements of Southern Financial Bancorp,
Inc. as of December 31, 1998 and 1997 and for each of the years then ended, have
been included herein in reliance upon the report of KPMG LLP, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of The Horizon Bank of Virginia as of December
31, 1998 and 1997 and for each of the years ended December 31, 1998, 1997 and
1996 have been included herein and in the registration statement in reliance
upon the report of Thompson, Greenspon & Co., P.C., Independent Certified Public
Accounts, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
-87-
<PAGE>
INDEX OF SIGNIFICANT TERMS
Additional Sums.....................58 Like Amount.........................57
Adjusted Treasury Rate..............56 Make-Whole Amount...................56
Capital Treatment Event.............57 Remaining Life......................56
Debenture Event of Default..........73 Tax Event...........................57
Event of Default....................61 Treasury Rate.......................56
Investment Company Act..............63 Trust Indenture Act.................53
Investment Company Event............57
-88-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SOUTHERN FINANCIAL BANCORP, INC.
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report....................................................................................F-4
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997...............................................F-5
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.....................F-6
Consolidated Statements of Comprehensive Income for the years ended December 31,
1998, 1997 and 1996........................................................................................F-7
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996...........................................................................F-8
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................F-9
Notes to Consolidated Financial Statements..............................................................F-10 - F-27
Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998................................F-28
Consolidated Statements of Income for the nine months ended September 30, 1999 and 1998...................F-29
Consolidated Statements of Comprehensive Income for the nine months ended
September 30, 1999 and 1998...............................................................................F-30
Consolidated Statements of Cash Flows for the three months ended September 30, 1999
and 1998..................................................................................................F-31
Notes to Interim Consolidated Financial Statements (Unaudited)..........................................F-32 - F-35
F-1
<PAGE>
THE HORIZON BANK OF VIRGINIA
Page
Independent Auditors' Report...................................................................................F-36
Financial Statements
Balance Sheets as of December 31, 1998 and 1997...........................................................F-37
Statements of Income for the years ended December 31, 1998, 1997 and 1996.................................F-38
Statements of Comprehensive Income for the years ended December 31, 1998,
1997 and 1996.............................................................................................F-39
Statements of Changes in Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996.......................................................................................F-40
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996......................F-41 - F-42
Notes to Financial Statements...........................................................................F-43 - F-57
Interim Financial Statements (Unaudited)
Balance Sheets as of September 30, 1999 and December 31, 1998.............................................F-58
Statements of Operations for the nine months ended September 30, 1999 and 1998............................F-59
Statements of Comprehensive Income for the nine months ended September 30,
1999 and 1998.............................................................................................F-60
Statements of Changes in Stockholders' Equity for the nine months ended
September 30, 1999 and year ended December 31, 1998.......................................................F-61
Statements of Cash Flows for the nine months ended September 30, 1999
and 1998..................................................................................................F-62
Notes to Interim Financial Statements (Unaudited).......................................................F-63 - F-64
F-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
SOUTHERN FINANCIAL BANCORP, INC. AND
THE HORIZON BANK OF VIRGINIA
Page
Pro Forma Combined Balance Sheet as of September 30, 1999......................................................F-66
Pro Forma Combined Statements of Income for the nine months ended
September 30, 1999.............................................................................................F-67
Pro Forma Combined Statements of Income for the nine months ended
September 30, 1998.............................................................................................F-68
Pro Forma Combined Statements of Income for the year ended
December 31, 1998..............................................................................................F-69
Pro Forma Combined Statements of Income for the year ended
December 31, 1997..............................................................................................F-70
Pro Forma Combined Statements of Income for the year ended
December 31, 1996..............................................................................................F-71
Notes to Pro Forma Combined Financial Information (Unaudited)..................................................F-72
</TABLE>
F-3
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Southern Financial Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
Southern Financial Bancorp, Inc. (Bancorp) as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of Bancorp's management. Our responsibility is
to express an opinion on these financial statements based on our audits. The
accompanying consolidated financial statements of the Bancorp as of December 31,
1996, were audited by other auditors whose report thereon dated February 4,
1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Financial Bancorp, Inc. as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.,
February 2, 1999
F-4
<PAGE>
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,374,945 $ 4,559,266
Overnight earning deposits 928,435 545,470
Investment securities, available-for-sale 74,438,682 4,692,758
Investment securities, held-to-maturity (estimated market value
of $37,794,344 and $80,795,929, respectively) 38,151,121 80,468,952
Loans held for sale 602,500 1,414,445
Loans receivable, net 131,645,482 128,958,190
Federal Home Loan Bank stock, at cost 1,082,500 930,500
Premises and equipment, net 2,370,711 2,398,541
Other assets 4,248,673 2,629,813
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 258,843,049 $ 226,597,935
- -------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 231,925,592 $ 202,200,249
Advances from Federal Home Loan Bank 3,500,000 4,000,000
Other liabilities 2,494,717 1,855,085
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 237,920,309 208,055,334
- -------------------------------------------------------------------------------------------------------------------------
Commitments
Stockholders' equity:
6% cumulative convertible preferred stock, $.01 par value, 500,000 shares
authorized, 13,621 and 15,634 shares issued
and outstanding, respectively 136 156
Common stock, $.01 par value, 5,000,000 shares authorized,
1,633,094 and 1,603,220 shares issued and outstanding,
respectively 16,331 16,216
Capital in excess of par value 15,648,527 15,556,882
Retained earnings 5,469,135 3,406,501
Accumulated other comprehensive income 259,698 33,933
Treasury stock, at cost (471,087) (471,087)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,922,740 18,542,601
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 258,843,049 $ 226,597,935
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $12,365,456 $ 11,567,846 $10,308,273
Investment securities 6,365,474 5,436,986 4,306,296
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 18,730,930 17,004,832 14,614,569
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 9,934,551 8,709,000 7,433,334
Borrowings 270,099 334,346 342,078
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 10,204,650 9,043,346 7,775,412
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 8,526,280 7,961,486 6,839,157
Provision for loan losses 975,000 880,000 695,000
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,551,280 7,081,486 6,144,157
- --------------------------------------------------------------------------------------------------------------------------
Other income:
Fee income 1,432,924 1,447,545 950,376
Gain on sale of loans 796,283 191,773 209,962
Gain on sale of investment securities 67,817 - -
Other 50,372 89,161 25,924
- --------------------------------------------------------------------------------------------------------------------------
Total other income 2,347,396 1,728,479 1,186,262
- --------------------------------------------------------------------------------------------------------------------------
Other expense:
Employee compensation and benefits 2,920,727 2,531,851 2,147,974
Premises and equipment 1,783,461 1,840,169 1,591,235
Deposit insurance assessments 124,193 109,010 1,085,536
Advertising 185,042 213,763 142,633
Other 1,142,192 887,102 939,729
- --------------------------------------------------------------------------------------------------------------------------
Total other expense 6,155,615 5,581,895 5,907,107
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,743,061 3,228,070 1,423,312
Provision for income taxes 1,084,300 1,021,800 469,600
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 2,658,761 $ 2,206,270 $ 953,712
- --------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic* $ 1.66 $ 1.39 $ 0.61
Diluted* 1.55 1.33 0.59
Weighted average shares outstanding:
Basic* 1,597,815 1,577,243 1,544,338
Diluted* 1,713,815 1,657,706 1,621,958
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*1996 amounts have been restated to conform with SFAS 128, "Earnings per Share."
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 2,658,761 $ 2,206,270 $ 953,712
Other comprehensive income, net of tax:
Unrealized gain on transfer of held-to-
maturity securities 151,544 - -
Unrealized gain (loss) arising during period 118,980 109,939 (90,691)
Less: Reclassification adjustment for gains
included in net income (44,759) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 225,765 109,939 (90,691)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,884,526 $ 2,316,209 $ 863,021
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Accumulated
Convertible Capital in Other
Preferred Common Excess of Retained Treasury Comprehensive
Stock Stock Par Value Earnings Stock Income
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 166 $13,912 $12,796,014 $ 3,050,284 $(99,990) $ 14,685
Dividends on preferred and common stock - - - (360,971) - -
Conversion of preferred shares to common stock (10) 16 (6) - - -
Options exercised - 594 494,778 - - -
Stock dividend of 10% - 1,419 1,985,587 (1,987,006) - -
Treasury stock - - - (444) (371,097) -
Change in other comprehensive income - - - - - (90,691)
Net income - - - 953,712 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 156 15,941 15,276,373 1,655,575 (471,087) (76,006)
Dividends on preferred and common stock - - - (455,344) - -
Options exercised - 275 280,509 - - -
Change in other comprehensive income - - - - - 109,939
Net income - - - 2,206,270 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 156 16,216 15,556,882 3,406,501 (471,087) 33,933
Dividends on preferred and common stock - - - (596,127) - -
Conversion of preferred stock to common stock (20) 32 (12) - - -
Options exercised - 83 91,657 - - -
Change in other comprehensive income - - - - - 225,765
Net income - - 2,658,761 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 136 $16,331 $15,648,527 $5,469,135 $(471,087) $ 259,698
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total
Stockholders'
Equity
- ---------------------------------------------------------------------
Balance, December 31, 1995 $15,775,071
Dividends on preferred and common stock (360,971)
Conversion of preferred shares to common stock -
Options exercised 495,372
Stock dividend of 10% -
Treasury stock (371,541)
Change in other comprehensive income (90,691)
Net income 953,712
- ---------------------------------------------------------------------
Balance, December 31, 1996 16,400,952
Dividends on preferred and common stock (455,344)
Options exercised 280,784
Change in other comprehensive income 109,939
Net income 2,206,270
- ---------------------------------------------------------------------
Balance, December 31, 1997 18,542,601
Dividends on preferred and common stock (596,127)
Conversion of preferred stock to common stock -
Options exercised 91,740
Change in other comprehensive income 225,765
Net income 2,658,761
- ---------------------------------------------------------------------
Balance, December 31, 1998 $20,922,740
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,658,761 $ 2,206,270 $ 953,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 930,671 566,989 251,249
Provision for loan losses 975,000 880,000 695,000
Provision for deferred income taxes 222,323 (209,383) (13,849)
Gain on sale of loans (796,283) (191,773) (209,962)
Loss on real estate owned - - 17,000
Gain on sale of investment securities, net (67,817) - -
Amortization of deferred loan fees (623,098) (607,286) (431,247)
Net funding of loans held for sale 1,608,228 (778,172) (64,538)
Decrease (increase) in other assets (1,793,183) 492,759 (255,565)
Increase in other liabilities 685,565 491,891 430,522
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,800,167 2,851,295 1,372,322
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in loans receivable (3,049,902) (21,421,747) (4,299,175)
Purchases of investment securities, available-for-sale (79,587,904) - -
Purchases of investment securities, held-to-maturity (1,959,970) (35,017,808) (32,427,276)
Paydowns of investment securities 36,800,004 20,020,684 11,844,529
Sale of investment securities, available-for-sale 16,965,806 - -
Decrease (increase) in overnight earning deposits, net (382,965) 1,850,104 (599,672)
Increase in premises and equipment, net (338,513) (911,095) (592,142)
(Increase) decrease in Federal Home Loan Bank stock (152,000) (62,900) 82,400
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,705,444) (35,542,762) (25,991,336)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 29,725,343 37,921,144 20,465,419
Increase (decrease) in advances from Federal Home
Loan Bank (500,000) (4,500,000) 4,500,000
Net proceeds from stock options exercised 91,740 280,784 495,372
Repurchase of common stock - - (371,541)
Dividends on preferred and common stock (596,127) (455,344) (360,971)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,720,956 33,246,584 24,728,279
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and due from banks 815,679 555,117 109,265
Cash and due from banks, beginning of period 4,559,266 4,004,149 3,894,884
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 5,374,945 $ 4,559,266 $ 4,004,149
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
Southern Financial Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
1. Organization and Significant Accounting Policies:
Southern Financial Bancorp, Inc. (the "Bancorp") was incorporated in
the state of Virginia on December 1, 1995. On December 1, 1995, Bancorp acquired
all of the outstanding shares of the Southern Financial Bank (the "Bank"). The
Bank, formerly Southern Financial Federal Savings Bank, converted from a savings
bank to a state chartered commercial bank effective December 1, 1995.
The principal activities of the Bank are to attract deposits, originate
loans and conduct mortgage banking as permitted for state chartered banks by
applicable regulations. The Bank conducts full-service banking operations in
Fairfax, Herndon, Leesburg, Middleburg, Warrenton, Winchester and Woodbridge,
Virginia, which are managed as a single business segment.
The accounting and reporting policies of Bancorp are in accordance with
generally accepted accounting principles and conform to general practices within
the banking industry. The more significant of these policies are discussed
below. Certain reclassifications were made to the prior year financial
statements to conform to the current year presentation. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Bancorp and the Bank. All significant intercompany accounts and
transactions have been eliminated.
Cash and Due from Banks and Overnight Earning Deposits
Amounts represent actual cash balances held by or due to the Bancorp.
For purposes of the consolidated statements of cash flows, the Bancorp defines
cash and due from banks as cash and cash equivalents.
Investment Securities
The Bancorp accounts for its investment securities in three categories:
held-to-maturity, available-for-sale, and trading. Investments in debt
securities are classified as held-to-maturity when the Bancorp has the positive
intent and ability to hold those securities to maturity. Held-to-maturity
securities are measured at amortized cost. The amortization of premiums and
accretion of discounts are computed using a method that approximates the level
yield method. Investment securities classified as available-for-sale are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of other comprehensive income in
stockholders' equity on an after-tax basis. Trading securities are reported at
fair value with unrealized gains and losses included in earnings. The specific
identification method is used to determine gains or losses on sales of
investment securities.
F-10
<PAGE>
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value.
Loans Receivable
Interest income is accrued on loans as earned on the outstanding
principal balances on the level yield method. Nonrefundable loan fees and direct
origination costs are deferred and recognized over the lives of the related
loans as adjustments of yield. Accrual of interest is discontinued when
management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Any accrued interest considered
uncollectable is charged against current income.
The allowance for loan losses is established through a provision for
loan losses, which is charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is a current estimate of the losses
inherent in the present portfolio based upon management's evaluation of the loan
portfolio. Estimates of losses inherent in the portfolio involve the exercise of
judgment and the use of assumptions. The evaluations take into consideration
such factors as changes in the nature, volume and quality of the loan portfolio,
prior loss experience, level of nonperforming loans, current and anticipated
general economic conditions and the value and adequacy of collateral. Changes in
the estimate of future losses may occur due to changing economic conditions and
the economic conditions of borrowers.
A loan is considered impaired when, based on all current information
and events, it is probable that the Bancorp will be unable to collect all
amounts due according to the contractual terms of the agreement, including all
scheduled principal and interest payments. Such impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or, as a practical expedient, impairment may be
measured based on the loan's observable market price, or if, the loan is
collateral dependent, the fair value of the collateral. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. Loans for which foreclosure is
probable continue to be accounted for as loans.
Each impaired loan is evaluated individually to determine the income
recognition policy. Generally, payments received are applied in accordance with
the contractual terms of the note or as a reduction of principal.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Expenditures for maintenance and repairs that do not
materially prolong the useful lives of the assets are charged to expense as
incurred.
Depreciation is computed using the straight-line method over estimated
useful lives of three to ten years for furniture and equipment and 30 years for
buildings. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of ten years or the lease term.
F-11
<PAGE>
Real Estate Owned
Bancorp records and carries real estate acquired through foreclosure at
the lower of the recorded investment in the loan or fair value less estimated
selling costs. Costs relating to development and improvement of property are
capitalized, provided that the resulting carrying value does not exceed fair
value. Costs relating to holding the assets are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. 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
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of primary and fully-diluted earnings per share with
basic and diluted earnings per share. Basic earnings per common share is
computed by dividing net income, less dividends on preferred stock, by the
weighted average number of shares of common stock outstanding during the
periods. Diluted earnings per common share is computed by dividing net income by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the periods. Common stock equivalents include the
number of shares issuable on exercise of outstanding options less the number of
shares that could have been purchased with the proceeds from the exercise of the
options based on the average price of common stock during the period plus the
number of shares issuable on conversion of the convertible preferred shares to
common shares.
Financial Instruments with Off-Balance Sheet Risk
The Bancorp is a party to financial instruments with off-balance sheet
risk in the normal course of business primarily to meet the financing needs of
its customers. These financial instruments involve, to varying degrees, elements
of credit risk that are not recognized in the balance sheet.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit written is represented by the contractual amount of those instruments.
The Bancorp generally requires collateral to support such financial instruments
in excess of the contractual amount of those instruments and essentially uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
New Accounting Standards
Effective October 1, 1998, the Bancorp adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). Adoption of SFAS 133 had no cumulative effect on
earnings. Concurrent with this adoption the Bancorp reclassified certain
investment securities, consisting of mortgage-backed securities with original
maturities of 15 and 30 years, from the Held to Maturity category to the
Available for Sale category. These investments had a book value of $18.2 million
and a market value of $18.4 million as of October 1, 1998, which increased
Stockholders' Equity by $151.5 thousand.
F-12
<PAGE>
Effective January 1, 1998, the Bancorp adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130). This
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
2. Investment Securities:
The portfolio consists of the following securities:
F-13
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC preferred stock $ 3,807,585 $ 80,939 $ - $ 3,888,524
FHLMC MBS 11,996,172 46,261 36,766 12,005,667
GNMA MBS 3,825,601 - 54,153 3,771,448
FNMA MBS 29,671,448 178,016 35,814 29,813,650
Collateralized mortgage obligations 1,526,527 2,568 - 1,529,095
Commercial MBS 18,043,819 222,332 19,901 18,246,250
Obligations of counties and municipalities 3,234,489 11,602 25,593 3,220,498
Corporate obligations 989,319 2,981 - 992,300
U.S. Government agency obligations 949,066 22,184 - 971,250
- ---------------------------------------------------------------------------------------------------------------------
$ 74,044,026 $ 566,883 $ 172,227 $ 74,438,682
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Available-for-sale:
FHLMC preferred stock $ 3,865,985 $ 80,630 $ 39,054 $ 3,907,561
FNMA MBS 782,186 3,011 - 785,197
- ---------------------------------------------------------------------------------------------------------------------
$ 4,648,171 $ 83,641 $ 39,054 $ 4,692,758
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
FHLMC MBS $ 4,091,316 $ 6,484 $ 27,668 $ 4,070,132
GNMA MBS 24,305,052 1,150 301,533 24,004,669
FNMA MBS 6,779,894 5,772 53,996 6,731,670
Collateralized mortgage obligations 1,015,264 - 1,699 1,013,565
Obligations of counties and municipalities 1,959,595 17,813 3,100 1,974,308
- ---------------------------------------------------------------------------------------------------------------------
$ 38,151,121 $ 31,219 $ 387,996 $ 37,794,344
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
FHLMC MBS $ 6,077,859 $ 69,247 $ 37,836 $ 6,109,270
GNMA MBS 42,471,075 226,020 39,186 42,657,909
FNMA MBS 27,075,234 191,349 80,392 27,186,191
Collateralized mortgage obligations 4,202,852 32,176 32,469 4,202,559
FHLB zero-coupon notes 641,932 - 1,932 640,000
- ---------------------------------------------------------------------------------------------------------------------
$ 80,468,952 $ 518,792 $ 191,815 $ 80,795,929
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
Held-to-maturity securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Held-to-maturity securities
totaling $36,191,526 have adjustable rates of interest while the remaining
held-to-maturity securities totaling $1,959,595 have fixed interest rates.
Available-for-sale securities are carried at fair value with unrealized
gains and losses reported as a separate component of stockholders' equity, net
of the tax effect. Available-for-sale securities totaling $34,760,501 have fixed
interest rates, and the remaining available-for-sale securities totaling
$39,678,181 have adjustable rates of interest.
Gross gains of $80,958 and gross losses of $13,141 were realized on the
sale of investment securities during the year ended December 31, 1998. There
were no sales of investment securities during the years ended December 31, 1997
and 1996.
As of December 31, 1998 and December 31, 1997, securities having a book
value of $63,569,352 and $71,324,504, respectively, were pledged as collateral
for advances from the Federal Home Loan Bank of Atlanta ("FHLB") and as
collateral for escrow deposits in accordance with Federal and state
requirements.
The following table sets forth information regarding maturity and
average yields of the investment portfolio:
<TABLE>
<CAPTION>
December 31, 1998
Available-for-sale Held-to-maturity
Fair Amortized Weighted Fair Amortized Weighted
Value Cost Average Yield Value Cost Average Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FHLMC preferred stock $ 3,888,524 $ 3,807,585 7.62% $ - $ - - %
Mortgage-backed securities:
Maturing after 10 years 45,590,765 45,493,221 6.30 34,806,471 35,176,262 5.99
Collateralized mortgage obligations:
Maturing after 5 years through 10 years 1,529,095 1,526,527 6.40 - - -
Maturing after 10 years - - - 1,013,565 1,015,264 11.31
Commercial MBS:
Maturing after 5 years through 10 years 8,012,500 7,926,211 6.87 - - -
Maturing after 10 years 10,233,750 10,117,608 6.89 - - -
Obligations of counties and municipalities:
Maturing after 5 years through 10 years 195,000 195,000 8.00 348,880 346,359 4.45
Maturing after 10 years 3,025,498 3,039,489 4.96 1,625,428 1,613,236 4.73
Corporate obligations:
Maturing after 5 years through 10 years 992,300 989,319 6.71 - - -
U.S. Government agency obligations:
Maturing after 10 years 971,250 949,066 6.25 - - -
-------------------------- ---------------------------
$74,438,682 $74,044,026 $37,794,344 $38,151,121
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturity of mortgage-backed securities is not a reliable
indicator of their expected life because borrowers have the right to repay their
obligations at any time.
F-15
<PAGE>
3. Loans Receivable:
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage:
Residential $ 26,046,289 $ 30,421,147
Nonresidential 64,890,406 57,160,286
Construction:
Residential 5,184,844 6,534,271
Nonresidential 11,213,848 13,160,542
Non-Mortgage:
Business 24,773,003 21,252,681
Consumer 2,424,602 3,092,938
- ----------------------------------------------------------------------------------------------------
Total loans receivable 134,532,992 131,621,865
Less:
Deferred loan fees, net 836,898 627,143
Allowance for loan losses 2,050,612 2,036,532
- ----------------------------------------------------------------------------------------------------
Loans receivable, net $ 131,645,482 $ 128,958,190
- ----------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth information regarding the allowance for loan
losses:
<TABLE>
<CAPTION>
December 31,
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance at beginning of period $ 2,036,532 $ 1,500,941
Provision for losses charged to income 975,000 880,000
Charge-offs, net (960,920) (344,409)
- --------------------------------------------------------------------------------------------------
Allowance at end of period $ 2,050,612 $ 2,036,532
- --------------------------------------------------------------------------------------------------
</TABLE>
Bancorp's loan portfolio is concentrated in the Northern Virginia area.
At December 31, 1998 and 1997, the average yield on loans receivable was 9.01
percent and 9.37 percent, respectively. The amount of loans being serviced for
others was $8,102,931 and $137,208 at December 31, 1998 and 1997, respectively.
At December 31, 1998, there were 12 loans with balances totaling approximately
$236,101 that had payments ninety days or more past due on which interest was
still accruing. At December 31, 1997, there was one loan with a balance of
approximately $1,000 that had payments ninety days or more past due on which
interest was still accruing.
F-16
<PAGE>
Impaired loans were as follows:
December 31,
1998 1997
- -----------------------------------------------------------------------
Carrying value $ 1,982,938 $ 1,444,861
Allocation of general reserve 297,441 204,313
The average carrying balances and interest income earned on impaired
loans were as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average carrying value $ 1,332,091 $ 1,373,997 $ 1,322,450
Income anticipated under
original loan agreements 192,224 165,400 220,461
Income recorded - 5,000 44,700
</TABLE>
4. Premises and Equipment:
Premises and equipment consists of the following:
December 31,
1998 1997
- -------------------------------------------------------------------------------
Land $ 568,500 $ 568,500
Building and improvements 980,848 951,028
Furniture and equipment 2,031,257 1,748,500
Leasehold improvements 1,034,361 1,008,393
- -------------------------------------------------------------------------------
4,614,966 4,276,421
Less: Accumulated depreciation
and amortization (2,244,255) (1,877,880)
- -------------------------------------------------------------------------------
Premises and equipment, net $2,370,711 $2,398,541
- -------------------------------------------------------------------------------
Depreciation and amortization expense aggregated $366,343, $327,340,
and $251,249 for the years ended December 31, 1998, 1997, and 1996,
respectively.
F-17
<PAGE>
5. Deposits:
Deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
Weighted Weighted
Average Average
Interest Rate Amount Interest Rate Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts -% $ 21,371,737 -% $ 13,001,697
Interest checking accounts 0.81 19,473,014 1.16 16,570,989
Money market and savings accounts 2.76 27,410,132 3.46 23,443,684
Certificates of deposit 5.36 163,670,709 5.82 149,183,879
- ----------------------------------------------------------------------------------------------------
4.18% $231,925,592 4.79% $202,200,249
- ----------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, certificates of deposit mature as follows:
1999 $ 138,360,136
2000 14,036,787
2001 6,359,301
2002 4,498,593
Thereafter 415,892
--------------
$ 163,670,709
==============
Deposits with balances greater than $100,000 totaled approximately
$45,947,283 and $33,541,040 at December 31, 1998 and 1997, respectively, of
which $24,060,064 and $17,962,855 represented certificates of deposit at
December 31, 1998 and 1997, respectively.
Interest expense by deposit category follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest checking accounts $ 213,990 $ 185,000 $ 211,746
Money market and savings accounts 774,965 761,000 710,372
Certificates of deposit 8,945,596 7,763,000 6,511,216
- ------------------------------------------------------------------------------------------
$9,934,551 $8,709,000 $7,433,334
- ------------------------------------------------------------------------------------------
</TABLE>
Total cash paid for interest aggregated approximately $3,044,796,
$3,017,413, and $2,628,853 for the years ended December 31, 1998, 1997,and 1996,
respectively.
6. Advances from Federal Home Loan Bank:
The Bancorp has a credit availability agreement with FHLB totaling
$45,000,000. The agreement does not have a maturity date and advances are made
at FHLB's discretion. At December 31, 1998 and 1997, advances from FHLB totaled
$3,500,000 and $4,000,000, respectively. The advances at December 31, 1998 were
made at variable interest rates. The weighted average rates of interest were
5.15 percent and
F-18
<PAGE>
5.95 percent at December 31, 1998 and 1997, respectively. Advances outstanding
at December 31, 1998, mature on October 19, 1999, and are secured by investment
securities having a book value of $59,316,280.
7. Stockholders' Equity:
Each share of the Bancorp's preferred stock is convertible to 1.6
shares of common stock. The preferred stock has an annual dividend rate of six
percent. Dividends are payable quarterly and are cumulative.
In fiscal year 1987, the Bancorp's stockholders approved an incentive
stock option plan under which options to purchase up to 83,660 shares of common
stock could be granted. During fiscal year 1994, this plan was amended to allow
an additional 100,000 shares of common stock to be granted. During 1997, the
plan was amended to allow an additional 100,000 shares of common stock to be
granted. In accordance with the plan agreement, the exercise price for stock
options equals the stock's market price on the date of grant. The maximum term
of all options granted under the plans is ten years and vesting occurs after one
year.
The Bancorp accounts for its stock option plan under APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation cost
for the plan been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Bancorp's net income and earnings per share in
the Consolidated Statements of Income, would have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 2,658,761 $ 2,206,270 $ 953,712
Pro forma 2,379,101 2,045,266 603,344
- -------------------------------------------------------------------------------------------
Basic earnings per share:
As reported 1.66 1.39 0.61
Pro forma 1.49 1.30 0.39
Diluted earnings per share:
As reported 1.55 1.33 0.59
Pro forma 1.39 1.23 0.37
- -------------------------------------------------------------------------------------------
Weighted-average assumptions:
Expected lives (years) 10 10 10
Risk-free interest rate (%) 4.50% 5.76% 6.06%
Expected volatility (%) 25.07% 23.39% 45.00%
Expected dividends (annual per share) 0.13% 0.13% -
- -------------------------------------------------------------------------------------------
</TABLE>
The fair values of the stock options outstanding used to determine the
pro forma impact of the options to compensation expense, and thus, net income
and earnings per share, were calculated using an option pricing model for each
grant made in 1998,1997 and 1996, using the key assumptions detailed above.
A summary of the status of the Bancorp's stock option plan as of
December 31, 1998, 1997 and 1996, respectively, and changes during the years
ended December 31, 1998, 1997 and 1996 is presented below. Average prices and
shares subject to options have been adjusted to reflect stock dividends.
F-19
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 174,314 $ 11.97 177,327 $11.02 188,792 $ 9.94
Granted 51,000 22.47 31,500 15.79 66,029 13.43
Exercised (8,301) 11.05 (27,431) 10.24 (65,373) 8.18
Expired (3,000) 19.50 (7,082) 11.74 (12,121) 13.04
Outstanding at end of period 214,013 14.40 174,314 11.97 177,327 11.02
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at end of period 165,013 142,814 112,127
- --------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the period $ 10.29 $ 7.74 $ 5.92
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
Remaining
Contractual
Exercise Options Options Life
Price Outstanding Exercisable (months)
-----------------------------------------------------
$ 7.49 7,260 7,260 18
8.83 29,039 29,039 66
9.30 6,453 6,453 6
9.61 16,133 16,133 52
11.98 29,039 29,039 79
12.73 9,902 9,902 91
13.64 37,687 37,687 85
13.75 3,000 3,000 97
16.00 26,500 26,500 103
21.25 35,000 - 109
24.00 1,000 - 117
25.25 3,000 - 113
26.00 10,000 - 113
-----------------------------------------------------
214,013 165,013
-----------------------------------------------------
There were 18 option holders at December 31, 1998. Options exercised
during 1998 had exercise prices ranging from $8.99 to $16.00. Options exercised
during 1997 had exercise prices ranging from $7.49 to $13.64. Options exercised
during 1996 had exercise prices ranging from $6.81 to $10.57. The closing price
of the Bancorp's stock at December 31, 1998 was $22.89 per share.
On May 28. 1996, the Bancorp acquired 9,374 shares of its own stock at
a market price of $16.00 in a stock swap transaction with the Chief Executive
Officer. The shares acquired were accepted as payment to redeem 22,026 options
to purchase common stock. The Bancorp accounted for this purchase as treasury
stock.
On July 30, 1996, the Bancorp acquired 14,771 shares of its own stock
at a market price of $15.31 in a stock swap transaction with the Controller. The
shares acquired were accepted as payment to redeem 22,000 options to purchase
common stock. The Bancorp accounted for the purchase as treasury stock.
F-20
<PAGE>
8. Regulatory Matters:
The Bancorp's primary supervisory agent is the Federal Reserve Bank.
The Federal Reserve Bank has mandated certain minimum capital standards for the
industry. In addition, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") outlines various levels of capital adequacy for the industry.
Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulation that,
if undertaken, could have a direct material effect on the Bancorp's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bancorp must meet specific capital guidelines that
involve quantitative measures of the Bancorp's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bancorp's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bancorp 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).
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Bancorp as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bancorp 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 Bancorp's actual capital amounts and ratios are also presented in
the tables below. (All dollar amounts are in thousands.)
<TABLE>
<CAPTION>
For To Be Well Capitalized
Captial Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital $ 22,594 14.8 % $ 12,256 8.0 % $ 15,320 10.0 %
(to risk-weighted assets)
Tier I Capital 20,496 13.4 6,128 4.0 9,192 6.0
(to risk-weighted assets)
Tier I Capital 20,496 8.0 10,249 4.0 12,811 5.0
(to average assets)
As of December 31, 1997
Total Capital 20,161 15.3 10,543 8.0 13,179 10.0
(to risk-weighted assets)
Tier I Capital 18,343 13.9 5,271 4.0 7,907 6.0
(to risk-weighted assets)
Tier I Capital 18,343 8.1 9,067 4.0 11,333 5.0
(to average assets)
</TABLE>
During 1996, the Bancorp paid an additional $830,270 one-time SAIF
assessment required by legislation to recapitalize the SAIF.
F-21
<PAGE>
9. Parent Company Activity:
The Bancorp owns all of the outstanding shares of the Bank.
Accordingly, the balance sheets and statements of income for the Bancorp only,
are as follows:
<TABLE>
<CAPTION>
Balance Sheets
December 31,
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investment in bank $ 20,923,860 $ 18,480,334
Other assets 1,843 65,668
- ---------------------------------------------------------------------------------------------
Total assets $ 20,925,703 $ 18,546,002
- ---------------------------------------------------------------------------------------------
Liabilities:
Other liabilities $ 2,963 $ 3,401
- ---------------------------------------------------------------------------------------------
Stockholders' equity:
Convertible preferred stock 136 156
Common stock 16,331 16,216
Capital in excess of par 15,648,527 15,556,882
Retained earnings 5,469,135 3,406,501
Accumulated other comprehensive income 259,698 33,933
Treasury stock (471,087) (471,087)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 20,922,740 18,542,601
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,925,703 $ 18,546,002
- ---------------------------------------------------------------------------------------------
Statements of Income
Year Ended Year Ended
December 31, December 31,
1998 1997
- ---------------------------------------------------------------------------------------------
Equity in earnings of Bank $ 2,658,761 $ 2,206,270
- ---------------------------------------------------------------------------------------------
</TABLE>
10. Estimated Fair Value of Financial Instruments:
The assumptions used and the estimates disclosed represent management's
best judgment of appropriate valuation methods. These estimates are based on
pertinent information available to management as of December 31, 1998. In
certain cases, fair values are not subject to precise quantification or
verification and may change as economic and market factors, and management's
evaluation of those factors change.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any estimation
technique. Therefore, these fair value estimates are not necessarily indicative
of the amounts that the Bancorp would realize in a market transaction. Because
of the wide range of valuation techniques and the numerous estimates which must
be made, it may be difficult to make reasonable comparisons of the Bancorp's
fair value information to that of other financial institutions. It is important
that the many uncertainties discussed above be considered when using the
estimated fair value disclosures and to realize that because of these
uncertainties, the aggregate fair value amount should in no way be construed as
representative of the underlying value of the Bancorp. The estimated fair values
of the Bancorp's financial instruments at December 31, 1998 and 1997 are as
follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
($ in thousands) December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks $ 5,375 $ 5,375 $ 4,559 $ 4,559
Available-for-sale securities 74,439 74,439 4,693 4,693
Held-to-maturity securities 38,151 37,794 80,469 80,796
Loans receivable, net of allowance 131,645 133,637 128,958 132,597
Loans held for sale 603 612 1,414 1,441
Financial liabilities:
Deposits:
Checking accounts 40,845 37,398 29,573 26,710
Money market and savings accounts 27,410 26,897 23,444 22,859
Certificates of deposit 163,671 164,559 149,184 149,563
</TABLE>
The following methods and assumptions were used to estimate the fair value
amounts at December 31, 1998 and 1997:
Cash and Due from Banks
Carrying amount approximates fair value.
Available-for-Sale Securities
Fair value is based on quoted market prices.
Held-to-Maturity Securities
Fair value is based on quoted market prices.
Loans Receivable, Net of Allowance
Fair value of loans is estimated using discounted cash flow analyses
based on contractual repayment schedules. The discount rates used in these
analyses are based on either the interest rates paid on U.S. Treasury securities
of comparable maturities adjusted for credit risk and non-interest operating
costs or the interest rates currently offered by the Bancorp for loans with
similar terms to borrowers of similar credit quality.
Loans Held for Sale
Fair value is based on selling prices arranged by arms-length contracts
with third parties.
Deposits
Fair value of deposit liabilities payable on demand, consisting of NOW
accounts, money market deposits, statement savings and other deposit accounts is
estimated using discounted cash flow analyses based on an assumed decay of core
balances over time. The indicated fair value does not consider the value of the
Bancorp's estimated deposit customer relationships. Fair value of fixed-rate
certificates of deposit is estimated based on discounted cash flow analyses
using the remaining maturity of the underlying accounts and interest rates
currently offered on certificates of deposit with similar original maturities.
F-23
<PAGE>
Off-Balance Sheet Instruments
The difference between the original fees charged by the Bank for
commitments to extend credit and letters of credit and the current fees charged
to enter into similar agreements is immaterial.
11. Savings Plan:
In fiscal year 1993, the Bancorp began an employee savings plan (the
"Savings Plan") that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S.
employees may defer a portion of their pretax earnings, up to the Internal
Revenue Service annual contribution limit. The Bancorp matches one half of each
employee's contributions on a discretionary basis based on Bancorp profit, such
match not to exceed 3 percent of the employee's earnings. The Bancorp's matching
contributions to the Savings Plan were $37,700, $24,000, and $20,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
12. Provision for Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 861,977 $ 1,231,183 $ 483,449
State - - -
- ----------------------------------------------------------------------------------------------
861,977 1,231,183 483,449
- ----------------------------------------------------------------------------------------------
Deferred (benefit) provision:
Federal 222,323 (209,383) (13,849)
State - - -
- ----------------------------------------------------------------------------------------------
222,323 (209,383) (13,849)
- ----------------------------------------------------------------------------------------------
$ 1,084,300 $ 1,021,800 $ 469,600
- ----------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect temporary differences in the recognition
of revenue and expenses for tax reporting and financial statement purposes,
principally because certain items, such as the allowance for loan losses and
loan fees, are recognized in different periods for financial reporting and tax
return purposes. A valuation allowance has not been established for deferred tax
assets. Realization of the deferred tax asset is dependent on generating
sufficient taxable income. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset will be
realized.
F-24
<PAGE>
Deferred tax assets and liabilities were comprised of the following
significant components as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Provision for losses on loans and real estate owned $ 269,986 $ 602,857
Valuation of loans and securities 134,183 17,328
Depreciation 131,726 111,006
Other 4,947 4,947
- --------------------------------------------------------------------------------------------
Gross deferred tax assets 540,842 736,138
- --------------------------------------------------------------------------------------------
Liabilities:
Deferred loan fees 213,565 186,538
FHLB dividend 35,771 35,771
- --------------------------------------------------------------------------------------------
Gross deferred tax liabilities 249,336 222,309
- --------------------------------------------------------------------------------------------
Net deferred tax assets $ 291,506 $ 513,829
- --------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory Federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax income 34% 34% 34%
Adjustment for prior year accrual (3%) -- --
Dividends received deduction (2%) (2%) (1%)
- ---------------------------------------------------------------------------------------------------
Effective tax rate 29% 32% 33%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Cash paid for income taxes was $1,175,000, $725,000, and $919,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
13. Commitments:
The Bank leases its corporate headquarters and branch facilities under
operating lease agreements expiring in fiscal years through 2002. As of December
31, 1998, future minimum lease payments required under these arrangements,
assuming no extension options are exercised, are as follows:
Years Ending Minimum Lease
December 31, Payments
------------------ -------------------
1999 $ 527,047
2000 540,265
2001 493,200
2002 372,912
2003 312,326
Thereafter 1,506,520
Rent expense aggregated $485,792, $558,704, and $504,647 for the years
ended December 31, 1998, 1997, and 1996, respectively.
F-25
<PAGE>
Outstanding loan commitments amounted to $11,842,340 (of which
$3,887,840 had fixed interest rates) and $5,393,550 (of which $413,550 had fixed
interest rates) at December 31, 1998 and 1997, respectively. The Bank had
commitments from investors of $1,171,500 and $1,825,395 to purchase loans from
the Bank at December 31, 1998 and 1997, respectively.
At December 31, 1998, the Bank had commercial letters of credit
outstanding in the amount of approximately $537,078.
At December 31, 1998, the Bank had unfunded lines of credit of
$9,212,327 and undisbursed construction loan funds of $6,491,231.
14. Earnings Per Share
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock. Potential dilutive common stock has no effect
on income available to common stockholders. Earnings per share amounts for prior
periods have been restated to give effect to the application of SFAS 128 which
was adopted in 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- -------------------------- --------------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 1,597,815 $ 1.66 1,577,243 $ 1.39 1,544,338 $ 0.61
=========== =========== ===========
Effect of dilutive
Securities:
Stock Options 92,343 55,240 50,960
Convertible Preferred Stock 21,975 25,223 25,223
============= =========== ============ =========== ============ ===========
Diluted EPS 1,712,133 $ 1.55 1,657,706 $ 1.33 1,620,521 $ 0.59
============= =========== ============ =========== ============ ===========
</TABLE>
15. Quarterly Financial Information (Unaudited - in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
Dec. 31, 1998 Sep. 30, 1998 Jun. 30, 1998 Mar. 31, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 2,243 $ 2,085 $ 2,120 $ 2,078
Provision for loan losses 300 225 225 225
Total other income 752 667 438 489
Total other expense 1,687 1,571 1,487 1,411
Net income 697 658 674 630
Earnings per share:
Basic 0.43 0.41 0.42 0.39
Diluted 0.41 0.38 0.39 0.37
Weighted average shares
outstanding:
Basic 1,603,220 1,602,066 1,593,260 1,592,548
Diluted 1,707,793 1,717,428 1,720,913 1,709,010
- -------------------------------------------------------------------------------------------------------------
F-26
<PAGE>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
Dec. 31, 1997 Sep. 30, 1997 Jun. 30, 1997 Mar. 31, 1997
- -------------------------------------------------------------------------------------------------------------
Net interest income $ 2,128 $ 2,081 $ 1,944 $ 1,809
Provision for loan losses 320 255 175 130
Total other income 462 463 401 402
Total other expense 1,429 1,452 1,355 1,346
Net income 579 568 556 503
Earnings per share:
Basic 0.36 0.36 0.35 0.32
Diluted 0.34 0.34 0.34 0.31
Weighted average shares
outstanding:
Basic 1,590,232 1,587,153 1,566,943 1,564,248
Diluted 1,691,107 1,669,150 1,631,054 1,627,704
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,280,330 $ 5,374,945
Overnight earning deposits 1,255,541 928,435
Investment securities, available-for-sale 81,821,408 74,438,682
Investment securities, held-to-maturity 28,501,975 38,151,121
Loans held for sale 479,000 602,500
Loans receivable, net 157,213,169 131,645,482
Federal Home Loan Bank stock, at cost 1,500,000 1,082,500
Premises and equipment, net 2,930,285 2,370,711
Other assets 7,731,136 4,248,673
------------- -------------
Total assets $ 287,712,844 $ 258,843,049
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 236,852,768 $ 231,925,592
Advances from Federal Home Loan Bank 27,000,000 3,500,000
Other liabilities 2,525,871 2,494,717
------------- -------------
Total liabilities 266,378,639 237,920,309
------------- -------------
Commitments
Stockholders' equity:
Preferred stock 136 136
Common stock 16,405 16,331
Capital in excess of par value 15,724,465 15,648,527
Retained earnings 7,157,586 5,469,135
Accumulated other comprehensive income (loss) (1,093,300) 259,698
Treasury stock, at cost (471,087) (471,087)
------------- -------------
Total stockholders' equity 21,334,205 20,922,740
------------- -------------
Total liabilities and stockholders' equity $ 287,712,844 $ 258,843,049
============= =============
</TABLE>
The accompanying notes are an intergral part of these financial statements.
F-28
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ----------
<S> <C>
Interest income:
Loans $ 9,807,464 $ 9,282,779
Investment securities 5,369,841 4,584,017
----------- -----------
Total interest income 15,177,305 13,866,796
----------- -----------
Interest expense:
Deposits 7,278,452 7,420,245
Borrowings 424,291 163,538
----------- -----------
Total interest expense 7,702,743 7,583,783
----------- -----------
Net interest income 7,474,562 6,283,013
Provision for loan losses 925,000 675,000
----------- -----------
Net interest income after provision
for loan losses 6,549,562 5,608,013
----------- -----------
Other income:
Gain on sale of loans 866,484 486,296
Fee income 1,208,872 1,049,814
Other 253,688 59,028
----------- -----------
Total other income 2,329,044 1,595,138
----------- -----------
Other expense:
Employee compensation and benefits 2,860,074 2,111,088
Premises and equipment 1,006,935 807,943
Data processing expense 594,759 523,519
Deposit insurance assessments 102,171 92,903
Advertising 181,920 124,931
Other 936,803 808,265
----------- -----------
Total other expense 5,682,662 4,468,649
----------- -----------
Income before income taxes 3,195,944 2,734,502
Provision for income taxes 944,600 772,200
----------- -----------
Net income $ 2,251,344 $ 1,962,302
=========== ===========
Earnings per common share:
Basic $ 1.40 $ 1.22
Diluted 1.34 1.14
Weighted average shares outstanding:
Basic 1,606,352 1,595,993
Diluted 1,684,557 1,715,787
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
CONSOLIATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- ------------
<S> <C> <C>
Net income $ 2,251,344 $ 1,962,302
Other comprehensive income:
Cash flow hedge:
Unrealized holding gain 848,321 -
Reclassification adjustment for net interest
expense included in net income 32,979 -
Available-for-sale securities:
Unrealized holding gain/(loss) (2,843,180) 264,215
Reclassification adjustment for gains
included in net income (88,117) -
----------- -----------
Other comprehensive income before tax (2,049,997) 264,215
Income tax expense related to items of other
comprehensive income 696,999 (89,833)
----------- -----------
Other comprehensive income, net of tax (1,352,998) 174,382
Comprehensive income $ 898,346 $ 2,136,684
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
in thousands
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 2,251,344 $ 1,962,302
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 683,424 693,002
Provision for loan losses 925,000 675,000
Gain on sale of loans (866,484) (486,296)
Gain on sale of securities (88,117) (22,716)
Amortization of deferred loan fees (420,792) (477,552)
Net change in loans held for sale 321,029 1,313,741
Increase in other assets (240,378) (925,893)
Increase in other liabilities 238,341 2,235,394
----------- ------------
Net cash provided by operating activities 2,803,367 4,966,982
----------- ------------
Cash flows from investing activities:
(Increase) decrease in loans receivable (27,187,813) 1,117,652
Purchase of investment securities, held-to-maturity - (1,959,970)
Purchase of investment securities, available-for-sale (33,464,570) (50,748,447)
Sale of investment securities available-for-sale 5,404,657 6,702,750
Paydowns of investment securities 27,035,189 25,364,188
Increase in overnight earning deposits, net (327,106) (5,537,128)
Increase in premises and equipment, net (881,135) (268,011)
Increase in Federal Home Loan Bank stock (417,500) (152,000)
----------- ------------
Net cash used in investing activities (29,838,278) (25,480,966)
----------- ------------
Cash flows from financing activities:
Net increase in deposits 4,927,176 24,409,262
Increase (decrease) in advances from FHLB 23,500,000 (4,000,000)
Proceeds from stock options exercised 76,013 91,739
Dividends on preferred and common stock (562,893) (432,842)
----------- ------------
Net cash provided by financing activities 27,940,296 20,068,159
----------- ------------
Net increase (decrease) in cash and due from banks 905,385 (445,825)
Cash and due from banks, beginning of period 5,374,945 4,559,266
----------- ------------
Cash and due from banks, end of period $ 6,280,330 $ 4,113,441
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and, therefore, do
not include all information or footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments which are, in
the opinion of management, necessary for a fair presentation have been included.
All adjustments are of a normal recurring nature. The results of operations for
the three-month period ended September 30, 1999 are not necessarily indicative
of the results of the full year. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and the notes
included in Southern Financial Bancorp, Inc.'s Annual Report for the year ended
December 31, 1998.
NOTE 2 - HEDGE ACCOUNTING
During the first quarter of 1999, the Bancorp entered into four
interest rate swap agreements that are accounted for as cash flow hedges. In
accordance with SFAS 133, the Bancorp records the change in fair value of the
swaps in comprehensive income. To the extent that the hedge is not completely
effective, the ineffective portion is charged or credited to other income or
expense. The amounts recorded in comprehensive income subsequently are
reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the certificates of deposit (CD's) affects
earnings.
Each of the four swap agreements has a notional amount of $5 million,
and the Bancorp agreed to pay a rate fixed for the period of the swap and
receive 3 month LIBOR. Three of the swaps are for a period of five years and
have fixed rates ranging from 5.23% to 5.29%; the fourth swap is for a period of
ten years and has a fixed rate of 5.45%. The purpose of all four of these swaps
was to hedge the variability of cash flows resulting from changes in interest
rates in the Bancorp's floating rate liabilities, specifically the Bancorp's
CD's in amounts greater than $90,000, which have maturities of one month to six
months. The Bancorp performed a regression analysis using monthly averages of
both 3 month LIBOR and the Bancorp's hedged CD's and determined that there was a
highly effective correlation. The Bancorp designated CD's that were outstanding
on the inception dates of the swaps as being hedged by the swaps, and as the
hedged CD's mature, the Bancorp has identified other individual CD's to replace
them. During the year ending December 31, 1999, approximately $46 thousand of
gains in accumulated other comprehensive income related to the interest rate
swaps are expected to be reclassified into interest expense as a yield
adjustment of the hedged CD's.
During the quarter ended September 30, 1999, no portion of the hedge
was "ineffective" as the spread between LIBOR (the denomination of the floating
rate side of the interest rate swaps) and the Bancorp's CD issuance costs
changed only minimally. Since there was no change in the net present value of
the favorable variance in the spread for the weighted average remaining life of
the interest rate swaps, the Bancorp recognized no income.
F-32
<PAGE>
NOTE 3 - INVESTMENT SECURITIES
The following table sets forth the Bancorp's investment securities
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amortized Estimated Aortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ---------- -----------
<S> <C>
Available-for-sale securities:
FHLMC preferred stock $ - $ - $ 3,807,585 $ 3,888,524
FHLMC MBS 7,752,982 7,741,319 11,996,172 12,005,667
GNMA MBS 2,806,022 2,778,575 3,825,601 3,771,448
FNMA MBS 16,911,804 16,891,770 29,671,448 29,813,650
Collaterized mortgage obligations 27,382,895 26,337,408 1,526,527 1,529,095
Commercial MBS 24,105,888 23,025,000 18,043,819 18,246,250
Obligations of counties and
municipalities 3,916,909 3,625,447 3,234,489 3,220,498
Corporate obligations 990,494 945,482 989,319 992,300
U.S. Treasury securities 491,056 476,407 - -
U.S. Government agency obligations - - 949,066 971,250
---------- ---------- ---------- ----------
$ 84,358,050 $ 81,821,408 $ 74,044,026 $ 74,438,682
========== ========== ========== ==========
Held-to-maturity securities:
FHLMC MBS $ 3,064,456 $ 3,044,728 $ 4,091,316 $ 4,070,132
GNMA MBS 18,230,059 17,932,645 24,305,052 24,004,669
FNMA MBS 5,248,579 5,146,577 6,779,894 6,731,670
Collateralized mortgage
obligations - - 1,015,264 1,013,565
Obligations of counties
and municipalities 1,958,881 1,856,911 1,959,595 1,974,308
------------ ------------- ------------ ------------
$ 28,501,975 $ 27,980,861 $ 38,151,121 $ 37,794,344
============ ============ ============ =============
</TABLE>
F-33
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C>
Mortgage:
Residential $ 23,932,826 $ 26,046,289
Nonresidential 86,016,842 64,890,406
Construction:
Residential 3,729,809 5,184,844
Nonresidential 11,244,078 11,213,848
Non-Mortgage:
Business 32,898,923 24,773,003
Consumer 2,416,957 2,424,602
------------- -------------
Total loans receivable 160,239,435 134,532,992
Less:
Deferred loan fees, net 764,528 836,898
Allowance for loan losses 2,261,738 2,050,612
------------- -------------
Loans receivable, net $ 157,213,169 $ 131,645,482
============= =============
</TABLE>
The following sets forth information regarding the allowance for loan losses:
Nine Months Nine Months
Ended Ended
9/30/1999 9/30/1998
------------ -----------
Allowance at beginning of period $ 2,050,612 $ 2,036,532
Provision for losses charged
to income 925,000 675,000
Charge-offs (918,686) (546,610)
Recoveries 204,812 7,853
------------ ----------
Allowance at end of period $ 2,261,738 $ 2,172,775
============ ===========
F-34
<PAGE>
NOTE 5 - EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of dilutive common stock equivalents.
<TABLE>
<CAPTION>
For the nine months ended
September 30, 1999 September 30, 1998
---------------------------- ----------------------------
Per Per
Share Share
Shares Amount Shares Amount
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic EPS 1,606,352 $ 1.40 1,595,993 $1.22
============ ============
Effect of dilutive
Securities:
Stock Options 56,230 95,568
Convertible Preferred Stock 21,975 24,226
------------- -------------
Diluted EPS 1,684,557 $1.34 1,715,787 $1.14
============= ============ ============= ============
</TABLE>
NOTE 6 - OTHER SIGNIFICANT MATTERS
On October 1, 1999, Southern Financial Bancorp, Inc. (Southern
Financial) merged with the Horizon Bank of Virginia (Horizon). This transaction
was accounted for as a pooling-of-interests business combination. Under the
terms of the merger agreement, Horizon shareholders received .63 or 1,045,734
shares of Southern Financial Bancorp common stock. Unaudited pro forma
consolidated financial information has been filed on Form 8-K of Southern
Financial dated October 1, 1999.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
The Horizon Bank of Virginia
Merrifield, Virginia
We have audited the accompanying balance sheets of The Horizon Bank of
Virginia as of December 31, 1998 and 1997, and the related statements of
operations, other comprehensive income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Horizon Bank of
Virginia as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Thompson, Greenspon & Co., P.C.
Fairfax, Virginia
January 29, 1999
F-36
<PAGE>
The Horizon Bank of Virginia
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,445,820 $ 6,467,421
Overnight earning deposits 30,846,000 20,308,000
Investment securities, available-for-sale 9,636,855 12,017,486
Investment securities, held to maturity (estimated market
value of $19,553,348 and $8,104,781, respectively) 19,531,871 8,098,909
Loans receivable, net 74,709,594 75,602,129
Premises and equipment, net 3,152,593 3,220,127
Other assets 2,088,334 1,704,091
- ---------------------------------------------------------------------------------------------------------------
Total assets $145,411,067 $127,418,163
===============================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $134,979,742 $118,164,235
Other liabilities 728,198 288,464
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 135,707,940 118,452,699
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $2.50 par value, 2,000,000 authorized,
1,639,729 and 1,557,778 shares issued and
outstanding, respectively 4,099,325 3,894,445
Capital in excess of par value 4,223,773 3,564,319
Retained earnings 1,352,984 1,503,105
Accumulated other comprehensive income 27,045 3,595
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,703,127 8,965,464
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $145,411,067 $127,418,163
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
The Horizon Bank of Virginia
Statements of Income
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 7,189,034 $ 7,021,964 $ 6,129,444
Investment securities 1,937,583 1,509,402 1,551,055
- ---------------------------------------------------------------------------------------------------------------
Total interest income 9,126,617 8,531,366 7,680,499
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,015,542 3,583,289 3,566,500
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 4,015,542 3,583,289 3,566,500
- ---------------------------------------------------------------------------------------------------------------
Net interest income 5,111,075 4,948,077 4,113,999
Provision for loan losses 325,801 385,314 211,152
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 4,785,274 4,562,763 3,902,847
- ---------------------------------------------------------------------------------------------------------------
Other income:
Fee income 785,631 518,167 392,358
Gain on sale of investment securities - 1,464 7,354
Other 12,000 9,828 6,905
- ---------------------------------------------------------------------------------------------------------------
Total other income 797,631 529,459 406,617
- ---------------------------------------------------------------------------------------------------------------
Other expense:
Employee compensation and benefits 1,936,704 2,014,174 1,858,954
Premises and equipment 938,142 917,786 738,029
Advertising 42,282 18,544 51,964
Other 1,614,360 1,229,924 1,043,510
- ---------------------------------------------------------------------------------------------------------------
Total other expense 4,531,488 4,180,428 3,692,457
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 1,051,417 911,794 617,007
Provision for income taxes 357,775 310,000 210,730
- ---------------------------------------------------------------------------------------------------------------
Net income $ 693,642 $ 601,794 $ 406,277
===============================================================================================================
Earnings per common share:
Basic* $ .43 $ .39 $ .26
Diluted* .42 .38 .26
Weighted average shares outstanding:
Basic* 1,620,817 1,557,744 1,551,890
Diluted* 1,633,548 1,571,446 1,564,956
- ---------------------------------------------------------------------------------------------------------------
*1996 amounts have been restated to conform with SFAS 128, "Earnings per Share."
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
The Horizon Bank of Virginia
Statements of Comprehensive Income
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $693,642 $601,794 $406,277
Other comprehensive income, net of tax:
Unrealized gain (loss) arising during period 23,450 14,201 (48,021)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income 23,450 14,201 (48,021)
Comprehensive income $717,092 $615,995 $358,256
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
The Horizon Bank of Virginia
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Net Unrealized Gain
Number Retained (Loss) on Securities
of Shares Par Value Surplus Earnings Available for Sales Totals
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 691,600 $3,458,000 $3,458,000 $ 843,954 $ 37,415 $7,797,369
Options exercised 17,850 87,125 87,125 - - 174,250
Stock dividend of 10 percent 69,784 348,920 - (348,920) - -
Stock split - 2 for 1 778,384 - - - - -
Options adjustment - - 18,794 - - 18,794
Change in other comprehensive
income - - - - (48,021) (48,021)
Net income - - - 406,277 - 406,277
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,557,618 3,894,045 3,563,919 901,311 (10,606) 8,348,669
Options exercised 160 400 400 - - 800
Change in other comprehensive
income - - - - 14,201 14,201
Net income - - - 601,794 - 601,794
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,557,778 3,894,445 3,564,319 1,503,105 3,595 8,965,464
Options excercised 4,114 10,285 10,285 - - 20,570
Stock dividend of 5 percent 77,837 194,595 649,169 (843,764) - -
Change in other comprehensive
income - - - - 23,450 23,450
Net income - - - 693,643 - 693,643
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,639,729 $4,099,325 $4,223,773 $1,352,984 $ 27,045 $9,703,127
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
The Horizon Bank of Virginia
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 693,642 $ 601,794 $ 406,277
Noncash items included in net income
Depreciation and amortization 291,847 271,477 220,242
Provision for loan losses 325,801 385,314 211,152
Provision for losses on other
real estate owned 120,000 64,513 61,000
Net amortization of premiums on
securities (11,840) (7,605) (5,852)
Stock option compensation - - 18,794
(Increase) Decrease in
Accrued interest receivable (42,861) 41,139 7,507
Other assets (490,930) 279,143 (87,081)
Increase (Decrease) in
Accrued interest payable (2,259) (2,444) (9,535)
Other accrued expenses 441,994 (28,422) 56,530
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 1,325,394 1,604,909 879,034
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net Federal funds sold (10,538,000) (5,423,000) (1,682,000)
Acquisition of bank premises and
equipment (194,765) (360,684) (440,008)
Loans collected (made), net 566,734 (6,026,430) (9,259,523)
Proceeds from the maturities of
investment securities 5,700,000 3,813,750 6,611,031
Purchase of securities available for sale (4,300,000) (8,563,636) (5,642,064)
Purchase of investment securities (17,117,041) (1,811,206) (6,993,917)
Proceeds from the maturities of
securities available for sale 6,700,000 5,924,242 8,285,939
Other real estate owned
Proceeds from sale - 527,376 -
Acquisition of intangible assets - (171,195) (40,500)
Capitalized expenses - - (2,800)
Additions to deposits - - (203,258)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing
Activities (19,183,072) (12,090,783) (9,367,100)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from sale of common stock 20,570 800 174,747
Net increase in deposits 16,815,507 7,471,842 13,614,467
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by
Financing Activities 16,836,077 7,472,642 13,789,214
- ------------------------------------------------------------------------------------------------------------
Net Decrease (Increase) in Cash and
Due from Banks (1,021,601) (3,013,232) 5,301,148
Cash and Due from Banks, beginning of year 6,467,421 9,480,653 4,179,505
- ------------------------------------------------------------------------------------------------------------
Cash and Due from Banks, end of year $ 5,445,820 $ 6,467,421 $ 9,480,653
============================================================================================================
Noncash
Unrealized gain on securities available
for sale, net $ 23,450 $ 14,201 $ (48,021)
============================================================================================================
Stock Dividend $ 843,764 $ - $ 348,920
============================================================================================================
</TABLE>
F-42
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Bank follows generally accepted accounting principles and reporting
practices applicable to the banking industry. Significant accounting
policies are summarized below.
Nature of Operations
The Horizon Bank of Virginia is a state member bank of the Federal
Reserve and provides a variety of banking services to its customers. As
a state bank, the Bank is subject to regulations of the Virginia State
Banking Commission and the Federal Reserve. The Bank serves primarily
the Northern Virginia area with services provided at four branch
offices and a mortgage department.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could vary
from the estimates that were used.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
Cash paid for interest amounted to $4,017,801 in 1998, $3,585,733 in
1997, and $3,516,036 in 1996.
Income taxes paid amounted to $287,000 in 1998, $279,040 in 1997, and
$136,717 in 1996.
The Bank is required by regulatory authorities to maintain a specific
portion of its assets in the form of legal cash reserves, computed by
applying prescribed percentages to its various types of deposits. When
the Bank's vault cash reserves and balances maintained at the Federal
Reserve Bank are in excess of that required, it may lend the excess to
other banks on a daily basis. The average balance required to be
maintained at the Federal Reserve Bank for the year ended December 31,
1998 was approximately $1,211,000.
The Bank's available unsecured Federal fund lines of credit with
correspondent banks is based on bank capital. At December 31, 1998, the
lines were approximately $6,330,000. Continued availability of the
lines are reviewed annually by the correspondent bank and the Federal
Reserve. The rate of interest charged fluctuates daily in response to
market conditions. There were no borrowings on these lines at December
31, 1998 and 1997.
F-43
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Securities
Securities are classified as investment securities to be held to
maturity when management has the intent and the Bank has the ability at
the time of purchase to hold them until maturity or on a long-term
basis. These securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed by the straight-line
method over their contractual lives. If the interest method of
accounting for amortization of premiums and accretion of discounts was
used, it would not have a material effect on the financial statements.
Gains and losses on the sale of such securities are determined by the
specific identification method.
Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are classified as
available for sale and accounted for at fair value on an aggregate
basis. These include securities used as part of the Bank's
asset/liability management strategy and may be sold in response to
changes in interest rates, prepayment risk, the need or desire to
increase capital, to satisfy regulatory requirements and other similar
factors. Unrealized gains and losses of securities available for sale
are excluded from earnings and included in stockholders' equity, net of
related income taxes. Realized gains and losses of securities available
for sale are included in net securities gains (losses) based on the
specific identification method.
Loans and Loan Fees
Loans are stated at the principal amount outstanding, net of deferred
loan fees. Interest on loans is generally computed using the simple
interest method. Loan fees and related direct loan origination costs
are deferred and recognized as an adjustment of yield over the life of
the loan or currently upon the sale or repayment of the loans.
Interest on all categories of loans is accrued based upon the principal
amounts outstanding. The accrual of interest income is discontinued on
loans which are past due ninety or more days as to principal or
interest payments, except for certain guaranteed loans and other
limited exceptions. When loans are placed on nonaccrual status,
interest accrued in the current year is charged against interest
income, and interest accrued in prior years is charged to the allowance
for loan losses. Loans may be reinstated to accrual status when all
payments are brought current, and, in the opinion of management,
collection of the remaining balance can reasonably be expected. The
classification of a loan as nonaccrual is not necessarily indicative of
a potential loan loss.
The Bank originates mortgage loans for both sale and for its own
portfolio in order to insure the availability of a broad range of
mortgage products for its customers. The Bank sells originated
mortgages primarily on the secondary market. The Bank retains
negligible risk of principal loss for mortgages sold.
Allowance for Loan Losses
The Bank grants loans to customers located in Northern Virginia.
Although the Bank has a diversified portfolio, a substantial number of
loans are unsecured or collateralized by real estate.
F-44
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (continued)
The allowance for loan losses is a current estimate of the losses
inherent in the loan portfolio. The allowance is maintained at a level
considered adequate by management to absorb inherent losses based upon
management's evaluation of the portfolio.
The allowance is increased by provisions for loan losses charged to
operating expense and reduced by net chargeoffs. The provisions are
based on management's estimate of net realizable value or fair value of
the collateral, as applicable, considering the current and future
operating or sales conditions. These estimates are susceptible to
changes that could result in a material adjustment to future results of
operations.
Bank Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Leasehold improvements are amortized
over the asset life using the straight-line method. Furniture and
equipment are depreciated over estimated useful lives of five and seven
years using the straight-line method. The bank headquarters building is
depreciated over its estimated useful life of approximately 31.5 years
using the straight-line method.
Other Real Estate Owned
Other real estate owned includes properties acquired through
foreclosure or other proceedings in satisfaction of indebtedness. At
the date of acquisition, such property is recorded at the lower of the
recorded investment in the related receivable or net realizable value.
Write-downs at the date of acquisition are charged to the allowance for
loans losses. Subsequent declines in market value, operating expenses
and gains or losses on disposition of other real estate are reflected
in other expenses.
Stockholders' Equity
The Bank was capitalized through a private offering circular dated
October 2, 1989, for $6,421,000. Capital funds were allocated equally
between capital stock and surplus. The Bank has 2,000,000, $2.50 par
value, common shares authorized. There were 1,639,729 outstanding in
1998, and 1,557,778 in 1997.
In January, 1998, the Bank declared a 5 percent stock dividend for
stockholders of record on February 15, 1998 and payable on March 15,
1998.
State banking laws and regulatory compliance restrict the availability
of earnings for the payment of dividends.
The Bank is also required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by the banking regulators. At
December 31, 1998, the Bank is required to have minimum Tier 1 and
Total capital ratios of 4.00 percent and 8.00 percent, respectively.
The Bank's actual ratios at that date were 12.21 percent and 13.46
percent, respectively.
F-45
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Bank utilizes an asset and liability approach to accounting for
income taxes. The objective is to recognize the amount of income taxes
payable or refundable in the current year based on the Bank's income
tax return and the deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
Bank's financial statements or tax returns. The asset and liability
method accounts for deferred income taxes by applying enacted statutory
rates to temporary differences, the difference between financial
statement amounts and tax bases of assets and liabilities. Deferred
income tax liabilities or assets are adjusted to reflect changes in tax
laws or rates in the year of enactment.
The Bank pays state franchise tax in lieu of state income taxes.
Income per Common Share
The Bank has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 which establishes standards for computing and
presenting earnings per share (EPS) for entities with publicly held
common stock. The standard requires presentation of two categories of
earnings per share, basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Bank.
The financial statements provide information that considers the effects
of the 10 percent stock dividend.
<TABLE>
<CAPTION>
1998 1997 1997
---------------------------- ---------------------------- ----------------------------
Per - Per - Per -
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available
to common
stockholders $693,642 1,620,817 $0.43 $601,794 1,557,744 $0.39 $406,277 1,551,890 $0.26
===== ===== =====
Effect of Dilutive
Securities
Stock options
unexercised - 12,731 - 13,702 - 13,066
-------- --------- -------- --------- -------- ---------
Dilutive EPS
Income available
to common
stockholders
plus assumed
conversions $693,642 1,633,548 $0.42 $601,794 1,571,446 $0.38 $406,277 1,564,956 $0.26
======== ========= ===== ======== ========= ===== ======== ========= =====
</TABLE>
F-46
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impaired Loans
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118. SFAS
No. 114, as amended provided that a loan is impaired when, based on
current information and events, it is probable that the creditor will
be unable to collect all principal and interest amounts due according
to the contractual terms of the loan agreement. SFAS No. 114, as
amended provides guidelines relating to recognition of interest income
on impaired loans and requires that impaired loans be measured based on
the present value of the expected future cash flows, discounted at the
loan's effective interest rate. The effective rate of a loan is defined
as the contractual interest rate adjusted for any deferred loan fees or
costs, premiums or discounts existing at the inception or acquisition
of the loan. If the loan is collateral dependent, as a practical
expedient, impairment can be based on a loan's observable market price
of the fair value of the collateral. The value of the loan is adjusted
through a valuation allowance created through a charge against income.
Residential mortgages, consumer installment obligations and credit
cards are excluded. Loans that were treated as in-substance
foreclosures under previous accounting pronouncements are considered to
be impaired loans and under SFAS No. 114 will remain in the loan
portfolio.
A loan may be placed on non-accrual status and not classified as an
impaired loan when in the opinion of management, based on current
information and events, it is probable that the Bank will eventually
collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Interest income for impaired
loans is generally recognized on an accrual basis unless it is deemed
inappropriate to do so. In cases which the receipt of interest payments
is deemed more uncertain, the cash basis of income recognition is
utilized. Loans are placed on non-accrual status when, in the judgement
of management, the probability of timely collection of interest is
deemed to be insufficient to warrant further accrual. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection
efforts are deemed sufficient to ensure full recovery. When a loan is
placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income.
Management considered loans impaired amounting to $922,460 at December
31, 1998 and $840,663 at December 31, 1997. The total allowance for
possible loan losses related to impaired loans amounted to $381,802 at
December 31, 1998 and $83,899 at December 31, 1997.
Accounting Pronouncements
SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities
This statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at
fair value. The Bank is evaluating the potential impact of adopting
SFAS No. 133. Management does not expect the adoption of SFAS No. 133
to have a material impact on financial condition or results of
operations. The statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999.
F-47
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
2. INVESTMENT SECURITIES
The portfolio consists of the following:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government Treasury
and agency obligations $ 9,595,877 $47,073 $ 6,095 $ 9,636,855
=========== ======= ======= ===========
December 31, 1997
-------------------------------------------------------------
Available for sale:
U.S. Government Treasury
and agency obligations $12,012,038 $36,484 $31,036 $12,017,486
=========== ======= ======= ===========
December 31, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
----------- ---------- ---------- --------------
Held to maturity:
U.S. Government Treasury
and agency obligations $19,531,871 $59,187 $37,710 $19,553,348
=========== ======= ======= ===========
December 31, 1997
-------------------------------------------------------------
Held to maturity:
U.S. Government Treasury
and agency obligations $ 8,098,909 $19,032 $13,160 $ 8,104,781
=========== ======= ======= ===========
</TABLE>
The scheduled maturities of the portfolio at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------ -------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,029,786 $ 6,022,188 $ 2,699,475 $ 2,708,813
Due from one year to
five years 13,502,085 13,531,160 6,896,402 6,928,042
----------- ----------- ----------- -----------
$19,531,871 $19,553,348 $ 9,595,877 $ 9,636,855
=========== =========== =========== ===========
</TABLE>
Securities with a carrying amount of $16,700,000 and $12,150,000 at
December 31, 1998 and 1997, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
F-48
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
3. LOANS RECEIVABLE
Loans receivable at December 31 include the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Mortgage:
Residential $28,776,000 $30,907,000
Nonresidential 20,234,000 16,944,000
Construction 1,764,000 2,936,000
Nonmortgage:
Business 16,041,000 15,386,000
Consumer 9,134,586 10,369,771
----------- -----------
Total loans receivable 75,949,586 76,542,771
Less: Deferred loan fees (228,973) (233,804)
Less: Allowance for loan losses (1,011,019) (706,838)
----------- -----------
Loans receivable, net $74,709,594 $75,602,129
=========== ===========
</TABLE>
An analysis of the allowance for loan losses at December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance beginning of year $ 706,838 $ 873,378
Provision for loan losses 325,801 385,314
Charge-offs, net (21,620) (551,854)
---------- ---------
$1,011,019 $ 706,838
========== =========
</TABLE>
Loans on which the accrual of interest has been discontinued amount to
$922,460 at December 31, 1998 and $962,496 at December 31, 1997. Had
interest been accrued on those loans, such income would have
approximated $104,143 and $46,449 for the years ended December 31, 1998
and 1997, respectively.
The amount of the allowance deducted for Federal income tax purposes in
1998 was $390,000, in 1997 was $646,000, and in 1996 was $199,724.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment include the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,304,033 $ 1,304,033
Building 494,633 494,633
Automobiles 103,360 103,360
Leasehold improvements 1,085,350 1,014,025
Furniture and equipment 1,638,059 1,514,935
----------- -----------
4,625,435 4,430,986
Less accumulated depreciation (1,472,842) (1,210,859)
----------- -----------
$ 3,152,593 $ 3,220,127
=========== ===========
</TABLE>
Depreciation of bank premises and equipment charged to expense amounted
to $262,299 in 1998, $258,477 in 1997, and $214,842 in 1996.
F-49
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
5. OTHER REAL ESTATE OWNED
Activity related to foreclosed real estate is as follows:
Expenses related to other real estate owned are included in other
operating expenses and amounted to $12,750 in 1998, $3,066 in 1997, and
$3,441 in 1996.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $ 546,177 $ 966,871
Additions - 171,195
Sales - (527,376)
Allowance for losses (120,000) (64,513)
---------- ----------
Balance, December 31 $ 426,177 $ 546,177
========== ==========
</TABLE>
Activity of the allowance for other real estate owned losses is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $ 125,513 $ 61,000
Additions 120,000 64,513
---------- ----------
Balance, December 31 $ 245,513 $ 125,513
========== ==========
</TABLE>
6. OTHER ASSETS
In addition to Other Real Estate Owned and Accrued Interest Receivable,
other assets include the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $98,353 in 1998 and $68,805 in 1997 $ 92,552 $ 55,002
Prepaid taxes and expenses 139,032 101,403
Deposits and other 41,716 42,933
Deferred tax asset 368,000 187,000
Covenant not to compete 206,420 -
---------- ---------
$ 847,720 $ 386,338
========== =========
</TABLE>
The goodwill of $190,905 is being amortized over sixty months under the
straight-line method. Amortization charged to expense amounted to
$29,548 in 1998, $13,000 in 1997 and $5,400 in 1996.
7. TIME DEPOSITS
The maturity distribution of time certificates of deposit in
denominations of $100,000 or more was approximately $25,107,867 at
December 31, 1998 and $16,735,561 at December 31, 1997.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
3 months or less $ 8,294,176
3 to 12 months 21,407,321
1 to 5 years 21,676,063
Over 5 years -
-----------
$51,377,560
===========
F-50
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
8. INCOME TAXES
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current income taxes $ 538,775 $ 286,500 $ 257,230
Deferred tax (benefit) expense (181,000) 23,500 (46,500)
--------- --------- ---------
Total income tax expense $ 357,775 $ 310,000 $ 210,730
========= ========= =========
</TABLE>
Net deferred tax assets are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred Source
---------------
Unearned loan fees $ 68,903 $ 72,841
Organization/start-up costs and other 2,110 2,016
Loan loss and other real estate reserve 277,289 117,337
Net unrealized loss on securities available for sale - 1,852
Non accrued loan interest 28,625 -
Depreciation 5,006 -
--------- ---------
Gross deferred tax assets 381,933 194,046
--------- ---------
Net unrealized gain on securities available for sale 13,933 -
Depreciation - 7,046
--------- ---------
Gross deferred tax liability 13,933 7,046
--------- ---------
Net deferred tax asset $ 368,000 $ 187,000
========= =========
</TABLE>
Net deferred tax assets for 1998 and 1997 are included in Other Assets.
Income taxes payable of $266,000 for 1998 are included in other accrued
expenses.
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying the applicable statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes $1,051,417 $ 911,794 $ 617,007
Applicable statutory income tax rate 34% 34% 34%
---------- ---------- ----------
Computed "expected" Federal tax expense 357,482 310,010 209,782
Adjustments to Federal income tax
resulting from:
Nondeductible items and other 293 (10) 948
---------- ---------- ----------
Provision for Federal income taxes $ 357,775 $ 310,000 $ 210,730
========== ========== ==========
</TABLE>
F-51
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
9. OPERATING LEASES
In 1998, the Bank entered into two new lease agreements for a new
branch and additional office space. The lease agreement provides for a
term of ten years ending April 30, 2008, with annual lease payments of
$45,000 plus 5 percent annual increases. The office space agreement is
a six year lease beginning February 1, 1999 at $59,598 per year with
three percent increases annually.
In July, 1996, the Bank commenced occupancy in a new branch location in
Fairfax City. The current rent expense being paid by the Bank is
$124,689 per year. The initial ten year lease began with the date of
occupancy and includes four additional five year options to extend the
lease. Additionally, the Bank currently holds a $650,000 first deed of
trust loan on the building and land on which the Fairfax City branch is
located.
The Bank leased office space for its mortgage department at $30,500 per
year, net of a sublease. The lease expired in September 1998.
In January, 1995, the Bank entered into a lease agreement for a new
branch located in Vienna. The agreement provides for a term of ten
years ending in February, 2005 with an automatic ten year renewal
option unless the Bank issues an advance written notice. Total base
annual lease payments are $107,870 adjusted 1.5 percent per annum.
In 1995, the Bank amended its current lease agreement for office space
and signed a new lease for an additional floor of office space. The
agreements call for total annual lease payments of $119,700 per year
plus two thirds of all real estate taxes. The leases are in force for a
term of 5 years, ending on June 30, 1999. The Bank has the option for
five additional terms of five years each and may terminate the leases
after the third year with proper notice.
The following are the future minimum lease payments at December 31,
1998:
Years ending December 31,
-------------------------
1999 $ 437,977
2000 415,145
2001 421,353
2002 427,775
2003 and thereafter 1,291,184
----------
Total $2,993,434
==========
Rent expense amounted to $420,000 in 1998, $401,500 in 1997 and
$319,500 in 1996.
10. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
directors, executive officers, employees and their associates. These
transactions have been made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons. Directors, officers and
their affiliated companies were indebted to the Bank for loans totaling
$1,622,674 at December 31, 1998 and $1,667,022 at December 31, 1997.
Activity of loans to directors, officers and their affiliated companies
is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $1,667,022 $1,291,000
Advances 255,345 727,772
Repayments (299,693) (351,750)
---------- ----------
Balance, December 31 $1,622,674 $1,667,022
========== ==========
</TABLE>
F-52
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
11. STOCK OPTIONS
Stock Option Plan
On April 9, 1991, the stockholders approved a stock option plan
authorizing options for 160,000 shares of the Bank's common stock, of
which 154,000 shares have been granted to eligible directors. On May
31, 1996, 4,650 options were granted to officers and employees. On
January 1, 1997, 1,350 options were granted to employees. Under the
terms of the plan the purchase price of the stock will be $5.00 per
share. Compensation expense has been recognized for options granted at
less than the market price at the measurement date. All options expire
April 9, 1999.
A summary of activities is as follows:
<TABLE>
<CAPTION>
Amount Price
--------- -----
<S> <C> <C>
Authorized 160,000
=========
Balance outstanding at December 31, 1996 24,800 $5
Granted 1,350 $5
Exercised (160) $5
---------
Balance outstanding at December 31, 1997 25,990 $5
Granted -
Exercised (4,114)
---------
Balance outstanding at December 31, 1998 21,876 $5
=========
</TABLE>
Stock Compensation
In 1996, the Bank adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation and will continue to apply Accounting Principles Board No.
25 and related interpretations in accounting for its plans. SFAS No.
123 establishes standards of financial accounting and reporting for
stock-based employee compensation plans including stock option plans,
stock purchase plans and other arrangements by which employees receive
shares of stock or other equity instruments based on the market price
of an entity's stock.
If the Bank had elected to recognize compensation cost for the plan
based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by SFAS No. 123, net
income and earnings per share would have been changed to the pro forma
amounts indicated below;
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income As reported $693,643 $601,794 $406,277
Pro forma $693,643 $601,215 $392,939
Earnings per share As reported $ .43 $ .39 $ .26
Pro forma $ .43 $ .39 $ .25
</TABLE>
F-53
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
11. STOCK OPTION PLAN (continued)
Stock Compensation (continued)
The fair value of Horizon Bank stock options used to compute pro forma
net income and earnings per share disclosures is the estimated present
value at grant date using the Minimum Value pricing model with the
following assumptions for 1998: a risk free interest rate of 6.50
percent, an estimated dividend yield of 3 percent and an expected
holding period of four years.
12. EMPLOYEE BENEFIT PLAN
In 1995, the Bank adopted a contributory 401 (k) savings plan covering
substantially all employees. Effective as of January 1, 1996, the plan
allows eligible employees to contribute a fixed percentage of their
compensation with the Bank matching a portion of each employee's
contribution. The Bank's contributions amounted to $22,513 in 1998,
$16,308 in 1997 and $17,378 in 1996.
13. BUSINESS COMBINATIONS
On March 13, 1996, the Bank completed its acquisition of the assets and
assumed certain liabilities of VIP Mortgage Corporation. The excess of
the total acquisition cost over the fair value of the net assets
acquired of $73,902 is being amortized over 5 years on a straight-line
basis. The acquisition has been accounted for as a purchase and results
of operations of VIP Mortgage Corporation since the date of acquisition
are included in the Bank's financial statements. A director of the Bank
was also an owner of the mortgage corporation. Certain contingent
payments relating to the purchase were made to former stockholders in
1998 and 1997.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair value
of each class of financial instrument for which it is practicable to
estimate that value.
Cash and Short-term Investment
For cash, due from banks, Federal funds sold and other short-term
instruments, the carrying amount approximates fair value.
Investment Securities and Securities Available for Sale
Fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans Receivable
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
F-54
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Deposit Liabilities
The fair value of demand deposits, savings account, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Commitments to Extend Credit, Stand-by Letters of Credit, and Financial
Guarantees Written
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counter parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of guarantees and letters of credit
is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
Unrecognized financial instrument accrual and deferral fees were not
considered material.
The estimated fair value of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 (In Thousands) 1997 (In Thousands)
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $ 36,292 $ 36,292 $ 26,775 $ 26,775
Securities 29,169 29,190 20,116 20,123
Loans 75,721 75,659 76,309 76,199
Less allowance for loan losses (1,011) - (707) -
Net loans 74,710 75,659 75,602 76,199
--------- --------- --------- ---------
Total financial liabilities $ 140,171 $ 141,141 $ 122,507 $ 123,097
========= ========= ========= =========
Financial Liabilities:
Deposits $ 134,980 $ 135,247 $ 118,164 $ 118,698
========= ========= --------- ---------
Total financial liabilities $ 134,980 $ 135,247 $ 118,164 $ 118,698
========= ========= ========= =========
Unrecognized financial instruments:
Commitments to extend credit $ 24,400 $ 24,400 $ 15,900 $ 15,900
Standby letters $ 1,880 $ 1,880 $ 1,848 $ 1,848
</TABLE>
F-55
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
15. SEGMENT INFORMATION
The Bank adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1998 which changes the way the
Bank reports information about its segments.
The Bank currently considers its banking operations and mortgage
operations as reportable segments.
Banking: This segment consists of all banking services and products
which are not reported under the mortgage operations.
Mortgage: This segment consists of mortgage banking products and
services. The main product of the mortgage department is providing
residential mortgage loans in the Northern Virginia metro area.
<TABLE>
<CAPTION>
Banking Mortgage Total
------- -------- -----
<S> <C> <C> <C>
1998 (In Thousands)
----
Interest Income $ 7,630 $ 1,497 $ 9,127
Interest Expense (2,909) (1,107) (4,016)
------- ------- -------
Net Interest Income 4,721 390 5,111
Provision for Loan Losses (303) (23) (326)
Other Income 454 344 798
Operating Expense (4,182) (349) (4,531)
Income Taxes (235) (123) (358)
------- ------- -------
Net Income $ 455 $ 239 $ 694
======= ======= =======
Banking Mortgage Total
------- -------- -----
1997 (In Thousands)
----
Interest Income $ 7,247 $ 1,284 $ 8,531
Interest Expense (2,993) (590) (3,583)
------- ------- -------
Net Interest Income 4,254 694 4,948
Provision for Loan Losses (343) (42) (385)
Other Income 302 227 529
Operating Expense (3,723) (457) (4,180)
Income Taxes (167) (143) (310)
------- ------- -------
Net Income $ 323 $ 279 $ 602
======= ======= =======
</TABLE>
F-56
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
16. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
In the normal course of business, the Bank incurs certain contingent
liabilities that are not reflected in the accompanying financial
statements. These contingent liabilities include standby letters of
credit and unfunded commitments. Commitments under standby letters of
credit approximated $1,880,553 in 1998 and $1,848,305 in 1997, and
unfunded commitments approximated $24,413,106 in 1998 and $15,899,877
in 1997. The Bank does not anticipate any material losses as a result
of these commitments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties and residential properties.
All of the Bank's loans, commitments, and commercial and standby
letters of credit have been granted to customers in the Banks market
area. The concentrations of credit by type of loan are set forth in
Note 3. 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 does
not extend credit to any single borrower or group of related borrowers
in excess of their legal limit. The Bank does not have a payroll
processing customer which may have deposits in excess of ten percent of
total deposits during seasonal peaks.
From time to time, the Bank is party to litigation and claims arising
in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims will not be material to the financial position.
In connection with the retirement of the former Chief Executive
Officer, the Bank entered into a contract with the former executive
which provided for his continued employment as a consultant through
December 31, 1997. In addition, the Bank received his agreement not to
compete which is effective upon resignation from the Board of Directors
and will remain in effect until April 30, 2000, in return for monthly
payments of $12,350 and continuation of certain benefits during the
agreement period.
F-57
<PAGE>
Horizon Bank of Virginia
Horizon Bank of Virginia
Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
Assets September 30, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Bank $ 4,813,561 $ 5,445,820
Federal Funds Sold 12,031,000 30,846,000
Investment Securities 20,540,617 19,531,871
Securities Available for Sale 17,933,144 9,636,855
Loans Receivable, net 67,030,498 74,709,594
Bank Premises and Equipment, Net 2,951,855 3,152,593
Accrued Interest Receivable 939,220 814,437
Other Real Estate Owned 123,000 426,177
Other Assets 1,710,517 847,720
- -------------------------------------------------------------------------------------------------------------------
Total Assets $128,073,412 $145,411,067
===================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits $118,261,531 $134,979,742
Other liabilities 1,299,594 728,198
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 119,561,125 135,707,940
Stockholders' Equity
Common stock 4,149,738 4,099,325
Capital in excess of par value 4,274,185 4,223,773
Retained earnings 267,218 1,352,984
Accumulated other comprehensive income (178,854) 27,045
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 8,512,287 9,703,127
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $128,073,412 $145,411,067
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
Horizon Bank of Virginia
Horizon Bank of Virginia
Statements of Operations
Three and Nine Months Ended September 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,582,152 $1,830,181 $ 4,918,151 $5,347,488
Investments securities 696,144 498,786 1,947,745 1,364,837
- ----------------------------------------------------------------------------------------------------------------
Total Interest Income 2,278,296 2,328,967 6,865,896 6,712,325
Interest expense:
Deposits 946,170 1,027,701 2,987,528 2,932,910
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income 1,332,126 1,301,266 3,878,368 3,779,415
Provision for Possible Loan
Losses 793,623 158,801 904,660 325,801
- ----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 538,508 1,142,465 2,973,708 3,453,614
- ----------------------------------------------------------------------------------------------------------------
Other income:
Fee income 162,131 213,365 573,959 614,037
Other 3,121 2,188 11,049 6,296
- ----------------------------------------------------------------------------------------------------------------
Total other income 165,252 215,553 585,008 620,333
- ----------------------------------------------------------------------------------------------------------------
Other expense:
Employee compensation and
benefits 630,068 519,011 1,657,752 1,475,410
Premises and equipment 280,476 228,999 787,263 695,654
Data processing expense 41,131 31,396 102,839 92,548
Merger expenses 995,908 - 995,908 -
Other 948,446 426,720 1,614,720 1,094,790
- ----------------------------------------------------------------------------------------------------------------
Total other expense 2,896,029 1,206,126 5,148,482 3,358,402
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes (2,192,274) 151,892 (1,599,766) 715,545
Provision for income taxes 715,075 (50,100) 514,000 (242,030)
- ----------------------------------------------------------------------------------------------------------------
Net Income $(1,477,199) $ 101,792 $(1,085,766) $ 473,515
================================================================================================================
Earnings (loss) per common share:
Basic $(.89) $.06 $(.65) $0.29
Diluted $(.89) $.06 $(.65) $0.29
Weighted average shares outstanding:
Basic 1,653,158 1,615,196 1,653,158 1,615,196
Diluted 1,653,158 1,627,973 1,653,158 1,627,973
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
The Horizon Bank of Virginia
Statements of Comprehensive Income
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Net (loss) income $(1,085,766) $473,515
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities, net (205,899) 1,047
----------- --------
Other comprehensive income (205,899) 1,047
Comprehensive income $(1,291,665) $474,562
=========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-60
<PAGE>
Horizon Bank of Virginia
Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999 and Year Ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Number Retained Comprehensive
of Shares Par Value Surplus Earnings Income Totals
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 1,557,778 $3,894,445 $3,564,319 $1,503,105 $ 3,595 $ 8,965,464
Exercise of stock options 4,114 10,285 10,285 - - 20,570
5 Percent Stock
Dividend 77,837 194,595 649,169 (843,764) - -
Net Change in Unrealized
Gain on Securities
Available for Sale - - - - 23,450 23,450
Net Income for the
Year Ended
December 31, 1998 - - - 693,643 - 693,643
- -------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 1,639,729 4,099,325 4,223,773 1,352,984 27,045 9,703,127
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Exercise of Stock
Options 20,165 50,413 50,412 - - 100,825
Net Change in
Unrealized Gain on
Securities Available
for Sale - - - - (205,899) (205,899)
Net Loss for the
Period Ended
September 30, 1999 - - - (1,085,766) - (1,085,766)
- --------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1999 1,659,894 $4,149,738 $4,274,185 $ 267,218 $(178,854) $ 8,512,287
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
Horizon Bank of Virginia
Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 30, September 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(1,085,766) $ 473,515
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 202,470 193,878
Provision for loan losses 904,660 325,801
(Increase) Decrease in other assets (987,580) 253,537
Increase (Decrease) in other liabilities 571,396 323,959
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities (394,820) 1,570,690
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net Federal funds sold 18,815,000 6,312,000
Increase in premises and equipment (17,147) (127,585)
Loans collected (made), net 6,829,052 (1,896,133)
Proceeds from the sale of other real estate owned 303,177 -
Proceeds from the maturities of investment securities - 1,800,000
Purchase of securities available for sale (8,296,289) (4,908,866)
Purchase of investment securities (1,253,846) (618,531)
Proceeds from the maturities of securities available for sale - 1,256,000
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 16,379,947 1,816,885
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from sale of common stock 100,825 20,570
Net decrease in deposits (16,718,211) (4,976,981)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (16,617,386) (4,956,411)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Due from Banks (632,259) (1,568,836)
Cash and Due from Banks, beginning of period 5,445,820 6,467,421
- -------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks, end of period $ 4,813,561 $ 4,898,585
===================================================================================================================
Noncash
Unrealized gain (loss) on securities available for sale, net $ (205,899) $ 1,047
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q, and, therefore, do not
include all information or footnotes necessary for a fair presentation
of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments which are, in the opinion of management, necessary for a
fair presentation have been included. All adjustments are of a normal
recurring nature. The results of operations for the nine-month period
ended September 30, 1999 are not necessarily indicative of the results
of the full year. These financial statements should be read in
conjunction with the financial statements and the notes included in The
Horizon Bank of Virginia's Annual Report for the year ended December
31, 1998.
2. INVESTMENT SECURITIES
The following table sets forth the Bank's investment securities
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Available-for-sale
securities:
U.S. Government
Treasury and
agency obligations $18,204,134 $17,933,144 $ 9,595,877 $ 9,636,855
=========== =========== ============ ============
Held-to-maturity
securities:
U.S. Government
Treasury and
agency obligations $20,540,617 $20,234,846 $19,531,871 $19,553,348
=========== =========== =========== ===========
</TABLE>
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Mortgage:
Residential $24,397,540 $28,776,000
Nonresidential 21,627,634 20,234,000
Construction: 3,106,398 1,764,000
Non-Mortgage:
Business 12,238,122 16,041,000
Consumer 7,745,368 9,134,586
---------- ----------
Total loan receivable 69,115,062 75,949,586
Less:
Deferred loan fees, net 185,615 228,973
Allowance for loan losses 1,898,949 1,011,019
---------- ----------
Loans receivable, net $67,030,498 $74,709,594
=========== ===========
</TABLE>
F-63
<PAGE>
The following sets forth information regarding the allowance for loan
losses:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
9/30/99 9/30/98
---------- ----------
<S> <C> <C>
Allowance at beginning of period $1,011,019 $ 706,838
Provision for losses charged to income 904,660 325,801
Charge-offs, net (16,730) (1,589)
---------- ----------
Allowance at end of period $1,898,949 $1,031,050
========== ==========
</TABLE>
4. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of dilutive common stock equivalents.
<TABLE>
<CAPTION>
For the nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Basic EPS 1,653,158 $(0.65) 1,615,196 $0.29
====== =====
Effect of dilutive
Securities:
Stock Options
unexercised - 12,777
--------- ---------
Diluted EPS 1,653,158 $(0.65) 1,627,973 $0.29
========= ====== ========= =====
</TABLE>
5. OTHER SIGNIFICANT MATTERS
The Bank signed a definitive Merger Agreement providing for a merger
with Southern Financial Bancorp, Inc. Stockholders of the Bank will
receive .63 shares of Southern Financial Bancorp common stock in
exchange for each share of its common stock. Subject to certain
conditions including receipt of regulatory approval and approval of the
shareholders of the Southern Financial Bancorp and the Bank, closing of
the merger occurred in the fourth quarter of 1999. The merger will be
accounted for under the pooling method.
6. MERGER EXPENSES
The bank has incurred merger related expenses through September 30,
1999 as follows:
September 30, 1999
------------------
Legal and accounting fees $130,850
Service bureau and system conversion 439,700
Printing and other costs 6,258
Compensation per employment contract 419,100
--------
$995,908
========
F-64
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
SOUTHERN FINANCIAL BANCORP, INC. AND THE HORIZON BANK OF VIRGINIA
The following unaudited pro forma condensed financial statements have
been prepared on a consolidated basis based upon the historical financial
statements of Southern Financial and Horizon. The pro forma combined information
gives effect to the merger with Horizon accounted for as a pooling of interests,
and is based on the issuance of 1,045,734 shares of Southern Financial common
stock in connection with the merger, which in turn is based on the number of
shares of Horizon common stock outstanding at September 30, 1999.
The pro forma financial statements should be read in conjunction with
the separate historical financial statements and the related notes thereto of
Southern Financial in and Horizon's historical financial statements. There are
no adjustments necessary to the historical results of operations as a result of
the merger. The pro forma combined financial position and results of operations
are not necessarily indicative of the results which would actually have been
attained if the Horizon merger had occurred in the past or which may be attained
in the future.
F-65
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Combined Balance Sheet
September 30, 1999
Southern Financial Horizon Adjustments Consolidated
------------------ ------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 6,280 $ 4,814 $ 11,094
Overnight earning deposits 1,256 12,031 13,287
Investment securities, available-for-sale 81,821 17,933 99,754
Investment securities, held-to-maturity 28,502 20,541 49,043
Loans held for sale 479 - 479
Loans receivable, net 157,213 67,030 224,243
Federal Home Loan Bank stock, at cost 1,500 - 1,500
Premises and equipment, net 2,930 2,952 5,882
Other assets 7,732 2,772 10,504
Total assets $ 287,713 $ 128,073 $ 415,786
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 236,853 $ 118,262 $ 355,115
Advances from Federal Home Loan Bank 27,000 - 27,000
Other liabilities 2,526 1,299 3,825
--------------------------------------------------------------------------
Total liabilities 266,379 119,561 385,940
--------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock - - -
Common stock 16 4,150 (4,139) 27
Capital in excess of par value 15,724 4,274 4,139 24,137
Retained earnings 7,158 267 7,425
Accumulated other comprehensive income (1,093) (179) (1,272)
Treasury stock, at cost (471) - (471)
--------------------------------------------------------------------------
Total stockholders' equity 21,334 8,512 29,846
--------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 287,713 $ 128,073 $ $ 415,786
==========================================================================
</TABLE>
F-66
<PAGE>
Unaudited Pro Forma Combined Statements of Income
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 9,807 $ 4,918 $ 14,726
Investment securities 5,370 1,948 7,318
---------------------------------------------------------
Total interest income 15,177 6,866 22,044
---------------------------------------------------------
Interest expense:
Deposits 7,278 2,988 10,267
Borrowings 424 - 424
---------------------------------------------------------
Total interest expense 7,703 2,988 10,691
---------------------------------------------------------
Net interest income 7,475 3,878 11,353
Provision for loan losses 925 905 1,830
---------------------------------------------------------
Net interest income after provision for loan losses 6,550 2,973 9,523
---------------------------------------------------------
Other income:
Fee income 1,209 574 1,783
Gain on sale of loans 866 - 866
Other 254 11 265
---------------------------------------------------------
Total other income 2,329 585 2,914
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,860 1,658 4,518
Premises and equipment 1,602 890 2,492
Deposit insurance assessments 102 9 111
Advertising 182 10 192
Merger expenses - 996 996
Other 937 1,595 2,532
---------------------------------------------------------
Total other expense 5,683 5,158 10,841
---------------------------------------------------------
Income before income taxes 3,196 (1,600) 1,596
Provision (Benefit) for income taxes 945 (514) 431
---------------------------------------------------------
Net income $ 2,251 (1,086) $ 1,165
=========================================================
Earnings per common share:
Basic $ 1.40 (0.65) $ 0.44
Diluted 1.34 (0.65) 0.43
Weighted average shares outstanding
Basic 1,606,352 1,653,158 2,647,842
Diluted 1,684,557 1,653,158 2,726,047
</TABLE>
F-67
<PAGE>
Unaudited Pro Forma Combined Statements of Income
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 9,283 $ 5,347 $ 4,630
Investment securities 4,584 1,365 5,949
---------------------------------------------------------
Total interest income 13,867 6,712 20,579
---------------------------------------------------------
Interest expense:
Deposits 7,420 2,933 10,353
Borrowings 164 - 164
---------------------------------------------------------
Total interest expense 7,584 2,933 10,517
---------------------------------------------------------
Net interest income 6,283 3,779 10,062
Provision for loan losses 675 325 1,000
---------------------------------------------------------
Net interest income after provision for loan losses 5,608 3,454 9,062
---------------------------------------------------------
Other income:
Fee income 1,050 614 1,664
Gain on sale of loans 486 - 486
Other 59 6 65
---------------------------------------------------------
Total other income 1,595 620 2,215
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,111 1,475 3,586
Premises and equipment 1,332 788 2,120
Deposit insurance assessments 93 11 104
Advertising 125 42 167
Other 808 1,042 1,850
---------------------------------------------------------
Total other expense 4,469 3,358 7,827
---------------------------------------------------------
Income before income taxes 2,734 716 3,450
Provision for income taxes 772 242 1,014
---------------------------------------------------------
Net income $ 1,962 $ 474 $ 2,436
=========================================================
Earnings per common share:
Basic $ 1.22 $ 0.29 $ 0.93
Diluted
1.14 0.29 0.89
Weighted average shares outstanding
Basic
1,595,993 1,615,196 2,613,566
Diluted
1,715,787 1,627,973 2,741,410
</TABLE>
F-68
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 12,365 $ 7,189 $ 19,554
Investment securities 6,366 1,938 8,304
---------------------------------------------------------
Total interest income 18,731 9,127 27,858
---------------------------------------------------------
Interest expense:
Deposits 9,935 4,016 13,951
Borrowings 270 - 270
---------------------------------------------------------
Total interest expense 10,205 4,016 14,221
---------------------------------------------------------
Net interest income 8,526 5,111 13,637
Provision for loan losses 975 326 1,301
---------------------------------------------------------
Net interest income after provision for loan losses 7,551 4,785 12,336
---------------------------------------------------------
Other income:
Fee income 1,433 786 2,219
Gain on sale of loans 796 - 796
Gain on sale of investment securities 68 - 68
Other 50 12 62
---------------------------------------------------------
Total other income 2,347 798 3,145
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,921 1,937 4,858
Premises and equipment 1,783 938 2,721
Deposit insurance assessments 124 - 124
Advertising 185 42 227
Other 1,142 1,614 2,756
---------------------------------------------------------
Total other expense 6,155 4,531 10,686
---------------------------------------------------------
Income before income taxes 3,743 1,052 4,795
Provision for income taxes 1,084 358 1,442
---------------------------------------------------------
Net income $ 2,659 $ 694 $ 3,353
=========================================================
Earnings per common share:
Basic $ 1.66 $ 0.43 $ 1.28
Diluted 1.55 0.42 1.22
Weighted average shares outstanding:
Basic 1,597,815 1,620,817 2,618,930
Diluted 1,713,815 1,633,548 2,742,950
</TABLE>
F-69
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 11,568 $ 7,022 $ 18,590
Investment securities 5,437 1,509 6,946
---------------------------------------------------------
Total interest income 17,005 8,531 25,536
---------------------------------------------------------
Interest expense:
Deposits 8,709 3,583 12,292
Borrowings 334 - 334
---------------------------------------------------------
Total interest expense 9,043 3,583 12,626
---------------------------------------------------------
Net interest income 7,962 4,948 12,910
Provision for loan losses 880 385 1,265
---------------------------------------------------------
Net interest income after provision for loan losses 7,082 4,563 11,645
---------------------------------------------------------
Other income:
Fee income 1,447 518 1,965
Gain on sale of loans 192 - 192
Gain on sale of investment securities - 1 1
Other 89 10 99
---------------------------------------------------------
Total other income 1,728 529 2,257
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,532 2,014 4,546
Premises and equipment 1,840 918 2,758
Deposit insurance assessments 109 - 109
Advertising 214 18 232
Other 887 1,230 2,117
---------------------------------------------------------
Total other expense 5,582 4,180 9,762
---------------------------------------------------------
Income before income taxes 3,228 912 4,140
Provision for income taxes 1,022 310 1,332
---------------------------------------------------------
Net income $ 2,206 $ 602 $ 2,808
=========================================================
Earnings per common share:
Basic $ 1.39 $ 0.39 $ 1.09
Diluted 1.33 0.38 1.06
Weighted average shares outstanding:
Basic 1,577,243 1,557,744 2,558,622
Diluted 1,657,706 1,571,446 2,647,717
</TABLE>
F-70
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 10,308 $ 6,129 $ 16,437
Investment securities 4,306 1,551 5,857
---------------------------------------------------------
Total interest income 14,614 7,680 22,294
---------------------------------------------------------
Interest expense:
Deposits 7,433 3,566 10,999
Borrowings 342 - 342
---------------------------------------------------------
Total interest expense 7,775 3,566 11,341
---------------------------------------------------------
Net interest income 6,839 4,114 10,953
Provision for loan losses 695 211 906
---------------------------------------------------------
Net interest income after provision for loan losses 6,144 3,903 10,047
---------------------------------------------------------
Other income:
Fee income 950 393 1,343
Gain on sale of loans 210 - 210
Gain on sale of investment securities - 7 7
Other 26 7 33
---------------------------------------------------------
Total other income 1,186 407 1,593
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,148 1,859 4,007
Premises and equipment 1,591 738 2,329
Deposit insurance assessments 1,085 - 1,085
Advertising 143 52 195
Other 940 1,044 1,984
---------------------------------------------------------
Total other expense 5,907 3,693 9,600
---------------------------------------------------------
Income before income taxes 1,423 617 2,040
Provision for income taxes 469 211 680
---------------------------------------------------------
Net income $ 954 $ 406 $ 1,360
=========================================================
Earnings per common share:
Basic $ 0.61 $ 0.26 $ 0.53
Diluted 0.59 0.26 0.52
Weighted average shares outstanding:
Basic 1,544,338 1,551,890 2,522,029
Diluted 1,621,958 1,564,956 2,607,880
</TABLE>
F-71
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position that
would have resulted had the merger been consummated at the beginning of
the periods indicated, nor is it necessarily indicative of the results
of operations in future periods or the future financial position of the
combined entities.
(2) It is assumed that the merger will be accounted for on a
pooling-of-interests accounting basis and, accordingly, the related pro
forma adjustments have been calculated using the exchange ratio,
whereby Southern Financial will issue 0.63 shares of Southern Financial
common stock for each share of Horizon common stock.
(3) Per share data for all periods has been computed based on the combined
historical income applicable to common shareholders of Southern
Financial and Horizon using the historical weighted average shares
outstanding, adjusted to equivalent shares of Southern Financial common
stock.
(4) Pro forma combined balance sheet adjustments reflect (i) the issuance
of shares of Southern Financial common stock and (ii) the elimination
of Horizon common stock.
F-72
<PAGE>
================================================================================
January __, 2000
$12,000,000
SOUTHERN FINANCIAL CAPITAL TRUST I
$_______Capital Securities
(liquidation amount $10 per capital security)
Fully and unconditionally guaranteed, as described herein, by
SOUTHERN FINANCIAL BANCORP, INC.
___________________
PROSPECTUS
___________________
McKinnon & Company, Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 3,644 *
National Association of Securities Dealers Examination Fee $ 1,880 *
Nasdaq National Market Fee $ 30,000
Printing Expenses $ 1,500
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 50,000
Blue Sky Fees and Expenses $ 2,000
Miscellaneous Expenses $ 5,000
-------------
Total $ 114,024
=============
</TABLE>
____________________
* Represents actual expenses. All other expenses are estimates.
Item 14. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia, 1950, as
amended (the "Code"), permits a Virginia corporation to indemnify any director
or officer for reasonable expenses incurred in any legal proceeding in advance
of final disposition of the proceeding, if the director or officer furnishes the
corporation a written statement of his good faith belief that he has met the
standard of conduct prescribed by the Code, and a determination is made by the
board of directors that such standard has been met. In a proceeding by or in the
right of the corporation, no indemnification shall be made in respect of any
matter as to which an officer or director is adjudged to be liable to the
corporation, unless the court in which the proceeding took place determines
that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall be made if the director or officer is
adjudged liable to the corporation on the basis that personal benefit was
improperly received by him. Corporations are given the power to make any other
or further indemnity, including advance of expenses, to any director or officer
that may be authorized by the articles of incorporation or any bylaw made by the
shareholders, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of incorporation,
indemnification of a director or officer is mandatory when he entirely prevails
in the defense of any proceeding to which he is a party because he is or was a
director or officer.
The Amended and Restated Articles of Incorporation of Southern
Financial contain provisions indemnifying the directors and officers of Southern
Financial against expenses and liabilities incurred in legal proceedings to the
fullest extent permitted by Virginia law.
Under the Amended and Restated Declaration of Trust, Southern
Financial, as depositor of the Trust, has agreed (i) to indemnify and hold
harmless each Administrative Trustee and any employee or agent of the Trust or
its Affiliates from and against any loss, damage, liability, tax, penalty,
expense or claim of any kind or nature whatsoever incurred by such person by
reason of the creation, operation or termination of the Trust or any act or
omission performed or omitted by such person in good faith on
II-1
<PAGE>
behalf of the Trust and in a manner such person reasonably believes to be within
the scope of authority conferred on such person by the Declaration, except that
no person shall be entitled to be indemnified in respect of any loss, damage or
claim incurred by such person by reason of negligence or willful misconduct with
respect to such acts or omissions, and (ii) to advance expenses (including legal
fees) incurred by such person in defending any claim, demand, action, suite or
proceeding, from time to time, prior to the final disposition of such claim,
demand, action, suit or proceeding.
Item 15. Recent Sales of Unregistered Securities
None.
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Form of Underwriting Agreement for offering of Capital
Securities.*
3.1 Amended and Restated Articles of Incorporation of Southern
Financial Bancorp, Inc. (incorporated herein by reference to
Exhibit 3.1 to Southern Financial Bancorp, Inc.'s
Registration Statement on Form S-4, Registration No.
33-95246, filed with the Securities and Exchange Commission
on August 4, 1995).
3.2 Bylaws of Southern Financial Bancorp, Inc. (incorporated
herein by reference to Exhibit 3.2 to Southern Financial
Bancorp, Inc.'s Registration Statement on Form S-4,
Registration No. 33-95246 filed with the Securities and
Exchange Commission on August 4, 1995).
4.1 Certificate of Trust of Southern Financial Capital Trust I.*
4.2 Trust Agreement between Southern Financial Bancorp, Inc. and
Wilmington Trust Company.*
4.3 Form of Amended and Restated Declaration of Trust for
Southern Financial Capital Trust I.*
4.4 Form of Junior Subordinated Indenture between Southern
Financial Bancorp, Inc. and Wilmington Trust Company, as
Trustee.*
4.5 Form of Capital Security (included in Exhibit 4.3 above).
4.6 Form of Junior Subordinated Debt Security (included in
Exhibit 4.4 above).
4.7 Form of Guarantee Agreement with respect to Trust Securities
issued by Southern Financial Capital Trust I.*
4.8 Form of Escrow Agreement among McKinnon & Company, Inc.,
Southern Financial Capital Trust I, Southern Financial
Bancorp, Inc. and Wilmington Trust Company.*
5.1 Opinion of Williams, Mullen, Clark & Dobbins, P.C.*
5.2 Opinion of Richards, Layton & Finger.*
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
8.1 Opinion of Williams, Mullen, Clark & Dobbins, P.C. as to tax
matters.*
12.1 Calculation of Ratio of Earnings to Fixed Charges.*
23.1 Consent of KPMG, LLP.*
23.2 Consent of Thompson, Greenspon & Co., P.C.*
23.3 Consent of Williams, Mullen, Clark & Dobbins, P.C. (included
in Exhibit 5.1 above).
23.4 Consent of Richards, Layton & Finger (included in Exhibit
5.2 above).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Trustee
under the Junior Subordinated Indenture.*
25.2 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Property
Trustee under the Amended and Restated Declaration of Trust
of Southern Financial Capital Trust I.*
25.3 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Guarantee
Trustee under the Guarantee Agreement for the benefit of
holders of Trust Securities of Southern Financial Capital
Trust I.*
________________
* Filed herewith.
(b) Financial Statement Schedules:
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
either included in the financial information set forth in the Prospectus or are
inapplicable and therefore have been omitted.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of a
Registrant pursuant to the foregoing provisions, or otherwise, each of the
Registrants has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a Registrant of expenses
incurred or paid by a director, officer or controlling person of a 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, such 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 Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
Each of the undersigned Registrants hereby undertakes to deliver or
cause to be delivered with the Prospectus, to each person to whom the Prospectus
is sent or given, the latest annual report, to security holders that is
incorporated by reference in the Prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the Prospectus, to
deliver, or cause to be delivered to each person to whom the Prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the Prospectus to provide such interim financial information.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Warrenton,
Commonwealth of Virginia, on January 5, 2000.
SOUTHERN FINANCIAL BANCORP, INC.
By: /s/ Georgia S. Derrico
------------------------------------
Georgia S. Derrico
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints Georgia S. Derrico and R.
Roderick Porter as attorneys and agents for the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act of
1933, as amended, any and all amendments and exhibits to the registration
statement and any and all applications, instruments and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of securities covered hereby with full power and authority to do and perform any
and all acts and things whatsoever requisite or desirable.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Georgia S. Derrico Chairman, Chief Executive Officer January 5, 2000
- ------------------------------------------- and Director
Georgia S. Derrico (Principal Executive Officer)
/s/ R. Roderick Porter President, Chief Operating Officer January 5, 2000
- ------------------------------------------- and Director
R. Roderick Porter
/s/ William H. Lagos Senior Vice President and Controller January 6, 2000
- ------------------------------------------- (Principal Financial Officer)
William H. Lagos (Principal Accounting Officer)
<PAGE>
/s/ Alfonso G. Finocchiaro Director January 6, 2000
- -------------------------------------------
Alfonso G. Finocchiaro
/s/ Virginia Jenkins Director January 6, 2000
- -------------------------------------------
Virginia Jenkins
Director January _, 2000
- -------------------------------------------
Michael P. Rucker
/s/ Robert P. Warhurst Director January 6, 2000
- -------------------------------------------
Robert P. Warhurst
/s/ John C. Belotti Director January 6, 2000
- -------------------------------------------
John C. Belotti
Director January _, 2000
- -------------------------------------------
Neil J. Call
/s/ David de Give Director January 5, 2000
- -------------------------------------------
David de Give
/s/ Fred L. Bollerer Director January 7, 2000
- -------------------------------------------
Fred L. Bollerer
/s/ John L. Marcellus, Jr. Director January 6, 2000
- -------------------------------------------
John L. Marcellus, Jr.
/s/ Richard E. Smith Director January 6, 2000
- -------------------------------------------
Richard E. Smith
</TABLE>
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Warrenton,
Commonwealth of Virginia, on January 5, 2000.
SOUTHERN FINANCIAL CAPITAL TRUST I
By: Southern Financial Bancorp, Inc.,
as Depositor
By: /s/ Georgia S. Derrico
------------------------------------
Georgia S. Derrico
Chairman and Chief Executive Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Form of Underwriting Agreement for offering of Capital
Securities.*
3.1 Amended and Restated Articles of Incorporation of Southern
Financial Bancorp, Inc. (incorporated herein by reference to
Exhibit 3.1 to Southern Financial Bancorp, Inc.'s
Registration Statement on Form S-4, Registration No.
33-95246, filed with the Securities and Exchange Commission
on August 4, 1995).
3.2 Bylaws of Southern Financial Bancorp, Inc. (incorporated
herein by reference to Exhibit 3.2 to Southern Financial
Bancorp, Inc.'s Registration Statement on Form S-4,
Registration No. 33-95246 filed with the Securities and
Exchange Commission on August 4, 1995).
4.1 Certificate of Trust of Southern Financial Capital Trust I.*
4.2 Trust Agreement between Southern Financial Bancorp, Inc. and
Wilmington Trust Company.*
4.3 Form of Amended and Restated Declaration of Trust for
Southern Financial Capital Trust I.*
4.4 Form of Junior Subordinated Indenture between Southern
Financial Bancorp, Inc. and Wilmington Trust Company, as
Trustee.*
4.5 Form of Capital Security (included in Exhibit 4.3 above).
4.6 Form of Junior Subordinated Debt Security (included in
Exhibit 4.4 above).
4.7 Form of Guarantee Agreement with respect to Trust Securities
issued by Southern Financial Capital Trust I.*
4.8 Form of Escrow Agreement among McKinnon & Company, Inc.,
Southern Financial Capital Trust I, Southern Financial
Bancorp, Inc. and Wilmington Trust Company.*
5.1 Opinion of Williams, Mullen, Clark & Dobbins, P.C.*
5.2 Opinion of Richards, Layton & Finger.*
8.1 Opinion of Williams, Mullen, Clark & Dobbins, P.C. as to tax
matters.*
12.1 Calculation of Ratio of Earnings to Fixed Charges.*
23.1 Consent of KPMG, LLP.*
23.2 Consent of Thompson, Greenspon & Co., P.C.*
23.3 Consent of Williams, Mullen, Clark & Dobbins, P.C. (included
in Exhibit 5.1 above).
23.4 Consent of Richards, Layton & Finger (included in Exhibit
5.2 above).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Trustee
under the Junior Subordinated Indenture.*
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
25.2 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Property
Trustee under the Amended and Restated Declaration of Trust
of Southern Financial Capital Trust I.*
25.3 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Wilmington Trust Company, as Guarantee
Trustee under the Guarantee Agreement for the benefit of
holders of Trust Securities of Southern Financial Capital
Trust I.*
________________
* Filed herewith.
Exhibit 1.1
UNDERWRITING AGREEMENT
for offering of
$_________ Capital Securities
SOUTHERN FINANCIAL CAPITAL TRUST I
(a Delaware Trust)
$________ Capital Securities (the "Capital Securities")
(Liquidation Amount of $10.00 per Capital Security)
UNDERWRITING AGREEMENT
---------------
_______ __, 2000
McKinnon & Company, Inc.
555 Main Street
First Virginia Building, 16th Floor
Norfolk, Virginia 23510
Dear Sirs:
Southern Financial Capital Trust I (the "Trust"), a statutory business
trust organized under the Business Trust Act (the "Delaware Act") of the State
of Delaware (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. (S)(S) 3801
et seq.), and Southern Financial Bancorp, Inc., a Virginia corporation (the
"Company" and, together with the Trust, the "Offerors"), confirm their agreement
(the "Agreement") with McKinnon & Company, Inc. (the "Underwriter") with respect
to the sale by the Trust of $______ Capital Securities (liquidation amount of
$10.00 per preferred security) of the Trust (the "Capital Securities") set forth
in Schedule A. The Capital Securities will be guaranteed on a subordinated basis
by the Company, to the extent set forth in the Prospectus (as defined herein),
with respect to distributions and payments upon liquidation, redemption and
otherwise (the "Capital Securities Guarantee") pursuant to the Guarantee
Agreement, to be dated as of ______ __, 2000, and as may be amended, (the
"Guarantee Agreement"), between the Company and Wilmington Trust Company, as
trustee (the "Guarantee Trustee"), and will be entitled to the benefits of
certain backup undertakings described in the Prospectus (as defined herein) with
respect to the Company's agreement pursuant to the Indenture (as defined herein)
to pay all expenses relating to administration of the Trust (other than payment
obligations with respect to the Capital Securities). The Capital Securities and
the related Capital Securities Guarantee are referred to herein as the
"Securities."
The Offerors have filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. _______) and a
related preliminary prospectus for the registration under the Securities Act of
1933, as amended (the "1933 Act") of (i) the Capital Securities, (ii) the
Capital Securities Guarantee, and (iii) the Junior Subordinated Debt Securities
(as defined below) to be issued and sold to the Trust by the Company, have filed
such amendments thereto, if any, and such amended preliminary prospectuses as
may have been
<PAGE>
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. Such registration
statement (as amended) and the prospectus constituting a part thereof
(including, in each case, the information, if any, deemed to be part thereof
pursuant to Rule 430A(b) of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations")), as from time to time amended or
supplemented pursuant to the 1933 Act, or otherwise, are hereinafter referred to
as the "Registration Statement" and the "Prospectus," respectively, except that,
if any revised prospectus shall be provided to the Underwriter by the Offerors
for use in connection with the offering of the Capital Securities which differs
from the Prospectus on file at the Commission at the time the Registration
Statement became effective (whether or not such revised prospectus is required
to be filed by the Offerors pursuant to Rule 424(b) of the 1933 Act
Regulations), the term "Prospectus" shall refer to such revised prospectus from
and after the time it is first provided to the Underwriter for such use.
The Offerors understand that the Underwriter proposes to make a public
offering of the Capital Securities as soon as the Underwriter deems advisable
after this Agreement has been executed and delivered and the Declaration (as
defined herein), the Indenture (as defined herein) and the Capital Securities
Guarantee have been qualified under the Trust Indenture Act of 1939, as amended
(the "1939 Act"). The entire proceeds to the Trust from the sale of the Capital
Securities will be combined with the entire proceeds from the sale by the Trust
to the Company of its common securities (the "Common Securities"), as guaranteed
on a subordinated basis by the Company, to the extent set forth in the
Prospectus, with respect to distributions and payments upon liquidation and
redemption thereof (the "Common Securities Guarantee" and together with the
Capital Securities Guarantee, the "Guarantees") pursuant to the Guarantee
Agreement between the Company and Guarantee Trustee, as Trustee, and will be
used by the Trust to purchase the $_______ aggregate principal amount of ____%
Junior Subordinated Debt Securities due _____ __, 2030 (the "Junior Subordinated
Debt Securities") issued by the Company under the Indenture (as defined herein).
The Capital Securities and the Common Securities will be issued pursuant to the
Amended and Restated Declaration of Trust of the Trust, to be dated as of
_______ __, 2000(the "Declaration"), among the Company, as Sponsor, Georgia S.
Derrico and R. Roderick Porter, as trustees (the "Administrative Trustees"), and
Wilmington Trust Company, as property trustee (the "Property Trustee" and,
together with the Administrative Trustees, the "Trustees"), and the holders from
time to time of undivided beneficial interests in the assets of the Trust. The
Junior Subordinated Debt Securities will be issued pursuant to an indenture, to
be dated as of _______ __, 2000, between the Company and Wilmington Trust
Company, as trustee (the "Indenture Trustee"), together with any amendments or
supplements thereto, the "Indenture"), between the Company and the Indenture
Trustee.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Offerors jointly and severally represent and warrant to the
Underwriter as of the date hereof and as of the Closing Time (as hereinafter
defined) as follows:
(i) At the time the Registration Statement became effective
and as of the date hereof, the Registration Statement complied in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations and
the 1939 Act and the rules and regulations of the
-2-
<PAGE>
Commission under the 1939 Act (the "1939 Act Regulations"), and did not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading.
The Prospectus, dated the date hereof (unless the term "Prospectus" refers to a
prospectus that has been provided to the Underwriter by the Trust for use in
connection with the offering of the Securities and that differs from the
Prospectus on file at the Commission at the time the Registration Statement
became effective, in which case, at the time it is first provided to the
Underwriter for such use) and at Closing Time referred to in Section 2 hereof,
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
the Offerors make no representations or warranties as to (A) that part of the
Registration Statement which constitutes the Statements of Eligibility and
Qualification (Forms T-1) under the 1939 Act of the Indenture Trustee, the
Property Trustee or the Guarantee Trustee or (B) the information contained in or
omitted from the Registration Statement or the Prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Offerors by or on behalf of the
Underwriter specifically for use in the Registration Statement and the
Prospectus.
(ii) To the best knowledge of the Offerors, KPMG LLP, the
accountants who certified the financial statements and supporting schedules
included in or incorporated by reference into the Registration Statement, are
independent public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(iii) The Trust has been duly created and is validly existing
and in good standing as a business trust under the Delaware Act with the power
and authority to own property and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform its
obligations under this Agreement, the Capital Securities, the Common Securities
and the Declaration; the Trust is not a party to or otherwise bound by any
agreement other than those described in the Prospectus; the Trust is and will be
classified for United States federal income tax purposes as a grantor trust and
not as an association taxable as a corporation; and the Trust is and will be
treated as a consolidated subsidiary of the Company pursuant to generally
accepted accounting principles.
(iv) The Common Securities have been duly authorized by the
Trust pursuant to the Declaration and, when issued and delivered by the Trust to
the Company against payment therefor as described in the Registration Statement
and Prospectus, will be validly issued and, subject to the terms of the
Declaration, fully paid and non-assessable undivided beneficial interests in the
assets of the Trust and will conform to all statements relating thereto
contained in the Prospectus; the issuance of the Common Securities is not
subject to preemptive or other similar rights.
(v) This Agreement has been duly authorized, executed and
delivered by each of the Offerors.
-3-
<PAGE>
(vi) The Declaration has been duly authorized by the Company,
as Sponsor, and will have been duly executed and delivered by the Company and
the Trustees, and assuming due authorization, execution and delivery of the
Declaration by the Property Trustee, the Declaration is and will be a valid and
binding obligation of the Company, the Trust and the Administrative Trustees,
enforceable against the Company and the Administrative Trustees in accordance
with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or
other similar laws affecting the rights of creditors now or hereafter in effect,
and to equitable principles that may limit the right to specific enforcement of
remedies, and further subject to 12 U.S.C. 1818(b)(6)(D) (or any successor
statute) and any bank regulatory powers now or hereafter in effect and to the
application of principles of public policy (collectively, the "Permitted
Exceptions") and will conform to all statements relating thereto in the
Prospectus; and the Declaration has been duly qualified under the 1939 Act.
(vii) The Guarantee Agreement has been duly authorized by the
Company and, when validly executed and delivered by the Company, assuming due
authorization, execution and delivery of the Guarantee Agreement by the
Guarantee Trustee, will constitute a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms except to
the extent that enforcement thereof may be limited by the Permitted Exceptions,
and each of the Guarantees and the Guarantee Agreement will conform to all
statements relating thereto contained in the Prospectus; and the trust pursuant
to the Guarantee Agreement will have been duly qualified under the 1939 Act.
(viii) The Capital Securities have been duly authorized by the
Trust pursuant to the Declaration and, when issued and delivered pursuant to
this Agreement and payment of the consideration therefor set forth in Schedule B
hereto, will be validly issued and, subject to the terms of the Declaration,
fully paid and non-assessable undivided beneficial interests in the Trust, will
be entitled to the benefits of the Declaration and will conform to all
statements relating thereto contained in the Prospectus; the issuance of the
Capital Securities is not subject to preemptive or other similar rights; and,
subject to the terms of the Declaration, holders of Capital Securities will be
entitled to the same limitation of personal liability under Delaware law as
extended to stockholders of private corporations for profit.
(ix) Each of the Administrative Trustees of the Trust is an
employee of the Company and has been duly authorized by the Company to execute
and deliver the Declaration; the Declaration has been duly executed and
delivered by the Administrative Trustees and is a valid and binding obligation
of each Administrative Trustee, enforceable against such Administrative Trustee
in accordance with its terms except to the extent that enforcement thereof may
be limited by the Permitted Exceptions.
(x) None of the Offerors is, and upon the issuance and sale of
the Capital Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus none will be, an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended (the "1940 Act").
-4-
<PAGE>
(xi) No authorization, approval, consent or order of any court
or governmental authority or agency is necessary in connection with the issuance
and sale of the Common Securities or the offering of the Capital Securities, the
Junior Subordinated Debt Securities or the Guarantees hereunder, except such as
may be required under the 1933 Act or the 1933 Act Regulations or state
securities laws and the qualification of the Declaration, the Capital Securities
Guarantee Agreement and the Indenture under the 1939 Act.
(b) The Company represents and warrants to the Underwriter as of the
date hereof and as of the Closing Time (as hereinafter defined) as follows:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, there has been no material adverse change in the condition,
financial or otherwise, or in the earnings or business affairs of the Trust or
the Company and its subsidiaries, considered as one enterprise, whether or not
arising in the ordinary course of business.
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Virginia with corporate power to own, lease and operate its properties and to
conduct its business as described in the Prospectus, to enter into and perform
its obligations under this Agreement, the Declaration, as Sponsor, the Indenture
and each of the Guarantees and to purchase, own, and hold the Common Securities
issued by the Trust; the Company is duly registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended; and the Company is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which the character or location of its properties or the
nature or the conduct of its business requires such qualification, except for
any failures to be so qualified or in good standing which, taken as a whole, are
not material to the Company and its subsidiaries, considered as one enterprise.
(iii) Southern Financial Bank (the "Principal Subsidiary
Bank") is a banking association formed under the laws of Virginia and authorized
thereunder to transact business; all of the issued and outstanding capital stock
of the Principal Subsidiary Bank has been duly authorized and validly issued, is
fully paid and non-assessable; and the capital stock of the Principal Subsidiary
Bank owned by the Company, directly or through subsidiaries, is owned free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(iv) The Indenture has been duly authorized by the Company
and, when validly executed and delivered by the Company, will constitute a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms except to the extent that enforcement thereof may be
limited by the Permitted Exceptions; the Indenture will conform to all
statements relating thereto contained in the Prospectus; and the Indenture has
been duly qualified under the 1939 Act.
(v) The Junior Subordinated Debt Securities have been duly
authorized by the Company and have been duly executed by the Company and, when
authenticated in the manner
-5-
<PAGE>
provided for in the Indenture and delivered against payment therefor as
described in the Prospectus, will constitute valid and binding obligations of
the Company, enforceable against the Company in accordance with their terms
except to the extent that enforcement thereof may be limited by the Permitted
Exceptions, will be in the form contemplated by, and subject to the Permitted
Exceptions entitled to the benefits of, the Indenture and will conform to all
statements relating thereto in the Prospectus.
(vi) The Company's obligations under the Guarantees are
subordinate and junior in right of payment to all liabilities of the Company.
(vii) The Junior Subordinated Debt Securities are subordinated
and junior in right of payment to all "Senior Debt" (as defined in the
Indenture) of the Company.
(viii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein and
compliance by the Company with its obligations hereunder will not conflict with
or constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or the Principal Subsidiary Bank pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the Company
or the Principal Subsidiary Bank is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or the Principal
Subsidiary Bank is subject (except for conflicts, breaches and defaults which
would not, individually or in the aggregate, be materially adverse to the
Company and its subsidiaries taken as a whole or materially adverse to the
transactions contemplated by this Agreement), nor will such action result in any
material violation of the provisions of the articles of incorporation or by-laws
of the Company, or any applicable law, administrative regulation or
administrative or court decree.
(c) Each certificate signed by any officer of the Company and delivered
to the Underwriter shall be deemed to be a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
(d) The Trust represents and warrants to the Underwriter as of the date
hereof and as of the Closing Time (as hereinafter defined) as follows:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the a
condition, financial or otherwise, or in the earnings or business affairs of the
Trust, whether or not arising in the ordinary course of business, and (B) there
have been no transactions entered into by the Trust, other than in the ordinary
course of business, which are material with respect to the Trust.
(ii) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the best
knowledge of the Trust, threatened, against or affecting the Trust that is
required to be disclosed in the Prospectus, other than actions, suits or
proceedings which are not
-6-
<PAGE>
reasonably expected, individually or in the aggregate, to have a material
adverse effect on the condition, financial or otherwise, or in the earnings or
business affairs of the Trust, whether or not arising in the ordinary course of
business; and there are no transactions, contracts or documents of the Trust
that are required to be filed as exhibits to the Registration Statement by the
1933 Act or by the 1933 Act Regulations that have not been so filed.
(iii) The Trust possesses adequate certificates, authorities
or permits issued by the appropriate state, federal or foreign regulatory
agencies or bodies to conduct the business now operated by it, and the Trust has
not received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding
would materially and adversely affect the condition, financial or otherwise, or
in the earnings or business affairs of the Trust.
(iv) The execution, delivery and performance of this
Agreement, the Declaration, the Guarantee Agreement and the Guarantees, the
issuance and sale of the Capital Securities and the Common Securities, and the
consummation of the transactions contemplated herein and therein and compliance
by the Trust with its obligations hereunder and thereunder have been duly
authorized by all necessary action (corporate or otherwise) on the part of the
Trust and do not and will not result in any violation of the Declaration or
Certificate of Trust and do not and will not conflict with, or result in a
breach of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Trust under (A) any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument to which the Trust
is a party or by which it may be bound or to which any of its properties may be
subject or (B) any existing applicable law, rule, regulation, judgment, order or
decree of any government, governmental instrumentality or court, domestic or
foreign, or any regulatory body or administrative agency or other governmental
body having jurisdiction over the Trust, or any of its properties (except for
conflicts, breaches, violations or defaults which would not, individually or in
the aggregate, be materially adverse to the Trust, or materially adverse to the
transactions contemplated by this Agreement).
(e) Each certificate signed by any Trustee of the Trust and delivered
to the Underwriter or counsel for the Underwriter shall be deemed to be a
representation and warranty by the Trust to the Underwriter as to the matters
covered thereby.
SECTION 2. SALE AND DELIVERY; CLOSING.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Trust
agrees to issue and sell the Capital Securities through the Underwriter, as
agent for the Trust, to the public and the Underwriter agrees to use its best
efforts to sell the Capital Securities as agent for the Trust, at the price per
Capital Security set forth on Schedule B (the "Public Offering Price"). The
Company agrees to pay the Underwriter a commission for Capital Securities sold
through the Underwriter in the public offering as set forth on Schedule B (the
"Selling Commission"). The Underwriter may reject any offer to purchase the
-7-
<PAGE>
Capital Securities made through the Underwriter in whole or in part, and any
such rejection shall not be deemed a breach of the Underwriter's agreement
contained herein.
(b) It is understood that, after the Registration Statement becomes
effective, you propose to sell the Capital Securities to the public as agent for
the Trust upon the terms and conditions set forth in the Prospectus. The escrow
procedures established by the Underwriter shall comply with Commission Rule
15c2-4 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All subscribers to whom the Underwriter directly sells Capital
Securities shall be instructed to make their check for payment of the Capital
Securities payable to "Southern Financial Capital Trust I Escrow Account." In
addition, the Underwriter shall comply with Rule 15c2-4. The Underwriter shall
transmit all funds that it receives from subscribers to Wilmington Trust
Company, the escrow agent (the "Escrow Agent") by noon of the next business day
following receipt thereof. Only broker/dealers who are either (i) members in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") that are registered with the NASD and maintain net capital pursuant to
Rule 15c3-1 promulgated under the Exchange Act of not less than $25,000 or (ii)
dealers with their principal places of business located outside the United
States, its territories and its possessions and not registered as brokers or
dealers under the Exchange Act, who have agreed not to make any sales within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein shall be designated selected dealers by
the Underwriter. The Underwriter shall require all selected dealers to comply
with Rule 15c2-4.
(c) The Underwriter shall direct the Escrow Agent to make payment for
the Capital Securities sold hereunder by wire transfer or certified or bank
cashier's check drawn to the order of the Trust in next day funds. Such payment
is to be made at the offices of Southern Financial Bancorp, Inc., at 10:00 a.m.
local time, on or about _______ __, 2000, or at such other time, date and place
as you and the Trust shall agree upon, such time and date being herein referred
to as the "Closing Time." Unless the transaction is closed book-entry only
through The Depository Trust Company, the certificates for the Capital
Securities will be delivered in such denominations and in such registrations as
the Underwriter requests in writing not later than the third (3rd) full business
day prior to the Closing Time, and will be made available for inspection by the
Underwriter at least twenty-four (24) hours prior to the Closing Time, with such
certificates to be delivered to the Escrow Agent by 12:00 p.m. on the day prior
to the Closing Time, along with addressed labels to be used to mail the
certificates to the purchasers thereof. The Trust shall direct the Escrow Agent
to deliver (i) payment of the portion of the Selling Commission due to the
Underwriter by wire transfer or certified or bank cashier's check drawn to the
order of the Underwriter in next day funds, to the Underwriter at the Closing
Time and (ii) payment of the portion of the Selling Commission due to each
selected dealer by wire transfer or certified or bank cashier's check drawn to
the order of such selected dealer in next day funds, to each selected dealer at
the Closing Time.
SECTION 3. COVENANTS OF THE OFFERORS. Each of the Offerors jointly and
severally covenants with the Underwriter as follows:
(a) The Offerors will notify the Underwriter promptly, and confirm the
notice in writing, (i) of the effectiveness of the Registration Statement and
any amendment thereto
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(including any post-effective amendment), (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the Prospectus or
for additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. The Offerors will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Offerors will give the Underwriter notice of their intention to
file or prepare (i) any amendment to the Registration Statement (including any
post-effective amendment), (ii) any amendment or supplement to the Prospectus
(including any revised prospectus which the Offerors propose for use by the
Underwriter in connection with the offering of the Capital Securities which
differs from the prospectus on file at the Commission at the time the
Registration Statement became effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations), or
(iii) any document that would as a result thereof be incorporated by reference
in the Prospectus whether pursuant to the 1933 Act, the 1934 Act or otherwise,
will furnish the Underwriter with copies of any such amendment, supplement or
other document within a reasonable amount of time prior to such proposed filing
or use, as the case may be, and will not file any such amendment, supplement or
other document or use any such prospectus to which the Underwriter or counsel
for the Underwriter shall reasonably object. Subject to the foregoing, the
Offerors will file the Prospectus pursuant to Rule 424(b) and Rule 430A under
the Act not later than the Commission's close of business on the second business
day following the execution and delivery of this Agreement.
(c) The Offerors will deliver to the Underwriter as many signed copies
of the Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein and
documents incorporated or deemed to be incorporated by reference therein) as the
Underwriter may reasonably request and will also deliver to the Underwriter a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for the Underwriter.
(d) The Offerors will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the 1933
Act, such number of copies of the Prospectus (as amended or supplemented) as the
Underwriter may reasonably request for the purposes contemplated by the 1933 Act
or the respective applicable rules and regulations of the Commission thereunder.
(e) If at any time when the Prospectus is required by the 1933 Act to
be delivered in connection with sales of the Capital Securities, any event shall
occur as a result of which the Prospectus as then amended or supplemented will
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in light of the circumstances
under which they were made not misleading or if it shall be necessary to amend
or supplement the Prospectus in order to comply with the requirements of the
1933 Act or the 1933 Act Regulations, the Offerors will, subject to paragraph
(b) above, promptly prepare and file with the Commission such amendment or
supplement which will correct such statement or omission
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or an amendment which will effect such compliance and the Offerors will furnish
to the Underwriter a reasonable number of copies of such amendment or
supplement.
(f) The Offerors will endeavor, in cooperation with the Underwriter, to
qualify the Capital Securities (and the Capital Securities Guarantee) and the
Junior Subordinated Debt Securities for offering and sale under the applicable
securities laws of such states and the other jurisdictions of the United States
as the Underwriter may designate; provided, however, that none of the Offerors
shall be obligated to qualify as a foreign corporation in any jurisdiction in
which it is not so qualified.
(g) The Company will make generally available to its security holders
and to the Underwriter as soon as practicable, but not later than 90 days after
the close of the period covered thereby, an earnings statement (which need not
be audited) of the Company and its subsidiaries, covering an applicable period
beginning not later than the first day of the Company's fiscal quarter next
following the "Effective Date" (as defined in Rule 158(c) under the Act) of the
Registration Statement, which will satisfy the provisions of Section 11(a) of
the 1933 Act.
SECTION 4. PAYMENT OF EXPENSES. The Company will pay all expenses
incident to the performance of each Offerors' obligations under this Agreement,
and will pay: (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Capital Securities, (iii) the fees and
disbursements of the Company's and the Trust's counsel and accountants and
counsel to the Underwriter, (iv) the qualification of the Capital Securities,
the Capital Securities Guarantee and the Junior Subordinated Debt Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including fees and expenses incurred in connection with the preparation of any
blue sky survey, (v) the printing and delivery to the Underwriter of copies of
the Registration Statement as originally filed and of each amendment thereto, of
each preliminary prospectus, and of the Prospectus and any amendments or
supplements thereto, (vi) the printing and delivery to the Underwriter of copies
of any blue sky survey, (vii) the fee of the National Association of Securities
Dealers, Inc., if applicable, (viii) the fees and expenses of the Indenture
Trustee, including the fees and disbursements of counsel for the Indenture
Trustee in connection with the Indenture and the Junior Subordinated Debt
Securities, (ix) the fees and expenses of the Property Trustee, and the
Guarantee Trustee, including the fees and disbursements of counsel for the
Property Trustee in connection with the Declaration and the Certificate of
Trust; (x) the cost and charges of any transfer agent or registrar, and (xi) the
cost of qualifying the Capital Securities with DTC.
If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section 5 or Section 9 hereof, the Company shall reimburse the
Underwriter for all of its reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriter.
SECTION 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
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warranties of the Offerors herein contained or in certificates of officers of
the Company, to the performance by the Offerors of their obligations hereunder,
and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M. on the date hereof, or with the consent of the Underwriter, at a
later time and date, not later, however, than 5:30 P.M. on the first business
day following the date hereof, or at such later time and date as may be approved
by the Underwriter; and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission. The
Prospectus shall have been filed with the Commission pursuant to Rule 424(b)
within the applicable time period prescribed for such filing by the 1933
Regulations and in accordance with Section 3(b) and prior to Closing Time the
Offerors shall have provided evidence satisfactory to the Underwriter of such
timely filing.
(b) At Closing Time the Underwriter shall have received:
(1) The favorable opinion of Williams, Mullen, Clark & Dobbins, P.C.,
counsel for the Company, dated as of the Closing Time, to the following effect:
(i) The Company is a duly organized and validly existing
corporation in good standing under the laws of the State of Virginia, has the
corporate power and authority to own its properties, conduct its business as
described in the Prospectus and perform its obligations under this Agreement,
and is duly registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended; the Principal Subsidiary Bank is a banking association
formed under the laws of Virginia and authorized thereunder to transact
business.
(ii) Except for those jurisdictions specifically enumerated in
such opinion, neither the Company nor the Principal Subsidiary Bank is required
to be qualified or licensed to do business as a foreign corporation in any
jurisdiction.
(iii) All the outstanding shares of capital stock of the
Principal Subsidiary Bank have been duly and validly authorized and issued and
are fully paid and non-assessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of the Principal Subsidiary
Bank are owned, directly or indirectly, by the Company free and clear of any
perfected security interest and, to the best knowledge of such counsel, any
other security interests, claims, liens or encumbrances.
(iv) To the best knowledge of such counsel, there is no
pending threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any of its
subsidiaries, of a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus, and there is no
franchise, contract, or other document of a character required to be described
in the Registration Statement or Prospectus, or to be filed as an exhibit, which
is not described or filed as required.
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(v) The Registration Statement has become effective under the
1933 Act; to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or threatened; the Registration Statement,
the Prospectus and each amendment thereof or supplement thereto (other than the
financial statements and other financial and statistical information contained
therein or incorporated by reference therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the 1933 Act and the 1933 Act Regulations and the
1934 Act and the 1934 Act Regulations.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company.
(vii) No authorization, approval, consent or order of any
court or governmental authority or agency is required in connection with the
offering, issuance or sale of the Capital Securities, the Capital Securities
Guarantee and the Junior Subordinated Debt Securities through the Underwriter,
except (a) such as may be required under the 1933 Act and the 1933 Act
Regulations and such as may be required under the blue sky or insurance laws of
any jurisdiction, and (b) the qualification of the Declaration, the Guarantee
Agreement and the Indenture under the 1939 Act.
(viii) The Declaration has been duly authorized, executed and
delivered by the Company and the Administrative Trustees and has been duly
qualified under the 1939 Act.
(ix) The Guarantee Agreement has been duly authorized,
executed and delivered by the Company, and assuming it is duly authorized,
executed and delivered by the Guarantee Trustee, constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except to the extent that enforcement thereof may be limited by the
Permitted Exceptions; and the Guarantee Agreement has been duly qualified under
the 1939 Act.
(x) The Indenture has been duly executed and delivered by the
Company and, assuming due authorization, execution, and delivery thereof by the
Indenture Trustee, is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except to the extent that
enforcement thereof may be limited by the Permitted Exceptions; the Indenture
has been duly qualified under the 1939 Act; and the Indenture conforms to the
description thereof in the Prospectus.
(xi) The Junior Subordinated Debt Securities have been duly
authorized and executed by the Company and, when authenticated by the Trustee in
the manner provided in the Indenture and delivered against payment therefor,
will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by the Permitted Exceptions; and the Junior
Subordinated Debt Securities conform to the description thereof in the
Prospectus.
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(xii) Neither the Company nor the Trust is, and upon the
issuance and sale of the Securities as herein contemplated and the application
of the net proceeds therefrom as described in the Prospectus neither will be, an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving certain matters of Delaware law upon the opinion of Richards, Layton &
Finger, special Delaware counsel to the Offerors, which shall be delivered in
accordance with Section 5(b)(2)hereto; and (B) as to matters of fact, to the
extent deemed proper, on the representations and warranties of the Offerors
contained herein or in the Declaration, the Indenture and the Guarantee
Agreement of even date herewith, between the Company and the Trust covering the
Common Securities and on certificates of responsible officers of the Company and
its subsidiaries and public officials.
(2) The favorable opinion of Richards, Layton & Finger, Special
Delaware counsel to the Offerors, in form and substance satisfactory to the
Underwriter, to the effect that:
(i) The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Act; all filings required
under the laws of the State of Delaware with respect to the formation and valid
existence of the Trust as a business trust have been made; the Trust has all
necessary power and authority to own property and to conduct its business as
described in the Registration Statement and the Prospectus and to enter into and
perform its obligations under this Agreement, the Capital Securities and the
Common Securities; the Trust is duly qualified and in good standing as a foreign
company in any other jurisdiction in which such qualification is necessary,
except to the extent that the failure to so qualify or be in good standing would
not have a material adverse effect on the Trust; and the Trust is not a party to
or otherwise bound by any agreement other than those described in the
Prospectus.
(ii) Assuming due authorization, execution and delivery by the
Company and the Trustees, the Declaration is a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as enforcement thereof may be limited by the Permitted Exceptions.
(iii) The Common Securities have been duly authorized by the
Declaration and are validly issued and (subject to the terms of the Declaration)
fully paid and non-assessable beneficial interests in the assets of the Trust,
and the issuance of the Common Securities is not subject to preemptive or other
similar rights.
(iv) The Capital Securities have been duly authorized by the
Declaration and are validly issued and, subject to the terms of the Declaration,
when delivered to and paid for by the Underwriter pursuant to this Agreement,
will be validly issued, fully paid and non-assessable beneficial interests in
the assets of the Trust; the holders of the Capital Securities will, subject to
the terms of the Declaration, be entitled to the same limitation of personal
liability under Delaware law as is extended to stockholders of private
corporations for profit; and the issuance of the Capital Securities is not
subject to preemptive or other similar rights.
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(v) The Common Securities, the Capital Securities and the
Declaration conform in all material respects to all statements relating thereto
contained in the Prospectus.
(vi) All of the issued and outstanding Common Securities of
the Trust are directly owned by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equitable right.
(vii) This Agreement has been duly authorized, executed and
delivered by the Trust.
(viii) The execution, delivery and performance of this
Agreement, the Declaration, the Capital Securities and the Common Securities;
the consummation of the transactions contemplated herein and therein; and the
compliance by the Trust with its obligations hereunder and thereunder do not and
will not result in any violation of the Declaration or Certificate of Trust, and
do not and will not conflict with, or result in, a breach of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Trust under (A) any contract, indenture, mortgage, loan agreement, note, lease
or any other agreement or instrument known to such counsel to which the Trust is
a party or by which it may be bound or to which any of its properties may be
subject (except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a material adverse effect on the condition,
financial or otherwise, or in the earnings or business affairs of the Trust, (B)
any existing applicable law, rule or regulation (other than the securities or
blue sky laws of the various states, as to which such counsel need express no
opinion) or (C) any judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, or any regulatory body or
administrative agency or other governmental body having jurisdiction over the
Trust or any of its properties.
(3) The favorable opinion, dated as of Closing Time, of Richards,
Layton & Finger, counsel to Wilmington Trust Company, as Property Trustee under
the Declaration, Guarantee Trustee under the Capital Securities Guarantee
Agreement, and Indenture Trustee under the Indenture, in form and substance
satisfactory to the Underwriter, to the effect that:
(i) Wilmington Trust Company is a Delaware banking corporation
with trust powers, duly organized, validly existing and in good standing under
the laws of the State of Delaware with all necessary power and authority to
execute and deliver, and to carry out and perform its obligations under the
terms of the Declaration.
(ii) The execution, delivery and performance by the Indenture
Trustee of the Indenture and the execution, delivery and performance by the
Property Trustee of the Declaration and the execution, delivery and performance
by the Guarantee Trustee of the Guarantee Agreement have been duly authorized by
all necessary corporate action on the part of the Indenture Trustee, the
Property Trustee and the Guarantee Trustee, respectively. The Indenture, the
Declaration and the Guarantee Agreement have been duly executed and delivered by
the
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Indenture Trustee, the Property Trustee and the Guarantee Trustee, respectively,
and constitute the legal, valid and binding obligations of the Indenture
Trustee, the Property Trustee and the Guarantee Trustee, respectively,
enforceable against the Indenture Trustee, the Property Trustee and the
Guarantee Trustee, respectively, in accordance with their terms, except as
enforcement thereof may be limited by the Permitted Exceptions.
(iii) The execution, delivery and performance of the
Indenture, the, Declaration and the Guarantee Agreement by the Indenture
Trustee, Property Trustee and the Guarantee Trustee, respectively, does not
conflict with or constitute a breach of the Certificate of Incorporation or
Bylaws of the Indenture Trustee, Property Trustee and the Guarantee Trustee,
respectively.
(iv) No consent, approval or authorization of, or registration
with or notice to, any Delaware or federal banking authority is required for the
execution, delivery or performance by the Indenture Trustee, the Property
Trustee and the Guarantee Trustee of the Indenture, the Declaration and the
Guarantee Agreement, respectively.
(4) The favorable opinion of Williams, Mullen, Christian & Dobbins,
P.C., tax counsel to the Company and the Trust, as to certain Federal tax
matters set forth in the Prospectus under "United States Income Taxation."
(5) Williams, Mullen, Christian & Dobbins, P.C. shall also provide a
written statement that nothing has come to their attention that has caused them
to believe that the Registration Statement (except for financial statements and
schedules and other financial or statistical data included or incorporated by
reference, therein, as to which counsel need make no statement), at the time it
became effective or as of the date of their respective opinions, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus (except for financial statements and schedules and other
financial or statistical data included or incorporated by reference therein, as
to which counsel need make no statement), as at the date hereof or at Closing
Time, included an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(6) At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings or business affairs of the
Trust or the Company and its subsidiaries, considered as one enterprise, whether
or not arising in the ordinary course of business, and the Underwriter shall
have received a certificate of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company and a
certificate of the Trustee of the Trust, and dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1 hereof are true and correct with the
same force and effect as though expressly made at and as of Closing Time, (iii)
the Trust and the Company have complied with all agreements and satisfied all
conditions on its part to be
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performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been initiated or threatened by the
Commission.
(7) At the Closing Time, KPMG LLP shall have furnished to the
Underwriter a letter or letters (which may refer to letters previously delivered
to the Underwriter), dated as of the Closing Time, in form and substance
satisfactory to the Underwriter, confirming that the response, if any, to Item
10 of the Registration Statement is correct insofar as it relates to them and
stating in effect that:
(i) They are independent accountants within the meaning of the
1933 Act and the1933 Act Regulations.
(ii) In their opinion, the consolidated financial statements
of the Company and its subsidiaries audited by them and included or incorporated
by reference in the Registration Statement and Prospectus comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act and the 1933 Act Regulations with respect to registration statements on Form
S-1.
(iii) On the basis of procedures (but not in accordance with
generally accepted auditing standards) consisting of:
(a) Reading the minutes of the meetings of the
shareholders, the board of directors, executive committee and audit committee of
the Company and the boards of directors and executive committees of its
subsidiaries as set forth in the minute books through a specified date not more
than five business days prior to the date of delivery of such letter;
(b) Performing the procedures specified by the
American Institute of Certified Public Accountants for a review of interim
financial information as described in SAS No. 71, Interim Financial Information,
on the unaudited condensed consolidated interim financial statements of the
Company and its consolidated subsidiaries included or incorporated by reference
in the Registration Statement and Prospectus and reading the unaudited interim
financial data, if any, for the period from the date of the latest balance sheet
included or incorporated by reference in the Registration Statement and
Prospectus to the date of the latest available interim financial data; and
(c) Making inquiries of certain officials of the
Company who have responsibility for financial and accounting matters regarding
the specific items for which representations are requested below; nothing has
come to their attention as a result of the foregoing procedures that caused them
to believe that:
(1) the unaudited condensed consolidated
interim financial statements, included or incorporated by reference in the
Registration Statement and Prospectus, do not comply as to form in all material
respects with the applicable accounting requirements of the 1934 Act and the
1934 Act Regulations thereunder;
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(2) any material modifications should be
made to the unaudited condensed consolidated interim financial statements,
included or incorporated by reference in the Registration Statement and
Prospectus, for them to be in conformity with generally accepted accounting
principles;
(3) (i) at the date of the latest available
interim financial data and at the specified date not more than five business
days prior to the date of the delivery of such letter, there was any change in
the capital stock or the long-term debt (other than scheduled repayments of such
debt) or any decreases in shareholders' equity of the Company and the
subsidiaries on a consolidated basis as compared with the amounts shown in the
latest balance sheet included or incorporated by reference in the Registration
Statement and the Prospectus or (ii) for the period from the date of the latest
available financial data to a specified date not more than five business days
prior to the delivery of such letter, there was any change in the capital stock
or the long-term debt (other than scheduled repayments of such debt) or any
decreases in shareholders' equity of the Company and the subsidiaries on a
consolidated basis, except in all instances for changes or decreases which the
Registration Statement and Prospectus discloses have occurred or may occur, or
KPMG LLP shall state any specific changes or decreases.
(iv) The letter shall also state that KPMG LLP has carried out
certain other specified procedures, not constituting an audit, with respect to
certain amounts, percentages and financial information which are included or
incorporated by reference in the Registration Statement and Prospectus and which
are specified by the Underwriter and agreed to by KPMG LLP, and has found such
amounts, percentages and financial information to be in agreement with the
relevant accounting, financial and other records of the Company and its
subsidiaries identified in such letter.
In addition, at or prior to the time this Agreement is executed, KPMG
LLP, shall have furnished to the Underwriter a letter dated the date of this
Agreement, in form and substance satisfactory to the Underwriter, to the effect
set forth in this subsection (7).
(8) At Closing Time, the National Association of Securities Dealers,
Inc. ("NASD") shall have confirmed in writing that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
If any condition specified in this Section shall not have been
fulfilled in all material respects when and as required to be fulfilled, this
Agreement may be terminated by the Underwriter by notice to the Offerors, in
writing or by telephone or telegraph confirmed in writing, at any time at or
prior to Closing Time, and such termination shall be without liability of any
party to any other party except as provided in Section 4 hereof, and except that
Sections 1, 7, and 8 shall survive any such termination and will remain in full
force and effect.
SECTION 6. [INTENTIONALLY OMITTED]
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SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Offerors jointly and severally agree to indemnify and hold
harmless the Underwriter and each of its partners, officers, directors, and
employees and each person, if any, who controls the Underwriter within the
meaning of the 1933 Act or the 1934 Act against any losses, claims, damages or
liabilities, and any action in respect thereof (including, but not limited to,
any loss, claim, damage, liability or action relating to purchases and sales of
the Capital Securities), joint or several, which arises out of, or is based
upon, (i) any untrue statement or alleged untrue statement of a material fact
contained in (A) the Registration Statement, or any amendment or supplement
thereto, including information deemed to be part of the Registration Statement
pursuant to Rule 430A(b) of the 1933 Act Regulations, if applicable, (B) the
Prospectus and any amendment or supplement thereto, or (C) any application or
other document, any amendment or supplement thereto, executed by the Offerors or
based upon information furnished by or on behalf of the Offerors filed in any
jurisdiction in order to qualify the Capital Securities under the securities or
blue sky laws thereof (each, an "Application") or (ii) the omission or alleged
omission to state in the Registration Statement, or any amendment or supplement
thereto, the Prospectus or any amendment or supplement thereto, or any
Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading, and shall reimburse as incurred the
Underwriter and each such controlling person for any legal and other expenses
incurred in investigating or defending or preparing to defend against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that neither of the Offerors
shall be liable to the Underwriter in any such case to the extent that any such
loss, claim, damage or liability arises out of, or is based upon, any untrue
statement or alleged untrue statement made in the Prospectus, including any
amendment or supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Offerors by or on behalf of the
Underwriter specifically for inclusion and actually included therein; and
provided further that, as to any Prospectus that has been amended or
supplemented as provided herein, this indemnity agreement shall not inure to the
benefit of the Underwriter, on account of any loss, claim, damage, liability or
action arising out of the sale of Capital Securities to any person by the
Underwriter if (A) the Underwriter failed to send or give a copy of the final
Prospectus as so amended or supplemented to that person at or prior to the
confirmation of the sale of such Capital Securities to such person in any case
where such delivery is required by the 1933 Act, and (B) the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact in any preliminary Prospectus was corrected in an
amendment or supplement thereto (but only if the sale to such person occurred
after the Offerors provided the Underwriter and the Underwriter received copies
of such amendment or supplement for distribution). This indemnity agreement will
be in addition to any liability which the Offerors may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company, the
Trust, the Trustees and each of the Company's directors, each of its officers
and each person, if any, who controls the Company or the Trust within the
meaning of the 1933 Act or the 1934 Act, to the same extent as the foregoing
indemnity from the Offerors to the Underwriter, but only with reference to
written information relating to such underwriter furnished to the Offerors by
the Underwriter and specifically included in the Prospectus. This indemnity
shall be in addition to
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any liability which such Underwriter may otherwise have. The Offerors
acknowledge that the statements set forth under the heading "Underwriting" in
the Prospectus constitute the only information furnished in writing by the
Underwriter for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 7, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may have
to any indemnified party otherwise than under subsection (a) or (b) of this
Section 7 or to the extent that the indemnifying party was not adversely
affected by such omission. In case any such action is brought against an
indemnified party and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties against which a claim is
to be made will be entitled to participate therein and, to the extent that it or
they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 7 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the lead Underwriter in the case of paragraph (a) of this Section
7, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions), or (ii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, which will not be unreasonably
withheld, unless such indemnified party waived its rights under this Section 7
in writing in which case the indemnified party may effect such a settlement
without such consent.
(d) The Company agrees to indemnify the Trust against all losses,
claims, damages or liabilities due from the Trust under Section 7(a) hereof.
-19-
<PAGE>
(e) If the indemnification provided for in the preceding paragraphs of
this Section 7 is unavailable or insufficient to hold harmless an indemnified
party under paragraph (a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then the
Offerors or the Underwriter shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) to which the Offerors and
the Underwriter may be subject in such proportion so that the Underwriter is
responsible for that portion represented by the percentage that the total
discounts and/or commissions received by the Underwriter bears to the sum of
such discounts and/or commissions and the purchase price of the Capital
Securities specified in Schedule B hereto and the Offerors are responsible for
the balance; provided, however, that (y) in no case shall the Underwriter be
responsible for any amount in excess of the total discounts and/or commissions
received by it with respect to the Capital Securities sold under this Agreement
and (z) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person who controls the Underwriter within the meaning of the
1933 Act shall have the same rights to contribution as the Underwriter, and each
person who controls either of the Offerors within the meaning of either the 1933
Act or the 1934 Exchange Act, each officer or trustee of the Offerors who shall
have signed the Registration Statement and each director or trustee of the
Offerors shall have the same rights to contribution as the Offerors, subject in
each case to clause (y) of this paragraph (e). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this paragraph
(e), notify such party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder or otherwise than under this paragraph (d).
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers or Trustees of the Offerors
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Underwriter or
controlling person, or by or on behalf of the Offerors and shall survive
delivery of the Capital Securities to the purchasers therefor.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Underwriter may terminate this Agreement, by notice to the
Offerors, at any time at or prior to Closing Time (i) if there has been, since
the date of this Agreement or since the respective dates as of which information
is given in the Registration Statement, any material adverse change in the
condition, financial or otherwise, or in the earnings or business affairs of the
Trust or the Company and its subsidiaries, considered as one enterprise, whether
or not arising in the ordinary course of business, or (ii) if there has occurred
any material adverse change in the financial markets in the United States or
elsewhere or any outbreak of hostilities or escalation thereof or other calamity
or crisis or any change or development involving a prospective change in
national or international political, financial or economic conditions, in
-20-
<PAGE>
each case the effect of which is such as to make it, in the judgment of the
Underwriter, impracticable to market the Capital Securities or to enforce
contracts for the sale of the Capital Securities, or (iii) if trading in any
securities of the Company or the Trust has been suspended or materially limited
by the Commission or the applicable exchange, or if trading generally on the New
York Stock Exchange, the American Stock Exchange or on the NASDAQ National
Market, has been suspended, limited or restricted or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have
been required, by said exchanges or such system or by order of the Commission,
the NASD or any governmental authority, or (iv) if a banking moratorium has been
declared by either Federal, New York, Virginia or Delaware authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and except that Sections 1, 7, and 8 shall survive
any such termination and will remain in full force and effect.
SECTION 10. [INTENTIONALLY OMITTED]
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to McKinnon & Company, 555 Main Street, First
Virginia Building, 16th Floor, Norfolk, Virginia 23510, Attention: William J.
McKinnon. Notices to the Trust and the Company shall be directed to them at
Southern Financial Bancorp, Inc., 37 E. Main Street, Warrenton, Virginia 22186,
Attention: R. Roderick Porter.
SECTION 12. PARTIES. This Agreement shall inure to the benefit of and
be binding upon the Underwriter and the Trust, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter and the Trust and the Company and their respective successors and
the controlling persons and officers, directors and trustees referred to in
Sections 6 and 7 and their heirs and legal Underwriter, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriter and the
Trust and the Company and their respective successors, and said controlling
persons and officers, directors and trustees and their heirs and legal
Underwriter, and for the benefit of no other person, firm or corporation. No
purchaser of Capital Securities from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed by
and construed in accordance with the laws of the State of Virginia applicable to
agreements made and to be performed in said State. Except as otherwise set forth
herein, specified times of day refer to City of Richmond time.
-21-
<PAGE>
SECTION 14. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such respective counterparts shall together
constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Trust a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Trust and the Company in accordance with its
terms.
Very truly yours,
SOUTHERN FINANCIAL BANCORP, INC.
By:______________________________
Title:
SOUTHERN FINANCIAL CAPITAL TRUST I
By:______________________________
Title: Administrative Trustee
By:______________________________
Title: Administrative Trustee
CONFIRMED AND ACCEPTED,
as of the date first above written:
McKINNON & COMPANY, INC.
By:_____________________________
William J. McKinnon, Jr.
President
-22-
<PAGE>
SCHEDULE A
Name of Underwriter Number of Capital Securities
McKinnon & Company, Inc. ___________
-23-
<PAGE>
SCHEDULE B
Underwriting Agreement dated ______ __, 2000
Registration Statement No. 333-____
Underwriter: McKinnon & Company, Inc.
Address of Underwriter: 555 Main Street, Suite 1212, Norfolk, Virginia 23510
Title, Purchase Price and Description of Securities:
Title: $_______ Capital Securities (Liquidation Amount $10.00)
1. The initial public offering price per security for the
Capital Securities, determined as provided in said Section 2, shall be
$10.00.
2. The compensation per Capital Security to be paid by the
Company to the Underwriter shall be $0.__, out of which commissions
payable to Selected Dealers shall be paid.
-24-
Exhibit 4.1
CERTIFICATE OF TRUST OF
SOUTHERN FINANCIAL CAPITAL TRUST I
THIS Certificate of Trust of Southern Financial Capital Trust I (the
"Trust") is being duly executed and filed on behalf of the Trust by the
undersigned, as trustee, to form a business trust under the Delaware Business
Trust Act (12 Del. C. ss. 3801 et seq.) (the "Act").
1. Name. The name of the business trust formed by this
Certificate of Trust is Southern Financial Capital Trust I.
2. Delaware Trustee. The name and business address of the trustee
of the Trust in the State of Delaware are Wilmington Trust Company, Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn:
Corporate Trust Administration.
3. Effective Date. This Certificate of Trust shall be effective
upon filing.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate
of Trust in accordance with Section 3811(a)(1) of the Act.
WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as Trustee
By: /s/ Patricia A. Evans
-------------------------------------
Name: Patricia A. Evans
Title: Financial Services Officer
Exhibit 4.2
TRUST AGREEMENT
THIS TRUST AGREEMENT, dated as of December 28, 1999 (this "Trust
Agreement"), between (i) SOUTHERN FINANCIAL BANCORP, INC., a Virginia
corporation (the "Depositor"), and (ii) WILMINGTON TRUST COMPANY, a Delaware
banking corporation (the "Trustee"). The Depositor and the Trustee hereby agree
as follows:
1. The trust created hereby (the "Trust") shall be known as
"SOUTHERN FINANCIAL CAPITAL TRUST I" in which name the Trustee, or the Depositor
to the extent provided herein, may engage in the transactions contemplated
hereby, make and execute contracts, and sue and be sued.
2. The Depositor hereby assigns, transfers, conveys and sets over
to the Trustee the sum of $10. The Trustee hereby acknowledges receipt of such
amount in trust from the Depositor, which amount shall constitute the initial
trust estate. The Trustee hereby declares that it will hold the trust estate in
trust for the Depositor. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. ss. 3801, et seq. (the "Business Trust Act"), and
that this document constitute the governing instrument of the Trust. The Trustee
is hereby authorized and directed to execute and file a certificate of trust
with the Delaware Secretary of State in accordance with the provisions of the
Business Trust Act.
3. The Depositor and the Trustee will enter into an amended and
restated Trust Agreement, satisfactory to each such party and substantially in
the form included as an exhibit to the 1933 Act Registration Statement (as
defined below), to provide for the contemplated operation of the Trust created
hereby and the issuance of the Capital Securities (the "Securities") referred to
therein. Prior to the execution and delivery of such amended and restated Trust
Agreement, the Trustee shall not have any duty or obligation hereunder or with
respect to the trust estate, except as otherwise required by applicable law or
as may be necessary to obtain prior to such execution and delivery of any
licenses, consents or approvals required by applicable law or otherwise.
4. The Depositor and the Trustee hereby authorize and direct the
Depositor, as the Sponsor of the Trust, (i) to file with the Securities and
Exchange Commission (the "Commission") and execute, in each case on behalf of
the Trust, the Registration Statement on Form S-1 (the "1933 Act Registration
Statement"), including any pre-effective or post-effective amendments to the
1933 Act Registration Statement, relating to the registration under the
Securities Act of 1933, as amended, of the Securities and possible certain other
securities, (ii) to file and execute on behalf of the Trust such applications,
reports, surety bonds, irrevocable consents, appointments of attorney for
service of process and other papers and documents as shall be necessary or
desirable to register the Securities under the securities or blue sky laws of
such jurisdictions as the Depositor, on behalf of the Trust, may deem necessary
or desirable and (iii) to execute on behalf of the Trust that certain
Underwriting Agreement relating to the Securities, among the Trust, the
Depositor and the Underwriter named therein, substantially in the form included
as an exhibit to the 1933 Act Registration Statement. In connection with the
filings referred to above, the Depositor hereby constitutes and appoints Georgia
S. Derrico and R. Roderick Porter, and each of them, as its true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the Depositor or in the Depositor's name, place and stead,
in any and all capacities, to sign any and all amendments (including
post-effective
<PAGE>
amendments) to the 1933 Act Registration Statement and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Commission and administrators of state securities or blue sky laws, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as the Depositor
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their respective substitute or
substitutes, shall do or cause to be done by virtue hereof.
5. This Trust Agreement may be executed in one or more
counterparts.
6. The number of Trustees initially shall be one (1) and
thereafter the number of Trustees shall be such number as shall be fixed from
time to time by a written instrument signed by the Depositor which may increase
or decrease the number of Trustees; provided, however, that to the extent
required by the Business Trust Act, one Trustee shall either be a natural person
who is a resident of the State of Delaware or, if not a natural person, an
entity which has its principal place of business in the State of Delaware and
otherwise meets the requirements of applicable Delaware law. Subject to the
foregoing, the Depositor is entitled to appoint or remove without cause any
Trustee at any time. The Trustees may resign upon thirty (30) days' prior notice
to the Depositor.
7. This Trust Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws of principles).
8. To the fullest extent permitted by applicable law, the Sponsor
shall indemnify and hold harmless the Trustee from and against any loss, damage
or claim incurred by the Trustee by reason of any act or omission performed or
omitted by the Trustee in good faith on behalf of the Trust and in a matter the
Trustee reasonably believed to be within the scope of authority conferred on the
Trustee by this Declaration, except that the Trustee shall not be entitled to be
indemnified in respect of any loss, damage or claim incurred by the Trustee by
reason of gross negligence or willful misconduct with respect to such acts or
omissions.
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be duly executed as of the day and year first above written.
SOUTHERN FINANCIAL BANCORP, INC.
By: /s/ William H. Lagos
---------------------------------
Name: William H. Lagos
Title: Senior Vice President
WILMINGTON TRUST COMPANY,
as Trustee
By: /s/ Patricia A. Evans
---------------------------------
Name: Patricia A. Evans
Title: Financial Services Officer
2
Exhibit 4.3
EXECUTION COPY
================================================================================
AMENDED AND RESTATED
DECLARATION OF TRUST
between
SOUTHERN FINANCIAL BANCORP, INC., as Depositor,
WILMINGTON TRUST COMPANY,
as Property Trustee,
WILMINGTON TRUST COMPANY,
as Delaware Trustee,
and
THE ADMINISTRATIVE TRUSTEES NAMED HEREIN
Dated as of _________ __, 2000
SOUTHERN FINANCIAL CAPITAL TRUST I
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I -- Defined Terms........................................................................................2
SECTION 1.01. Definitions......................................................................................2
ARTICLE II -- Continuation of the Trust..........................................................................12
SECTION 2.01. Name............................................................................................12
SECTION 2.02. Office of the Delaware Trustee; Principal Place of Business.....................................13
SECTION 2.03. Organizational Expenses.........................................................................13
SECTION 2.04. Issuance of the Capital Securities..............................................................13
SECTION 2.05. Issuance of the Common Securities; Subscription and Purchase of Junior Subordinated Debt
Securities....................................................................................................13
SECTION 2.06. Declaration of Trust............................................................................14
SECTION 2.07. Authorization to Enter into Certain Transactions................................................14
SECTION 2.08. Assets of Trust.................................................................................18
SECTION 2.09. Title to Trust Property.........................................................................18
ARTICLE III -- Payment Account...................................................................................18
SECTION 3.01. Payment Account.................................................................................18
ARTICLE IV -- Distributions; Redemption..........................................................................18
SECTION 4.01. Distributions...................................................................................18
SECTION 4.02. Redemption......................................................................................20
SECTION 4.03. Subordination of Common Securities..............................................................22
SECTION 4.04. Payment Procedures..............................................................................22
SECTION 4.05. Tax Returns and Reports.........................................................................23
SECTION 4.06. Payment of Taxes; Duties of the Trust...........................................................23
SECTION 4.07. Payments Under Indenture........................................................................23
ARTICLE V -- Trust Securities Certificates.......................................................................23
SECTION 5.01. Initial Ownership...............................................................................23
SECTION 5.02. Trust Securities Certificates...................................................................23
SECTION 5.03. Execution and Delivery of Trust Securities Certificates.........................................24
SECTION 5.04. Global Capital Security.........................................................................24
SECTION 5.05. Registration of Transfer and Exchange Generally; Certain Transfers and Exchanges; Capital
Securities Certificates.......................................................................................26
SECTION 5.06. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates..............................27
SECTION 5.07. Persons Deemed Securityholders..................................................................28
SECTION 5.08. Access to List of Securityholders'Names and Addresses...........................................28
SECTION 5.09. Maintenance of Office or Agency; Transfer Agent.................................................28
SECTION 5.10. Appointment of Paying Agent.....................................................................28
SECTION 5.11. Ownership of Common Securities by Depositor.....................................................29
SECTION 5.12. Notices to Clearing Agency......................................................................29
SECTION 5.13. Rights of Securityholders.......................................................................29
ARTICLE VI -- Acts of Securityholders; Meetings; Voting..........................................................32
SECTION 6.01. Limitations on Capital Securityholder's Voting Rights...........................................32
SECTION 6.02. Notice of Meeting...............................................................................33
SECTION 6.03. Meetings of Securityholders.....................................................................33
SECTION 6.04. Voting Rights...................................................................................33
SECTION 6.05. Proxies.........................................................................................33
<PAGE>
SECTION 6.06. Securityholder Action by Written Consent........................................................34
SECTION 6.07. Record Date for Voting and Other Purposes.......................................................34
SECTION 6.08. Acts of Securityholders.........................................................................34
SECTION 6.09. Inspection of Records...........................................................................35
ARTICLE VII -- Representations and Warranties....................................................................35
SECTION 7.01. Representations and Warranties of the Property Trustee and the Delaware Trustee.................35
SECTION 7.02. Representations and Warranties of Depositor.....................................................36
ARTICLEVIII -- The Trustees......................................................................................37
SECTION 8.01. Certain Duties and Responsibilities.............................................................37
SECTION 8.02. Events of Default Notices; Deferral of Interest Payment Notices.................................38
SECTION 8.03. Certain Rights of Property Trustee..............................................................39
SECTION 8.04. Not Responsible for Recitals....................................................................41
SECTION 8.05. May Hold Securities.............................................................................41
SECTION 8.06. Compensation, Indemnity, Fees...................................................................41
SECTION 8.07. Corporate Property Trustee Required; Eligibility of Trustees....................................43
SECTION 8.08. Conflicting Interests...........................................................................43
SECTION 8.09. Co-Trustees and Separate Trustee................................................................43
SECTION 8.10. Resignation and Removal; Appointment of Successor...............................................45
SECTION 8.11. Acceptance of Appointment by Successor..........................................................46
SECTION 8.12. Merger, Conversion, Consolidation or Succession to Business.....................................47
SECTION 8.13. Preferential Collection of Claims Against Depositor or Trust....................................47
SECTION 8.14. Reports by Property Trustee.....................................................................48
SECTION 8.15. Reports to the Property Trustee.................................................................48
SECTION 8.16. Evidence of Compliance with Conditions Precedent................................................49
SECTION 8.17. Number of Trustees..............................................................................49
SECTION 8.18. Delegation of Power.............................................................................49
ARTICLE IX -- Termination, Liquidation and Merger................................................................50
SECTION 9.01. Termination Upon Expiration Date; Termination Upon Special Event................................50
SECTION 9.02. Early Termination...............................................................................50
SECTION 9.03. Termination.....................................................................................50
SECTION 9.04. Liquidation.....................................................................................50
SECTION 9.05. Mergers, Consolidations, Amalgamations or Replacements of the Trust.............................52
ARTICLE X -- Miscellaneous Provisions............................................................................53
SECTION 10.01. Limitation of Rights of Securityholders........................................................53
SECTION 10.02. Liability of the Depositor.....................................................................53
SECTION 10.03. Amendment......................................................................................53
SECTION 10.04. Separability...................................................................................55
SECTION 10.05. Governing Law..................................................................................55
SECTION 10.06. Payments Due on Non-Business Day...............................................................55
SECTION 10.07. Successors.....................................................................................55
SECTION 10.08. Headings.......................................................................................55
SECTION 10.09. Reports, Notices and Demands...................................................................55
SECTION 10.10. Agreement Not to Petition......................................................................56
SECTION 10.11. Trust Indenture Act; Conflict with Trust Indenture Act.........................................56
SECTION 10.12. Acceptance of Terms of Declaration of Trust, Guarantee and Indenture...........................57
SECTION 10.13. Execution in Counterparts......................................................................57
</TABLE>
ii
<PAGE>
SOUTHERN FINANCIAL CAPITAL TRUST I
Certain Sections of this Declaration of Trust relating to
Sections 310 through 318 of the Trust Indenture Act of 1939:
Trust Indenture Declaration of
Act Section Trust Section
- --------------- -------------
ss.310 (a)(1)...................................... 8.07
(a)(2)...................................... 8.07
(a)(3)...................................... 8.09
(a)(4)...................................... 2.07(a)(ii)
(b)......................................... 8.08
ss.311 (a)......................................... 8.13
(b)......................................... 8.13
ss.312 (a)......................................... 5.08
(b)......................................... 5.08
(c)......................................... 5.08
ss.313 (a)......................................... 8.14(a)
(a)(4)...................................... 8.14(b)
(b)(1)...................................... 8.14(a)
(b)(2)...................................... 8.14(b)
(c)......................................... 10.09
(d)........................................ 8.14(c)
ss.314 (a)......................................... 8.15
(b)......................................... Not Applicable
(c)(1)...................................... 8.16
(c)(2)...................................... 8.16
(c)(3)...................................... Not Applicable
(d)......................................... Not Applicable
(e)......................................... 1.01, 8.16
ss.315 (a)......................................... 8.01(a), 8.03(a)
(b)......................................... 8.02
(c)......................................... 8.01(a)
(d)......................................... 8.01, 8.03
(e)......................................... Not Applicable
ss.316 (a)......................................... Not Applicable
(a)(1)(A)................................... Not Applicable
(a)(1)(B)................................... Not Applicable
(a)(2)...................................... Not Applicable
(b)......................................... 5.13
(c)......................................... 6.07
ss.317 (a)(1)...................................... Not Applicable
(a)(2)...................................... Not Applicable
(b)......................................... 5.10
ss.318 (a)......................................... 10.11
- -----------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Declaration of Trust.
<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST,
dated as of ________ __, 2000, between (i) SOUTHERN
FINANCIAL BANCORP, INC., a Virginia corporation
(including any successors or assigns, the
"Depositor"), (ii) WILMINGTON TRUST COMPANY, a
Delaware corporation, as property trustee (in such
capacity, the "Property Trustee" and, in its separate
corporate capacity and not in its capacity as
Property Trustee, the "Trust Company"), (iii)
WILMINGTON TRUST COMPANY, a Delaware corporation, as
Delaware trustee (the "Delaware Trustee"), (iv)
GEORGIA S. DERRICO, an individual, and R. RODERICK
PORTER, an individual, each of whose address is c/o
Southern Financial Bancorp, Inc. (each an
"Administrative Trustee" and, collectively, the
"Administrative Trustees") (the Property Trustee, the
Delaware Trustee and the Administrative Trustees are
referred to collectively herein as the "Trustees")
and (v) the several Holders, as hereafter defined.
W I T N E S S E T H :
WHEREAS the Depositor and the Delaware Trustee have heretofore duly
declared and established a business trust pursuant to the Delaware Business
Trust Act by entering into a certain Declaration of Trust, dated as of December
28, 1999 (the "Original Declaration of Trust"), and by the execution and filing
by the Delaware Trustee with the Secretary of State of the State of Delaware of
the Certificate of Trust, filed on December 28, 1999 (the "Certificate of
Trust"), and attached as Exhibit A; and
WHEREAS the Depositor, the Delaware Trustee and the Administrative
Trustees desire to amend and restate the Original Declaration of Trust in its
entirety as set forth herein to provide for, among other things (i) the issuance
and sale of the Common Securities by the Trust to the Depositor, (ii) the
issuance and sale of the Capital Securities (the "Capital Securities") by the
Trust pursuant to the Underwriting Agreement, as hereafter defined, (iii) the
acquisition by the Trust from the Depositor of all of the right, title and
interest in the Junior Subordinated Debt Securities, as hereafter defined, and
(iv) the appointment of Wilmington Trust Company, a Delaware corporation (in
such capacity, the "Property Trustee" and, in its separate corporate capacity
and not in its capacity as Property Trustee, the "Trust Company");
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other parties
and for the benefit of the Securityholders, as hereafter defined, hereby amends
and restates the Original Declaration of Trust in its entirety and agrees as
follows:
<PAGE>
ARTICLE I
Defined Terms
SECTION 1.01. Definitions. For all purposes of this
Declaration of Trust, except as otherwise expressly provided or unless the
context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(b) all other terms used herein that are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(c) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as the case
may be, of this Declaration of Trust; and
(d) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Declaration of Trust as a whole
and not to any particular Article, Section or other subdivision; and
"Act" has the meaning specified in Section 6.08.
"Additional Distribution" has the meaning specified in Section
4.01(c).
"Adjusted Treasury Rate" means, with respect to any Redemption
Date, the Treasury Rate plus (i) 2.00% if such Redemption Date occurs on or
before April 15, 2001, or (ii) 1.25% if such Redemption Date occurs after April
15, 2001.
"Administrative Action" has the meaning specified in the
definition of "Tax Event" in this Section 1.01.
"Administrative Trustee" means each of Georgia S. Derrico and
R. Roderick Porter, solely in such Person's capacity as Administrative Trustee
of the Trust continued hereunder and not in such Person's individual capacity,
or such Administrative Trustee's successor in interest in such capacity, or any
successor trustee appointed as herein provided.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Capital Security or beneficial interest therein,
the rules and procedures of the
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depositary for such Capital Security, in each case to the extent applicable to
such transaction and as in effect from time to time.
"Bankruptcy Event" means, with respect to any Person:
(a) the entry of a decree or order by a court having
jurisdiction in the premises adjudging such Person a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjudication or composition of or in
respect of such Person under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of such Person or of any substantial part of
its property or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect
for a period of 60 consecutive days; or
b) the institution by such Person of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law, or the consent by it to the filing
of any such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator (or similar official) of such Person or
of any substantial part of its property or the making by it of an
assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due
and its willingness to be adjudicated a bankrupt, or the taking of
corporate action by such Person in furtherance of any such action.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Depositor to have been duly
adopted by the Depositor's Board of Directors, or such committee of the Board of
Directors or officers of the Depositor to which authority to act on behalf of
the Board of Directors has been delegated, and to be in full force and effect on
the date of such certification and delivered to the Trustees.
"Business Day" means a day other than (a) a Saturday or
Sunday, (b) a day on which banking institutions in the City of Richmond,
Virginia are authorized or required by law or executive order to remain closed
or (c) a day on which the Property Trustee's Corporate Trust Office or the
Corporate Trust Office of the Debenture Trustee is closed for business.
"Capital Securities" means each of the $______ Preferred
Securities to be issued on the date hereof, each representing an undivided
beneficial interest in the assets of the Trust, having a Liquidation Amount of
$10.00 per Capital Security and having the rights provided therefor in this
Declaration of Trust, including the right to receive Distributions and a
Liquidation Distribution as provided herein.
"Capital Securities Certificate" means a certificate
evidencing ownership of Capital Securities, substantially in the form attached
as Exhibit B.
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"Capital Securityholder" means a Person in whose name a
Capital Security or Capital Securities is registered in the Securities Register;
and any such Person shall be deemed to be a beneficial owner within the meaning
of the Delaware Business Trust Act.
"Capital Treatment Event" has the meaning specified in Section
1.01 of the Indenture.
"Cede" has the meaning specified in Section 5.04(a).
"Certificate of Trust" has the meaning specified in the
preamble to this Declaration of Trust.
"Clearing Agency" means an organization registered as a
"clearing agency" pursuant to Section 17A of the Securities Exchange Act of
1934. The Depository Trust Company shall be the initial Clearing Agency.
"Clearing Agency Participant" means a broker, dealer, bank,
other financial institution or other Person for whom from time to time a
Clearing Agency effects book-entry transfers and pledges of securities deposited
with the Clearing Agency.
"Closing Date" has the meaning specified in the Underwriting
Agreement.
"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Securities Exchange Act of
1934, or, if at any time after the execution of this instrument such Commission
is not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.
"Common Securities" means the Common Securities, each
representing an undivided beneficial interest in the assets of the Trust, having
a Liquidation Amount of $10.00 and having the rights provided therefor in this
Declaration of Trust, including the right to receive Distributions and a
Liquidation Distribution as provided herein.
"Common Securities Certificate" means a certificate evidencing
ownership of Common Securities, substantially in the form attached as Exhibit C.
"Comparable Treasury Issue" means with respect to any
Redemption Date the United States Treasury security selected by the Quotation
Agent as having a maturity comparable to the Remaining Life that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the Remaining Life. If no United States Treasury security has a
maturity that is within a period from three months before to three months after
_______ 15, 2005, the two most closely corresponding United States Treasury
securities shall be used as the Comparable Treasury Issue, and the Treasury Rate
shall be interpolated or extrapolated on a straight-line basis, rounding to the
nearest month using such securities.
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"Comparable Treasury Price" means (A) the average of five
Reference Treasury Dealer Quotations for such Redemption Date, after excluding
the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if
the Debenture Trustee obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such Quotations.
"Corporate Trust Office" means the principal office of the
Property Trustee located in Wilmington, Delaware which, at the time of the
execution of this Declaration of Trust, is located at 1100 North Market Street,
Attn: Corporate Trust Administration, Wilmington, Delaware 19890.
"Debenture Event of Default" means an "Event of Default" as
defined in the Indenture.
"Debenture Trustee" means Wilmington Trust Company, a Delaware
corporation and any successor.
"Declaration of Trust" means this Amended and Restated
Declaration of Trust, as the same may be modified, amended or supplemented in
accordance with the applicable provisions hereof, including all exhibits hereto,
including, for all purposes of this Amended and Restated Declaration of Trust,
the provisions of the Trust Indenture Act that are deemed to be a part of and
govern this Amended and Restated Declaration of Trust and any modification,
amendment or supplement of either, respectively.
"Definitive Capital Securities Certificate" means Capital
Securities Certificates issued in certificated, fully registered form.
"Delaware Business Trust Act" means Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. ss.ss. 3801, et seq., as it may be amended from
time to time.
"Delaware Trustee" means the corporation identified as the
"Delaware Trustee" in the preamble to this Declaration of Trust solely in its
capacity as Delaware Trustee of the Trust continued hereunder and not in its
individual capacity, or its successor in interest in such capacity, or any
successor trustee appointed as herein provided.
"Depositor" has the meaning specified in the preamble to this
Declaration of Trust.
"Distribution Date" has the meaning specified in Section
4.01(a).
"Distributions" means amounts payable in respect of the Trust
Securities as provided in Section 4.01.
"Early Termination Event" has the meaning specified in Section
9.02.
"Escrow Agent" means Wilmington Trust Company.
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"Event of Default" means any one of the following events
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) the occurrence of a Debenture Event of Default; or
(b) default by the Trust in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(c) default by the Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(d) default in the performance, or breach, in any material
respect, of any covenant or warranty of the Trustees in this
Declaration of Trust (other than a covenant or warranty, a default in
the performance or breach of which is addressed in clause (b) or (c)
above), and continuation of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to
the defaulting Trustee or Trustees by the Holders of at least 25% in
aggregate Liquidation Amount of the Outstanding Capital Securities, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder; or
(e) the occurrence of a Bankruptcy Event with respect to the
Property Trustee and the failure by the Depositor to appoint a
successor Property Trustee within 60 days thereof.
"Expiration Date" has the meaning specified in Section 9.01.
"Federal Reserve" means the Board of Governors of the Federal
Reserve System.
"Global Capital Securities" means a beneficial interest in the
Capital Securities, ownership and transfers of which shall be made through book
entries by a Clearing Agency as described in Section 5.11.
"Global Capital Securities Certificate" means a certificate
evidencing ownership of Global Capital Securities, substantially in the form
attached as Exhibit B.
"Guarantee" means the Guarantee Agreement executed and
delivered by the Depositor and Wilmington Trust Company, as trustee,
contemporaneously with the execution and delivery of this Declaration of Trust,
for the benefit of the Holders of the Trust Securities, as amended from time to
time.
"Holder" or "Securityholder" means a Person in whose name a
Trust Security or Trust Securities is registered in the Securities Register; any
such Person shall be deemed to be a beneficial owner of such Trust Securities
within the meaning of the Delaware Business Trust Act; provided, however, that
in determining whether the Holders of the requisite amount of
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Capital Securities have voted on any matter provided for in this Declaration of
Trust, then for the purpose of any such determination, so long as Definitive
Capital Securities Certificates have not been issued, the term Securityholders
or Holders as used herein shall refer to the Owners.
"Indenture" means the Junior Subordinated Indenture, dated as
of ___________ __, 2000, between the Depositor and the Debenture Trustee, as
trustee, (as amended or supplemented from time to time) relating to the issuance
of the Junior Subordinated Debt Securities.
"Investment Company Event" has the meaning specified in
Section 1.01 of the Indenture.
"Junior Subordinated Debt Securities" means $__________ in
aggregate principal amount of the Depositor's Junior Subordinated Debt
Securities due ______ 15, 2030, issued pursuant to the Indenture.
"Junior Subordinated Debt Securities Redemption Date" means,
with respect to any Junior Subordinated Debt Securities to be redeemed under the
Indenture, the date fixed for redemption under the Indenture or pursuant to an
Officers' Certificate in accordance with the terms of the Indenture.
"Letter of Representations" means the agreement between the
Trust, the Property Trustee and The Depository Trust Company ("DTC"), as the
initial Clearing Agency, dated as of the Closing Date.
"Lien" means any lien, pledge, charge, encumbrance, mortgage,
deed of trust, adverse ownership interest, hypothecation, assignment, security
interest or preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever.
"Like Amount" means (a) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount equal to that portion
of the principal amount of Junior Subordinated Debt Securities to be
contemporaneously redeemed in accordance with the Indenture allocated to the
Trust Securities based upon their relative Liquidation Amounts and the proceeds
of which will be used to pay the Redemption Price of such Trust Securities, and
(b) with respect to a distribution of Junior Subordinated Debt Securities to
Holders in connection with a dissolution or liquidation of the Trust, Junior
Subordinated Debt Securities having a principal amount equal to the Liquidation
Amount of the Trust Securities of the Holder to whom such Junior Subordinated
Debt Securities are distributed.
"Liquidation Amount" means the stated amount of $10.00 per
Trust Security.
"Liquidation Date" means the date on which Junior Subordinated
Debt Securities are to be distributed to Holders of Trust Securities in
connection with a termination and liquidation of the Trust pursuant to Section
9.04(a).
"Liquidation Distribution" has the meaning specified in
Section 9.04(d).
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"1940 Act" means the Investment Company Act of 1940.
"Officers' Certificate" means a certificate signed by the
Chairman and Chief Executive Officer, President or a Vice President, and by the
Treasurer, an Associate Treasurer, an Assistant Treasurer, the Controller, the
Secretary or an Assistant Secretary, of the Depositor, and delivered to the
appropriate Trustee. One of the officers signing an Officers' Certificate given
pursuant to Section 8.16 shall be the principal executive, financial or
accounting officer of the Depositor. Any Officers' Certificate delivered with
respect to compliance with a condition or covenant provided for in this
Declaration of Trust shall include:
(a) a statement that each officer signing the Officers'
Certificate has read the covenant or condition and the definitions
relating thereto;
(b) a brief statement of the nature and scope of the
examination or investigation undertaken by each officer in rendering
the Officers' Certificate;
(c) a statement that each such officer has made such
examination or investigation as, in such officer's opinion, is
necessary to enable such officer to express an informed opinion as to
whether or not such covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
officer, such condition or covenant has been complied with.
"Opinion of Counsel" means a written opinion of counsel, who
may be counsel for the Trust, the Property Trustee or the Depositor, but not an
employee of any thereof, and which opinion shall be reasonably acceptable to the
Property Trustee.
"Original Declaration of Trust" has the meaning specified in
the preamble to this Declaration of Trust.
"Other Capital Securities" means Capital Securities that are
not Global Capital Securities.
"Outstanding", with respect to Capital Securities, means, as
of the date of determination, all Capital Securities theretofore executed and
delivered under this Declaration of Trust, except;
(a) Capital Securities theretofore canceled by the Property
Trustee or delivered to the Property Trustee for cancellation;
(b) Capital Securities for whose payment or redemption money
in the necessary amount has been theretofore deposited with the
Property Trustee or any Paying Agent for the benefit of the Holders of
such Capital Securities; provided that, if such
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Capital Securities are to be redeemed, notice of such redemption has
been duly given pursuant to this Declaration of Trust; and
(c) Capital Securities that have been paid or in exchange for
or in lieu of which other Capital Securities have been executed and
delivered pursuant to Sections 5.02, 5.04, 5.05, 5.11 and 5.13;
provided, however, that in determining whether the Holders of the
requisite Liquidation Amount of the Outstanding Capital Securities have
given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Capital Securities owned by the Depositor, any
Trustee or any Affiliate of the Depositor or any Trustee shall be
disregarded and deemed not to be Outstanding, except that (a) in
determining whether any Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or
waiver, only Capital Securities that a Responsible Officer of such
Trustee actually knows to be so owned shall be so disregarded and (b)
the foregoing shall not apply at any time when all of the outstanding
Capital Securities are owned by the Depositor, one or more of the
Trustees and/or any such Affiliate. Capital Securities so owned that
have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Administrative Trustees
the pledgee's right so to act with respect to such Capital Securities
and that the pledgee is not the Depositor or any Affiliate of the
Depositor.
"Owner" means each Person who is the beneficial owner of a
Global Capital Security as reflected in the records of the Clearing Agency or,
if a Clearing Agency Participant is not the Owner, then as reflected in the
records of a Person maintaining an account with such Clearing Agency (directly
or indirectly), in accordance with the rules of such Clearing Agency.
"Paying Agent" means any paying agent or co-paying agent
appointed pursuant to Section 5.10 and shall initially be the Trust Company.
"Payment Account" means a segregated corporate trust account,
without interest, maintained by the Property Trustee with the Trust Company in
its trust department for the benefit of the Securityholders in which all amounts
paid in respect of the Junior Subordinated Debt Securities will be held and from
which the Property Trustee shall make payments to the Securityholders in
accordance with Sections 4.01 and 4.02.
"Person" means any individual, corporation, partnership, joint
venture, trust, limited liability company or corporation, unincorporated
organization or government or any agency or political subdivision thereof.
"Property Trustee" means the commercial bank or trust company
identified as the "Property Trustee" in the preamble to this Declaration of
Trust solely in its capacity as Property Trustee of the Trust continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor property trustee appointed as herein provided.
"Quotation Agent" means Wilmington Trust Company, a Delaware
corporation, and its successors; provided, however, that if the foregoing shall
cease to be a primary U.S.
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Government securities dealer (a "Primary Treasury Dealer"), the Depositor shall
substitute therefor another Primary Treasury Dealer.
"Redemption Date" means, with respect to any Trust Security to
be redeemed, the date fixed for such redemption by or pursuant to this
Declaration of Trust, provided, however, that each Junior Subordinated Debt
Securities Redemption Date and the Stated Maturity of the Junior Subordinated
Debt Securities shall be a Redemption Date for a Like Amount of Trust
Securities.
"Redemption Price" means:
(a) in the case of a redemption, other than as provided in
Paragraph (b) below, the following prices expressed in percentages of the
Liquidation Amount, together with accumulated Distributions to but excluding the
date fixed for redemption, if redeemed during the 12-month period beginning
April 15:
Year Redemption Price
2005 %
2006 %
2007 %
2008 %
2009 %
2010 %
2011 %
2012 %
2013 %
2014 %
and 100% on or after April 15, 2014.
(b) in the case of a redemption prior to April 15, 2005
following a Tax Event, Investment Company Event or Capital Treatment Event, an
amount for each Capital Security equal to the Make-Whole Amount for a
corresponding $10.00 principal amount of Junior Subordinated Debentures,
together with accumulated distributions to but excluding the date fixed for
redemption. The "Make-Whole Amount" will be equal to the greater of (i) 100% of
the principal amount of such Junior Subordinated Debentures, and (ii) as
determined by a Quotation Agent, the sum of the present values of the principal
amount and premium payable as part of the Redemption Price with respect to an
optional redemption of such Junior Subordinated Debentures on April 15, 2005,
together with the present values of scheduled payments of interest (not
including the portion of any such payments of interest accrued as of the
Redemption Date) from the Redemption Date to April 15, 2005 (the "Remaining
Life"), in each case discounted to the Redemption Date on a semi-annual basis
(assuming a 360-day year consisting of 30-day months) at the Adjusted Treasury
Rate. The Redemption Price in the case of a redemption on or after April 15,
2005 following a Tax Event, Investment Company Event or Capital Treatment
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Event shall equal the Redemption Price then applicable to a redemption under
Paragraph (a) above.
"Reference Treasury Dealer" means (i) the Quotation Agent and
(ii) any other Primary Treasury Dealer selected by the Debenture Trustee after
consultation with the Depositor.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any Redemption Date, the average, as
determined by the Debenture Trustee, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Debenture Trustee by such Reference
Treasury Dealer at 5:00 p.m., Richmond, Virginia time, on the third Business Day
preceding such Redemption Date.
"Relevant Trustee" has the meaning specified in Section 8.10.
"Responsible Officer" means, when used with respect to the
Property Trustee, any officer assigned to the Corporate Trust Office, including
any managing director, vice president, assistant vice president, assistant
treasurer, assistant secretary or any other officer of the Property Trustee
customarily performing functions similar to those performed by any of the above
designated officers and having direct responsibility for the administration for
this Declaration of Trust, and also, with respect to a particular matter, any
other officer to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.
"Securities Act" means the Securities Act of 1933.
"Securities Register" and "Securities Registrar" have the
respective meanings specified in Section 5.05.
"Securityholder" or "Holder" means a Person in whose name a
Trust Security or Trust Securities is registered in the Securities Register; any
such Person shall be deemed to be a beneficial owner within the meaning of the
Delaware Business Trust Act; provided, however, that in determining whether the
Holders of the requisite amount of Capital Securities have voted on any matter
provided for in this Declaration of Trust, then for the purpose of any such
determination, so long as Definitive Capital Securities Certificates have not
been issued, the term Securityholders or Holders as used herein shall refer to
the Owners.
"Stated Maturity" has the meaning specified in Section 1.01 of
the Indenture.
"Tax Event" has the meaning specified in Section 1.01 of the
Indenture.
"Transfer Agent" means the Trust Company as set forth in the
preamble to this Declaration of Trust.
"Treasury Rate" means (i) the yield, under the heading that
represents the average for the week immediately prior to the calculation date,
appearing in the most recently published statistical release designated "H.15
(519)" or any successor publication that is published weekly
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by the Board of Governors of the Federal Reserve System and that establishes
yields on actively traded United States Treasury securities adjusted to constant
maturity under the caption "Treasury Constant Maturities," for the maturity
corresponding to the Remaining Life (if no maturity is within three months
before or after the Remaining Life, yields for the two published maturities most
closely corresponding to the Remaining Life shall be determined and the Treasury
Rate shall be interpolated or extrapolated from such yields on a straight-line
basis, rounding to the nearest month) or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue, calculated using a price for
the Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for such Redemption Date. The
Treasury Rate shall be calculated on the third Business Day preceding the
Redemption Date.
"Trust" means Southern Financial Capital Trust I.
"Trust Company" has the meaning specified in the preamble to
this Declaration of Trust.
"Trust Indenture Act" has the meaning specified in Section
1.01 of the Indenture.
"Trust Property" means (a) the Junior Subordinated Debt
Securities, (b) the rights of the Property Trustee under the Guarantee, (c) any
cash or deposit in, or owing to, the Payment Account and (d) all proceeds and
rights in respect of the foregoing.
"Trust Securities Certificate" means any one of the Common
Securities Certificates or the Capital Securities Certificates.
"Trust Security" means any one of the Common Securities or the
Capital Securities.
"Trustees" means, collectively, the Property Trustee, the
Delaware Trustee and the Administrative Trustees.
"Underwriter" shall mean McKinnon & Company, Inc., a Virginia
corporation.
"Underwriting Agreement" means the Underwriting Agreement,
dated as of ______ __, 2000, between the Trust, the Depositor and the
Underwriter.
ARTICLE II
Continuation of the Trust
SECTION 2.01. Name. The Trust continued hereby shall be known
as "Southern Financial Capital Trust I", as such name may be modified from time
to time by the
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Administrative Trustees following written notice to the Holders and the other
Trustees, in which name the Trustees may conduct the business of the Trust, make
and execute contracts and other instruments on behalf of the Trust and sue and
be sued.
SECTION 2.02. Office of the Delaware Trustee; Principal Place
of Business. The address of the Delaware Trustee in the State of Delaware is
Wilmington Trust Company, 1100 N. Market Street, Attention: Corporate Trust
Administration, Wilmington, Delaware 19890, or such other address in the State
of Delaware as the Delaware Trustee may designate by written notice to the
Securityholders and the Depositor. The principal executive office of the Trust
is in care of Southern Financial BanCorp, Inc., 37 E. Main Street, Warrenton,
Virginia 22186.
SECTION 2.03. Organizational Expenses. The Depositor, as
borrower on the Junior Subordinated Debt Securities, shall pay all expenses of
the Trust as they arise or shall, upon request of any Trustee, promptly
reimburse such Trustee for any such expenses paid by such Trustee. The Depositor
shall make no claim upon the Trust Property for the payment of such expenses.
SECTION 2.04. Issuance of the Capital Securities. The Capital
Securities to be issued will be limited to $9,200,000.00 aggregate Liquidation
Amount outstanding at any one time.
On ______ __, 2000, the Depositor, on behalf of the Trust, and
pursuant to the Original Declaration of Trust, and the Underwriter executed and
delivered the Underwriting Agreement. On or before the Closing Date, an
Administrative Trustee, on behalf of the Trust, shall execute or cause to be
executed in accordance with Section 5.02 and delivered to the Escrow Agent, a
Global Capital Securities Certificate in an aggregate amount of Capital
Securities having an aggregate Liquidation Amount of $____________ against
receipt of the aggregate purchase price of such Capital Securities equal to 100%
of the Liquidation Amount multiplied by the number of Capital Securities being
purchased, which amount the Administrative Trustee shall promptly deliver to the
Property Trustee.
SECTION 2.05. Issuance of the Common Securities; Subscription
and Purchase of Junior Subordinated Debt Securities. Contemporaneously with the
execution and delivery of this Declaration of Trust, an Administrative Trustee,
on behalf of the Trust, shall execute or cause to be executed in accordance with
Section 5.02(a) and delivered to the Depositor Common Securities Certificates,
registered in the name of the Depositor, in an aggregate amount of ________
Common Securities having an aggregate Liquidation Amount of $_______ against
payment by the Depositor of $_________ to the Trust. Contemporaneously
therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to
and purchase from the Depositor Junior Subordinated Debt Securities, registered
in the name of the Property Trustee and held for the benefit of the Holders of
the Trust Securities having an aggregate principal amount equal to $__________,
and, in satisfaction of the purchase price for such Junior Subordinated Debt
Securities, the Trust shall deliver to the Depositor the sum of $____________.
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SECTION 2.06. Declaration of Trust. The exclusive purposes and
functions of the Trust are to (a) issue and sell Trust Securities, (b) use the
proceeds from the sale of Trust Securities to acquire the Junior Subordinated
Debt Securities, (c) receive payments to be made with respect to the Junior
Subordinated Debt Securities, and (d) engage in only those other activities
necessary or incidental thereto such as registering the transfer of the Capital
Securities. The Depositor hereby appoints the Trustees as trustees of the Trust,
to have all the rights, powers and duties to the extent set forth herein, and
the Trustees hereby accept such appointment. The Property Trustee hereby
declares that it will hold the Trust Property in trust upon and subject to the
conditions set forth herein for the benefit of the Trust and the
Securityholders. The Administrative Trustees shall have all rights, powers and
duties set forth herein and in accordance with applicable law with respect to
accomplishing the purposes of the Trust. The Delaware Trustee shall not be
entitled to exercise any powers, nor shall the Delaware Trustee have any of the
duties and responsibilities, of the Property Trustee or the Administrative
Trustees set forth herein. The Delaware Trustee shall be one of the Trustees of
the Trust for the sole and limited purpose of fulfilling the requirements of
Section 3807 of the Delaware Business Trust Act.
SECTION 2.07. Authorization to Enter into Certain
Transactions. (a) The Trustees shall conduct the affairs of the Trust in
accordance with the terms of this Declaration of Trust. Subject to the
limitations set forth in paragraph (b) of this Section and in accordance with
the following provisions (i) and (ii), the Trustees shall have the authority to
enter into all transactions and agreements determined by the Trustees to be
appropriate in exercising the authority, express or implied, otherwise granted
to the Trustees under this Declaration of Trust, and to perform all acts in
furtherance thereof, including without limitation, the following:
(i) As among the Trustees, each Administrative Trustee shall
have the power and authority to act on behalf of the Trust with respect
to the following matters:
(A) the issuance and sale of the Trust Securities;
(B) to cause the Trust to enter into, and to execute,
deliver and perform on behalf of the Trust, the Underwriting
Agreement, the Letter of Representations and such other
agreements as may be necessary or desirable in connection with
the purposes and function of the Trust;
(C) assisting in the registration of the Capital
Securities under the Securities Act, and under state
securities or blue sky laws, and the qualification of this
Declaration of Trust as a trust indenture under the Trust
Indenture Act;
(D) assisting in the listing, if any, of the Capital
Securities upon such securities exchange or exchanges as shall
be determined by the Depositor and the registration of the
Capital Securities under the Securities Exchange Act of 1934
(the "Exchange Act"), and the preparation and filing of all
periodic and other reports and other documents pursuant to the
foregoing;
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(E) the sending of notices (other than notices of
default) and other information regarding the Trust Securities
and the Junior Subordinated Debt Securities to the
Securityholders in accordance with this Declaration of Trust;
(F) the appointment of a Paying Agent, Transfer Agent
and Securities Registrar in accordance with this Declaration
of Trust;
(G) registering transfer of the Trust Securities in
accordance with this Declaration of Trust;
(H) to the extent provided in this Declaration of
Trust, the winding up of the affairs and liquidation of the
Trust and the preparation, execution and filing of the
certificate of cancellation with the Secretary of State of the
State of Delaware;
(I) unless otherwise determined by the Depositor, the
Property Trustee or the Administrative Trustees or as
otherwise required by the Delaware Business Trust Act or the
Trust Indenture Act, to execute on behalf of the Trust (either
acting alone or together with any or all of the Administrative
Trustees) any documents that the Administrative Trustees have
the power to execute pursuant to this Declaration of Trust;
and
(J) the taking of any action incidental to the
foregoing as the Trustees may from time to time determine is
necessary or advisable to give effect to the terms of this
Declaration of Trust for the benefit of the Securityholders
(without consideration of the effect of any such action on any
particular Securityholders).
(ii) As among the Trustees, the Property Trustee shall have
the power, duty and authority to act on behalf of the Trust with
respect to the following matters:
(A) the establishment of the Payment Account;
(B) the receipt of the Junior Subordinated Debt
Securities;
(C) the collection of interest, principal and any
other payments made in respect of the Junior Subordinated Debt
Securities in the Payment Account;
(D) the distribution of amounts owed to the
Securityholders in respect of the Trust Securities;
(E) the exercise of all of the rights, powers and
privileges of a holder of the Junior Subordinated Debt
Securities;
(F) the sending of notices of default and other
information regarding the Trust Securities and the Junior
Subordinated Debt Securities to the Securityholders in
accordance with this Declaration of Trust;
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(G) the distribution of the Trust Property in
accordance with the terms of this Declaration of Trust;
(H) to the extent provided in this Declaration of
Trust, the winding up of the affairs of and liquidation of the
Trust and the preparation, execution and filing of the
certificate of cancellation with the Secretary of State of the
State of Delaware;
(I) after an Event of Default (other than an Event of
Default pursuant to paragraph (b), (c), (d) or (e) of the
definition of such term if such Event of Default is by or with
respect to the Property Trustee) the taking of any action
incidental to the foregoing as the Property Trustee may from
time to time determine is necessary or advisable to give
effect to the terms of this Declaration of Trust and protect
and conserve the Trust Property for the benefit of the
Securityholders (without consideration of the effect of any
such action on any particular Securityholder); and
(J) except as otherwise provided in this Section
2.07(a)(ii), the Property Trustee shall have none of the
duties, liabilities, powers or authority of the Administrative
Trustees set forth in Section 2.07(a)(i).
(b) So long as this Declaration of Trust remains in effect,
the Trust (or the Trustees acting on behalf of the Trust) shall not undertake
any business, activities or transactions except as expressly provided herein or
contemplated hereby. In particular, the Trustees shall not (i) acquire any
investments or engage in any activities not authorized by this Declaration of
Trust, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or
otherwise dispose of any of the Trust Property or interests therein, including
to Securityholders, except as expressly provided herein, (iii) intentionally
take any action that would cause the Trust to fail or cease to qualify as a
"grantor trust" or as other than an association taxable as a corporation for
United States federal income tax purposes, (iv) incur any indebtedness for
borrowed money or issue any other debt, (v) take or consent to any action that
would result in the placement of a Lien on any of the Trust Property, (vi)
invest any proceeds received by the Trust from holding the Junior Subordinated
Debt Securities, but shall distribute all such proceeds to Holders pursuant to
the terms of this Declaration of Trust and of the Trust Securities, (vii)
acquire any assets other than the Trust Property, (viii) possess any power or
otherwise act in such a way as to vary the Trust Property, (ix) possess any
power or otherwise act in such a way as to vary the terms of the Trust
Securities in any way whatsoever (except to the extent expressly authorized in
this Declaration of Trust or by the terms of the Trust Securities), (x) issue
any securities or other evidences of beneficial ownership of, or beneficial
interest in, the Trust other than the Trust Securities, or (xi) other than as
provided in this Declaration of Trust or by the terms of the Trust Securities,
so long as any Junior Subordinated Debt Securities are held by the Property
Trustee, (A) direct the time, method and place of exercising any trust or power
conferred upon the Debenture Trustee with respect to the Junior Subordinated
Debt Securities, (B) waive any past default that is waivable under the
Indenture, (C) exercise any right to rescind or annul any declaration that the
principal of all Junior Subordinated Debt Securities shall be due and payable,
or (D) consent to
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any amendment, modification, or termination of the Indenture or the Junior
Subordinated Debt Securities where such consent shall be required unless the
Trust shall have received an Opinion of Counsel of a independent law firm to the
effect that such amendment, modification or termination will not cause more than
an insubstantial risk that the Trust will be deemed an Investment Company
required to be registered under the 1940 Act, that the Trust will not be
classified as a grantor trust or will be classified as an association taxable as
a corporation for United States federal income tax purposes or that the Junior
Subordinated Debt Securities will not be classified as indebtedness for such
purposes. The Administrative Trustees shall defend all claims and demands of all
Persons at any time claiming any Lien on any of the Trust Property adverse to
the interest of the Trust or the Securityholders in their capacity as
Securityholders.
(c) In connection with the issuance and sale of the Trust
Securities, the Depositor shall have the right and responsibility to assist the
Trust with respect to, or effect on behalf of the Trust, the following (and any
actions taken by the Depositor in furtherance of the following prior to the date
of this Declaration of Trust are hereby ratified and confirmed in all respects):
(i) the preparation by the Trust of a prospectus relating to
the Trust Securities and the preparation and filing by the Trust with
the Commission and the execution on behalf of the Trust of a
registration statement on the appropriate form in relation to the Trust
Securities, including any amendments thereto;
(ii) the determination of the states in which to take
appropriate action to qualify or register for sale all or part of the
Trust Securities and the determination of any and all such acts, other
than actions that must be taken by or on behalf of the Trust, and the
advice to the Trustees of actions they must take on behalf of the
Trust, and the preparation for execution and filing of any documents to
be executed and filed by the Trust or on behalf of the Trust, as the
Depositor deems necessary or advisable in order to comply with the
applicable laws of any such states;
(iii) the preparation for filing by the Trust with the
Commission and the execution on behalf of the Trust of a registration
statement on Form 8-A relating to the registration of the Trust
Securities under Section 12(b) or 12(g) of the Exchange Act, including
any amendments thereto;
(iv) the negotiation of the terms of, and the execution and
delivery of, the Underwriting Agreement providing for the sale of the
Trust Securities and such other agreements as may be necessary or
desirable in connection with the consummation of the transactions
contemplated thereby, all in its capacity as Depositor and on behalf of
the Trust; and
(v) the taking of any other actions necessary or desirable to
carry out any of the foregoing activities.
(d) Notwithstanding anything herein to the contrary, each
Administrative Trustee is authorized and directed to conduct the affairs of the
Trust and to operate the Trust so
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that the Trust will not (i) be deemed to be an "investment company" required to
be registered under the 1940 Act, or (ii) fail to be classified as a grantor
trust or as other than an association taxable as a corporation for United States
federal income tax purposes and so that the Junior Subordinated Debt Securities
will be treated as indebtedness of the Depositor for United States federal
income tax purposes. In this connection, the Depositor and each of the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the Certificate of Trust or this Declaration of Trust, that each
of the Depositor and each Administrative Trustee determines in its discretion to
be necessary or desirable for such purposes, as long as such action does not
adversely affect in any material respect the interests of the Holders of the
Trust Securities.
SECTION 2.08. Assets of Trust. The assets of the Trust shall
consist solely of the Trust Property.
SECTION 2.09. Title to Trust Property. Legal title to all
Trust Property shall be vested at all times in the Property Trustee (in its
capacity as such) and shall be held and administered by the Property Trustee for
the benefit of the Trust and the Securityholders in accordance with this
Declaration of Trust.
ARTICLE III
Payment Account
SECTION 3.01. Payment Account. (a) On or prior to the Closing
Date, the Property Trustee shall establish the Payment Account. The Property
Trustee and any agent of the Property Trustee shall have exclusive control and
sole right of withdrawal with respect to the Payment Account for the purpose of
making deposits in and withdrawals from the Payment Account in accordance with
this Declaration of Trust. All moneys and other property deposited or held from
time to time in the Payment Account shall be held by the Property Trustee in the
Payment Account for the exclusive benefit of the Securityholders and for
distribution as herein provided, including (and subject to) any priority of
payments provided for herein or by applicable law.
(b) The Property Trustee shall deposit in the Payment Account,
promptly upon receipt, all payments of principal of or interest on, and any
other payments or proceeds with respect to, the Junior Subordinated Debt
Securities. Amounts held in the Payment Account shall not be invested by the
Property Trustee pending distribution thereof.
ARTICLE IV
Distributions; Redemption
SECTION 4.01. Distributions. (a) Distributions on the Trust
Securities shall be cumulative and will accumulate whether or not there are
funds of the Trust available for the
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payment of Distributions. Distributions shall accrue from _______ __, 2000, and,
except in the event (and to the extent) that the Depositor exercises its right
to defer the payment of interest on the Junior Subordinated Debt Securities
pursuant to the Indenture, shall be payable quarterly in arrears on the 15th day
of January, April, July and October of each year, commencing on April 15, 2000.
If any date on which a Distribution is otherwise payable is not a Business Day,
then the payment of such Distribution shall be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect of
any such delay), in each case with the same force and effect as if made on such
date (each date on which distributions are payable in accordance with this
Section 4.01(a), a "Distribution Date"). Accrued Distributions that are not paid
on the applicable Distribution Date will bear interest on the amount thereof (to
the extent permitted by law) at a fixed annual rate equal to _____%, compounded
quarterly from the relevant Distribution Date in accordance with Section 2.02 of
the Indenture.
(b) The Trust Securities represent undivided beneficial
ownership interests in the Trust Property, and, assuming payments of interest on
the Junior Subordinated Debt Securities are made when due (and before giving
effect to Additional Distributions, defined below, if applicable), Distributions
on each of the Trust Securities shall be payable at a fixed annual rate equal to
$______ (which is _____% of the Liquidation Amount of each of the Trust
Securities) in accordance with Section 2.02 of the Indenture. The amount of
Distributions payable for any period shall be computed on the basis of the
actual number of days elapsed in a year of twelve 30-day months; except that the
amount of interest payable for any partial period shall be computed on the basis
of the actual number of days elapsed in a 360-day year. The amount of
Distributions payable for any period shall include the Additional Distributions,
if any.
(c) So long as no Debenture Event of Default has occurred and
is continuing, the Depositor has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debt Securities at any time and
from time to time for a period not exceeding 20 consecutive quarterly periods
(an "Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debt Securities. As a consequence of
any such deferral, quarterly Distributions on the Trust Securities by the Trust
will also be deferred during any Extension Period (and the amount of
Distributions to which Holders are entitled will accumulate additional
Distributions thereon at a fixed annual rate equal to ______% thereof,
compounded quarterly from the relevant payment date for such Distributions
during any such Extension Period, to the extent permitted by applicable law, but
not exceeding the interest rate then accruing on the Junior Subordinated Debt
Securities (each such increase in Distribution, as described in this Section
4.01(c), an "Additional Distribution"). No interest or other amounts shall be
due and payable during an Extension Period except at the end thereof.
(d) Distributions on the Trust Securities shall be made by the
Property Trustee from the Payment Account and shall be payable on each
Distribution Date only to the extent that the Trust has funds then on-hand and
available in the Payment Account for the payment of such Distributions.
(e) Distributions on the Trust Securities with respect to a
Distribution Date shall be payable to the Holders of record as they appear on
the Securities Register for the Trust
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Securities at the close of the Business Day next preceding each 15th day of
January, April, July and October.
SECTION 4.02. Redemption. (a) On each Junior Subordinated Debt
Securities Redemption Date and on the Stated Maturity of the Junior Subordinated
Debt Securities, the Trust will be required to redeem a Like Amount of Trust
Securities at the applicable Redemption Price.
(b) Other than on the Stated Maturity, notice of redemption
shall be given by the Property Trustee by first class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Redemption Date to
each Holder of Trust Securities to be redeemed, at such Holder's address
appearing in the Security Register. All notices of redemption shall identify the
Trust Securities to be redeemed (including CUSIP numbers) and shall state:
(i) the Redemption Date;
(ii) the applicable Redemption Price, or, if the
Redemption Price cannot be calculated prior to the time the
notice is required to be sent, the estimate of the Redemption
Price provided pursuant to the Indenture together with a
statement that it is an estimate and that the actual
Redemption Price will be calculated on the third Business Day
prior to the Redemption Date (and, if an estimate is provided,
a further notice shall be sent of the actual Redemption Price
on the date, or as soon as practicable thereafter, that notice
of such actual Redemption Price is received pursuant to the
Indenture);
(iii) the CUSIP number or CUSIP numbers of the
Capital Securities affected;
(iv) if less than all the Outstanding Trust
Securities are to be redeemed, the identification and the
total Liquidation Amount of the particular Trust Securities to
be redeemed; and
(v) that on the Redemption Date the Redemption Price
will become due and payable upon each such Trust Security to
be redeemed and that Distributions thereon will cease to
accrue on and after such date.
The Trust in issuing the Trust Securities may use "CUSIP",
and/or "private placement" numbers (if then generally in use), and, if so, the
Property Trustee shall indicate the "CUSIP" or "private placement" numbers of
the Trust Securities in notices of redemption and related materials as a
convenience to Securityholders; provided that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Trust Securities or as contained in any notice of redemption and related
material. The Depositor shall promptly notify the Property Trustee of any change
in such numbers.
(c) The Trust Securities redeemed on each Redemption Date
shall be redeemed at the applicable Redemption Price with the proceeds from the
contemporaneous
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redemption of Junior Subordinated Debt Securities. Redemptions of the Trust
Securities shall be made and the applicable Redemption Price shall be payable on
each Redemption Date only to the extent that the Trust has funds then on hand
and available in the Payment Account for the payment of such Redemption Price.
(d) If the Property Trustee gives a notice of redemption in
respect of any Trust Securities, then, by 12:00 noon, Richmond, Virginia time,
on the Redemption Date, subject to Section 4.02(c), the Property Trustee will,
so long as the Capital Securities are in book-entry-only form, irrevocably
deposit with the Clearing Agency for the Capital Securities funds sufficient to
pay the applicable Redemption Price and will give such Clearing Agency
irrevocable instructions and authority to pay the Redemption Price to the
Holders thereof. With respect to Capital Securities held in certificated form,
the Property Trustee, subject to Section 4.02(c), will irrevocably deposit with
the Paying Agent funds sufficient to pay the applicable Redemption Price and
will give the Paying Agent irrevocable instructions and authority to pay the
Redemption Price to the Holders thereof upon surrender of their Capital
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of Securityholders
holding Trust Securities so called for redemption will cease, except the right
of such Securityholders to receive the applicable Redemption Price and any
Distribution payable on or prior to the Redemption Date, but without interest,
and such Capital Securities will cease to be outstanding. In the event that any
date on which any applicable Redemption Price is payable is not a Business Day,
then payment of the applicable Redemption Price payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay), except that, if such Business
Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case, with the same force and effect
as if made on such date. In the event that payment of the applicable Redemption
Price in respect of any Trust Securities called for redemption is improperly
withheld or refused and not paid either by the Trust or by the Depositor
pursuant to the Guarantee, Distributions on such Trust Securities will continue
to accrue, at the then applicable rate, from the Redemption Date originally
established by the Trust for such Trust Securities to the date such applicable
Redemption Price is actually paid, in which case the actual payment date will be
the date fixed for redemption for purposes of calculating the applicable
Redemption Price.
(e) Payment of the applicable Redemption Price on, and any
distributions of Junior Subordinated Debt Securities to Holders of, the Trust
Securities shall be made to the Holders thereof as they appear on the Securities
Register on the relevant record date, and, with respect to Trust Securities held
in certificated form, upon surrender of such certificated Trust Securities to
the Paying Agent.
(f) Subject to Section 4.03(a), if less than all the
Outstanding Trust Securities are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of Trust Securities to be redeemed shall be
allocated on a pro rata basis (based on Liquidation Amounts) among the Trust
Securities. The particular Trust Securities to be redeemed shall be selected on
a
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pro rata basis (based upon Liquidation Amounts) not more than 60 days prior to
the Redemption Date by the Property Trustee from the Outstanding Trust
Securities not previously called for redemption, by such method as the Property
Trustee shall deem fair and appropriate and which may provide for the selection
for redemption of portions (equal to $10.00 or a multiple of $10.00 in excess
thereof) of the Liquidation Amount of Trust Securities. The Property Trustee
shall promptly notify the Securities Registrar in writing of the Trust
Securities selected for redemption and, in the case of any Trust Securities
selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of this Declaration of Trust, unless the context otherwise
requires, all provisions relating to the redemption of Trust Securities shall
relate, in the case of any Trust Securities redeemed or to be redeemed only in
part, to the portion of the Liquidation Amount of Trust Securities that has been
or is to be redeemed.
SECTION 4.03. Subordination of Common Securities. (a) Payment
of Distributions (including Additional Distributions, if applicable) on, and the
Redemption Price of the Trust Securities, as applicable, shall be made subject
to Section 4.02(f), pro rata to the Holders of the Trust Securities based on the
Liquidation Amount of the Trust Securities; provided, however, that if on any
Distribution Date or Redemption Date any Debenture Event of Default (or other
event that, with notice or the passage of time or both, would become such an
Event of Default) or an Event of Default shall have occurred and be continuing,
no payment of any Distribution (including Additional Distributions, if
applicable) on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions (including Additional Distributions, if
applicable) on all outstanding Capital Securities for all Distribution Dates
occurring on or prior thereto, or, in the case of payment of the applicable
Redemption Price the full amount of such Redemption Price on all outstanding
Capital Securities, shall have been made or provided for, and all funds
immediately available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions (including Additional
Distributions, if applicable) on, or the Redemption Price of, Capital Securities
then due and payable.
(b) In the case of the occurrence of any Event of Default
resulting from any Debenture Event of Default, the Holder of Common Securities
will be deemed to have waived any right to act with respect to any such Event of
Default under this Declaration of Trust until all such Events of Default with
respect to the Capital Securities have been cured, waived or otherwise
eliminated. Until all such Events of Default under this Declaration of Trust
with respect to the Capital Securities have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the Holders of
the Capital Securities and not on behalf of the Holder of the Common Securities,
and only the Holders of the Capital Securities will have the right to direct the
Property Trustee to act on their behalf.
SECTION 4.04. Payment Procedures. In the event Definitive
Capital Securities Certificates are issued, payments of Distributions (including
Additional Distributions, if applicable) in respect of the Capital Securities
shall be made by check mailed to the address of the Person entitled thereto at
such address as shall appear on the Securities Register. If the Capital
Securities are held by a Clearing Agency, such Distributions shall be made to
the Clearing Agency in immediately available funds, which shall credit the
relevant Persons'
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accounts at such Clearing Agency on the applicable Distribution Dates. Payments
in respect of the Common Securities shall be made in such manner as shall be
mutually agreed between the Property Trustee and the Common Securityholder.
SECTION 4.05. Tax Returns and Reports. The Administrative
Trustees shall prepare (or cause to be prepared), at the Depositor's expense,
and file all United States federal, state and local tax and information returns
and reports required to be filed by or in respect of the Trust. In this regard,
the Administrative Trustees shall (a) prepare and file (or cause to be prepared
and filed) the appropriate Internal Revenue Service forms required to be filed
in respect of the Trust in each taxable year of the Trust and (b) prepare and
furnish (or cause to be prepared and furnished) to each Securityholder all
Internal Revenue Service forms required to be provided by the Trust. The
Administrative Trustees shall provide the Depositor and the Property Trustee
with a copy of all such returns and reports promptly after such filing or
furnishing. The Administrative Trustees shall comply with United States federal
withholding and backup withholding tax laws and information reporting
requirements with respect to any payments to Securityholders.
SECTION 4.06. Payment of Taxes; Duties of the Trust. Pursuant
to Section 10.06 of the Indenture, the Depositor, as borrower on the Junior
Subordinated Debt Securities, has agreed to, and it shall, promptly pay any
taxes, duties or governmental charges of whatever nature (other than United
States withholding taxes) imposed on the Trust by the United States or any other
taxing authority.
SECTION 4.07. Payments Under Indenture. Any amount payable
hereunder to any Holder (and any Owner with respect thereto) shall be reduced by
the amount of any corresponding payment such Holder (and Owner) has directly
received pursuant to Section 5.08 of the Indenture or Section 5.13 of this
Declaration of Trust.
ARTICLE V
Trust Securities Certificates
SECTION 5.01. Initial Ownership. Upon the formation of the
Trust and until the issuance of the Trust Securities, and at any time during
which no Trust Securities are outstanding, the Depositor shall be the sole
beneficial owner of the Trust.
SECTION 5.02. Trust Securities Certificates. (a) The Capital
Securities Certificates shall be issued only in minimum denominations of $10.00
Liquidation Amount and multiples of $10.00 in excess thereof, and the Common
Securities Certificates shall be issued in denominations of $10.00 Liquidation
Amount. The Trust Securities Certificates shall be executed on behalf of the
Trust by the manual or facsimile signature of at least one Administrative
Trustee. Trust Securities Certificates bearing the manual or facsimile
signatures of individuals who were, at the time when such signatures shall have
been affixed, authorized to sign on behalf of the Trust, shall be validly issued
and entitled to the benefits of this Declaration of Trust, notwithstanding that
such individuals or any of them shall have ceased to be so
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authorized prior to the delivery of such Trust Securities Certificates or did
not hold such offices at the date of delivery of such Trust Securities
Certificates. A transferee of a Trust Securities Certificate shall become a
Securityholder, and shall be entitled to the rights and subject to the
obligations of a Securityholder hereunder, upon due registration of such Trust
Securities Certificate in such transferee's name pursuant to Sections 5.04, 5.05
and 5.06.
(b) Upon their original issuance, Capital Securities
Certificates representing Other Capital Securities shall be issued in definitive
form and may not be represented by the Global Security.
(c) A single Common Securities Certificate representing the
Common Securities shall be issued to the Depositor in the form of a definitive
Common Securities Certificate.
SECTION 5.03. Execution and Delivery of Trust Securities
Certificates. At or prior to the Closing Date, the Administrative Trustees shall
cause Trust Securities Certificates, in an aggregate Liquidation Amount as
provided in Sections 2.04 and 2.05, to be executed on behalf of the Trust and
delivered to the Property Trustee and upon such delivery the Property Trustee
shall countersign such Trust Securities Certificates and make available for
delivery such Trust Securities Certificates upon the written order of the
Depositor, signed by its chairman of the board, president, any executive vice
president or any vice president, treasurer or assistant treasurer or controller
without further corporate action by the Depositor, in authorized denominations.
SECTION 5.04. Global Capital Security. (a) Any Global Capital
Security issued under this Declaration of Trust shall be registered in the name
of Cede & Co. ("Cede") as nominee of the Clearing Agency and delivered to its
custodian therefor, and such Global Capital Security shall constitute a single
Capital Security for all purposes of this Declaration of Trust.
(b) Notwithstanding any other provision in this Declaration of
Trust, the Global Capital Security may not be exchanged in whole or in part for
Capital Securities registered, and no transfer of the Global Capital Security in
whole or in part may be registered, in the name of any Person other than the
Clearing Agency for such Global Capital Security, Cede, or other nominee thereof
unless (i) such Clearing Agency advises the Property Trustee in writing that
such Clearing Agency is no longer willing or able to properly discharge its
responsibilities as Clearing Agency with respect to such Global Capital
Security, and the Depositor is unable to locate a qualified successor, (ii) the
Trust at its sole option advises DTC in writing that it elects to terminate the
book-entry system through the Clearing Agency, or (iii) there shall have
occurred and be continuing a Debenture Event of Default. In addition, beneficial
interests in a Global Capital Security may be exchanged by or on behalf of DTC
for certificated Capital Securities upon request by DTC, but only upon at least
20 days prior written notice given to the Property Trustee in accordance with
the Applicable Procedures.
(c) If a Global Capital Security is to be exchanged for Other
Capital Securities or canceled in whole, it shall be surrendered by or on behalf
of the Clearing Agency or its nominee to the Securities Registrar for exchange
or cancellation as provided in this Article V. If
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a Global Capital Security is to be exchanged for Other Capital Securities or
canceled in part, or if an Other Capital Security is to be exchanged in whole or
in part for a beneficial interest in the Global Capital Security, then either
(i) such Global Capital Security shall be so surrendered for exchange or
cancellation as provided in this Article V or (ii) the aggregate Liquidation
Amount thereof shall be reduced, subject to Section 5.02, or increased by an
amount equal to the portion thereof to be so exchanged or canceled, or equal to
the aggregate Liquidation Amount of such Other Capital Security to be so
exchanged for a beneficial interest therein, as the case may be, by means of an
appropriate adjustment made on the records of the Securities Registrar,
whereupon the Property Trustee, in accordance with the Applicable Procedures,
shall instruct the Clearing Agency or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of the Global Capital Security by the Clearing Agency and Clearing Agency
Participants, accompanied by registration instructions executed by an
Administrative Trustee on behalf of the Trust, the Property Trustee shall,
subject to this Article V, countersign and make available for delivery any
executed Capital Securities delivered to it issuable in exchange for such Global
Capital Security (or any portion thereof) in accordance with the instructions of
the Clearing Agency. The Property Trustee shall not be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be fully
protected in relying on, such instructions.
(d) The Clearing Agency or its nominee, as the registered
owner of the Global Capital Security, shall be considered the Holder of the
Capital Securities represented by the Global Capital Security for all purposes
under this Declaration of Trust and the Capital Securities, and owners of
beneficial interests in the Global Capital Security shall hold such interests
pursuant to the Applicable Procedures and, except as otherwise provided herein,
shall not be entitled to have any of the individual Capital Securities
represented by the Global Capital Security registered in their names, shall not
receive or be entitled to receive physical delivery of any such Capital
Securities in definitive form and shall not be considered the Holders thereof
under this Declaration of Trust. Accordingly, any such owner's beneficial
interest in the Global Capital Security shall be shown only on, and the transfer
of such interest shall be effected only through, records maintained by the
Clearing Agency or its nominee. The Securities Registrar and the Trustees shall
be entitled to deal with the Clearing Agency for all purposes of this
Declaration of Trust relating to the Global Capital Securities (including the
payment of the Liquidation Amount of and Distributions on the Global Capital
Securities and the giving of instructions or directions to Owners of Global
Capital Securities) as the sole Holder of Global Capital Securities and shall
have no obligations to the Owners thereof. Neither the Property Trustee nor the
Securities Registrar shall have any liability in respect of any transfers
effected by the Clearing Agency.
(e) The rights of Owners of beneficial interests in the Global
Capital Security shall be exercised only through the Clearing Agency and shall
be limited to those established by law and agreements between such owners and
the Clearing Agency. Neither the Clearing Agency nor its nominee will consent or
vote with respect to the Capital Securities. Under its usual procedures, the
Clearing Agency or its nominee would mail an Omnibus Proxy to the Trust as soon
as possible after the relevant record date. The Omnibus Proxy assigns the
consenting or voting rights of the Clearing Agency or its nominee to those
Clearing Agency Participants,
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identified in a listing attached to such Omnibus Proxy, to whose accounts the
Capital Securities are credited on such record date.
SECTION 5.05. Registration of Transfer and Exchange Generally;
Certain Transfers and Exchanges; Capital Securities Certificates. (a) The
Property Trustee shall keep or cause to be kept at its Corporate Trust Office a
register or registers for the purpose of registering Capital Securities
Certificates and Common Securities Certificates and transfers and exchanges of
Capital Securities Certificates and Common Securities Certificates in which the
registrar and transfer agent with respect to the Capital Securities (the
"Securities Registrar"), subject to such reasonable regulations as it may
prescribe, shall provide for the registration of Capital Securities Certificates
and Common Securities Certificates (subject to Section 5.11 in the case of
Common Securities Certificates) and registration of transfers and exchanges of
Capital Securities Certificates and Common Securities Certificates as herein
provided. Such register is herein sometimes referred to as the "Securities
Register." The Property Trustee is hereby appointed "Securities Registrar" for
the purpose of registering Capital Securities and transfers of Capital
Securities as herein provided. The provisions of Sections 8.01, 8.03 and 8.06
shall apply to the Property Trustee also in its role as Securities Registrar.
Upon surrender for registration of transfer of any Capital
Security at the offices or agencies of the Property Trustee designated for that
purpose, the Administrative Trustees shall execute, and the Property Trustee
shall countersign and make available for delivery, in the name of the designated
transferee or transferees, one or more new Capital Securities of any authorized
denominations of like tenor and aggregate liquidation amount and bearing such
restrictive legends as may be required by this Declaration of Trust.
At the option of the Holder, Capital Securities may be
exchanged for other Capital Securities of any authorized denominations, of like
tenor and aggregate Liquidation Amount and bearing such restrictive legends as
may be required by this Declaration of Trust, upon surrender of the Capital
Securities to be exchanged at such office or agency. Whenever any securities are
so surrendered for exchange, an Administrative Trustee shall execute and the
Property Trustee shall countersign and make available for delivery the Capital
Securities that the Holder making the exchange is entitled to receive.
All Capital Securities issued upon any transfer or exchange of
Capital Securities shall be the valid obligations of the Trust, entitled to the
same benefits under this Declaration of Trust as the Capital Securities
surrendered upon such transfer or exchange.
Every Capital Security presented or surrendered for transfer
or exchange shall (if so required by the Property Trustee) be duly endorsed, or
be accompanied by a written instrument of transfer in form satisfactory to the
Property Trustee and the Securities Registrar, duly executed by the Holder
thereof or such Holder's attorney duly authorized in writing.
No service charge shall be made to a Holder for any transfer
or exchange of Capital Securities, but the Property Trustee or the Securities
Registrar may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any transfer or
exchange of Capital Securities.
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Neither the Trust nor the Property Trustee shall be required,
pursuant to the provisions of this Section, (i) to issue, register the transfer
of or exchange any Capital Security during a period beginning at the opening of
business 15 days before the day of mailing of a notice of redemption of Capital
Securities pursuant to Article IV and ending at the close of business on the day
of such mailing of the notice of redemption, or (ii) to register the transfer of
or exchange any Capital Security so selected for redemption in whole or in part,
except, in the case of any such Capital Security to be redeemed in part, any
portion thereof not to be redeemed.
(b) Certain Transfers and Exchanges. Subject to Section
5.04(c), but notwithstanding any other provision of this Declaration of Trust,
transfers and exchanges of Capital Securities and beneficial interests in a
Global Capital Security shall be made only in accordance with this Section
5.05(b) and Section 5.04(c).
(i) Non-Global Capital Security to Global Capital Security. If
the Holder of an Other Capital Security (other than the Global Capital
Security) wishes at any time to transfer all or any portion of such
Other Capital Security to a Person who wishes to take delivery thereof
in the form of a beneficial interest in the Global Capital Security,
such transfer may be effected only in accordance with the provisions of
this Clause (b)(i) and subject to the Applicable Procedures. Upon
receipt by the Securities Registrar of (A) such Other Capital Security
as provided in Section 5.05(a) and instructions satisfactory to the
Securities Registrar directing that a beneficial interest in the Global
Capital Security in a specified liquidation amount not greater than the
liquidation amount of such Other Capital Security be credited to a
specified Clearing Agency Participant's account and (B) a Capital
Securities Certificate duly executed by such Holder or such Holder's
attorney duly authorized in writing, then the Securities Registrar
shall cancel such Other Capital Security (and issue a new Other Capital
Security in respect of any untransferred portion thereof) as provided
in Section 5.01(a) and increase the aggregate liquidation amount of the
Global Capital Security by the specified liquidation amount as provided
in Section 5.04(c).
(ii) Non-Global Capital Security to Non-Global Capital
Security. A Capital Security that is not a Global Capital Security may
be transferred, in whole or in part, to a Person who takes delivery in
the form of another Capital Security that is not a Global Capital
Security as provided in Section 5.05(a).
(iii) Exchanges Between Global Capital Security and Non-Global
Capital Security. A beneficial interest in the Global Capital Security
may be exchanged for a Capital Security that is not a Global Capital
Security as provided in Section 5.04.
SECTION 5.06. Mutilated, Destroyed, Lost or Stolen Trust
Securities Certificates. Provided Definitive Capital Securities Certificates are
issued, if (a) any mutilated Trust Securities Certificate shall be surrendered
to the Securities Registrar, or if the Securities Registrar shall receive
evidence to its satisfaction of the destruction, loss or theft of any Trust
Securities Certificate and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustees such security or indemnity as may be
required by them to save each of
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them harmless, then in the absence of notice that such Trust Securities
Certificate shall have been acquired by a bona fide purchaser, the
Administrative Trustees, or any one of them, on behalf of the Trust shall
execute and make available for delivery, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust
Securities Certificate of like class, tenor and denomination. In connection with
the issuance of any new Trust Securities Certificate under this Section, the
Administrative Trustees or the Securities Registrar may require the payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith. Any duplicate Trust Securities Certificate issued
pursuant to this Section shall constitute conclusive evidence of an undivided
beneficial interest in the assets of the Trust, as if originally issued, whether
or not the lost, stolen or destroyed Trust Securities Certificate shall be found
at any time.
SECTION 5.07. Persons Deemed Securityholders. The Trustees or
the Securities Registrar shall treat the Person in whose name any Trust
Securities are issued as the owner of such Trust Securities for the purpose of
receiving Distributions and for all other purposes whatsoever, and neither the
Trustees nor the Securities Registrar shall be bound by any notice to the
contrary.
SECTION 5.08. Access to List of Securityholders' Names and
Addresses. Each Owner of Trust Securities acknowledges that the Depositor, the
Property Trustee, the Delaware Trustee or the Administrative Trustees may from
time to time make reasonable use of information consisting of such Owner's name
and address, including the furnishing of a list of such names and addresses as
contemplated hereunder, and each Owner shall be deemed to have agreed not to
hold the Depositor, the Property Trustee or the Administrative Trustees
accountable by reason of the disclosure of its name and address, regardless of
the source from which such information was derived.
SECTION 5.09. Maintenance of Office or Agency; Transfer Agent.
The Administrative Trustees shall maintain an office or offices or agency or
agencies where Definitive Capital Securities Certificates, if issued, may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustees in respect of the Trust Securities may be
served. The Administrative Trustees initially designate Wilmington Trust
Company, 1100 N. Market Street, Attention: Corporate Trust Administration,
Wilmington, Delaware 19890, as its corporate trust office for such purposes. The
Administrative Trustees shall give prompt written notice to the Depositor and to
the Securityholders of any change in the location of the Securities Register or
any such office or agency. The Trust Company shall act as initial transfer agent
for the Trust Securities.
SECTION 5.10. Appointment of Paying Agent. The Paying Agent
shall make Distributions to Securityholders from the Payment Account and shall
report the amounts of such Distributions to the Property Trustee and the
Administrative Trustees. Any Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making the
distributions referred to above. The Administrative Trustees may revoke such
power and remove any Paying Agent if such Administrative Trustees determine in
their sole discretion that such Paying Agent shall have failed to perform its
obligations under this Declaration of Trust in any material respect. The Paying
Agent shall initially be the Trust Company, and any
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co-paying agent chosen by the Trust Company and acceptable to the Administrative
Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted
to resign as Paying Agent upon 30 days' written notice to the Administrative
Trustees, the Property Trustee and the Depositor. In the event that the Trust
Company shall no longer be the Paying Agent or a successor Paying Agent shall
resign or its authority to act be revoked, the Administrative Trustees shall
appoint a successor that is acceptable to the Property Trustee and the Depositor
to act as Paying Agent (which shall be a bank or trust company). The
Administrative Trustees shall cause such successor Paying Agent or any
additional Paying Agent appointed by the Administrative Trustees to execute and
deliver to the Trustees an instrument in which such successor Paying Agent or
additional Paying Agent shall agree with the Trustees that, as Paying Agent,
such successor Paying Agent or additional Paying Agent will hold all sums, if
any, held by it for payment to the Securityholders in trust for the benefit of
the Securityholders entitled thereto until such sums shall be paid to such
Securityholders. The Paying Agent shall return all unclaimed funds to the
Property Trustee and, upon removal of a Paying Agent, such Paying Agent shall
also return all funds in its possession to the Property Trustee. The provisions
of Sections 8.01, 8.03 and 8.06 herein shall apply to the Trust Company also in
its role as Paying Agent, for so long as the Trust Company shall act as Paying
Agent and to the extent applicable, to any other paying agent appointed
hereunder. Any reference in this Declaration of Trust to the Paying Agent shall
include any co-paying agent, unless the context requires otherwise.
SECTION 5.11. Ownership of Common Securities by Depositor. The
Depositor shall acquire and retain beneficial and record ownership of the Common
Securities. To the fullest extent permitted by law, other than a transfer in
connection with a consolidation or merger of the Depositor into another
corporation, or any conveyance, transfer or lease by the Depositor of its
properties and assets substantially as an entirety to any Person, pursuant to
Section 8.01 of the Indenture, any attempted transfer of the Common Securities
shall be void. The Administrative Trustees shall cause each Common Securities
Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE".
SECTION 5.12. Notices to Clearing Agency. To the extent that a
notice or other communication to the Owners is required under this Declaration
of Trust, for so long as Capital Securities are represented by a Global
Securities Certificate, the Trustees shall give all such notices and
communications specified herein to be given to Owners to the Clearing Agency,
and shall have no obligations to give duplicates thereof to the Owners.
SECTION 5.13. Rights of Securityholders. (a) The legal title
to the Trust Property is vested exclusively in the Property Trustee (in its
capacity as such) in accordance with Section 2.09, and the Securityholders shall
not have any right or title therein other than the undivided beneficial
ownership interest in the assets of the Trust conferred by their Trust
Securities, and they shall have no right to call for any partition or division
of property, profits or rights of the Trust, except as described below. The
Trust Securities shall be personal property giving only the rights specifically
set forth therein and in this Declaration of Trust. The Trust Securities shall
have no preemptive or singular rights and, when issued and delivered to
Securityholders against payment of the purchase price therefor will be fully
paid and nonassessable. The Holders, in their capacities as such, shall be
entitled to the same limitation of
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personal liability extended to stockholders of private corporations for profit
organized under the General Corporation Law of the State of Delaware.
(b) For so long as any Capital Securities remain Outstanding,
if, upon a Debenture Event of Default, the Debenture Trustee fails, or the
Holders of not less than 25% in principal amount of the outstanding Junior
Subordinated Debt Securities fail, to declare the principal amount of all of the
Junior Subordinated Debt Securities to be immediately due and payable, the
Holders of at least 25% in Liquidation Amount of the Capital Securities then
Outstanding shall have such right by a notice in writing to the Depositor and
the Debenture Trustee with a copy to the Property Trustee; and upon any such
declaration such principal amount of and the accrued interest on all of the
Junior Subordinated Debt Securities shall become immediately due and payable;
provided that the payment of principal and interest on such Junior Subordinated
Debt Securities shall remain subordinated to the extent provided in the
Indenture.
At any time after such a declaration of acceleration with
respect to the Junior Subordinated Debt Securities has been made and before a
judgment or decree for payment of the money due has been obtained by the
Debenture Trustee as provided in the Indenture, the holders of a majority in
principal amount of the outstanding Junior Subordinated Debt Securities, by
written notice to the Property Trustee, the Depositor and the Debenture Trustee,
may rescind and annul such declaration and its consequences if:
(i) the Depositor has paid or deposited with the Debenture
Trustee a sum sufficient to pay
(A) all overdue installments of interest (including
any Additional Interest (as defined in the Indenture)) on all
of the Junior Subordinated Debt Securities,
(B) the principal of any Junior Subordinated Debt
Securities that have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Junior Subordinated Debt Securities, and
(C) all sums paid or advanced by the Debenture
Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Debenture Trustee,
its agents and counsel; and
(ii) all Events of Default with respect to the Junior
Subordinated Debt Securities, other than the nonpayment of the
principal of the Junior Subordinated Debt Securities that has become
due solely by such acceleration, have been cured or waived as provided
in Section 5.13 of the Indenture.
If such holders of the Junior Subordinated Debt Securities
fail to annul any such declaration and waive such default, the Holders of
Capital Securities representing a majority in aggregate Liquidation Amount of
all the Outstanding Capital Securities shall also have the right to rescind and
annul such declaration and its consequences by written notice to the Depositor,
the
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Property Trustee and the Debenture Trustee, subject to the satisfaction of the
conditions set forth in Clause (i) and (ii) of this Section 5.13(b).
Should the holders of a majority in aggregate principal amount
of the outstanding Junior Subordinated Debt Securities fail to take such
actions, the Holders of a majority in aggregate Liquidation Amount of the
Capital Securities may, on behalf of the Holders of all the Capital Securities,
waive any past default under the Indenture, except a default in the payment of
principal or interest (unless such default has been cured and a sum sufficient
to pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee) or a default in
respect of a covenant or provision that, under the Indenture, cannot be modified
or amended without the consent of the holder of each outstanding Junior
Subordinated Debt Security. No such rescission shall affect any subsequent
default or impair any right consequent thereon.
Upon receipt by the Property Trustee of written notice
declaring such an acceleration, or rescission and annulment thereof, by Holders
of the Capital Securities all or part of which is represented by Global Capital
Securities, a record date shall be established for determining Holders of
Outstanding Capital Securities entitled to join in such notice, which record
date shall be at the close of business on the day the Property Trustee receives
such notice. The Holders on such record date, or their duly designated proxies,
and only such Persons, shall be entitled to join in such notice, whether or not
such Holders remain Holders after such record date; provided that, unless such
declaration of acceleration, or rescission and annulment, as the case may be,
shall have become effective by virtue of the requisite percentage having joined
in such notice prior to the day that is 90 days after such record date, such
notice of declaration of acceleration, or rescission and annulment, as the case
may be, shall automatically and without further action by any Holder be canceled
and of no further effect. Nothing in this paragraph shall prevent a Holder, or a
proxy of a Holder, from giving, after expiration of such 90 day period, a new
written notice of declaration of acceleration, or rescission and annulment
thereof, as the case may be, that is identical to a written notice that has been
canceled pursuant to the proviso to the preceding sentence, in which event a new
record date shall be established pursuant to the provisions of this Section
5.13(b).
(c) For so long as any Capital Securities remain Outstanding,
to the fullest extent permitted by law and subject to the terms of this
Declaration of Trust and the Indenture, upon a Debenture Event of Default
specified in Section 5.01(1) or 5.01(2) of the Indenture, any Holder of Capital
Securities shall have the right to institute a proceeding directly against the
Depositor, pursuant to Section 5.08 of the Indenture, for enforcement of payment
to such Holder of the principal amount of or interest (including any Additional
Interest) on Junior Subordinated Debt Securities having a principal amount equal
to the aggregate Liquidation Amount of the Capital Securities held by such
Holder (a "Direct Action"). Except as set forth in Sections 5.13(b) and 5.13(c)
hereof, the Holders of Capital Securities shall have no right to exercise
directly any right or remedy available to the Holders of, or in respect of, the
Junior Subordinated Debt Securities.
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(d) A Securityholder may institute a legal proceeding directly
against the Guarantor under the Guarantee to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust or any
person or entity.
ARTICLE VI
Acts of Securityholders; Meetings; Voting
SECTION 6.01. Limitations on Capital Securityholder's Voting
Rights. (a) Except as provided in this Declaration of Trust and in the Indenture
and as otherwise required by law, no Holder of Capital Securities shall have any
right to vote or in any manner otherwise control the administration, operation
and management of the Trust or the obligations of the parties hereto, nor shall
anything herein set forth, or contained in the terms of the Trust Securities
Certificates, be construed so as to constitute the Capital Securityholders from
time to time as partners or members of an association. Unless a Debenture Event
of Default shall have occurred and be continuing, any Trustee may be removed at
any time by the vote of the Common Securityholder. The right to vote to appoint,
remove or replace the Administrative Trustees is vested exclusively in the
Depositor as the Holder of the Common Securities.
(b) So long as any Junior Subordinated Debt Securities are
held by the Property Trustee, the Trustees shall not (i) direct the time, method
and place of conducting any proceeding for any remedy available to the Debenture
Trustee, or executing any trust or power conferred on the Property Trustee with
respect to such Junior Subordinated Debt Securities, (ii) waive any past default
that is waivable under Section 5.13 of the Indenture, (iii) exercise any right
to rescind or annul a declaration that the principal of all the Junior
Subordinated Debt Securities shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Junior
Subordinated Debt Securities, where such consent shall be required, without, in
each case, obtaining the prior approval of the Holders of at least a majority in
aggregate Liquidation Amount of all Outstanding Capital Securities; provided,
however, that where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debt Securities affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of each Holder of Capital Securities. The Trustees shall not revoke any action
previously authorized or approved by a vote of the Holders of Capital
Securities, except by a subsequent vote of the Holders of Capital Securities.
The Property Trustee shall notify all Holders of the Capital Securities of any
notice of default received from the Debenture Trustee with respect to the Junior
Subordinated Debt Securities. In addition to obtaining the foregoing approvals
of the Holders of the Capital Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion
of Counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States federal
income tax purposes as a result of such action and that such action would not
cause the Trust to be classified as other than a grantor trust.
(c) If any proposed amendment to the Declaration of Trust
provides for, or the Trustees otherwise propose to effect, (i) any action that
would adversely affect in any material
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respect the interests, powers, preferences or special rights of the Trust
Securities, whether by way of amendment to the Declaration of Trust or
otherwise, or (ii) the dissolution, winding-up or termination of the Trust,
other than pursuant to the terms of this Declaration of Trust, then the Holders
of Outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal.
SECTION 6.02. Notice of Meeting. Notice of all meetings of the
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Property Trustee pursuant to Section 10.09 to each Securityholder
of record, at his registered address, at least 15 days and not more than 90 days
before the meeting. At any such meeting, any business properly before the
meeting may be so considered whether or not stated in the notice of the meeting.
Any adjourned meeting may be held as adjourned without further notice.
SECTION 6.03. Meetings of Securityholders. No annual meeting
of Securityholders is required to be held. The Administrative Trustees, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Securityholders of record of 25% of the Securities (based upon
their Liquidation Amount) and the Administrative Trustees or the Property
Trustee may, at any time in their discretion, call a meeting of Securityholders
to vote on any matters as to which Securityholders are entitled to vote.
Securityholders of record of 50% of the Outstanding Securities
(based upon their Liquidation Amount), present in person or represented by
proxy, shall constitute a quorum at any meeting of Securityholders.
If a quorum is present at a meeting, an affirmative vote by
the Securityholders of record present, in person or by proxy, holding more than
a majority of the Securities (based upon their Liquidation Amount) held by the
Securityholders of record present, either in person or by proxy, at such meeting
shall constitute the action of the Securityholders, unless this Declaration of
Trust requires a greater number of affirmative votes.
SECTION 6.04. Voting Rights. Securityholders shall be entitled
to one vote for each $10.00 of Liquidation Amount represented by their
Outstanding Trust Securities in respect of any matter as to which such
Securityholders are entitled to vote.
SECTION 6.05. Proxies. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy; provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustees, or with such other officer or agent of the
Trust as the Administrative Trustees may direct, for verification prior to the
time at which such vote shall be taken. Proxies may be solicited in the name of
the Property Trustee or one or more officers of the Property Trustee. Only
Securityholders of record shall be entitled to vote. When Trust Securities are
held jointly by several persons, any one of them may vote at any meeting in
person or by proxy in respect of such Trust Securities, but if more than one of
them shall be present at such meeting in person or by proxy, and such joint
owners or their proxies so present disagree as to any vote to be cast, such vote
shall not be received in respect of such Trust Securities. A proxy purporting to
be executed by or on behalf of a Securityholder shall be deemed valid unless
challenged at or prior to its exercise, and the
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burden of proving invalidity shall rest on the challenger. No proxy shall be
valid more than three years after its date of execution.
SECTION 6.06. Securityholder Action by Written Consent. Any
action that may be taken by Securityholders at a meeting may be taken without a
meeting if Securityholders holding more than a majority of all Outstanding
Securities (based upon their Liquidation Amount) entitled to vote in respect of
such action (or such larger proportion thereof as shall be required by any
express provision of this Declaration of Trust) shall consent to the action in
writing.
SECTION 6.07. Record Date for Voting and Other Purposes. For
the purposes of determining the Securityholders who are entitled to notice of
and to vote at any meeting or by written consent, or to participate in any
Distribution in respect of which a record date is not otherwise provided for in
this Declaration of Trust, or for the purpose of any other action, the
Administrative Trustees may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders or the payment of a
Distribution or other action, as the case may be, as a record date for the
determination of the identity of the Securityholders of record for such
purposes.
SECTION 6.08. Acts of Securityholders. Any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
permitted by this Declaration of Trust to be given, made or taken by
Securityholders or Owners may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Securityholders or
Owners in person or by an agent duly appointed in writing; and, except as
otherwise expressly provided herein, such action shall become effective when
such instrument or instruments are delivered to an Administrative Trustee. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Securityholders or
Owners signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Declaration of Trust and (subject to Section 8.01) conclusive in
favor of the Trustees, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be provided by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner that any Trustee receiving the same deems sufficient.
The ownership of Trust Securities shall be proved by the
Securities Registrar.
Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Securityholder of any Trust Security shall
bind every future Securityholder of the
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same Trust Security and the Securityholder of every Trust Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustees or
the Trust in reliance thereon, whether or not notation of such action is made
upon such Trust Security.
Without limiting the foregoing, a Securityholder entitled
hereunder to take any action hereunder with regard to any particular Trust
Security may do so with regard to all or any part of the Liquidation Amount of
such Trust Security or by one or more duly appointed agents each of which may do
so pursuant to such appointment with regard to all or any part of such
Liquidation Amount.
If any dispute shall arise between the Securityholders and the
Administrative Trustees or among such Securityholders or Trustees with respect
to the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.
A Holder may institute a legal proceeding directly against the
Depositor under the Guarantee to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee (as defined
in the Guarantee), the Trust, any Trustee or any person or entity.
SECTION 6.09. Inspection of Records. Upon reasonable notice to
the Administrative Trustees and the Property Trustee, the records of the Trust
shall be open to inspection by Securityholders during normal business hours for
any purpose reasonably related to such Securityholder's interest as a
Securityholder.
ARTICLE VII
Representations and Warranties
SECTION 7.01. Representations and Warranties of the Property
Trustee and the Delaware Trustee. The Property Trustee and the Delaware Trustee,
each severally on behalf of and as to itself, hereby represents and warrants for
the benefit of the Depositor and the Securityholders that:
(a) The Property Trustee is a corporation with trust powers,
duly organized, validly existing and in good standing under the laws of
the State of Delaware, with trust power and authority to execute and
deliver, and to carry out and perform its obligations under the terms
of this Declaration of Trust.
(b) the execution, delivery and performance by the Property
Trustee of this Declaration of Trust have been duly authorized by all
necessary corporate action on the part of the Property Trustee; and
this Declaration of Trust has been duly executed and delivered by the
Property Trustee, and constitutes a legal, valid and binding obligation
of the Property Trustee, enforceable against it in accordance with its
terms, subject to
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applicable bankruptcy, reorganization, moratorium, insolvency, and
other similar laws affecting creditors' rights generally and to general
principles of equity and the discretion of the court (regardless of
whether the enforcement of such remedies is considered in a proceeding
in equity or at law).
(c) The execution, delivery and performance of this
Declaration of Trust by the Property Trustee does not conflict with or
constitute a breach of the certificate of incorporation or by-laws of
the Property Trustee.
(d) At the Closing Date, the Property Trustee has not
knowingly created any liens or encumbrances on such Trust Securities.
(e) No consent, approval or authorization of, or registration
with or notice to, any state or federal authority is required for the
execution, delivery or performance by the Property Trustee of this
Declaration of Trust.
(f) The Delaware Trustee is duly organized, validly existing
and in good standing under the laws of the State of Delaware, with
trust power and authority to execute and deliver, and to carry out and
perform its obligations under the terms of, this Declaration of Trust.
(g) The execution, delivery and performance by the Delaware
Trustee of this Declaration of Trust have been duly authorized by all
necessary corporate action on the part of the Delaware Trustee; and
this Declaration of Trust has been duly executed and delivered by the
Delaware Trustee, and constitutes a legal, valid and binding obligation
of the Delaware Trustee, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, reorganization, moratorium,
insolvency, and other similar laws affecting creditors' right generally
and to general principles of equity and the discretion of the court
regardless of whether the enforcement of such remedies is considered in
a proceeding in equity or at law).
(h) The execution, delivery and performance or this
Declaration of Trust by the Delaware Trustee do not conflict with or
constitute a breach of the certificate of incorporation or by-laws of
the Delaware Trustee.
(i) No consent, approval or authorization of, or registration
with or notice to, any state or federal banking authority is required
for the execution, delivery or performance by the Delaware Trustee of
this Declaration of Trust.
(j) The Delaware Trustee is an entity that has its principal
place of business in the State of Delaware.
SECTION 7.02. Representations and Warranties of Depositor. The
Depositor hereby represents and warrants for the benefit of the Securityholders
that the Trust Securities Certificates issued at the Closing Date on behalf of
the Trust have been duly authorized and will have been duly and validly
executed, issued and delivered by an
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Administrative Trustee pursuant to the terms and provisions of, and in
accordance with the requirements of, this Declaration of Trust, and the
Securityholders will be, as of each such date, entitled to the benefits of this
Declaration of Trust.
ARTICLE VIII
The Trustees
SECTION 8.01. Certain Duties and Responsibilities. (a) The
duties and responsibilities of the Trustees shall be as provided by this
Declaration of Trust and, in the case of the Property Trustee, by the Trust
Indenture Act; provided, however, that the Property Trustee shall not be subject
to the provisions of the Trust Indenture Act until such time as this Declaration
of Trust becomes qualified under the Trust Indenture Act. Notwithstanding the
foregoing, no provisions of this Declaration of Trust shall require the Trustees
to expend or risk their own funds or otherwise incur any financial liability in
the performance of any of their duties hereunder, or in the exercise of any of
their rights or powers, if they shall have reasonable grounds for believing that
repayment of such funds or indemnity satisfactory to it against such risk or
liability is not reasonably assured to it. Whether or not herein expressly so
provided, every provision of this Declaration of Trust relating to the conduct
or affecting the liability of, or affording protection to, the Trustees shall be
subject to the provisions of this Article. Nothing in this Declaration of Trust
shall be construed to release an Administrative Trustee from liability for his
own grossly negligent action, his own grossly negligent failure to act, or his
own willful misconduct. To the extent that, at law or in equity, an
Administrative Trustee has duties (including fiduciary duties) and liabilities
relating to the Trust or to the Securityholders, such Administrative Trustee
shall not be liable to the Trust or to any Securityholder for such Trustee's
good faith reliance on the provisions of this Declaration of Trust. The
provisions of this Declaration of Trust, to the extent that they restrict the
duties and liabilities of the Administrative Trustees otherwise existing at law
or in equity, are agreed by the Depositor and the Securityholders to replace
such other duties and liabilities of the Administrative Trustees.
(b) All payments made by the Property Trustee or a Paying
Agent in respect of the Trust Securities shall be made only from the revenue and
proceeds from the Trust Property and only to the extent that there shall be
sufficient revenue or proceeds from the Trust Property to enable the Property
Trustee or a Paying Agent to make payments in accordance with the terms hereof.
Each Securityholder, by its acceptance of a Trust Security, agrees that it will
look solely to the revenue and proceeds from the Trust Property to the extent
legally available for distribution to it as herein provided and that the
Trustees are not personally liable to it for any amount distributable in respect
of any Trust Security or for any other liability in respect of any Trust
Security. This Section 8.01(b) does not limit the liability of the Trustees
expressly set forth elsewhere in this Declaration of Trust or, in the case of
the Property Trustee, in the Trust Indenture Act, if applicable.
(c) No provision of this Declaration of Trust shall be
construed to relieve the Property Trustee from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
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(i) the Property Trustee shall not be liable for any
error of judgment made in good faith by an authorized officer
of the Property Trustee, unless it shall be proved that the
Property Trustee was negligent in ascertaining the pertinent
facts;
(ii) the Property Trustee shall not be liable with
respect to any action taken or omitted to be taken by it in
good faith in accordance with the direction of the Holders of
not less than a majority in Liquidation Amount of the Trust
Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the
Property Trustee, or exercising any trust or power conferred
upon the Property Trustee under this Declaration of Trust;
(iii) the Property Trustee's sole duty with respect
to the custody, safekeeping and physical preservation of the
Junior Subordinated Debt Securities and the Payment Account
shall be to deal with such Property in a similar manner as the
Property Trustee deals with similar property for its own
account, subject to the protections and limitations on
liability afforded to the Property Trustee under this
Declaration of Trust and the Trust Indenture Act;
(iv) the Property Trustee shall not be liable for any
interest on any money received by it except as it may
otherwise agree with the Depositor; and money held by the
Property Trustee need not be segregated from other funds held
by it, except in relation to the Payment Account maintained by
the Property Trustee pursuant to Section 3.01 and except to
the extent otherwise required by law; and
(v) the Property Trustee shall not be responsible for
monitoring the compliance by the Administrative Trustees or
the Depositor with their respective duties under this
Declaration of Trust nor shall the Property Trustee be liable
for the default or misconduct of the Administrative Trustees
or the Depositor.
SECTION 8.02. Events of Default Notices; Deferral of Interest
Payment Notices. Within five Business Days after the occurrence of any Event of
Default actually known to a Responsible Officer of the Property Trustee, the
Property Trustee shall transmit, in the manner and to the extent provided in
Section 10.09, notice of such Event of Default to the Securityholders, the
Administrative Trustees and the Depositor, unless such Event of Default shall
have been cured or waived. The Depositor and the Administrative Trustees are
required to file annually with the Property Trustee a certificate as to whether
or not they are in compliance with all the conditions and covenants applicable
to them under the Declaration.
Within five Business Days after the receipt of notice of the
Depositor's exercise of its right to defer the payment of interest on the Junior
Subordinated Debt Securities pursuant to the Indenture, the Administrative
Trustee shall transmit, in the manner and to the extent provided in Section
10.09, notice of such exercise to the Securityholders and the Property Trustee,
unless such exercise shall have been revoked.
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SECTION 8.03. Certain Rights of Property Trustee. Subject to
the provisions of Section 8.01:
(a) the Property Trustee may conclusively rely and shall be
fully protected in acting or refraining from acting in good faith upon
any resolution, opinion of Counsel, certificate, written representation
of a Holder or transferee, certificate of auditors or any other
certificate, statement, instrument, opinion, report, notice, request,
consent, order, appraisal, bond, debenture, note, other evidence of
indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
(b) if (i) in performing its duties under this Declaration of
Trust the Property Trustee is required to decide between alternative
courses of action or (ii) in construing any of the provisions of this
Declaration of Trust the Property Trustee finds the same ambiguous or
inconsistent with any other provisions contained herein or (iii) the
Property Trustee is unsure of the application of any provision of this
Declaration of Trust, then, except as to any matter as to which the
Securityholders are entitled to vote under the terms of this
Declaration of Trust, the Property Trustee shall deliver a notice to
the Depositor requesting written instructions of the Depositor as to
the course of action to be taken, and the Property Trustee shall take
such action, or refrain from taking such action, as the Property
Trustee shall be instructed in writing to take, or to refrain from
taking, by the Depositor; provided, however, that if the Property
Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably
shorter period of time set forth in such notice (which, to the extent
practicable, shall not be less than two Business Days), it may, but
shall be under no duty to, take or refrain from taking such action not
inconsistent with this Declaration of Trust as it shall deem advisable
and in the best interests of the Securityholders, in which event the
Property Trustee shall have no liability except for its own bad faith,
negligence or willful misconduct;
(c) any direction or act of the Depositor or the
Administrative Trustee contemplated by this Declaration of Trust shall
be sufficiently evidenced by an Officers' Certificate;
(d) whenever in the administration of this Declaration of
Trust, the Property Trustee shall deem it desirable that a matter be
established before undertaking, suffering or omitting any action
hereunder, the Property Trustee (unless other evidence is herein
specifically prescribed) may, in the absence of bad faith on its part,
request and conclusively rely upon an Officers' Certificate which, upon
receipt of such request, shall be promptly delivered by the Depositor
or the Administrative Trustees (which Officers' Certificate will be
evidence only for purposes of determining entitlement to
indemnification of the Property Trustee from the Depositor but not with
respect to any liability to Securityholders);
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(e) the Property Trustee shall have no duty to see to any
recording, filing or registration of any instrument (including any
financing or continuation statement or any filing under tax or
securities laws) or any re-recording, re-filing or re-registration
thereof;
(f) the Property Trustee may consult with counsel of its
selection (which counsel may be counsel to the Depositor or any of its
Affiliates, and may include any of its employees), and the advice of
such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in
good faith and in reliance thereon, and, in accordance with such
advice, such counsel may be counsel to the Depositor or any of its
Affiliates, and may include any of its employees; the Property Trustee
shall have the right at any time to seek instructions concerning the
administration of this Declaration of Trust from any court of competent
jurisdiction;
(g) the Property Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Declaration
of Trust at the request or direction of any of the Securityholders
pursuant to this Declaration of Trust, unless such Securityholders
shall have offered to the Property Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities that
might be incurred by it in compliance with such request or direction;
(h) the Property Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, approval, bond, debenture, note or other evidence of
indebtedness or other paper or document, unless requested in writing to
do so by one or more Securityholders, but the Property Trustee may make
such further inquiry or investigation into such facts or matters as it
may see fit;
(i) the Property Trustee may execute any of its trusts or
powers hereunder or perform any of its duties hereunder either directly
or by or through its agents or attorneys, and the Property Trustee
shall not be responsible for any misconduct or negligence on the part
of, or for the supervision of, any such agent or attorney appointed by
it with due care hereunder;
(j) whenever in the administration of this Declaration of
Trust the Property Trustee shall deem it desirable to receive
instructions with respect to enforcing any remedy or right or taking
any other action hereunder, the Property Trustee (i) may request
instructions from the Holders of the Trust Securities, which
instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to
direct the Property Trustee under the terms of the Trust Securities in
respect of such remedy, right or action, (ii) may refrain from
enforcing such remedy or right or taking such other action until such
instructions are received, and (iii) shall be fully protected in acting
in accordance with such instructions;
(k) except as otherwise expressly provided by this Declaration
of Trust, the Property Trustee shall not be under any obligation to
take any action that is discretionary under the provisions of this
Declaration of Trust;
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(l) when the Property Trustee incurs expenses or renders
services in connection with a Bankruptcy Event, such expenses
(including the fees and expenses of its counsel) and the compensation
for such services are intended to constitute expenses of administration
under any bankruptcy law or law relating to creditors' rights
generally; and
(m) the Property Trustee shall not be charged with knowledge
of an Event of Default unless a Responsible Officer of the Property
Trustee obtains actual knowledge of such event or the Property Trustee
receives written notice of such event from Securityholders holding at
least 25% of the Outstanding Trust Securities (based upon Liquidation
Amount).
No provision of this Declaration of Trust shall be deemed to
impose any duty or obligation on the Property Trustee to perform any act or acts
or exercise any right, power, duty or obligation conferred or imposed on it, in
any jurisdiction in which it shall be illegal, or in which the Property Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts, or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Property Trustee
shall be construed to be a duty.
SECTION 8.04. Not Responsible for Recitals. The recitals
contained herein and in the Trust Securities Certificates shall be taken as the
statements of Trust, and the Trustees do not assume any responsibility for their
correctness. The Trustees shall not be accountable for the use or application by
the Depositor of the proceeds of the Junior Subordinated Debt Securities.
SECTION 8.05. May Hold Securities. Except as provided in the
definition of the term "Outstanding" in Article I, any Trustee or any other
agent of any Trustee or the Trust, in its individual or any other capacity, may
become the owner or pledgee of Trust Securities and, subject to Sections 8.08
and 8.13, may otherwise deal with the Trust with the same rights that it would
have if it were not a Trustee or such other agent.
SECTION 8.06. Compensation, Indemnity, Fees. Pursuant to
Section 10.06 of the Indenture, the Depositor, as borrower on the Junior
Subordinated Debt Securities, agrees:
(a) to pay to the Trustees from time to time such compensation
as shall from time to time be agreed to in writing by the Depositor and
the respective Trustees for all services rendered by them hereunder
(which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);
(b) to the fullest extent permitted by applicable law and
except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and
advances incurred or made by the Trustees in accordance with any
provision of this Declaration of Trust (including the reasonable
compensation and the expenses and disbursements of its agents and
counsel), except any such expense,
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disbursement or advance as may be attributable (i) to the negligence or
willful misconduct of the Property Trustee, or (ii) to the gross
negligence or willful misconduct of any of the other Trustees;
(c) to the fullest extent permitted by applicable law, to
indemnify and hold harmless each Trustee and any employee or agent of
the Trust or its Affiliates (each referred to herein as an "Indemnified
Person") from and against any loss, damage, liability, tax, penalty,
expense or claim of any kind or nature whatsoever incurred by such
Indemnified Person by reason of the creation, operation or termination
of the Trust or any act or omission performed or omitted by such
Indemnified Person in good faith on behalf of the Trust and in a manner
such Indemnified Person reasonably believed to be within the scope of
authority conferred on such Indemnified Person by this Declaration of
Trust, except that (i) the Property Trustee shall not be entitled to be
indemnified in respect of any loss, damage or claim incurred by the
Property Trustee by reason of negligence or willful misconduct with
respect to such acts or omissions, and (ii) no other Indemnified Person
shall be entitled to be indemnified in respect of any loss, damage or
claim incurred by such Indemnified Person by reason of gross negligence
or willful misconduct with respect to such acts or omissions; and
(d) to the fullest extent permitted by applicable law, to
advance expenses (including legal fees) incurred by an Indemnified
Person in defending any claim, demand, action, suit or proceeding, from
time to time, prior to the final disposition of such claim, demand,
action, suit or proceeding upon receipt by the Depositor of (i) a
written affirmation by or on behalf of the Indemnified Person of its or
his good faith belief that it or he has met the standard of conduct set
forth in this Section 8.06 and (ii) an undertaking by or on behalf of
the Indemnified Person to repay such amount if it shall be determined
that the Indemnified Person is not entitled to be indemnified as
authorized in the preceding subsection.
The provisions of this Section 8.06 shall survive the
termination of this Declaration of Trust or the earlier resignation or removal
of any Trustee.
No Trustee may claim any lien or charge on any Trust Property
as a result of any amount due pursuant to this Section 8.06.
The Depositor and any Trustee (in the case of the Property
Trustee, subject to Section 8.08 hereof) may engage in or possess an interest in
other business ventures of any nature or description, independently or with
others, similar or dissimilar to the business of the Trust, and none of the
Trust, the Holders, the Depositor or any such Trustee shall have any rights by
virtue of this Declaration of Trust in and to such independent ventures or the
income or profits derived therefrom, and the pursuit of any such venture, even
if competitive with the business of the Trust, shall not be deemed wrongful or
improper. Neither the Depositor, nor any Trustee, shall be obligated to present
any particular investment or other opportunity to the Trust, even if such
opportunity is of a character that, if presented to the Trust, could be taken by
the Trust, and the Depositor or any Trustee shall have the right to take for its
own account (individually or as a partner or fiduciary) or to recommend to
others any such particular
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investment or other opportunity. Any Trustee may engage or be interested in any
financial or other transaction with the Depositor or any Affiliate of the
Depositor, or may act as depository for, trustee or agent for, or act on any
committee or body of holders of, securities or other obligations of the
Depositor or its Affiliates.
SECTION 8.07. Corporate Property Trustee Required; Eligibility
of Trustees. (a) There shall at all times be a Property Trustee hereunder with
respect to the Trust Securities. The Property Trustee shall be a Person that is
a national or state chartered bank or trust company and eligible pursuant to the
Trust Indenture Act to act as such and has a combined capital and surplus of at
least $50 million. If any such Person publishes reports of condition at least
annually, pursuant to law or to the requirements of its supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such Person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Property Trustee with respect to the Trust Securities shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereafter specified in this
Article; provided, however, that the Property Trustee need not qualify under the
Trust Indenture Act until such time as this Declaration of Trust is qualified
under the Trust Indenture Act.
(b) There shall at all times be one or more Administrative
Trustees hereunder. Each Administrative Trustee shall be either a natural person
who is at least 21 years of age or a legal entity that shall act through one or
more persons authorized to bind that entity.
(c) There shall at all times be a Delaware Trustee. The
Delaware Trustee shall either be (i) a natural person who is at least 21 years
of age and a resident of the State of Delaware or (ii) a legal entity with its
principal place of business in the State of Delaware, and that otherwise meets
the requirements of applicable Delaware law, that shall act through one or more
persons authorized to bind such entity.
SECTION 8.08. Conflicting Interests. If the Property Trustee
has or shall acquire a conflicting interest within the meaning of the Trust
Indenture Act, the Property Trustee shall either eliminate such interest or
resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trust Indenture Act and this Declaration of Trust.
SECTION 8.09. Co-Trustees and Separate Trustee. Unless an
Event of Default shall have occurred and be continuing, at any time or times,
for the purpose of meeting the legal requirements of the Trust Indenture Act or
of any jurisdiction in which any part of the Trust Property may at the time be
located, the Depositor and the Administrative Trustees, by agreed action of the
majority of such Trustees, shall have power to appoint, and upon the written
request of the Administrative Trustees, the Depositor shall for such purpose
join with the Administrative Trustees in the execution, delivery, and
performance of all instruments and agreements necessary or proper to appoint,
one or more Persons approved by the Property Trustee either to act as
co-trustee, jointly with the Property Trustee, of all or any part of such Trust
Property, or to the extent required by law to act as separate trustee of any
such property, in either case with such powers as may be provided in the
instrument of appointment, and to vest in such Person or Persons in the capacity
aforesaid, any property, title, right or power deemed
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necessary or desirable, subject to the other provisions of this Section. If the
Depositor does not join in such appointment within 15 days after the receipt by
it of a request so to do, or in case a Debenture Event of Default has occurred
and is continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.
Should any written instrument from the Depositor be required
by any co-trustee or separate trustee so appointed for more fully confirming to
such co-trustee or separate trustee such property, title, right or power, any
and all such instruments shall, on request, be executed, acknowledged and
delivered by the Depositor.
Every co-trustee or separate trustee shall, to the extent
permitted by law, but to such extent only, be appointed subject to the following
terms, namely:
(a) The Trust Securities shall be executed and made available
for delivery, and all rights, powers, duties, and obligations hereunder in
respect of the custody of securities, cash and other personal property held by,
or required to be deposited or pledged with, the Trustees specified hereunder
shall be exercised solely by such Trustees and not by such co-trustee or
separate trustee.
(b) The rights, powers, duties and obligations hereby
conferred or imposed upon the Property Trustee in respect of any property
covered by such appointment shall be conferred or imposed upon and exercised or
performed by the Property Trustee or by the Property Trustee and such co-trustee
or separate trustee jointly, as shall be provided in the instrument appointing
such co-trustee or separate trustee, except to the extent that under any law of
any jurisdiction in which any particular act is to be performed, the Property
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.
(c) The Property Trustee at any time, by an instrument in
writing executed by it, with the written concurrence of the Depositor, may
accept the resignation of or remove any co-trustee or separate trustee appointed
under this Section, and, in case a Debenture Event of Default has occurred and
is continuing, the Property Trustee shall have power to accept the resignation
of, or remove, any such co-trustee or separate trustee without the concurrence
of the Depositor. Upon the written request of the Property Trustee, the
Depositor shall join with the Property Trustee in the execution, delivery and
performance of all instruments and agreements necessary or proper to effectuate
such resignation or removal. A successor to any co-trustee or separate trustee
so resigned or removed may be appointed in the manner provided in this Section.
(d) No co-trustee or separate trustee hereunder shall be
personally liable by reason of any act or omission of the Property Trustee or
any other trustee hereunder.
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(e) The Property Trustee shall not be required to supervise
any co-trustee or separate trustee, nor shall it be liable by reason of any act
of a co-trustee or separate trustee or any employees or agents of a co-trustee
or separate trustee.
(f) Any Act of Holders delivered to the Property Trustee shall
be deemed to have been delivered to each such co-trustee and separate trustee.
SECTION 8.10. Resignation and Removal; Appointment of
Successor. No resignation or removal of any Trustee (the "Relevant Trustee") and
no appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 8.11.
Subject to the immediately preceding paragraph, a Relevant
Trustee may resign at any time by giving written notice thereof to the
Securityholders. If the instrument of acceptance by the successor Trustee
required by Section 8.11 shall not have been delivered to the Relevant Trustee
within 30 days after the giving of such notice of resignation or removal, the
Relevant Trustee may petition, at the expense of the Trust, any court of
competent jurisdiction for the appointment of a successor Relevant Trustee.
Unless a Debenture Event of Default shall have occurred and be
continuing, any Trustee may be removed at any time by Act of the Common
Securityholder. If a Debenture Event of Default shall have occurred and be
continuing, the Property Trustee or the Delaware Trustee, or both of them, may
be removed at such time by Act of the Holders of a majority in Liquidation
Amount of the Outstanding Capital Securities, delivered to the Relevant Trustee
(in its individual capacity and on behalf of the Trust). An Administrative
Trustee may be removed by Act of the Common Securityholder at any time.
If any Trustee shall resign, be removed or become incapable of
acting as Trustee, or if a vacancy shall occur in the office of any Trustee for
any cause, at a time when no Debenture Event of Default shall have occurred and
be continuing, the Common Securityholder, by Act of the Common Securityholder
delivered to the retiring Trustee, shall promptly appoint a successor Trustee or
Trustees and the retiring Trustee shall comply with the applicable requirements
of Section 8.11. If the Property Trustee or the Delaware Trustee shall resign,
be removed or become incapable of continuing to act as the Property Trustee or
the Delaware Trustee, as the case may be, at a time when a Debenture Event of
Default shall have occurred and be continuing, the Capital Securityholders, by
Act of the Capital Securityholders of a majority in Liquidation Amount of the
Capital Securities then outstanding delivered to the retiring Relevant Trustee,
shall promptly appoint a successor Relevant Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 8.11.
If an Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee, at a time when a Debenture Event of Default
shall have occurred and be continuing, the Common Securityholder, by Act of the
Common Securityholder delivered to such Administrative Trustee, shall promptly
appoint a successor Administrative Trustee or Administrative Trustees and such
successor Administrative Trustee or Trustees shall comply with the applicable
requirements of Section 8.11. If no successor Relevant Trustee shall have
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been so appointed by the Common Securityholder or the Capital Securityholders
and accepted appointment in the manner required by Section 8.11, any
Securityholder who has been a Securityholder of Trust Securities for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Relevant
Trustee.
The Property Trustee shall give notice of each resignation and
each removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 10.08 and shall give notice to
the Depositor. Each notice shall include the name of the successor Relevant
Trustee and the address of its Corporate Trust Office if it is the Property
Trustee.
Notwithstanding the foregoing or any other provision of this
Declaration of Trust, in the event any Administrative Trustee or a Delaware
Trustee who is a natural person dies, or becomes, in the opinion of the
Depositor, incompetent or incapacitated, or, in the case of an Administrative
Trustee, ceases to be an employee of the Depositor, the vacancy created by such
death, incompetence, incapacity or ceasing to be an employee of the Depositor
may be filled by (a) the unanimous act of remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirement
for Administrative Trustees or Delaware Trustee, as the case may be, set forth
in Section 8.07).
SECTION 8.11. Acceptance of Appointment by Successor. In the
case of the appointment hereunder of a successor Trustee, such successor Trustee
so appointed shall execute, acknowledge and deliver to the Trust and to the
retiring Trustee any instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective, and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with the rights, powers, trusts and duties of the retiring Trustee, but,
on the request of the Depositor or the successor Trustee, such retiring Trustee
shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee, and, if the Property Trustee is the resigning Trustee, the
Property Trustee shall duly assign, transfer and deliver to the successor
Property Trustee all Trust Property and money held by such retiring Property
Trustee hereunder.
In case of the appointment hereunder of a successor Relevant
Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with
respect to the Trust Securities shall execute and deliver an amendment hereto
wherein each successor Relevant Trustee shall accept such appointment and which
(a) shall contain such provisions as shall be necessary or desirable to transfer
and confirm to, and to vest in, each successor Relevant Trustee all the rights,
powers, trusts and duties of the retiring Relevant Trustee with respect to the
Trust Securities and the Trust and (b) shall add to or change any of the
provisions of this Declaration of Trust as shall be necessary to provide for or
facilitate the administration of the Trust by more than one Relevant Trustee, it
being understood that nothing herein or in such amendment shall constitute such
Relevant Trustees co-trustees of the same trust and that each such Relevant
Trustee shall be Trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Relevant Trustee;
and, upon the execution and delivery of such
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amendment, the resignation or removal of the retiring Relevant Trustee shall
become effective to the extent provided therein, and each such successor
Relevant Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Relevant
Trustee; but, on request of the Trust or any successor Relevant Trustee, such
retiring Relevant Trustee shall duly assign, transfer and deliver to such
successor Relevant Trustee all Trust Property, all proceeds thereof and money
held by such retiring Relevant Trustee hereunder with respect to the Trust
Securities and the Trust.
Upon written request of any such successor Relevant Trustee,
the Trust shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Relevant Trustee all such rights,
powers and trusts referred to in the first or second preceding paragraph, as the
case may be.
No successor Relevant Trustee shall accept its appointment
unless, at the time of such acceptance, such successor Relevant Trustee shall be
qualified and eligible under this Article.
SECTION 8.12. Merger, Conversion, Consolidation or Succession
to Business. Any Person into which the Property Trustee, the Delaware Trustee or
any Administrative Trustee that is not a natural person may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Relevant Trustee
shall be a party, or any Person succeeding to all or substantially all the
corporate trust business of such Relevant Trustee, shall be the successor of
such Relevant Trustee hereunder, provided such Person shall be otherwise
qualified and eligible under this Article, without the execution or filing of
any paper or any further act on the part of any of the parties hereto.
SECTION 8.13. Preferential Collection of Claims Against
Depositor or Trust. In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other similar judicial proceeding relative to the Trust or any other obligor
upon the Trust Securities or the property of the Trust or of such other obligor
or their creditors, the Property Trustee (irrespective of whether any
Distributions on the Trust Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the
Property Trustee shall have made any demand on the Trust for the payment of any
past due Distributions) shall be entitled and empowered, to the fullest extent
permitted by law, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of any
Distributions owing and unpaid in respect of the Trust Securities and
to file such other papers or documents as may be necessary or advisable
in order to have the claims of the Property Trustee (including any
claim for the reasonable compensation, expenses, disbursements and
advances of the Property Trustee, its agents and counsel) and of the
Holders allowed in such judicial proceeding, and
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(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Property Trustee and, in the event the
Property Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Property Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
agents and counsel, and any other amounts due the Property Trustee.
Nothing herein contained shall be deemed to authorize the
Property Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or compensation
affecting the Trust Securities or the rights of any Holder thereof or to
authorize the Property Trustee to vote in respect of the claim of any Holder in
any such proceeding.
SECTION 8.14. Reports by Property Trustee. Upon qualification
of this Declaration of Trust under the Trust Indenture Act,
(a) Not later than the last calendar day in February of each
year commencing with the last calendar day in February of 2001, the Property
Trustee shall transmit to all Securityholders in accordance with Section 10.09,
and to the Depositor, a brief report dated as of the prior December 31 with
respect to:
(i) its eligibility under Section 8.07 or, in lieu
thereof, if to the best of its knowledge it has continued to
be eligible under such Section, a written statement to such
effect; and
(ii) any change in the property and funds in its
possession as Property Trustee since the date of its last
report and any action taken by the Property Trustee in the
performance of its duties hereunder that it has not previously
reported and that in its opinion materially affects the Trust
Securities.
(b) In addition, the Property Trustee shall transmit to
Securityholders such reports concerning the Property Trustee and its actions
under this Declaration of Trust as may be required pursuant to the Trust
Indenture Act at the times and in the manner provided pursuant thereto.
(c) A copy of each such report shall, at the time of such
transmission to the Holders, be filed with the Commission and with the
Depositor.
SECTION 8.15. Reports to the Property Trustee. Upon
qualification of this Indenture under the Trust Indenture Act, the Depositor and
the Administrative Trustees on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate
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required by Section 314(a) of the Trust Indenture Act in the form, in the manner
and at the times required by Section 314 of the Trust Indenture Act.
SECTION 8.16. Evidence of Compliance with Conditions
Precedent. Upon qualification of this Indenture under the Trust Indenture Act,
each of the Depositor and the Administrative Trustees on behalf of the Trust
shall provide to the Property Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Declaration of Trust that
relate to any of the matters set forth in Section 314(c) of the Trust Indenture
Act. Any certificate or opinion required to be given by an officer pursuant to
Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an
Officers' Certificate.
SECTION 8.17. Number of Trustees. (a) The number of Trustees
shall be four (4); provided that the Holder of all of the Common Securities by
written instrument may increase or decrease the number of Administrative
Trustees. The Property Trustee and the Delaware Trustee may be the same Person.
(b) If a Trustee ceases to hold office for any reason and the
number of Administrative Trustees is not reduced pursuant to Section 8.17(a), or
if the number of Trustees is increased pursuant to Section 8.17(a), a vacancy
shall occur. The vacancy shall be filled with a Trustee appointed in accordance
with Section 8.10.
(c) The death, resignation, retirement, removal, bankruptcy,
incompetence or incapacity to perform the duties of a Trustee shall not operate
to annul the Trust. Whenever a vacancy in the number of Administrative Trustees
shall occur, until such vacancy is filled by the appointment of an
Administrative Trustee in accordance with Section 8.10, the Administrative
Trustees in office, regardless of their number (and notwithstanding any other
provision of this Agreement), shall have all the powers granted to the
Administrative Trustees and shall discharge all the duties imposed upon the
Administrative Trustees by this Declaration of Trust.
SECTION 8.18. Delegation of Power. (a) Any Administrative
Trustee may, by power of attorney consistent with applicable law, delegate to
any other natural person over the age of 21 his or her power for the purpose of
executing any documents contemplated in Section 2.07(a), including any
registration statement or amendment thereto filed with the Commission, or making
any other governmental filing; and
(b) The Administrative Trustees shall have power to delegate
from time to time to such of their number or to the Depositor the doing of such
things and the execution of such instruments either in the name of the Trust or
the names of the Administrative Trustees or otherwise as the Administrative
Trustees may deem expedient, to the extent such delegation is not prohibited by
applicable law or contrary to the provisions of this Declaration of Trust, as
set forth herein.
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ARTICLE IX
Termination, Liquidation and Merger
SECTION 9.01. Termination Upon Expiration Date; Termination
Upon Special Event. Unless earlier terminated, the Trust shall automatically
terminate on April 15, 2040 (the "Expiration Date"), following the distribution
of the Trust Property in accordance with Section 9.04.
SECTION 9.02. Early Termination. The first to occur of any of
the following events is an "Early Termination Event":
(a) the occurrence of a Bankruptcy Event in respect of, or the
dissolution or liquidation of, the Depositor or the Holder of the
Common Securities;
(b) the written direction to the Property Trustee from the
Depositor, as borrower with respect to the Junior Subordinated Debt
Securities, at any time (which direction is optional and wholly within
the discretion of the Depositor, subject to receipt of prior approval
of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve (including upon the
occurrence and continuation of a Tax Event or a Capital Treatment Event
in respect of the Trust)) to terminate the Trust and, after
satisfaction of liabilities to creditors of the Trust as provided by
applicable law, distribute a Like Amount of the Junior Subordinated
Debt Securities to Securityholders;
(c) the redemption of all of the Trust Securities in
connection with the redemption of all of the Junior Subordinated Debt
Securities (including upon the occurrence and continuation of a Tax
Event or a Capital Treatment Event pursuant to Section 11.07(b) of the
Indenture); and
(d) the entry of an order for dissolution of the Trust by a
court of competent jurisdiction.
SECTION 9.03. Termination. The respective obligations and
responsibilities of the Trustees and the Trust created and continued hereby
shall terminate upon the latest to occur of the following: (a) the payment of
any expenses owed by the Trust, (b) the distribution by the Property Trustee to
Securityholders upon the liquidation of the Trust pursuant to Section 9.04, or
upon the redemption of all of the Trust Securities pursuant to Section 4.02, of
all amounts required to be distributed hereunder upon the final payment of the
Trust Securities, and (c) the discharge of all administrative duties of the
Administrative Trustees, including the performance of any tax reporting
obligations with respect to the Trust or the Securityholders.
SECTION 9.04. Liquidation. (a) If an Early Termination Event
specified in clause (a), (b) or (d) of Section 9.02 occurs or upon the
Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously
as the Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law,
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to each Securityholder a Like Amount of Junior Subordinated Debt Securities,
subject to Section 9.04(d). Notice of liquidation shall be given by the Property
Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more
than 90 days prior to the Liquidation Date to each Holder at such Holder's
address appearing in the Securities Register. All notices of liquidation shall:
(i) state the Liquidation Date (which, in the case of any
liquidation following the occurrence of a Special Event, shall not be
more than 90 days following such occurrence);
(ii) state that, from and after the Liquidation Date, the
Trust Securities will no longer be deemed to be Outstanding and any
Trust Securities Certificates not surrendered for exchange will be
deemed to represent a Like Amount of Junior Subordinated Debt
Securities; and
(iii) provide such information with respect to the mechanics
by which Holders may exchange Trust Securities Certificates for Junior
Subordinated Debt Securities, or, if Section 9.04(d) applies, receive a
Liquidation Distribution, as the Administrative Trustees or the
Property Trustee shall deem appropriate.
(b) Except where Section 9.02(c) or 9.04(d) applies, in order
to effect the liquidation of the Trust and distribution of the Junior
Subordinated Debt Securities to Securityholders, the Property Trustee shall
establish a record date for such distribution (which shall be not more than 45
days prior to the Liquidation Date) and, either itself acting as exchange agent
or through the appointment of a separate exchange agent, shall establish such
procedures as it shall deem appropriate to effect the distribution of Junior
Subordinated Debt Securities in exchange for the outstanding Trust Securities
Certificates.
(c) Except where Section 9.02(c) or 9.04(d) applies, after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Junior Subordinated
Debt Securities will be issued to Holders, upon surrender of such certificates
to the Administrative Trustees or their agent for exchange, (iii) any Trust
Securities Certificates not so surrendered for exchange will be deemed to
represent a Like Amount of Junior Subordinated Debt Securities accruing interest
at the rate provided for in the Junior Subordinated Debt Securities from the
last Distribution Date on which a Distribution was made on such Trust Securities
Certificates until such certificates are so surrendered (or until such
certificates are so surrendered, no payments of interest or principal will be
made to the Holders of Trust Securities Certificates with respect to such Junior
Subordinated Debt Securities) and (iv) all rights of Securityholders holding
Trust Securities will cease, except the right of such Securityholders to receive
Junior Subordinated Debt Securities upon surrender of Trust Securities
Certificates.
(d) In the event that, notwithstanding the other provisions of
this Section 9.04, whether because of an order for dissolution entered by a
court of competent jurisdiction or otherwise, distribution of the Junior
Subordinated Debt Securities in the manner provided herein is determined by the
Property Trustee not to be practical, the Trust Property shall be liquidated,
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and the Trust shall be dissolved, wound-up or terminated, by the Property
Trustee in such manner as the Property Trustee determines. In such event, on the
date of the dissolution, winding-up or other termination of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, an amount equal to the
aggregate of the Liquidation Amount plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such dissolution, winding up or termination, the
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts). Holders of the Common Securities will be entitled to
receive Liquidation Distributions upon any such dissolution, winding-up or
termination pro rata (determined as aforesaid) with Holders of Capital
Securities, except that, if a Debenture Event of Default has occurred and is
continuing, the Capital Securities shall have a priority over the Common
Securities, and no payments shall be made with respect to the Common Securities
until Holders of Capital Securities have been paid in full. Any such
determination and liquidation by the Property Trustee shall be conclusive upon
the Securityholders and the Property Trustee shall have no liability in
connection therewith.
SECTION 9.05. Mergers, Consolidations, Amalgamations or
Replacements of the Trust. The Trust may not merge with or into, consolidate,
amalgamate, or be replaced by, or convey, transfer or lease its properties and
assets substantially as an entirety to any corporation or other Person, except
pursuant to this Section 9.05. At the request of the Depositor, with the consent
of the Administrative Trustees and without the consent of the Holders of the
Capital Securities, the Property Trustee or the Delaware Trustee, the Trust may
merge with or into, consolidate, amalgamate, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to a
trust organized as such under the laws of any State; provided, however, that (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Capital Securities or (b) substitutes for the Capital
Securities other securities having substantially the same terms as the Capital
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Capital Securities rank in priority with respect to
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Depositor expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Junior
Subordinated Debt Securities, (iii) the Successor Securities (if Capital
Securities) are listed or traded, or any Successor Securities will be listed or
traded upon notification of issuance, on any national securities exchange or
other organization on which the Capital Securities are then listed or traded, if
any, (iv) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Capital Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the Holders of the Capital Securities (including any Successor
Securities) in any material respect, (vi) such successor entity has a purpose
identical and limited to that of the Trust, (vii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Depositor has received an Opinion of Counsel to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer
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or lease does not adversely affect the rights, preferences and privileges of the
Holders of the Capital Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act
and (viii) the Depositor or any permitted successor or assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not,
except with the consent of Holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to any other entity or permit any other entity to consolidate, amalgamate, merge
with or into, or replace it if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as an association taxable as a corporation or
as other than a grantor trust for United States federal income tax purposes.
ARTICLE X
Miscellaneous Provisions
SECTION 10.01. Limitation of Rights of Securityholders. The
death, incapacity, liquidation, dissolution, termination or bankruptcy of any
Person having an interest, beneficial or otherwise, in Trust Securities shall
not operate to terminate this Declaration of Trust, or entitle the legal
representatives or heirs of such person, or any Securityholder for such person,
to claim an accounting, take any action or bring any proceeding in any court for
a partition or winding-up of the arrangements contemplated hereby, or otherwise
affect the rights, obligations and liabilities of the parties hereto or any of
them.
SECTION 10.02. Liability of the Depositor. The Depositor, as
borrower with respect to the Junior Subordinated Debt Securities, shall be
liable for all the debts and obligations of the Trust (other than with respect
to payments of principal, interest, or premium, if any, on the Trust Securities)
to the extent not satisfied out of the Trust's assets.
SECTION 10.03. Amendment. (a) This Declaration of Trust may be
amended from time to time by the Property Trustee, the Administrative Trustees
and the Depositor, without the consent of any Securityholders (i) to cure any
ambiguity, correct or supplement any provision herein that may be inconsistent
with any other provision herein, or to make any other provisions with respect to
matters or questions arising under this Declaration of Trust that shall not be
inconsistent with the other provisions of this Declaration of Trust; or (ii) to
modify, eliminate or add to any provisions of this Declaration of Trust to such
extent as shall be necessary to ensure that the Trust will be classified for
United States federal income tax purposes as a grantor trust or as other than an
association taxable as a corporation at all times that any Trust Securities are
outstanding or to ensure that the Trust will not be required to register as an
investment company under the 1940 Act; provided, however, that in the case of
clause (i), such action shall not adversely affect in any material respect the
interests of any Securityholder, and
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any amendments of this Declaration of Trust shall become effective when notice
thereof is given to the Securityholders.
(b) Except as provided in Section 10.02(c), any provision of
this Declaration of Trust may be amended by the Trustees and the Depositor with
(i) the consent of Securityholders representing not less than a majority (based
upon Liquidation Amounts) of the Trust Securities then Outstanding and (ii)
receipt by the Trustees of an Opinion of Counsel to the effect that such
amendment or the exercise of any power granted to the Trustees in accordance
with such amendment will not affect the Trust's status as a grantor trust or as
other than an association taxable as a corporation for United States federal
income tax purposes or the Trust's exemption from the status of an investment
company under the 1940 Act.
(c) In addition to and notwithstanding any other provision in
this Declaration of Trust, without the consent of each affected Securityholder
(such consent being obtained in accordance with Section 6.03 or 6.08), this
Declaration of Trust may not be amended to (i) change the amount or timing of
any Distribution on the Trust Securities or otherwise adversely affect the
amount of any Distribution required to be made in respect of the Trust
Securities as of a specified date or (ii) restrict the right of a Securityholder
to institute suit for the enforcement of any such payment on or after such date.
Notwithstanding any other provision herein, without the unanimous consent of the
Securityholders (such consent being obtained in accordance with Section 6.03 or
6.08), this paragraph (c) of this Section 10.02 may not be amended.
(d) Notwithstanding any other provisions of this Declaration
of Trust, no Trustee shall enter into or consent to any amendment to this
Declaration of Trust that would cause the Trust to fail or cease to qualify for
the exemption from status of an investment company under the 1940 Act or fail or
cease to be classified as a grantor trust or as other than an association
taxable as a corporation for United States federal income tax purposes.
(e) Notwithstanding anything in this Declaration of Trust to
the contrary, without the consent of the Depositor this Declaration of Trust may
not be amended in a manner that imposes any additional obligation on the
Depositor.
(f) Notwithstanding any other provision of this Declaration of
Trust, no amendment to this Declaration of Trust may be made if, as a result of
such amendment, it would cause the Trust to fail to be classified as a grantor
trust or as other than an association taxable as a corporation for United States
federal income tax purposes.
(g) In the event that any amendment to this Declaration of
Trust is made, the Administrative Trustees shall promptly provide to the
Depositor a copy of such amendment.
(h) Neither the Property Trustee nor the Delaware Trustee
shall be required to enter into any amendment to this Declaration of Trust that
affects its own rights, duties or immunities under this Declaration of Trust or
would otherwise expose the Property Trustee to any liability or be contrary to
applicable law. The Property Trustee shall be entitled to receive an
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Officers' Certificate stating that any amendment to this Declaration of Trust is
in compliance with this Declaration of Trust.
SECTION 10.04. Separability. In case any provision in this
Declaration of Trust or in the Trust Securities Certificates shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.05. Governing Law. This Declaration of Trust and
the rights and obligations of each of the Securityholders, the Trust and the
Trustees with respect to this Declaration of Trust and the Trust Securities
shall be construed in accordance with and governed by the laws of the State of
Delaware without regard to its conflict of laws principles. The provisions of
Sections 3540 and 3561 of Title 12 of the Delaware Code shall not apply to this
Trust.
SECTION 10.06. Payments Due on Non-Business Day. If the date
fixed for any payment on any Trust Security shall be a day that is not a
Business Day, then such payment need not be made on such date but may be made on
the next succeeding day that is a Business Day (except as otherwise provided in
Section 4.02(d)), with the same force and effect as though made on the date
fixed for such payment, and no interest shall accrue thereon for the period
after such date.
SECTION 10.07. Successors. This Declaration of Trust shall be
binding upon and shall inure to the benefit of any successor to the Depositor,
the Trust or the Relevant Trustee, including any successor by operation of law.
Except in connection with a consolidation, merger or sale involving the
Depositor that is permitted under Article VI of the Indenture and pursuant to
which the assignee agrees in writing to perform the Depositor's obligations
hereunder, the Depositor shall not assign its obligations hereunder.
SECTION 10.08. Headings. The Article and Section headings are
for convenience only and shall not affect the construction of this Declaration
of Trust.
SECTION 10.09. Reports, Notices and Demands. Any report,
notice, demand or other communication that, by any provision of this Declaration
of Trust, is required or permitted to be given or served to or upon any
Securityholder or the Depositor may be given or served in writing by deposit
thereof, first class postage prepaid, in the United States mail, hand delivery
or facsimile transmission, in each case, addressed, (a) in the case of a Capital
Securityholder, to such Capital Securityholder as such Securityholder's name and
address may appear on the Securities Register, and (b) in the case of the Common
Securityholder or the Depositor, to Southern Financial BanCorp, Inc., 37 E. Main
Street, Warrenton, Virginia, 22186, Facsimile Number: (540) 349-3904. Any notice
to Capital Securityholders may also be given to such owners as have, within two
years preceding the giving of such notice, filed their names and addresses with
the Property Trustee for that purpose. Such notice, demand or other
communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.
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Any notice, demand or other communication that by any
provision of this Declaration of Trust is required or permitted to be given or
served to or upon the Trust, the Property Trustee, the Delaware Trustee or the
Administrative Trustees shall be given in writing addressed (until another
address is published by the Trust) as follows: (a) with respect to the Property
Trustee to Wilmington Trust Company, 1100 N. Market Street, Attention: Corporate
Trust Administration, Wilmington, Delaware 19890, facsimile no.: (302) 651-8882;
(b) with respect to the Delaware Trustee to Wilmington Trust Company, 1100 N.
Market Street, Attention: Corporate Trust Administration, Wilmington, Delaware
19890, facsimile no.: (302) 651-8882; and (c) with respect to the Administrative
Trustees, to them at the address above for notices to the Depositor, marked
"Attention: Administrative Trustees of Southern Financial Capital Trust I". Such
notice, demand or other communication to or upon the Trust or the Property
Trustee shall be deemed to have been sufficiently given or made only upon actual
receipt of the writing by the Trust or the Property Trustee.
SECTION 10.10. Agreement Not to Petition. Each of the Trustees
and the Depositor agree for the benefit of the Securityholders that, until at
least one year and one day after the Trust has been terminated in accordance
with Article IX, they shall not file, or join in the filing of, a petition
against the Trust under any bankruptcy, insolvency, reorganization or other
similar law (including, without limitation, the United States Bankruptcy Code)
(collectively, "Bankruptcy Laws") or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Laws. In the event the
Depositor takes action in violation of this Section 10.10, the Property Trustee
agrees, for the benefit of Securityholders, that at the expense of the
Depositor, it shall file an answer with the bankruptcy court or otherwise
properly contest the filing of such petition by the Depositor against the Trust
or the commencement of such action and raise the defense that the Depositor has
agreed in writing not to take such action and should be estopped and precluded
therefrom and such other defenses, if any, as counsel for the Trustee or the
Trust may assert. The provisions of this Section 10.10 shall survive the
termination of this Declaration of Trust.
SECTION 10.11. Trust Indenture Act; Conflict with Trust
Indenture Act. This Declaration of Trust will be qualified under the Trust
Indenture Act. By its terms, this Declaration of Trust incorporates certain
provisions of the Trust Indenture Act.
(a) This Declaration of Trust is subject to the provisions of
the Trust Indenture Act that are required to be part of this Declaration of
Trust and shall, to the extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is a
trustee for the purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualifies or conflicts
with another provision hereof that is required to be included in this
Declaration of Trust by any of the provisions of the Trust Indenture Act, such
required provision shall control. If any provision of this Declaration of Trust
modifies or excludes any provision of the Trust Indenture Act that may be so
modified or excluded, the latter provision shall be deemed to apply to this
Declaration of Trust as so modified or excluded, as the case may be.
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(d) The application of the Trust Indenture Act to this
Declaration of Trust shall not affect the nature of the Securities as equity
securities representing undivided beneficial interests in the assets of the
Trust.
SECTION 10.12. Acceptance of Terms of Declaration of Trust,
Guarantee and Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY
INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER,
WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE
UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A
BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL OF THE TERMS AND PROVISIONS OF
THIS DECLARATION OF TRUST AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND
OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE
AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND
PROVISIONS OF THIS DECLARATION OF TRUST SHALL BE BINDING, OPERATIVE AND
EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS.
SECTION 10.13. Execution in Counterparts. This instrument may
be executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
WITNESS the following signatures:
SOUTHERN FINANCIAL BANCORP, INC.,
as Depositor
By:___________________________
Name:_________________________
Title:________________________
WILMINGTON TRUST COMPANY
(as Delaware Trustee and not in its
individual capacity)
By:___________________________
Name:_________________________
Title:________________________
57
<PAGE>
______________________________
Georgia S. Derrico, as
Administrative Trustee
______________________________
R. Roderick Porter, as
Administrative Trustee
58
<PAGE>
EXHIBIT A
CERTIFICATE OF TRUST OF
SOUTHERN FINANCIAL CAPITAL TRUST I
THIS CERTIFICATE OF TRUST of Southern Financial Capital Trust
I (the "Trust"), dated as of ________ __, is being duly executed and filed on
behalf of the Trust by the undersigned, as trustee, to form a business trust
under the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.).
1. Name. The name of the business trust formed by this
Certificate of Trust is Southern Financial Capital Trust I.
2. Delaware Trustee. The name and business address of the
trustee of the Trust in the State of Delaware are Wilmington Trust Company, 1100
North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
3. Effective Date. This Certificate of Trust shall be
effective upon filing.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate of Trust in accordance with Section 3811(a)(1) of the Act.
WILMINGTON TRUST COMPANY, not
in its individual capacity but
solely as trustee
By:___________________________
Name: ________________________
Title: _______________________
<PAGE>
EXHIBIT B
IF THE CAPITAL SECURITIES CERTIFICATE IS TO BE A GLOBAL
SECURITIES CERTIFICATE, INSERT--[This Capital Securities Certificate is a Global
Capital Securities Certificate within the meaning of the Declaration of Trust
hereafter referred to and is registered in the name of The Depository Trust
Company (the "Depositary") or a nominee of the Depositary. This Capital
Securities Certificate is exchangeable for Capital Securities Certificates
registered in the name of a person other than the Depositary or its nominee only
in the limited circumstances described in the Declaration of Trust, and no
transfer of this Capital Securities Certificate (other than a transfer of this
Capital Securities Certificate as a whole by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary) may be registered except in the limited circumstances
described in the Declaration of Trust.
Unless this Capital Securities Certificate is presented by an
authorized representative of The Depository Trust Company (55 Water Street, New
York) to Southern Financial Capital Trust I or its agent for registration of
transfer, exchange or payment, and any Capital Securities Certificate issued is
registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company and any payment hereon
is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.]
<PAGE>
Liquidation Amount of
Certificate Number Capital Securities
CUSIP NO. [ ]
Certificate Evidencing Southern Financial Capital Trust I
$_.____ Capital Securities
(Liquidation Amount $10.00 per Capital Security)
Southern Financial Capital Trust I, a statutory business trust
formed under the laws of the state of Delaware (the "Trust"), hereby certifies
that ___________ (the "Holder") is the registered owner of ____________ ( )
Capital Securities of the Trust in an aggregate liquidation amount of
$________________, representing an undivided beneficial interest in the assets
of the Trust and designated Southern Financial Capital Trust I Capital Trust
Securities (Liquidation Amount $10.00 per Capital Security) (the "Capital
Securities"). The Capital Securities are transferable on the books and records
of the Trust, in person or by a duly authorized attorney, upon surrender of this
certificate duly endorsed and in proper form for transfer as provided in Section
5.05 of the Declaration of Trust (as defined below). The designations, rights,
privileges, restrictions, preferences and other terms and provisions of the
Capital Securities are set forth in, and this certificate and the Capital
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Declaration of Trust of
the Trust, dated as of ________ __, 2000, as the same may be amended from time
to time (the "Declaration of Trust"), between Southern Financial Bancorp, Inc.,
as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust
Company, as Delaware Trustee, and the Administrative Trustees named therein,
including the designation of the terms of Capital Securities as set forth
therein. The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Southern Financial Bancorp, Inc., a Virginia corporation, and
Wilmington Trust Company, as Guarantee Trustee, dated as of ________ __, 2000
(the "Guarantee"), to the extent provided therein. The Trust will furnish a copy
of the Declaration of Trust and the Guarantee to the Holder without charge upon
written request to the Trust at its principal place of business or registered
office.
Terms used but not defined herein have the meanings set forth
in the Declaration of Trust. The Declaration of Trust and this Capital Security
shall be governed by and construed in accordance with the laws of the State of
Delaware without regard to conflicts of laws principles thereof.
Upon receipt of this certificate, the Holder is bound by the
Declaration of Trust and is entitled to the benefits thereunder.
2
<PAGE>
IN WITNESS WHEREOF, one of the Administrative Trustees of the
Trust has executed this Certificate this ____ day of _____________.
SOUTHERN FINANCIAL CAPITAL TRUST I
by_________________________________
Name:___________________________
Title: Administrative Trustee
COUNTERSIGNED AND REGISTERED:
WILMINGTON TRUST COMPANY, as
Property Trustee
by_________________________________
Authorized Signatory
3
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this
Capital Security to:
(Insert assignee's social security or tax identification number)
(Insert address and zip code of assignee)
and irrevocably appoints
agent to transfer this Capital Security Certificate on the books of the Trust.
The agent may substitute another to act for him or her.
Date:____________________
Signature_______________________________
(Sign exactly as your name appears on
the other side of this Capital Security
Certificate)
______________________________________________
The signature(s) should be guaranteed by
an eligible guarantor institution
(banks, stockbrokers, savings and loan
associations and credit unions with
membership in an approved signature
guarantee medallion program), pursuant
to SEC Rule 17Ad-15.
<PAGE>
EXHIBIT C
THIS CERTIFICATE IS NOT TRANSFERABLE
Liquidation Amount of
Certificate Number Common Securities
Certificate Evidencing Common Securities
of
Southern Financial Capital Trust I
Common Securities
(Liquidation Amount $10.00 per Common Security)
Southern Financial Capital Trust I, a statutory business trust
formed under the laws of the State of Delaware (the "Trust"), hereby certifies
that Southern Financial Bancorp, Inc. (the "Holder") is the registered owner of
_________ ______________________ (______) common securities of the Trust
representing beneficial interests in the Trust and designated the Common
Securities (Liquidation Amount $10.00 per Common Security) (the "Common
Securities"). Except as provided in Section 5.11 of the Declaration of Trust (as
defined below) the Common Securities are not transferable and any attempted
transfer hereof shall be void. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Common
Securities are set forth in, and this certificate and the Common Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Declaration of Trust of the Trust,
dated as of ________ __, 2000, as the same may be amended from time to time (the
"Declaration of Trust"), between Southern Financial Bancorp, Inc., as Depositor,
Wilmington Trust Company, as Property Trustee, Wilmington Trust Company as
Delaware Trustee, and the Administrative Trustees named therein, including the
designation of the terms of the Common Securities as set forth therein. The
Trust will furnish a copy of the Declaration of Trust to the Holder without
charge upon written request to the Trust at its principal place of business or
registered office.
Terms used but not defined herein have the meanings set forth
in the Declaration of Trust. The Declaration of Trust and this Common Security
shall be governed by and construed in accordance with the laws of the State of
Delaware without regard to conflicts of laws principles thereof.
Upon receipt of this certificate, the Holder is bound by the
Declaration of Trust and is entitled to the benefits thereunder.
<PAGE>
IN WITNESS WHEREOF, one of the Administrative Trustees of the
Trust has executed this certificate this ____ day of ________ __, 2000.
SOUTHERN FINANCIAL CAPITAL TRUST I
By:_________________________________
Name:_______________________________
Title: Administrative Trustee
COUNTERSIGNED AND REGISTERED:
WILMINGTON TRUST COMPANY, as
Property Trustee
By:_________________________________
Authorized Signatory
Dated:
2
Exhibit 4.4
EXECUTION COPY
================================================================================
SOUTHERN FINANCIAL BANCORP, INC.
to
WILMINGTON TRUST COMPANY
Trustee
-----------------------------
JUNIOR SUBORDINATED INDENTURE
Dated as of __________ __, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
ARTICLE I -- Definitions and Other Provisions of General Application..............................................1
SECTION 1.01. Definitions......................................................................................1
SECTION 1.02. Compliance Certificate and Opinions.............................................................13
SECTION 1.03. Forms of Documents Delivered to Trustee.........................................................14
SECTION 1.04. Acts of Holders.................................................................................15
SECTION 1.05. Notices to Trustee and Company..................................................................16
SECTION 1.06. Notice to Holders: Waiver.......................................................................17
SECTION 1.07. Conflict with Trust Indenture Act...............................................................17
SECTION 1.08. Effect of Headings and Table of Contents........................................................17
SECTION 1.09. Successors and Assigns..........................................................................17
SECTION 1.10. Separability Clause.............................................................................17
SECTION 1.11. Benefits of Indenture...........................................................................18
SECTION 1.12. Governing Law...................................................................................18
SECTION 1.13. Non-Business Day................................................................................18
ARTICLE II -- Security Forms.....................................................................................18
SECTION 2.01. Forms Generally.................................................................................18
SECTION 2.02. Form of Face of Security........................................................................19
SECTION 2.03. Form of Reverse of Security.....................................................................25
SECTION 2.04. Additional Provisions Required in Global Security...............................................30
SECTION 2.05. Form of Trustee's Certificate of Authentication.................................................31
ARTICLE III -- The Securities....................................................................................31
SECTION 3.01. Title and Terms.................................................................................31
SECTION 3.02. Denominations...................................................................................34
SECTION 3.03. Execution, Authentication, Delivery and Dating..................................................35
SECTION 3.04. Temporary Securities............................................................................37
SECTION 3.05. Global Securities...............................................................................37
SECTION 3.06. Registration, Transfer and Exchange Generally: Certain Transfers and Exchanges: Restricted
Securities Legends............................................................................................39
SECTION 3.07. Mutilated, Destroyed, Lost and Stolen Securities................................................43
SECTION 3.08. Payment of Interest; Interest Rights Preserved..................................................44
SECTION 3.09. Persons Deemed Owners...........................................................................46
SECTION 3.10. Cancellation....................................................................................47
SECTION 3.11. Computation of Interest.........................................................................47
SECTION 3.12. Deferrals of Interest Payment Dates.............................................................47
SECTION 3.13. CUSIP Numbers...................................................................................49
ARTICLE IV -- Satisfaction and Discharge.........................................................................50
SECTION 4.01. Satisfaction and Discharge of Indenture.........................................................50
SECTION 4.02. Application of Trust Money......................................................................51
ARTICLE V -- Remedies............................................................................................51
SECTION 5.01. Events of Default...............................................................................51
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment..............................................53
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee.................................55
SECTION 5.04. Trustee May File Proofs of Claim................................................................56
SECTION 5.05. Trustee May Enforce Claim Without Possession of Securities......................................57
SECTION 5.06. Application of Money Collected..................................................................58
SECTION 5.07. Limitation on Suits.............................................................................58
SECTION 5.08. Unconditional Right of Holders to Receive Principal and Interest................................59
SECTION 5.09. Restoration of Rights and Remedies..............................................................60
SECTION 5.10. Rights and Remedies Cumulate....................................................................60
SECTION 5.11. Delay or Omission Not Waiver....................................................................60
SECTION 5.12. Control by Holders..............................................................................61
SECTION 5.13. Waiver of Past Defaults.........................................................................62
<PAGE>
Page
SECTION 5.14. Undertaking for Costs...........................................................................62
SECTION 5.15. Waiver of Usury, Stay or Extension Laws.........................................................62
ARTICLE VI -- The Trustee........................................................................................63
SECTION 6.01. Certain Duties and Responsibilities.............................................................63
SECTION 6.02. Notice of Defaults..............................................................................64
SECTION 6.03. Certain Rights of Trustee.......................................................................65
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities..........................................66
SECTION 6.05. May Hold Securities.............................................................................67
SECTION 6.06. Money Held in Trust.............................................................................67
SECTION 6.07. Compensation and Reimbursement..................................................................67
SECTION 6.08. Disqualification; Conflicting Interests.........................................................68
SECTION 6.09. Corporate Trustee Required; Eligibility.........................................................68
SECTION 6.10. Resignation and Removal, Appointment of Successor...............................................69
SECTION 6.11. Acceptance of Appointment Successor.............................................................71
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business.....................................72
SECTION 6.13. Preferential Collection of Claims Against Company...............................................73
SECTION 6.14. Appointment of Authenticating Agent.............................................................73
SECTION 6.15. Trustee's Rights and Obligations................................................................75
ARTICLE VII -- Holder's Lists and Reports by Trustee and Company.................................................75
SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders.......................................75
SECTION 7.02. Preservation of Information, Communications to Holders..........................................75
SECTION 7.03. Reports by Trustee..............................................................................76
SECTION 7.04. Reports by Company..............................................................................76
ARTICLE VIII -- Consolidation, Merger, Conveyance, Transfer or Lease.............................................77
SECTION 8.01. Company May Consolidate Only on Certain Terms...................................................77
SECTION 8.02. Successor Company Substituted...................................................................78
ARTICLE IX -- Supplemental Indentures............................................................................79
SECTION 9.01. Supplemental Indentures without Consent of Holders..............................................79
SECTION 9.02. Supplemental Indentures with Consent of Holders.................................................80
SECTION 9.03. Execution of Supplemental Indentures............................................................82
SECTION 9.04. Effect of Supplemental Indentures...............................................................83
SECTION 9.05. Conformity with Trust Indenture Act.............................................................83
SECTION 9.06. Reference in Securities to Supplemental Indentures..............................................83
ARTICLE X -- Covenants...........................................................................................84
SECTION 10.01. Payment of Principal and Interest..............................................................84
SECTION 10.02. Maintenance of Office or Agency................................................................84
SECTION 10.03. Money for Security Payments to be Held in Trust................................................84
SECTION 10.04. Statement as to Compliance.....................................................................86
SECTION 10.05. Waiver of Certain Covenants....................................................................86
SECTION 10.06. Payment of the Trusts'Costs and Expenses.......................................................87
SECTION 10.07. Additional Covenants...........................................................................87
SECTION 10.08. Information Returns............................................................................89
SECTION 10.09. Statement by Officers as to Default............................................................89
SECTION 10.10 Delivery of Certain Information.................................................................89
ARTICLE XI -- Redemption or Prepayment of Securities.............................................................90
SECTION 11.01. Applicability of This Article..................................................................90
SECTION 11.02. Election To Redeem: Notice to Trustee..........................................................90
SECTION 11.03. Selection of Securities to be Redeemed.........................................................90
SECTION 11.04. Notice of Redemption...........................................................................91
SECTION 11.05. Deposit of Redemption Price....................................................................92
SECTION 11.06. Payment of Securities Called for Redemption....................................................93
SECTION 11.07. Company's Right of Redemption..................................................................93
ARTICLE XII -- Sinking Funds.....................................................................................94
SECTION 12.01. Applicability of Article.......................................................................94
SECTION 12.02. Satisfaction of Sinking Fund Payments with Securities..........................................94
SECTION 12.03. Redemption of Securities Sinking Fund..........................................................95
ARTICLE XIII -- Subordination of Securities......................................................................97
ii
<PAGE>
Page
SECTION 13.01. Securities Subordinate to Senior Debt..........................................................97
SECTION 13.02. Payment Over of Proceeds upon Dissolution......................................................97
SECTION 13.03. Prior Payment to Senior Debt Upon Acceleration of Securities...................................99
SECTION 13.04. No Payment When Senior Debt in Default.........................................................99
SECTION 13.05. Payment Permitted If No Default...............................................................100
SECTION 13.06. Subrogation to Rights of Holders of Senior Debt...............................................101
SECTION 13.07. Provisions Solely to Define Relative Rights...................................................101
SECTION 13.08. Trustee to Effectuate Subordination...........................................................102
SECTION 13.09. No Waiver of Subordination Provisions.........................................................102
SECTION 13.10. Notice to Trustee.............................................................................102
SECTION 13.11. Reliance on Judicial Order or Certificate of Liquidating Agent................................103
SECTION 13.12. Trustee Not Fiduciary for Holders of Senior Debt..............................................103
SECTION 13.13. Rights of Trustee as Holder of Senior Debt: Preservation of Trustee's Rights..................103
SECTION 13.14. Article Applicable to Paying Agents...........................................................103
SECTION 13.15. Certain Conversions or Exchanges Deemed Payment...............................................104
</TABLE>
iii
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
Reconciliation and tie between the Trust Indenture Act of 1939
(including cross-references to provisions of Sections 310 to and including 317
which, pursuant to Section 318(c) of the Trust Indenture Act of 1939, as amended
by the Trust Reform Act of 1990, are a part of and govern the Indenture whether
or not physically contained therein) and the Junior Subordinated Indenture,
dated as of ________ __, 2000.
<TABLE>
<CAPTION>
Indenture
Trust Indenture Act Section Section
- --------------------------- -------
<S> <C>
ss.310(a)(1), (2) and (5)............................................................. 6.09
ss.310(a)(3).......................................................................... Not Applicable
ss.310(a)(4).......................................................................... Not Applicable
ss.310(b)............................................................................. 6.08, 6.10
ss.310(c)............................................................................. Not Applicable
ss.311(a)............................................................................. 6.13
ss.311(b)............................................................................. 6.13
ss.311(c)............................................................................. Not Applicable
ss.312(a)............................................................................. 7.01, 7.02(a)
ss.312(b)............................................................................. 7.02(b)
ss.312(c)............................................................................. 7.02(c)
ss.313(a)............................................................................. 7.03(a)
ss.313(b)............................................................................. 7.03(b)
ss.313(c)............................................................................. 7.03(a), 7.03(b)
ss.313(d)............................................................................. 7.03(c)
ss.314(a)(1), (2) and (3)............................................................. 7.04
ss.314(a)(4).......................................................................... 10.04
ss.314(b)............................................................................. Not Applicable
ss.314(c)(1).......................................................................... 1.02
ss.314(c)(2).......................................................................... 1.02
ss.314(c)(3).......................................................................... Not Applicable
ss.314(d)............................................................................. Not Applicable
ss.314(e)............................................................................. 1.02
ss.314(f)............................................................................. Not Applicable
ss.315(a)............................................................................. 6.01(a)
ss.315(b)............................................................................. 6.02, 7.03(a)
ss.315(c)............................................................................. 6.01(b)
ss.315(d)............................................................................. 6.01(c)
ss.315(d)(1).......................................................................... 6.01(c)(1)
ss.315(d)(2).......................................................................... 6.01(c)(2)
ss.315(d)(3).......................................................................... 6.01(c)(3)
ss.315(e)............................................................................. 5.14
ss.316(a)............................................................................. 5.12
ss.316(a)(1)(A)....................................................................... 5.12
ss.316(a)(1)(B)....................................................................... 5.13
ss.316(a)(2).......................................................................... Not Applicable
ss.316(b)............................................................................. 5.08
ss.316(c)............................................................................. 1.04(f)
ss.317(a)(1).......................................................................... 5.03
ss.317(a)(2).......................................................................... 5.04
ss.317(b)............................................................................. 10.03
ss.318(a)............................................................................. 1.07
</TABLE>
- ------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Junior Subordinated Indenture.
<PAGE>
JUNIOR SUBORDINATED INDENTURE, dated as of
________ __, 2000, between SOUTHERN FINANCIAL
BANCORP, INC., a bank holding company established
under the laws of the Commonwealth of Virginia
(hereafter called the "Company") having its principal
office at 37 East Main Street, Warrenton, Virginia
20186, and WILMINGTON TRUST COMPANY, a Delaware
corporation, as Trustee (hereafter called the
"Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured junior
subordinated debt securities in series (hereafter called the "Securities") of
substantially the tenor hereafter provided, including, without limitation,
Securities issued to evidence loans made to the Company of the proceeds from the
issuance from time to time by one or more business trusts (each a "Southern
Financial Capital Trust" and, collectively, the "Southern Financial Capital
Trusts") of preferred trust interests in such Southern Financial Capital Trusts
(the "Capital Securities") and common interests in such Southern Financial
Capital Trusts (the "Common Securities" and, collectively with the Capital
Securities, the "Trust Securities"), and to provide the terms and conditions
upon which the Securities are to be authenticated, issued and delivered.
NOW THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of
the premises and the purchase of the Securities by the Holders thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the Securities or of any series thereof, as follows:
ARTICLE I
Definitions and Other Provisions of General Application
SECTION 1.01. Definitions. For all purposes of this Indenture, except
as otherwise expressly provided or unless the context otherwise requires:
(1) The terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular.
<PAGE>
(2) All other terms used herein that are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein.
(3) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and the term "generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles that are generally accepted at the date or time of such computation;
provided, that when two or more principles are so generally accepted, it shall
mean that set of principles consistent with those in use by the Company.
(4) The words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
(5) Unless otherwise specified herein, any reference to an "Article" or
Section" refers to an Article or a Section, as the case may be, of this
Indenture.
"Act", when used with respect to any Holder, has the meaning specified
in Section 1.04.
"Additional Interest" means the interest, if any, that shall accrue on
any interest on the Securities of any series the payment of which has not been
made on the applicable Interest Payment Date and that shall accrue at the rate
per annum specified or determined as specified in any Officers' Certificate
delivered pursuant to Section 3.01.
"Additional Sums" has the meaning specified in Section 10.06.
"Administrative Action" has the meaning specified in the definition of
"Tax Event" in this Section 1.01.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
-2-
<PAGE>
"Agent Member" means any member of, or participant in, the Depositary.
"Amended and Restated Declaration of Trust" for each series of
Securities has the meaning specified in the Officers' Certificate for such
series delivered pursuant to Section 3.01.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities of one or more series.
"Board of Directors" means either the board of directors of the Company
or any committee of that board duly authorized to act hereunder.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors, or such committee of the Board of Directors or officers
of the Company to which authority to act on behalf of the Board of Directors has
been delegated, and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means any day other than (i) a Saturday or Sunday, (ii)
a day on which banking institutions in the City of Richmond, Virginia are
authorized or required by law or executive order to remain closed, or (iii) a
day on which the Corporate Trust Office of the Trustee, or, with respect to the
Securities of a series issued to a Southern Financial Capital Trust, the
Corporate Trust Office of the Property Trustee under the related Trust
Agreement, is closed for business.
"Capital Securities" has the meaning specified in the first recital of
this Indenture.
"Capital Treatment Event" means the Company shall have received an
opinion of independent bank regulatory counsel experienced in such matters to
the effect that, as a result of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or therein
or any rules, guidelines or policies of the Federal Reserve or (b) any official
or administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement, action or decision is announced
-3-
<PAGE>
on or after the original Issue Date of the Capital Securities, the Company will
not be entitled to treat the Capital Securities as "Tier I Capital" (or the
equivalent thereof) (except to the extent that the Capital Securities would
otherwise constitute more than 25% of the Company's Tier I Capital (or the
equivalent thereof)) for purposes of the risk-based capital adequacy guidelines
of the Federal Reserve, as then in effect and applicable to the Company;
provided, however, that the distribution of the Securities in connection with
the liquidation of a Southern Financial Capital Trust by the Company shall not
in and of itself constitute a Capital Treatment Event.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Common Securities" has the meaning specified in the first recital of
this Indenture.
"Common Stock" means the common stock, $0.01 par value, of the Company.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Guarantee" means the guarantee by the Company of the
distributions on the Trust Securities of a Southern Financial Capital Trust to
the extent of the Guarantee Agreement.
"Company Request" and "Company Order" mean, respectively, the written
request or order signed in the name of the Company by the Chairman, Chief
Executive Officer, President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary of
the Company, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be administered,
which office as of the date of this Indenture is located at 1100 N. Market
Street, Attention: Corporate Trust Administration, Wilmington, Delaware 19890.
-4-
<PAGE>
"Corporation" includes a corporation, association, company, joint-stock
company or business trust.
"Declaration of Trust" for each series of Securities has the meaning
specified in the Officers' Certificate for such series delivered pursuant to
Section 3.01.
"Defaulted Interest" has the meaning specified in Section 3.08.
"Depositary" means, with respect to the Securities of any series
issuable or issued in whole or in part in the form of one or more Global
Securities, the Person designated as Depositary by the Company pursuant to
Section 3.01 with respect to such series (or any successor thereto (a "Successor
Depositary")).
"Determination Date" has the meaning specified in Section 2.02.
"Discount Security" means any security that provides for an amount less
than the principal amount thereof to be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 5.02.
"Dollar" means the currency of the United States of America that, as at
the time of payment, is legal tender for the payment of public and private
debts.
"DTC" means The Depository Trust Company.
"Event of Default", unless otherwise specified in the supplemental
indenture creating a series of Securities, has the meaning specified in Article
V.
"Extension Period" has the meaning specified in Section 3.12.
"Federal Reserve" means the Board of Governors of the Federal Reserve
System.
"Foreign Currency" means any currency issued by the government of one
or more countries other than the United States of America or by any recognized
confederation or association of such governments.
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"Global Security" means a Security in the form prescribed in Section
2.04 evidencing all or part of a series of Securities, issued to the Depositary
or its nominee for such series, and registered in the name of such Depositary or
its nominee.
"Guarantee Agreement" for each series of Securities has the meaning
specified in the Officers' Certificate for such series delivered pursuant to
Section 3.01.
"Holder" means a Person in whose name a Security is registered in the
Securities Register.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof
and shall include the terms of each particular series of Securities established
as contemplated by Section 3.01.
"Institutional Accredited Investor" means an accredited investor within
the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act.
"Interest Payment Date" means as to each series of Securities the
Stated Maturity of an installment of interest on such Securities.
"Interest Rate" means the rate of interest specified or determined as
specified in each Security as being the rate of interest payable on such
Security.
"Investment Company Event" means the receipt by a Southern Financial
Capital Trust of an Opinion of Counsel experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
such Southern Financial Capital Trust is or will be considered an "investment
company" that is required to be registered under the 1940 Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Capital Securities of such
Southern Financial Capital Trust.
"Junior Subordinated Payment" has the meaning specified in Section
13.02.
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"Lien" means any mortgage, pledge, lien, security interest or other
encumbrance.
"Liquidation Amount" has the meaning specified in Section 1.01 of the
Trust Agreement.
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether as the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
"1940 Act" means the Investment Company Act of 1940.
"Officers' Certificate" means a certificate signed by the Chairman and
Chief Executive Officer, President, or Vice President, and by the Treasurer, the
Controller, the Chief Financial Officer, the Secretary or any Assistant
Secretary of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company.
"Original Issue Date" means the date of issuance specified as such in
each Security.
"Other Debentures" means, with respect to any series of Securities, all
junior subordinated debt securities to be issued by the Company pursuant to this
Indenture, other than such series of Securities, with substantially similar
subordination terms, and that will be issued and sold (if at all) to any
Southern Financial Capital Trust established by the Company (if any), and will
be unsecured and subordinate and junior in right of payment to the extent and in
the manner set forth in this Indenture to all Senior Debt of the Company.
"Other Guarantees" means, with respect to any series of Securities, all
guarantees (if any) to be issued by the Company with respect to Capital
Securities (if any) to be issued by any Southern Financial Capital Trust to be
established by the Company (if any), other than the guarantee related to such
series of Securities.
"Outstanding" means, when used in reference to any Securities, as of
the date of determination, all Securities
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theretofore authenticated and delivered under this indenture, except:
(i) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities for whose payment money in the necessary
amount has been theretofore deposited with the Trustee or any Paying
Agent in trust for the Holders of such Securities; and
(iii) Securities in substitution for or in lieu of which other
Securities have been authenticated and delivered or that have been paid
pursuant to Section 3.07, unless proof satisfactory to the Trustee is
presented that any such Securities are held by Holders in whose hands
such Securities are valid, binding and legal obligations of the
Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities that a Responsible Officer actually knows to
be so owned shall be so disregarded. Securities so owned that have been pledged
in good faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Securities and that the pledgee is not the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor. Upon the
written request of the Trustee, the Company shall furnish the Trustee promptly
an Officers' Certificate listing and identifying all Securities, if any, known
by the Company to be owned or held by or for the account of the Company, or any
other obligor on the Securities or any Affiliate of the Company or such obligor,
and, subject to the provisions of Section 6.01, the Trustee shall be entitled to
accept such Officers' Certificate as conclusive evidence of the facts therein
set forth and of the fact that all Securities not listed therein are outstanding
for the purpose of any such determination.
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"Paying Agent" means the Trustee or any Person authorized by the
Company to pay the principal of or interest on any Securities on behalf of the
Company.
"Person" means any individual, Corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Place of Payment" means, with respect to the Securities of any series,
the place or places where the principal of and interest on the Securities of
such series are payable pursuant to Sections 3.01 and 3.08.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 3.07 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
"Proceeding" has the meaning specified in Section 13.02.
"Property Trustee" means, in respect of any Southern Financial Capital
Trust, the commercial bank or trust company identified as the "Property Trustee"
in the related Trust Agreement, solely in its capacity as Property Trustee of
such Southern Financial Capital Trust under each Trust Agreement and not in its
individual capacity, or its successor in interest in such capacity, or any
successor property trustee appointed as therein provided.
"Redemption Date", when used with respect to any Security of a series
to be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date with respect to the Securities of a series means, unless otherwise provided
pursuant to Section 3.01 with respect to Securities of a series, the date that
is the Business Day next preceding such Interest Payment Date.
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"Southern Financial Capital Trust" has the meaning specified in the
first recital of this Indenture.
"Responsible Officer", when used with respect to the Trustee, means any
officer assigned to the Corporate Trust Office, including any managing director,
vice president, assistant vice president, assistant treasurer, assistant
secretary or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and having
direct responsibility for the administration of this Indenture, and also, with
respect to a particular matter, any other officer to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject.
"Restricted Security" means each Security required pursuant to Section
3.06(c) to bear a Restricted Securities Legend.
"Restricted Securities Certificate" means a certificate substantially
in the form set forth in Exhibit A to this Indenture.
"Restricted Securities Legend" means a legend substantially in the form
of the legend required in the form of Security set forth in Section 2.02 to be
placed on a Restricted Security.
"Securities" has the meaning specified in the first recital of this
Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Certificate" means a certificate evidencing ownership of
Securities.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 3.06.
"Senior Debt" with respect to any series of Securities means (a) the
principal of, and premium, if any, and interest on all indebtedness of the
Company for money borrowed, whether outstanding on the date of execution of this
Indenture or thereafter created, assumed or incurred, (b) all obligations to
make payment pursuant to the terms of financial instruments, such as (i)
securities contracts and foreign currency exchange contracts, (ii) derivative
instruments, such as swap agreements (including interest rate and foreign
exchange note swap
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agreements), cap agreements, floor agreements, collar agreements, interest rate
agreements, foreign exchange agreements, options, commodity futures contracts
and commodity options contracts, and (iii) similar financial instruments;
except, in the case of both (a) and (b) above, such indebtedness and obligations
that are expressly stated to rank junior in right of payment to, or pari passu
in right of payment with, the Securities, (c) any indebtedness or obligations of
others of the kind described in both (a) and (b) above for the payment of which
the Company is responsible or liable as guarantor or otherwise, and (d) any
deferrals, renewals or extensions of any such Senior Debt; provided, however,
that Senior Debt shall not be deemed to include (a) any debt of the Company
that, when incurred and without respect to any election under Section 1111(b) of
the U.S. Bankruptcy Code of 1978, as amended, was without recourse to the
Company; (b) any debt of the Company to any of its Subsidiaries; (c) debt to any
employee of the Company; (d) debt that by its terms is subordinated to trade
accounts payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of such debt by the
Holders as a result of the subordination provisions of this Indenture would be
greater than such payments otherwise would have been as a result of any
obligation of such holders of such debt to pay amounts over to the obligees on
such trade accounts payable or accrued liabilities arising in the ordinary
course of business as a result of the subordination provisions to which such
debt is subject; (e) trade accounts payable or accrued liabilities arising in
the ordinary course of business; and (f) any other debt securities issued
pursuant to this Indenture.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 3.08.
"Stated Maturity" when used with respect to any Security or any
installment of principal thereof or interest thereon means the date specified
pursuant to the terms of such Security as the date on which the principal of
such Security or such installment of interest is due and payable, in the case of
such principal, as such date may be shortened or extended as provided pursuant
to the terms of such Security and this Indenture.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For purposes of this definition, "voting stock" means stock that
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ordinarily has voting power for the election of directors, whether at all times
or only so long as no senior class of stock has such voting power by reason of
any contingency.
"Successor Security" of any particular Security means every Security
issued after, and evidencing all or a portion of the same debt as that evidenced
by, such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.07 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Successor Trustee" has the meaning specified in the definition of
"Trustee" in this Section 1.01.
"Tax Event" means the receipt by the Trust or the Company of an opinion
of an independent tax counsel to the Company experienced in such matters to the
effect that, as a result of (a) any amendment to or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein, (b) any judicial decision or official administrative pronouncement,
ruling, regulatory procedure, notice or announcement, including any notice or
announcement of intent to adopt such procedures or regulations (an
"Administrative Action") or (c) any amendment to or change in the administrative
position or interpretation of any Administrative Action or judicial decision
that differs from the theretofore generally accepted position, in each case, by
any legislative body, court, governmental agency or regulatory body,
irrespective of the manner in which such amendment or change is made known,
which amendment or change is effective or such Administrative Action or decision
is announced, in each case, on or after the Original Issue Date of the
applicable series of Securities or the issue date of the applicable Capital
Securities issued by the affected Southern Financial Capital Trust, there is
more than an insubstantial risk that (x) if the Securities are held by or on
behalf of the affected Southern Financial Capital Trust, (i) the Trust is, or
will be within 90 days of the date of such opinion, subject to United States
federal income tax with respect to interest accrued or received on the
Securities or subject to more than a de minimis amount of other taxes, duties or
other governmental charges as determined by such counsel, or (ii) any portion of
interest payable by the Company to the affected Southern Financial Capital Trust
on the Securities is not, or within 90 days of the date of such opinion will not
be,
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deductible by the Company in whole or in part for United States federal income
tax purposes or (y) with respect to Securities that are no longer held by or on
behalf of the affected Southern Financial Capital Trust, any portion of interest
payable by the Company on the Securities is not, or within 90 days of the date
of such opinion will not be, deductible by the Company in whole or in part for
United States federal income tax purposes.
"Trust Agreement" with respect to each series of Securities means the
Declaration of Trust with respect to such series, as amended by the Amended and
Restated Declaration of Trust with respect to such series.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb), as in effect on the date of this Indenture, except as
provided in Sections 1.07 and 9.05.
"Trust Securities" has the meaning specified in the first recital of
this Indenture.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee (a "Successor Trustee")
shall have become such pursuant to the applicable provisions of this Indenture,
and thereafter "Trustee" shall mean or include each Person who is then a Trustee
hereunder and, if at any time there is more than one such Person, "Trustee" as
used with respect to the Securities of any series shall mean the Trustee with
respect to Securities of that series.
"Vice President", when used with respect to the Company, means any duly
appointed vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
SECTION 1.02. Compliance Certificate and Opinions. Upon any application
or request by the Company to the Trustee to take any action under any provision
of this Indenture, the Company shall furnish to the Trustee an Officers'
Certificate stating that all conditions precedent (including covenants
compliance with which constitutes a condition precedent), if any, provided for
in this Indenture relating to the proposed action have been complied with and an
Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent (including covenants compliance with which constitute a
condition precedent), if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
is specifically required by any
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provision of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than the
certificates provided regarding conditions or covenants waived by the Holders
pursuant to Section 10.05) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 1.03. Forms of Documents Delivered to Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representation
with respect to matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect
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to such factual matters is in the possession of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions, or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04. Acts of Holders. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be given to or taken by Holders, may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
is or are delivered to the Trustee, and, where it is hereby expressly required,
to the Company. Such instrument or instruments (and the action embodied therein
and evidenced thereby) are herein sometimes referred to as the "Act" of the
Holders signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 6.01) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a Person acting in other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority.
(c) The fact and date of the execution by any Person of any
such instrument or writing, or the authority of the Person executing the same,
may also be proved in any other manner that the Trustee deems sufficient and in
accordance with such reasonable rules as the Trustee may determine.
(d) The ownership of Securities shall be proved by the
Securities Register.
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(e) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done or suffered to be done by the Trustee or the Company in reliance
thereon, whether or not notation of such action is made upon such Security.
(f) The Company may, but shall not be obligated to, fix a
record date for the purpose of determining the Holders entitled to take any
action under this Indenture by vote or consent. Except as otherwise provided
herein, such record date shall be the later of 30 days prior to the first
solicitation of such consent or vote or the date of the most recent list of
Security Holders furnished to the Trustee pursuant to Section 7.01 prior to such
solicitation. If a record date is fixed, those persons who were Security Holders
at such record date (or their duly designated proxies), and only those persons,
shall be entitled to take such action by vote or consent or to revoke any vote
or consent previously given, whether or not such persons continue to be Holders
after such record date, provided, however, that unless such vote or consent is
obtained from the Holders (or their duly designated proxies) of the requisite
principal amount of Outstanding Securities prior to the date that is the 120th
day after such record date, any such vote or consent previously given shall
automatically and without further action by any Holder be canceled and of no
further effect.
SECTION 1.05. Notices to Trustee and Company. Any request, demand,
authorization, direction, notice, consent, waiver or Act of Holders or other
document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with:
(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
or
(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose (except as otherwise provided in Section
5.01 hereof) hereunder if in writing and mailed, first class, postage
prepaid, to the Company addressed to it at the address of its principal
office specified in the first paragraph of this instrument or at any
other address previously furnished in writing to the Trustee by the
Company.
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SECTION 1.06. Notice to Holders: Waiver. Where this Indenture provides
for notice to Holders of any event, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed, first
class postage prepaid, to each Holder affected by such event, at the address of
such Holder as it appears in the Securities Register, not later than the latest
date, and not earlier than the earliest date, prescribed for the giving of such
notice. In any case where notice to Holders is given by mail, neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders. In case, by reason of the suspension of or irregularities in
regular mail service or for any other reason, it shall be impossible or
impracticable to mail notice of any event to Holders when such notice is
required to be given pursuant to any provision of this Indenture or of the
relevant Securities, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice. Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
SECTION 1.07. Conflict with Trust Indenture Act. If any provision of
this Indenture limits, qualifies or conflicts with the duties imposed by any of
Section 310 to 317, inclusive, of the Trust Indenture Act through operation of
Section 318(c) thereof, such imposed duties shall control.
SECTION 1.08. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 1.09. Successors and Assigns. All covenants and agreements in
this Indenture by the Company shall bind its successors and assigns, whether so
expressed or not.
SECTION 1.10. Separability Clause. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
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SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in
the Securities, express or implied, shall give to any Person, other than the
parties hereto, any Paying Agent and their successors and assigns, the holders
of Senior Debt and the Holders of the Securities, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 1.12. Governing Law. This Indenture and the Securities shall be
governed by and construed in accordance with the laws of the Commonwealth of
Virginia, without regard to principles of conflicts of laws.
SECTION 1.13. Non-Business Day. In any case where any Interest Payment
Date, Redemption Date or Stated Maturity of any Security shall not be a Business
Day, then (notwithstanding any other provision of this Indenture or the
Securities) payment of interest or principal need not be made on such date, but
may be made on the next succeeding Business Day (and no interest shall accrue
for the period from and after such Interest Payment Date, Redemption Date or
Stated Maturity, as the case may be, until such next succeeding Business Day)
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on the Interest Payment Date or
Redemption Date or at the Stated Maturity, as the case may be.
ARTICLE II
Security Forms
SECTION 2.01. Forms Generally. The Securities of each series and the
Trustee's certificate of authentication shall be in substantially the forms set
forth in this Article, or in such other form or forms as shall be established by
or pursuant to a Board Resolution or in one or more indentures supplemental
hereto, in each case with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Indenture and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with applicable tax
laws or the rules of any securities exchange or as may, consistently herewith,
be determined by the officers executing such securities, as evidenced by their
execution of the Securities. If the form of Securities of any series is
established by action
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taken pursuant to a Board Resolution, a copy of an appropriate record of such
action shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the Company
Order contemplated by Section 3.03 with respect to the authentication and
delivery of such Securities.
The definitive Securities shall be printed, lithographed or engraved or
produced by any combination of these methods, if required by any securities
exchange on which the Securities may be listed, on a steel engraved border or
steel engraved borders or may be produced in any other manner permitted by the
rules of any securities exchange on which the Securities may be listed, all as
determined by the officers executing such Securities, as evidenced by their
execution of such Securities.
Securities distributed to holders of book-entry Capital Securities
shall be distributed in the form of one or more Global Securities registered in
the name of a Depositary or its nominee, and deposited with the Securities
Registrar, as custodian for such Depositary, or held by such Depositary for
credit by the Depositary to the respective accounts of the beneficial owners of
the Securities represented thereby (or such other accounts they may direct).
Securities distributed to holders of Capital Securities other than book-entry
Capital Securities shall not be issued in the form of a Global Security or any
other form intended to facilitate book-entry trading in beneficial interests in
such Securities.
SECTION 2.02. Form of Face of Security.
[If this Security is a Restricted Security, insert--THIS SECURITY HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR
ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS
SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS
ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY
PRIOR TO THE DATE THAT IS ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH SOUTHERN FINANCIAL BANCORP, INC. (THE
"COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR
ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTIONS TERMINATION DATE")
ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE
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SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT
TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF
SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL "ACCREDITED INVESTOR", FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN
ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH
MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE. THIS LEGEND WILL BE REMOVED
UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTIONS TERMINATION DATE.]
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<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
(Title of Security)
CUSIP No.
$
SOUTHERN FINANCIAL BANCORP, INC., a corporation organized and existing
under the laws of the Commonwealth of Virginia (hereafter called the "Company",
which term includes any successor corporation under the Indenture hereafter
referred to), for value received, hereby promises to pay to
_________________________, or its registered assigns, the principal sum of
____________________ Dollars on ________ __, (the "Stated Maturity"). The
Company further promises to pay interest on such principal sum from
_______________, or from the most recent interest payment date (each such date,
an "Interest Payment Date") on which interest has been paid or duly provided
for, [monthly] [quarterly] [semi-annually] [annually] [if applicable,
insert--(subject to deferral as set forth herein)], in arrears on [insert
applicable Interest Payment Dates] of each year, commencing _______________, at
the annual rate of [___]%, until the principal hereof shall have become due and
payable, [if applicable, insert--plus Additional Interest, if any,] until the
principal hereof is paid or duly provided for or made available for payment [if
applicable, insert--on any overdue principal and (without duplication and to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the annual rate of [___]% compounded
[monthly] [quarterly] [semi-annually] [annually] as Additional Interest].
The amount of interest payable for any period shall be computed on the
basis of the actual number of days elapsed in a year of twelve 30-day months;
except that the amount of interest payable for any partial period shall be
computed on the basis of the actual number of days elapsed in a 360-day year. In
the event that any date on which interest is payable on this Security is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on the date the payment was originally payable. A "Business Day"
shall mean any day other than (i) a Saturday or Sunday, (ii) a day on which
banking institutions in the City of Richmond, Virginia are authorized or
required by law or executive order to remain closed or (iii) a
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<PAGE>
day on which the Corporate Trust Office of the Trustee or the Corporate Trust
Office of the Property Trustee under the Trust Agreement hereafter referred to
for Southern Financial Capital Trust I is closed for business. The interest
installment so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in the Indenture, be paid to the Person
in whose name this Security (or one or more Predecessor Securities, as defined
in the Indenture) is registered at the close of business on the Regular Record
Date for such interest installment, which shall be the [insert definition of
Regular Record Date]. Any such interest installment not so punctually paid or
duly provided for shall forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in such Indenture.
[If applicable, insert--So long as no Event of Default has occurred and
is continuing, the Company shall have the right at any time during the term of
this Security, from time to time, to defer payment of interest on such Security
for up to _______________ consecutive [monthly] [quarterly] [semi-annual]
[annual] interest payment periods with respect to each deferral period (each an
"Extension Period"), during which Extension Periods the Company shall have the
right to make partial payments of interest on any Interest Payment Date, and at
the end of which the Company shall pay all interest then accrued and unpaid on
the Securities (together with Additional Interest thereon to the extent
permitted by applicable law); provided, however, that no Extension Period may
extend beyond the Stated Maturity of this Security. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions,
on or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock (which includes common and preferred stock)
or (ii) make any payment of principal of, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Company (including any
Other Debentures) that rank pari passu with or junior in interest to this
Security or (iii) make any guarantee payments with respect
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to any guarantee by the Company of the debt securities of any Subsidiary of the
Company (including Other Guarantees) if such guarantee ranks pari passu with or
junior in interest to this Security (other than (a) dividends or distributions
in Common Stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the applicable Company Guarantee,
(d) purchases or acquisitions of shares of the Company's Common Stock in
connection with the satisfaction by the Company of its obligations under any
employee benefit plan or other contractual obligation of the Company (other than
a contractual obligation ranking pari passu with or junior to these Securities),
(e) as a result of a reclassification of the Company's capital stock or the
exchange or conversion of one class or series of the Company's capital stock for
another class or series of the Company's capital stock or (f) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged). Prior to the termination of any such Extension Period,
the Company may further extend such Extension Period, provided, however, that
such extension does not cause such Extension Period to exceed _______________
consecutive [monthly] [quarterly] [semi-annual] [annual] interest payment
periods or extend beyond the Stated Maturity of this Security. Upon the
termination of any such Extension Period and the payment of all accrued and
unpaid interest and any Additional Interest then due, and, subject to the
foregoing limitations, the Company may elect to begin a new Extension Period. No
interest shall be due and payable during an Extension Period except at the end
thereof. The Company shall give the Trustee notice of its election to begin any
Extension Period at least three Business Days prior to the Interest Payment
Date, [if applicable, insert--or, with respect to the Securities issued to a
Southern Financial Capital Trust, prior to the earlier of (i) the date the
Distributions on the Capital Securities would have been payable except for the
election to begin or extend such Extension Period or (ii) the date the
Administrative Trustees are required to give notice to any automated quotation
system or to holders of such Capital Securities of the record date or the date
such Distributions are payable, but in any event not less than three Business
Days prior to such record date]. There is no limitation on the number of times
the Company may elect to begin an Extension Period.
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<PAGE>
Payment of the principal of and interest on this Security will be made
at the office or agency of the Trustee in the City of Wilmington, Delaware or at
the office of such Paying Agents in the United States as the Company may
designate from time to time, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts [if applicable, insert--; provided, however, that at the option of
the Company payment of any interest may be made (except in the case of
Securities in Global form) (i) by check mailed to the address of the Person
entitled thereto as such address shall appear in the Securities Register or (ii)
by wire transfer in immediately available funds at such place and to such
account as may be designated by the Person entitled thereto as specified in the
Securities Register].
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and junior in right of payment to the prior
payment in full of all Senior Debt, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such actions as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes. Each
Holder hereof, by his acceptance hereof, waives all notice of the acceptance of
the subordination provisions contained herein and in the Indenture by each
holder of Senior Debt, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon such provisions.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
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<PAGE>
Date: SOUTHERN FINANCIAL BANCORP, INC.
[Seal]
By: ________________________________
[Chairman and Chief Executive
Officer, President or Vice
President
Attest:
_______________________
[Secretary or Assistant
Secretary]
SECTION 2.03. Form of Reverse of Security. This Security is one of a
duly authorized issue of securities of the Company (herein called the
"Securities"), issued and to be issued in one or more series under a Junior
Subordinated Indenture, dated as of ____________, as supplemented by an
Officers' Certificate dated as of ____________ (herein called the "Indenture"),
between the Company and Wilmington Trust Company, as Trustee (herein called the
"Trustee", which term includes any Successor Trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Trustee, the Company and the Holders of the
Securities, and of the terms upon which the Securities are, and are to be,
authenticated and delivered. This Security is one of the series designated on
the face hereof,[limited in aggregate principal amount to
$____________].
All terms used in this Security that are defined in the Indenture [if
applicable, insert--and in the Amended and Restated Declaration of Trust of
[insert the applicable Southern Financial Capital Trust], dated as of
[_______________], as amended (the "Amended and Restated Declaration of Trust"),
among Southern Financial Bancorp, Inc., as Depositor, and the Trustees named
therein,] shall have the meanings assigned to them in the Indenture or, to the
extent not defined in the Indenture, the Amended and Restated Declaration of
Trust, as the case may be.
[If applicable, insert--The Company has the right to redeem this
Security (i) on or after _______________, in whole at any time or in part from
time to time, or (ii) in whole (but not in part), at any time within 90 days
following the occurrence and during the continuation of a Tax Event, an
Investment Company
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<PAGE>
Event or a Capital Treatment Event, in each case at the Redemption Price
described below, and subject to possible regulatory approval.]
[If applicable, insert--In the case of a redemption on or after
_______________, the Redemption Price shall equal the following prices,
expressed in percentages of the principal amount hereof, together with accrued
interest to but excluding the date fixed for redemption, if redeemed during the
12-month period beginning
____________:
Year Redemption Price
---- ----------------
and 100% on or after ____________, 20__.
In the case of a redemption prior to ____________, 20__, following a Tax Event,
an Investment Company Event or a Capital Treatment Event, the Redemption Price
shall equal the "Make-Whole Amount" (as hereafter defined) for a corresponding
$__________ principal amount hereof, together with accrued interest to but
excluding the date fixed for redemption, which Make-Whole Amount will be equal
to the greater of (i) 100% of the principal amount hereof, and (ii) as
determined by a Quotation Agent (as defined in the Declaration of Trust), the
sum of the present values of the principal amount hereof and the premium, if
any, payable as part of the Redemption Price with respect to an optional
redemption hereof on ____________, 20__, together with the present values of
scheduled payments of interest (not including the portion of any such payments
of interest accrued as of the Redemption Date) from the date fixed for
redemption to ____________, 20__, in each case discounted to the date fixed for
redemption on a semi-annual basis (assuming a 360-day year consisting of 30-day
months) at the Adjusted Treasury Rate (as defined in the Declaration of Trust).
The Redemption Price in the case of a redemption on or after ____________, 20__
following a Tax Event, an Investment Company Event or a Capital Treatment Event
shall equal the Redemption Price then applicable to a redemption under the first
sentence of this paragraph.]
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<PAGE>
In the event of redemption of this Security in part only, a new
Security or Securities of this series for the unredeemed portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.
[If the Security is not a Discount Security,--If an Event of Default
with respect to Securities of this series shall occur and be continuing, the
principal of this Security may be declared due and payable in the manner, with
the effect and subject to the conditions provided in the Indenture.]
[If the Security is a Discount Security,--If an Event of Default with
respect to Securities of this series shall occur and be continuing, an amount of
principal of this Security may be declared due and payable in the manner, with
the effect and subject to the conditions provided in the Indenture. Such amount
shall be equal to [--insert formula for determining the amount]. Upon payment
(i) of the amount of principal so declared due and payable and (ii) of interest
on any overdue principal and overdue interest (in each case to the extent that
the payment of such interest shall be legally enforceable), all of the Company's
obligations in respect of the payment of the principal of and interest, if any,
on this Security shall terminate.]
The Indenture permits, with certain exceptions as therein provided, the
Company and the Trustee at any time to enter into a supplemental indenture or
indentures for the purpose of modifying in any manner the rights and obligations
of the Company and of the Holders of the Securities, with the consent of the
Holders of not less than a majority in principal amount of the Outstanding
Securities of each series to be affected by such supplemental indenture. The
Indenture also contains provisions permitting Holders of specified percentages
in principal amount of the Securities of each series at the time Outstanding, on
behalf of the Holders of all Securities of such series, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Security shall be conclusive and binding upon such Holder and
upon all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
[If the Security is not a Discount Security,--As provided in and
subject to the provisions of the Indenture, if an Event of Default with respect
to the Securities of this series at the time
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<PAGE>
Outstanding occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in aggregate principal amount of the
Outstanding Securities of this series may declare such portion of the principal
amount as may be specified in the terms of all the Securities of this series to
be due and payable immediately, by a notice in writing to the Company (and to
the Trustee if given by Holders), provided, however, that, in the case of the
Securities of this series issued to a Southern Financial Capital Trust, if upon
an Event of Default, the Trustee or the Holders of not less than 25% in
aggregate principal amount of the Outstanding Securities of this series fail to
declare the principal of all the Securities of this series to be immediately due
and payable, the holders of at least 25% in aggregate Liquidation Amount of the
corresponding series of Capital Securities then outstanding shall have such
right by a notice in writing to the Company and the Trustee with a copy to the
Property Trustee. The Holders of a majority in aggregate principal amount of the
Outstanding Securities of this series may annul such declaration and waive the
default by written notice to the Property Trustee, the Company and the Trustee
if the default (other than the nonpayment of the principal of these Securities
that has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Trustee. Should the
Holders of the Securities of this series fail to annul such declaration and
waive such default, the holders of a majority in aggregate Liquidation Amount of
the Capital Securities shall have such right. Upon any such declaration such
principal amount and the accrued interest (including any Additional Interest) on
all the Securities of this series shall become immediately due and payable,
provided that the payment of principal and interest (including any Additional
Interest) on such Securities shall remain subordinated to the extent provided in
Article XIII of the Indenture.]
[If the Security is a Discount Security,--As provided in and subject to
the provisions of the Indenture, if an Event of Default with respect to the
Securities of this series at the time Outstanding occurs and is continuing, then
and in every such case the Trustee or the Holders of not less than 25% in
aggregate principal amount of the Outstanding Securities of this series may
declare the principal amount of all the Securities of this series to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), provided, however, that, in the case of the Securities of
this series issued to a Southern Financial Capital Trust, if upon an Event of
Default, the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Outstanding Securities of this series fail to declare the
principal of all the Securities of this series to be immediately due and
payable, the holders of at least 25% in
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<PAGE>
aggregate Liquidation Amount of the corresponding series of Capital Securities
then outstanding shall have such right by a notice in writing to the Company and
the Trustee with a copy to the Property Trustee. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of this series may
annul such declaration and waive the default by written notice to the Property
Trustee, the Company and the Trustee if the default (other than the nonpayment
of the principal of these Securities that has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Trustee. Should the Holders of the Securities of this
series fail to annul such declaration and waive such default, the holders of a
majority in aggregate Liquidation Amount of the Capital Securities shall have
such right. Upon any such declaration such principal amount and the accrued
interest (including any Additional Interest) on all the Securities of this
series shall become immediately due and payable, provided that the payment of
principal and interest (including any Additional Interest) on such Securities
shall remain subordinated to the extent provided in Article XIII of the
Indenture.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and interest on this
Security at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Securities
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company maintained pursuant to Section 10.02 of the
Indenture duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Company and the Securities Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing and thereupon
one or more new Securities of this series, of authorized denominations and for
the same aggregate principal amount, will be issued to the designated transferee
or transferees. No service charge shall be made for any such registration of
transfer or exchange, but the
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<PAGE>
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee shall treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security is overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Securities of this series are issuable in registered form without
coupons. As provided in the Indenture and subject to certain limitations therein
set forth, Securities of this series are exchangeable for a like aggregate
principal amount of Securities of such series of a different authorized
denomination, as requested by the Holder surrendering the same.
The Company and, by its acceptance of this Security or a beneficial
interest therein, the Holder of, and any Person that acquires a beneficial
interest in, this Security intend that such Security constitute indebtedness and
agree to treat such Security as indebtedness for all United States Federal,
state and local tax purposes.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES THEREOF.
SECTION 2.04. Additional Provisions Required in Global Security. Any
Global Security issued hereunder shall, in addition to the provisions contained
in Sections 2.02 and 2.03, bear a legend in substantially the following form:
"This Security is a Global Security within the meaning of the Indenture
hereafter referred to and is registered in the name of The Depository
Trust Company (the "Depositary") or a nominee of the Depositary. This
Security is exchangeable for Securities registered in the name of a
person other than the Depositary or its nominee only in the limited
circumstances described in the Indenture and no transfer of this
Security (other than a transfer of this Security as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary) may
be registered except in limited circumstances.
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<PAGE>
Unless this Security is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York) to Southern
Financial Bancorp, Inc. or its agent for registration of transfer,
exchange or payment, and any Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized
representative of The Depository Trust Company and any payment hereon
is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & CO., has an interest herein."
SECTION 2.05. Form of Trustee's Certificate of Authentication. This is
one of the Securities referred to in the within mentioned Indenture:
___________________________________
as Trustee
Dated:
By:________________________________
Authorized Signatory
ARTICLE III
The Securities
SECTION 3.01. Title and Terms. The aggregate principal amount of
Securities that may be authenticated and delivered under this Indenture is
unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto, prior
to the issuance of Securities of a series:
(a) the title of the securities of such series, which shall
distinguish the Securities of the series from all other Securities;
(b) the limit, if any, upon the aggregate principal amount of
the Securities of such series that may be authenticated and made
available for delivery under this
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Indenture (except for Securities authenticated and made available for
delivery upon registration of, transfer of, or in exchange for, or in
lieu of, other Securities of the series pursuant to Section 3.04, 3.06,
3.07, 9.06 or 11.06); provided, however, that the authorized aggregate
principal amount of such series may be increased above such amount by a
Board Resolution to such effect;
(c) the Stated Maturity or Maturities on which the principal
of the Securities of such series is payable or the method of
determination thereof;
(d) the rate or rates, if any, at which the Securities of such
series shall bear interest, if any, the rate or rates and extent to
which Additional Interest, if any, shall be payable in respect of any
Securities of such series, the Interest Payment Dates on which such
interest shall be payable, the right, pursuant to Section 3.12 or as
otherwise set forth therein, of the Company to defer or extend an
Interest Payment Date, and the Regular Record Date for the interest
payable on any Interest Payment Date or the method by which any of the
foregoing shall be determined;
(e) the place or places where the principal of and interest on
the Securities of such series shall be payable, the place or places
where the Securities of such series may be presented for registration
of transfer or exchange, and the place or places where notices and
demands to or upon the Company in respect of the Securities of such
series may be made;
(f) the period or periods within or the date or dates on
which, if any, the price or prices at which and the terms and
conditions upon which the Securities of such series may be redeemed, in
whole or in part, at the option of the Company;
(g) the obligation or the right, if any, of the Company to
redeem, repay or purchase the Securities of such series pursuant to any
sinking fund, amortization or analogous provisions, or at the option of
a Holder thereof, and the period or periods within which, the prices or
prices at which, the currency or currencies (including currency unit or
units) in which and the other terms and conditions upon which
Securities of the series shall be redeemed, repaid or purchased, in
whole or in part, pursuant to such obligations;
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(h) the denominations in which any Securities of such series
shall be issuable, if other than in blocks having aggregate principal
amounts of not less than $25.00 and multiples of $25.00 in excess
thereof;
(i) if other than Dollars, the currency or currencies
(including currency unit or units) in which the principal of and
interest, if any, on the Securities of the series shall be payable, or
in which the Securities of the series shall be denominated and the
manner of determining the equivalent thereof in Dollars for purposes of
the definition of the term "Outstanding";
(j) the additions, modifications or deletions, if any, in the
Events of Default or covenants of the Company set forth herein with
respect to the Securities of such series;
(k) if other than the principal amount thereof, the portion of
the principal amount of Securities of such series that shall be payable
upon declaration of acceleration of the Maturity thereof;
(l) the additions or changes, if any, to this Indenture with
respect to the Securities of such series as shall be necessary to
permit or facilitate the issuance of the Securities of such series in
bearer form, registrable or not registrable as to principal, and with
or without interest coupons;
(m) any index or indices used to determine the amount of
payments of principal on the Securities of such series or the manner in
which such amounts will be determined;
(n) the issuance of a temporary Global Security representing
all of the Securities of such series and exchange of such temporary
Global Security for definitive Securities of such series;
(o) whether the Securities of the series shall be issued in
whole or in part in the form of one or more Global Securities and, in
such case, the Depositary for such Global Securities, which Depositary
shall be a clearing agency registered under the Securities Exchange Act
of 1934;
(p) the appointment of any Paying Agent or Agents for the
Securities of such series;
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(q) the terms of any right to convert or exchange Securities
of such series into any other securities or property of the Company,
and the additions or changes, if any, to this Indenture with respect to
the Securities of such series to permit or facilitate such conversion
or exchange;
(r) the transfer restrictions and legends required to be on
the Securities;
(s) the definitions of Amended and Restated Declaration of
Trust, Declaration of Trust and Guarantee Agreement for each series;
(t) the relative degree, if any, to which the Securities of
the series shall be senior to or be subordinated to other series of
Securities in right of payment, whether such other series of Securities
are Outstanding or not; and
(u) any other terms of the Securities of such series (which
terms shall not be inconsistent with the provisions of this Indenture).
All Securities of any one series shall be substantially identical
except as to denomination and except as may otherwise be provided herein or in
or pursuant to such Board Resolution and set forth in such Officers' Certificate
or in any such indenture supplemental hereto.
Unless otherwise provided with respect to the Securities of any series,
at the option of the Company, interest on the Securities of any series that
bears interest may be paid (except in the case of Securities in Global form) (i)
by check mailed to the address of the Person entitled thereto as such address
shall appear in the Securities Register or (ii) by wire transfer in immediately
available funds at such place and to such account as may be designated by the
Person entitled thereto as specified in the Securities Register.
SECTION 3.02. Denominations. The Securities of each series shall be in
registered form without coupons and shall be issuable initially in blocks having
aggregate principal amounts of not less than $25.00 and multiples of $25.00 in
excess thereof, unless otherwise specified as contemplated by Section 3.01.
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SECTION 3.03. Execution, Authentication, Delivery and Dating. The
Securities shall be executed on behalf of the Company by its Chairman of the
Board, its President or one of its Vice Presidents under its corporate seal
reproduced or impressed thereon and attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities. At any time and from time to
time after the execution and delivery of this Indenture, the Company may deliver
Securities executed by the Company to the Trustee for authentication. Securities
may be authenticated on original issuance from time to time and delivered
pursuant to such procedures acceptable to the Trustee ("Procedures") as may be
specified from time to time by Company Order. Procedures may authorize
authentication and delivery pursuant to oral instructions of the Company or a
duly authorized agent, which instructions shall be promptly confirmed in
writing. The Trustee shall authenticate and deliver such Securities in
accordance with such instructions and as provided in this Indenture.
Prior to the delivery of a Security in any such form to the Trustee for
authentication, the Company shall deliver to the Trustee the following:
(a) a Company Order requesting the Trustee's authentication
and delivery of all or a portion of the Securities of such series, and
if less than all, setting forth procedures for such authentication;
(b) the Board Resolution by or pursuant to which such form of
Security has been approved, and the Board Resolution, if any, by or
pursuant to which the terms of the Securities of such series have been
approved, and, if pursuant to a Board Resolution, an Officers'
Certificate describing the action taken;
(c) an Officers' Certificate dated the date such certificate
is delivered to the Trustee, stating that all conditions precedent
provided for in this Indenture relating
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to the authentication and delivery of Securities in such form and with
such terms have been complied with; and
(d) an Opinion of Counsel or Opinions of Counsel substantially
to the effect that (i) the form of such Securities has been duly
authorized and approved in conformity with the provisions of this
Indenture; (ii) the terms of such Securities have been duly authorized
and determined in conformity with the provisions of this Indenture, or,
if such terms are to be determined pursuant to Procedures, when so
determined such terms shall have been duly authorized and determined in
conformity with the provisions of this Indenture; and (iii) Securities
in such form when completed by appropriate insertions and executed and
delivered by the Company to the Trustee for authentication in
accordance with this Indenture, authenticated and made available for
delivery by the Trustee in accordance with this Indenture within the
authorization as to aggregate principal amount established from time to
time by the Board of Directors and sold in the manner specified in such
Opinion of Counsel, will constitute valid and legally binding
obligations of the Company entitled to the benefits of this Indenture,
subject to bankruptcy, reorganization, insolvency, fraudulent transfer,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles, and
except as enforcement thereof may be limited by (A) requirements that a
claim with respect to any Securities denominated other than in Dollars
(or a Foreign Currency or currency unit judgment in respect of such
claim) be converted into Dollars at a rate of exchange prevailing on a
date determined pursuant to applicable law or (B) governmental
authority to limit, delay or prohibit the making of payments in Foreign
Currencies or currency units or payments outside the United States, and
subject to such other qualifications as such counsel shall conclude do
not materially affect the rights of Holders of such Securities.
The Trustee shall be entitled to receive the documents referred to in
clauses (b) and (d) above only at or prior to the first request of the Company
to the Trustee to authenticate Securities of such series.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture, or
be valid or obligatory for any purpose, unless
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there appears on such Security a certificate of authentication substantially in
the form provided for herein executed by the Trustee by the manual signature of
one of its authorized officers, and such certificate upon any Security shall be
conclusive evidence, and the only evidence, that such Security has been duly
authenticated and made available for delivery hereunder.
SECTION 3.04. Temporary Securities. Pending the preparation of
definitive Securities of any series, the Company may execute, and upon Company
Order the Trustee shall authenticate and deliver, temporary Securities that are
printed, lithographed, typewritten, mimeographed or otherwise produced, in any
denomination, substantially of the tenor of the definitive Securities of such
series in lieu of which they are issued and with such appropriate insertions,
omissions, substitutions and other variations as the officers executing such
Securities may determine, as evidenced by their execution of such Securities.
If temporary Securities of any series are issued, the Company will
cause definitive Securities of such series to be prepared without unreasonable
delay. After the preparation of definitive Securities, the temporary Securities
shall be exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for that purpose
without charge to the Holder. Upon surrender for cancellation of any one or more
temporary Securities, the Company shall execute and the Trustee shall
authenticate and make available for delivery in exchange therefor a like
principal amount of definitive Securities of the same series of authorized
denominations having the same original Issue Date and Stated Maturity and having
the same terms as such temporary Securities. Until so exchanged, the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as definitive Securities.
SECTION 3.05. Global Securities. (a) Each Global Security issued under
this Indenture shall be registered in the name of the Depositary designated by
the Company for such Global Security or a nominee thereof and delivered to such
Depositary or a nominee thereof or custodian therefor, and each such Global
Security shall constitute a single Security for all purposes of this Indenture.
(b) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities registered,
and no transfer of a Global
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Security in whole or in part may be registered, in the name of any Person other
than the Depositary for such Global Security or a nominee thereof unless (i)
such Depositary advises the Trustee in writing that such Depositary is no longer
willing or able to continue as a Depositary with respect to such Global
Security, and no successor depositary shall have been appointed, or if at any
time the Depositary ceases to be a "clearing agency" registered under the
Securities Exchange Act of 1934, as amended, at a time when the Depositary is
required to be so registered to act as such depositary, (ii) the Company in its
sole discretion determines that such Global Security shall be so exchangeable,
(iii) there shall have occurred and be continuing an Event of Default or (iv)
pursuant to the following sentence. All or any portion of a Global Security may
be exchanged for a Security that has a like aggregate principal amount and is
not a Global Security upon 20 days' prior request made by the Depositary or its
Agent Member to the Securities Registrar.
(c) If any Global Security is to be exchanged for other
Securities or canceled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Securities Registrar for exchange or
cancellation as provided in this Article III. If any Global Security is to be
exchanged for other Securities or canceled in part, or if another Security is to
be exchanged in whole or in part for a beneficial interest in any Global
Security, then either (i) such Global Security shall be so surrendered for
exchange or cancellation as provided in this Article III or (ii) the principal
amount thereof shall be reduced, subject to Section 3.06(b)(iv), or increased by
an amount equal to the portion thereof to be so exchanged or canceled, or equal
to the principal amount of such other Security to be so exchanged for a
beneficial interest therein, as the case may be, by means of an appropriate
adjustment made on the records of the Securities Registrar, whereupon the
Trustee shall instruct the Depositary or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Security by the Depositary, accompanied by registration instructions
and, to the extent required by Section 3.06, a Restricted Securities
Certificate, the Trustee shall, subject to Section 3.05(b) and as otherwise
provided in this Article III, authenticate and make available for delivery any
Securities issuable in exchange for such Global Security (or any portion
thereof) in accordance with the instructions of the Depositary. The Trustee
shall not be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be fully protected in relying on, such
instructions.
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(d) The Depositary or its nominee, as registered owner of a
Global Security, shall be the Holder of such Global Security for all purposes
under this Indenture and the Securities, and owners of beneficial interests in a
Global Security shall hold such interest pursuant to the rules and procedures of
the Depositary. Accordingly, any such owner's beneficial interests in a Global
Security shall be shown only on, and the transfer of such interest shall be
effected only through, records maintained by the Depositary or its nominee or
its Agent Members. Neither the Trustee nor the Securities Registrar shall have
any liability in respect of any transfers effected by the Depositary.
(e) The rights of the owners of beneficial interests in a
Global Security shall be exercised only through the Depositary and shall be
limited to those established by law and agreements between such owners and the
Depositary and/or its Agent Members.
SECTION 3.06. Registration, Transfer and Exchange Generally: Certain
Transfers and Exchanges: Restricted Securities Legends. (a) The Company shall
cause to be kept at the Corporate Trust Office of the Trustee a register in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of the Securities and of transfers of
Securities. Such register is herein sometimes referred to as the "Securities
Register". The Trustee is hereby appointed "Securities Registrar" for the
purpose of registering the Securities and transfers of Securities as herein
provided.
Upon surrender for registration of transfer of any Security at the
office of the agent of the Company designated for that purpose, the Company
shall execute, and the Trustee shall authenticate and make available for
delivery, in the name of the designated transferee or transferees, one or more
new Securities of the same series of any authorized denominations, of a like
aggregate principal amount, of the same Original Issue Date and Stated Maturity
and having the same terms and bearing such restrictive legends as may be
required by this Indenture.
At the option of the Holder, Securities may be exchanged for other
Securities of the same series of any authorized denominations, of a like
aggregate principal amount, of the same Original Issue Date and Stated Maturity
and having the same terms and bearing such restrictive legends as may be
required by this Indenture, upon surrender of the Securities to be exchanged at
such office or agency. Whenever any Securities are so surrendered for exchange,
the Company shall execute, and the
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Trustee shall authenticate and make available for delivery, the Securities that
the Holder making the exchange is entitled to receive.
All Securities issued upon any transfer or exchange of Securities shall
be the valid obligations of the Company, evidencing the same debt, and entitled
to the same benefits under this Indenture, as the Securities surrendered upon
such transfer or exchange.
Every Security presented or surrendered for transfer or exchange shall
(if so required by the Company or the Securities Registrar) be duly endorsed, or
be accompanied by a written instrument of transfer in form satisfactory to the
Company and the Securities Registrar, duly executed by the Holder thereof or his
attorney duly authorized in writing.
No service charge shall be made to a Holder for any transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any transfer or exchange of Securities.
Neither the Company nor the Trustee shall be required, pursuant to the
provisions of this Section, (i) to issue, transfer or exchange any Security of
any series during a period beginning at the opening of business 15 days before
the day of mailing of a notice of redemption of Securities pursuant to Article
XI and ending at the close of business on the day of mailing of notice of
redemption or (ii) to transfer or exchange any Security so selected for
redemption in whole or in part, except, in the case of any Security to be
redeemed in part, any portion thereof not to be redeemed.
(b) Certain Transfers and Exchanges. Notwithstanding any other
provision of this Indenture, transfers and exchanges of Securities and
beneficial interests in a Global Capital Security of the kinds specified in this
Section 3.06(b) shall be made only in accordance with this Section 3.06(b).
(i) Non-Global Security to Global Security. If the
Holder of a Security (other than a Global Security) wishes at any time to
transfer all or any portion of such Security to a Person who wishes to take
delivery thereof in the form of a beneficial interest in a Global Security, such
transfer may be effected only in accordance with the provisions of this clause
(b)(i) and subject to the rules and procedures of the Depositary.
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Upon receipt by the Securities Registrar of (A) such Security as provided in
Section 3.06(a) and instructions satisfactory to the Securities Registrar
directing that a beneficial interest in the Global Security in a specified
principal amount not greater than the principal amount of such Security be
credited to a specified Agent Member's account and (B) a Securities Certificate
duly executed by such Holder or such Holder's attorney duly authorized in
writing, then the Securities Registrar shall cancel such Security (and issue a
new Security in respect of the untransferred portion thereof) as provided in
Section 3.06(a) and increase the aggregate principal amount of the Global
Security by the specified principal amount as provided in Section 3.05(c).
(ii) Non-Global Security to Non-Global Security. A
Security that is not a Global Security may be transferred, in whole or in part,
to a Person who takes delivery in the form of another Security that is not a
Global Security as provided in Section 3.06(a); provided, that if such Security
to be transferred in whole or in part is a Restricted Security, the Securities
Registrar shall have received a Restricted Securities Certificate duly executed
by the transferor Holder or such Holder's attorney duly authorized in writing.
(iii) Exchanges between Global Security and
Non-Global Security. A beneficial interest in a Global Security may be exchanged
for a Security that is not a Global Security as provided in Section 3.05.
(c) Restricted Securities Legend. (i) Except as set forth
below, all Securities shall bear a Restricted Securities Legend, substantially
in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE
DATE THAT IS ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF
AND THE LAST DATE ON WHICH SOUTHERN FINANCIAL BANCORP, INC. (THE
"COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE
RESTRICTIONS TERMINATION DATE") ONLY (A) TO THE
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COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH
(a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT ACQUIRING
THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT
WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO
ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR
TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR
OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE
AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH MAY BE
OBTAINED FROM THE COMPANY OR THE TRUSTEE. THIS LEGEND WILL BE REMOVED
UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTIONS TERMINATION
DATE.
(ii) Subject to the following clauses of this Section 3.06(c),
a Security (other than a Global Security) that does not bear a
Restricted Securities Legend may be issued in exchange for or in lieu
of a Restricted Security or any portion thereof that bears such legend
if, in the Company's judgment, placing such a legend upon such new
Security is not necessary to ensure compliance with the registration
requirements of the Securities Act, and the Trustee, at the written
direction of the Company in the form of an Officers' Certificate, shall
countersign and deliver such a new Security as provided in this Article
III.
(iii) Notwithstanding the foregoing provisions of this Section
3.06(c), a successor Security of a Security that does not bear a
Restricted Securities Legend shall not bear such form of legend unless
the Company has reasonable cause to believe that such successor
Security is a "restricted security" within the meaning of Rule 144
under the Securities Act, in which case the Trustee, at the written
direction of the Company in the form of an Officers' Certificate, shall
countersign and deliver a new Security
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bearing a Restricted Securities Legend in exchange for such successor
Security as provided in this Article III.
(iv) Upon any sale or transfer of a Restricted Security
(including any Restricted Security represented by a Global Security)
pursuant to an effective registration statement under the Securities
Act or pursuant to Rule 144 under the Securities Act after such
registration ceases to be effective: (A) in the case of any Restricted
Security that is a definitive Security, the Securities Registrar shall
permit the Holder thereof to exchange such Restricted Security for a
definitive Security that does not bear the Restricted Securities Legend
and rescind any restriction on the transfer of such Restricted
Security; and (B) in the case of any Restricted Security that is
represented by a Global Security, the Securities Registrar shall permit
the Holder of such Global Security to exchange such Global Security for
another Global Security that does not bear the Restricted Securities
Legend.
(v) If Restricted Securities are being presented or
surrendered for transfer or exchange then there shall be (if so
required by the Trustee), (A) if such Restricted Securities are being
delivered to the Securities Registrar by a Holder for registration in
the name of such Holder, without transfer, a certification from such
Holder to that effect; or (B) if such Restricted Securities are being
transferred, (i) a certification from the transferor in a form
substantially similar to that attached as Exhibit A, and (ii) if the
Company or Securities Registrar so requests, evidence reasonably
satisfactory to them as to the compliance with the restrictions set
forth in the Restricted Securities Legend.
(vi) If the Securities are issued pursuant to an effective
registration statement, no Restricted Securities Legend shall be
required.
SECTION 3.07. Mutilated, Destroyed, Lost and Stolen Securities. If any
mutilated Security is surrendered to the Trustee together with such security or
indemnity as may be required by the Company or the Trustee to hold each of them
harmless, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a new Security of the same issue and series of like
tenor and principal amount, having the same Original Issue Date and Stated
Maturity and
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bearing the same Interest Rate as such mutilated Security, and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and to the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security, and (ii) such security or indemnity as may be required by them to hold
each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute, and, upon its request, the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same issue and series of like tenor and principal amount, having the same
Original Issue Date and Stated Maturity and bearing the same Interest Rate as
such destroyed, lost or stolen Security, and bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.08. Payment of Interest; Interest Rights Preserved. Interest
on any Security of any series that is payable, and is punctually paid or duly
provided for, on any Interest Payment Date, shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date
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for such interest in respect of Securities of such series, except that, unless
otherwise provided in the Securities of such series, interest payable on the
Stated Maturity of a Security shall be paid to the Person to whom principal is
paid. The initial payment of interest on any Security of any series that is
issued between a Regular Record Date and the related Interest Payment Date shall
be payable as provided in such Security or in the Board Resolution pursuant to
Section 3.01 with respect to the related series of Securities.
Any interest on any Security that is payable, but is not timely paid or
duly provided for, on any Interest Payment Date for Securities of such series
(herein called "Defaulted Interest"), shall forthwith cease to be payable to the
registered Holder on the relevant Regular Record Date by virtue of having been
such Holder, and such Defaulted Interest may be paid by the Company, at its
election in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities of such series in respect
of which interest is in default (or their respective Predecessor Securities) are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
in this Clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall not be more than 15 days
and not less than 10 days prior to the date of the proposed payment and not less
than 10 days after the receipt by the Trustee of the notice of the proposed
payment. The Trustee shall promptly notify the Company of such Special Record
Date and, in the name and
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at the expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be mailed, first
class, postage prepaid, to each Holder of a Security of such series at the
address of such Holder as it appears in the Securities Register not less than 10
days prior to such Special Record Date. The Trustee may, in its discretion, in
the name and at the expense of the Company, cause a similar notice to be
published at least once in a newspaper, customarily published in the English
language on each Business Day and of general circulation in the Borough of
Manhattan, the City of New York, but such publication shall not be a condition
precedent to the establishment of such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date therefor
having been mailed as aforesaid, such Defaulted Interest shall be paid to the
Persons in whose names the Securities of such series (or their respective
Predecessor Securities) are registered on such Special Record Date and shall no
longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities of the series in respect of which interest is
in default may be listed and, upon such notice as may be required by such
exchange (or by the Trustee if the Securities are not listed), if, after notice
given by the Company to the Trustee of the proposed payment pursuant to this
Clause, such payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Security shall carry the rights to interest accrued and unpaid, and to
accrue, that were carried by such other Security. Any interest on any Security
that is deferred or extended pursuant to Section 3.12 shall not constitute
Defaulted Interest for purposes of this Section 3.08.
SECTION 3.09. Persons Deemed Owners. The Company, the Trustee and any
agent of the Company or the Trustee may treat the Person in whose name any
Security is registered as the owner of such Security for the purpose of
receiving payment of principal of and (subject to Section 3.08) interest on such
Security and for all other purposes whatsoever, whether or not such Security is
overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary. No holder of any
beneficial interest in any Global Security held on its behalf by a Depositary
shall have any rights under this Indenture with respect to such Global Security,
and such Depositary may be treated by the Company, the Trustee and any agent of
the Company or the Trustee as the owner of such Global Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the
Company or the Trustee from giving effect to any written certification, proxy,
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or other authorization furnished by a Depositary or impair, as between the
Depositary and such holders of beneficial interests, the operation of customary
practices governing the exercise of the rights of the Depositary (or its
nominee) as Holder of any Security.
SECTION 3.10. Cancellation. All Securities surrendered for payment,
redemption, transfer or exchange shall, if surrendered to any Person other than
the Trustee, be delivered to the Trustee, and any such Securities and Securities
surrendered directly to the Trustee for any such purpose shall be promptly
canceled by it. The Company may at any time deliver to the Trustee for
cancellation any Securities previously authenticated and made available for
delivery hereunder that the Company may have acquired in any manner whatsoever,
and all Securities so delivered shall be promptly canceled by the Trustee. No
Securities shall be authenticated in lieu of or in exchange for any Securities
canceled as provided in this Section, except as expressly permitted by this
Indenture. All canceled Securities shall be delivered to the Company.
SECTION 3.11. Computation of Interest. Except as otherwise specified as
contemplated by Section 3.01 for Securities of any series, interest on the
Securities of each series for any period shall be computed on the basis of a
360-day year of twelve 30-day months, and interest on the Securities of each
series for any partial period shall be computed on the basis of the number of
days elapsed in a 360-day year of twelve 30-day months.
SECTION 3.12. Deferrals of Interest Payment Dates. If specified as
contemplated by Section 3.01 with respect to the Securities of a particular
series, provided that no Event of Default has occurred and is continuing with
respect to such Securities, the Company shall have the right, at any time or
from time to time during the term of such series, to defer the payment of
interest on such Securities for such period or periods as may be specified as
contemplated by Section 3.01 (each, an "Extension Period") during which
Extension Periods the Company shall have the right to make partial payments of
interest on any Interest Payment Date. No Extension Period shall end on a date
other than an Interest Payment Date. At the end of any such Extension Period the
Company shall pay all interest then accrued and unpaid on the Securities
(together with Additional Interest thereon, if any, at the rate specified for
the Securities of such series to the extent permitted by applicable law),
provided, however, that no Extension Period may extend beyond the Stated
Maturity of these Securities. During any such Extension Period, the Company
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shall not (i) declare or pay dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock (which includes common and preferred stock), or (ii) make any
payment of principal, interest, or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company (including Other Debentures) that rank
pari passu with or junior in interest to the Securities of such series or (iii)
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any Subsidiary of the Company (including Other Guarantees) if
such guarantee ranks pari passu with or junior in interest to the Securities of
such series (other than (a) dividends or distributions in common stock of the
Company, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the applicable Company Guarantee, (d) purchases or
acquisitions of shares of the Company's Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plan
or other contractual obligation of the Company (other than a contractual
obligation ranking pari passu with or junior to these Securities, (e) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock, or (f) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged). Prior to the termination of any such Extension Period,
the Company may further extend such Extension Period; provided, however, that no
Extension Period shall exceed the period or periods specified in such Securities
or extend beyond the Stated Maturity of such Securities. Upon termination of any
Extension Period and upon the payment of all accrued and unpaid interest and any
Additional Interest then due on any Interest Payment Date, and subject to the
foregoing limitations, the Company may elect to begin a new Extension Period. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company shall give the Trustee and the Property Trustee notice of
its election to begin any such Extension Period (or an extension thereof) at
least three Business Days prior to the Interest Payment Date or, with respect to
the Securities of a series issued to a Southern Financial Capital Trust, prior
to the earlier of (i) the date the Distributions on the Trust Securities of such
Southern Financial Capital Trust would have been payable except for the election
to
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begin or extend such Extension Period or (ii) the date the Administrative
Trustees or such Southern Financial Capital Trust are required to give notice to
any automated quotation system or to holders of Trust Securities of the record
date or the date such Distributions are payable, but in any event not less than
three Business Days prior to such record date. There is no limitation on the
number of times that the Company may elect to begin an Extension Period.
SECTION 3.13. CUSIP Numbers. The Company in issuing the Securities may
use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall
use "CUSIP" numbers in notices of redemption or other related material as a
convenience to Holders; provided, however, that any such notice or other related
material may state that no representation is made as to the correctness of such
numbers either as printed on the Securities or as contained in any notice of a
redemption or other related material and that reliance may be placed only on the
other identification numbers printed on the Securities, and any such redemption
shall not be affected by any defect in or omission of such numbers.
So long as the Securities are held by or on behalf of a Southern
Financial Capital Trust, notwithstanding anything to the contrary herein, the
Company shall have the right to set off any payment it is otherwise required to
make hereunder in respect of any Security with and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, any
payment under a Company Guarantee used to satisfy the related payment of
indebtedness hereunder.
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ARTICLE IV
Satisfaction and Discharge
SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture,
upon Company Request, shall cease to be of further effect (except as to (i) any
surviving rights of transfer, substitution and exchange of Securities, (ii)
rights hereunder of Holders to receive payments of principal of and interest on
the Securities and other rights, duties and obligations of the Holders as
beneficiaries hereof with respect to the amounts, if any, deposited with the
Trustee pursuant to this Article IV and (iii) the rights and obligations of the
Trustee hereunder), and the Trustee, on demand of and at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and
delivered (other than (i) Securities that have been destroyed,
lost or stolen and that have been replaced or paid as provided
in Section 3.07 and (ii) Securities for whose payment money
has theretofore been deposited in trust or segregated and held
in trust by the Company and thereafter repaid to the Company
or discharged from such trust, as provided in Section 10.03)
have been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to
the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their
Stated Maturity within one year of the date of
deposit, or
(iii) are to be called for redemption within
one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of Clause (B)(i), (ii) or (iii) above, has
deposited or caused to be deposited with the Trustee as trust funds in
trust for such purpose an amount
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in the currency or currencies in which the Securities of such series
are payable sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for
cancellation, for principal and interest (including any Additional
Interest) to the date of such deposit (in the case of Securities that
have become due and payable) or to the Stated Maturity or the date for
redemption, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture or the earlier
resignation or removal of the Trustee, the obligations of the Company to the
Trustee under Section 6.07 and, if money shall have been deposited with the
Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations
of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall
survive.
SECTION 4.02. Application of Trust Money. Subject to the provisions of
the last paragraph of Section 10.03, all money deposited with the Trustee
pursuant to Section 4.01, shall be held in trust and applied by the Trustee, in
accordance with the provisions of the Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal and interest for the payment of which such
money or obligations have been deposited with or received by the Trustee;
provided, however, that such moneys need not be segregated from other funds
except to the extent required by law.
ARTICLE V
Remedies
SECTION 5.01. Events of Default. "Event of Default", wherever used
herein with respect to the Securities of any series, means any one of the
following events (whatever the
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reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Security
of that series, including any Additional Interest in respect thereof,
when it becomes due and payable, and continuance of such default for a
period of 30 days (subject to the deferral of any due date in the case
of an Extension Period); or
(2) default in the payment of the principal of any Security of
that series when due, whether at its Maturity, upon redemption, by
declaration of acceleration or otherwise; or
(3) default in the observance or performance in any material
respect, of any covenant of the Company in this Indenture (other than a
covenant a default in the performance of which or the breach of which
is elsewhere in this Section specifically dealt with), and continuance
of such default for a period of 90 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
outstanding principal amount of the Securities of that series a written
notice specifying such default and requiring it to be remedied; or
(4) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law, or appointing a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or of any substantial part of its property or
ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a
period of 60 consecutive days; or
(5) the institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings
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against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law, or the
consent by it to the filing of any such petition or to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its
property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due and its willingness to be
adjudicated a bankrupt, or the taking of corporate action by the
Company in furtherance of any such action; or
(6) in respect of a series issued to a Southern Financial
Capital Trust, the voluntary or involuntary dissolution, winding-up or
termination of a Southern Financial Capital Trust, except in connection
with the distribution of the Securities of such series to the holders
of Trust Securities in liquidation of such Southern Financial Capital
Trust, the redemption of all the Trust Securities of a Southern
Financial Capital Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the applicable Trust Agreement; or
(7) any other Event of Default with respect to Securities of
that series as set forth in the Board Resolution and the Officers'
Certificate, or established in a supplemental indenture hereto, prior
to the issuance of the series of such Securities as contemplated by
Section 3.01.
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an
Event of Default with respect to Securities of any series at the time
Outstanding occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in aggregate principal amount of the
Outstanding Securities of that series may declare the principal amount (or, if
the Securities of that series are Discount Securities, such portion of the
principal amount as may be specified in the terms of that series) of all the
Securities of that series to be due and payable immediately, by a notice in
writing to the Company (and to the Trustee if given by Holders), provided,
however, that, in the case of the Securities of a series issued to a Southern
Financial Capital Trust, if, upon an Event of Default, the Trustee or the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Securities of that series
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fail to declare the principal of all the Securities of that series to be
immediately due and payable, the holders of at least 25% in aggregate
Liquidation Amount of the corresponding series of Capital Securities then
outstanding shall have such right by a notice in writing to the Company and the
Trustee with a copy to the Property Trustee. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of a series may annul
such declaration and waive the default by written notice to the Property
Trustee, the Company and the Trustee if the default (other than the nonpayment
of the principal of these Securities that has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Trustee. Should the Holders of the Securities of such a
series fail to annul such declaration and waive such default, the holders of a
majority in aggregate Liquidation Amount of the Capital Securities shall have
such right. Upon any such declaration such principal amount (or specified
amount) of and the accrued interest (including any Additional Interest) on all
the Securities of such series shall become immediately due and payable,
provided, however, that the payment of principal and interest (including any
Additional Interest) on such Securities shall remain subordinated to the extent
provided in Article XIV.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereafter in this
Article provided, the Holders of a majority in aggregate principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(A) all overdue installments of interest (including
any Additional Interest) on all Securities of that series,
(B) the principal of any Securities of that series
that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the
Securities, and
(C) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
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disbursements and advances of the Trustee, its agents and
counsel.
(2) all Events of Default with respect to Securities of that
series, other than the nonpayment of the principal of Securities of
that series that has become due solely by such acceleration, have been
cured or waived as provided in Section 5.13.
The Company is required to file annually with the Trustee a certificate
as to whether or not the Company is in compliance with all the conditions and
covenants applicable to it under this Indenture.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Upon receipt by the Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, with respect to Securities of
a series all or part of which is represented by a Global Security, a record date
shall be established for determining Holders of Outstanding Securities of such
series entitled to join in such notice, which record date shall be at the close
of business on the day the Trustee receives such notice. The Holders on such
record date, or their duly designated proxies, and only such Persons, shall be
entitled to join in such notice, whether or not such Holders remain Holders
after such record date; provided, however, that, unless such declaration of
acceleration, or rescission and annulment, as the case may be, shall have become
effective by virtue of the requisite percentage having joined in such notice
prior to the day that is 90 days after such record date, such notice of
declaration of acceleration, or rescission and annulment, as the case may be,
shall automatically and without further action by any Holder be canceled and of
no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy
of a Holder, from giving, after expiration of such 90-day period, a new written
notice of declaration of acceleration, or rescission and annulment thereof, as
the case may be, that is identical to a written notice that has been canceled
pursuant to the proviso to the preceding sentence, in which event a new record
date shall be established pursuant to the provisions of this Section 5.02.
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee. The Company covenants that if:
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(1) default is made in the payment of any installment of
interest (including any Additional Interest) on any Security when such
interest becomes due and payable, and such default continues for a
period of 30 days, or
(2) default is made in the payment of the principal of any
Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal, including any sinking fund payment or
analogous obligations and interest (including any Additional Interest); and, in
addition thereto, all amounts owing to the Trustee under Section 6.07 and
Section 10.06.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default with respect to Securities of any series occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders of Securities of such series by
such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
SECTION 5.04. Trustee May File Proofs of Claim. In case of the pendency
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company or any other obligor upon the Securities or the property of the
Company or of such other obligor or their creditors,
(a) the Trustee (irrespective of whether the principal of the
Securities of any series shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether
the Trustee shall have made any
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demand on the Company for the payment of overdue principal or interest
(including any Additional Interest)) shall be entitled and empowered,
by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of
principal and interest (including any Additional Interest)
owing and unpaid in respect to the Securities and to file such
other papers or documents as may be necessary or advisable and
to take any and all actions as are authorized under the Trust
Indenture Act in order to have the claims of the Holders and
any predecessor to the Trustee under Section 6.07 and of the
Holders allowed in any such judicial proceedings; and
(ii) in particular, the Trustee shall be authorized
to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same in
accordance with Section 5.06; and
(b) any custodian, receiver, assignee, trustee, liquidator,
sequestrator (or other similar official) in any such judicial
proceeding is hereby authorized by each Holder to make such payments to
the Trustee for distribution in accordance with Section 5.06, and in
the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due to it and
any predecessor Trustee under Section 6.07.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any proceeding; provided, however, that
the Trustee may, on behalf of the Holders, vote for the election of a trustee in
bankruptcy or similar official and be a member of a creditors' or other similar
committee.
SECTION 5.05. Trustee May Enforce Claim Without Possession of
Securities. All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its
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own name as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of all the amounts owing to the Trustee and any
predecessor Trustee under Section 6.07, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 5.06. Application of Money Collected. Any money or property
collected or to be applied by the Trustee with respect to a series of Securities
pursuant to this Article shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money or
property on account of principal or interest (including any Additional
Interest), upon presentation of the Securities and the notation thereon of the
payment, if only partially paid, and upon surrender thereof, if fully paid:
First: to the payment of all amounts due the Trustee and any
predecessor Trustee under Section 6.07;
Second: to the payment of the amounts then due and unpaid upon
such series of Securities for principal and interest (including any
Additional Interest), in respect of which or for the benefit of which
such money has been collected, ratably, without preference or priority
of any kind, according to the amounts due and payable on such series of
Securities for principal and interest (including any Additional
Interest), respectively; and
Third: the balance, if any, to the Person or Persons entitled
thereto.
SECTION 5.07. Limitation on Suits. No Holder of any Securities of any
series shall have any right to institute any proceeding, judicial or otherwise,
with respect to this Indenture or for the appointment of a receiver, assignee,
trustee, liquidator, sequestrator (or other similar official) or for any other
remedy hereunder, unless:
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Securities
of that series;
(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities of that series shall have made written
request to the Trustee to institute
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proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that
series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing itself of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Securities, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all such Holders.
SECTION 5.08. Unconditional Right of Holders to Receive Principal and
Interest. Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right that is absolute and unconditional to receive
payment of the principal of and (subject to Section 3.08) interest (including
any Additional Interest) on such Security on the respective Stated Maturities
expressed in such Security and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder. In the case of Securities of a series issued to a Southern Financial
Capital Trust, any holder of the corresponding series of Capital Securities
shall have the right, upon the occurrence of an Event of Default described in
Section 5.01(1) or 5.01(2) hereof, to institute a suit directly against the
Company for enforcement of payment to such Holder of principal of and (subject
to Section 3.08) interest (including any Additional Interest) on the Securities
having a principal amount equal to the aggregate Liquidation Amount of the
Capital Securities of the corresponding series held by such Holder.
Notwithstanding any payments made to a holder of Capital Securities by the
Company in connection with a suit directly against the Company, the Company
shall remain obligated to pay the principal of or interest on the Securities,
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and the Company shall be subrogated to the rights of the holder of such Capital
Securities with respect to payments on the Capital Securities to the extent of
any payments made by the Company to such holder in any suit directly against the
Company.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in this Section 5.08,
available to the holders of the Securities unless there shall have been an Event
of Default under the Trust Agreement.
SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any
Holder has instituted any proceeding to enforce any right or remedy under this
Indenture and such proceeding has been discontinued or abandoned for any reason,
or has been determined adversely to the Trustee or to such Holder, then and in
every case the Company, the Trustee and the Holders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
SECTION 5.10. Rights and Remedies Cumulate. Except as otherwise
provided in the last paragraph of Section 3.07, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
SECTION 5.11. Delay or Omission Not Waiver. Except as otherwise
provided in the last paragraph of Section 3.07, no delay or omission of the
Trustee or of any Holder of any Security to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee
or to the Holders may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the Holders, as the case may be.
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SECTION 5.12. Control by Holders. The Holders of a majority in
principal amount of the Outstanding Securities of any series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee, with respect to the Securities of such series, provided that:
(1) such direction shall not be in conflict with any rule of
law or with this Indenture;
(2) the Trustee may take any other action deemed proper by the
Trustee that is not inconsistent with such direction; and
(3) subject to the provisions of Section 6.01, the Trustee
shall have the right to decline to follow such direction if the Trustee
in good faith shall, by a Responsible Officer or Officers of the
Trustee, determine that the proceeding so directed would be unjustly
prejudicial to the Holders not joining in any such direction or would
involve the Trustee in personal liability.
Upon receipt by the Trustee of any written notice directing the time,
method or place of conducting any such proceeding or exercising any such trust
or power, with respect to Securities of a series all or part of which is
represented by a Global Security, a record date shall be established for
determining Holders of outstanding Securities of such series entitled to join in
such notice, which record date shall be at the close of business on the day the
Trustee receives such notice. The Holders on such record date, or their duly
designated proxies, and only such Persons, shall be entitled to join in such
notice, whether or not such Holders remain Holders after such record date;
provided, however, that, unless the Holders of a majority in principal amount of
the Outstanding Securities of such series shall have joined in such notice prior
to the day that is 90 days after such record date, such notice shall
automatically and without further action by any Holder be canceled and of no
further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of
a Holder, from giving, after expiration of such 90-day period, a new written
notice identical to a written notice that has been canceled pursuant to the
proviso to the preceding sentence, in which event a new record date shall be
established pursuant to the provisions of this Section 5.12.
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SECTION 5.13. Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of a series affected
thereby may, on behalf of the Holders of all the Securities of such series,
waive any past default, except a default in the payment of principal of or
interest (including any Additional Interest) (unless such default has been cured
and a sum sufficient to pay all overdue installments of interest and principal
due otherwise than by acceleration has been deposited with the Trustee) on any
Security of such series or a default in respect of a covenant or provision that,
under Article IX, cannot be modified or amended without the consent of the
Holder of each outstanding Security of such series and, in the case of
Securities of a series issued to a Southern Financial Capital Trust, should the
Holders of such Securities fail to annul such declaration and waive such
default, the holders of a majority in aggregate Liquidation Amount of the
related series of Capital Securities shall have such right.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14. Undertaking for Costs. All parties to this Indenture
agree, and each Holder of any Security by his acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken or omitted by it as Trustee, the filing
by any party litigant in such suit of an undertaking to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10% in principal amount of the
outstanding Securities of any series, or to any suit instituted by any Holder
for the enforcement of the payment of the principal of or interest (including
any Additional Interest) on any Security on or after the respective Stated
Maturities expressed in such Security.
SECTION 5.15. Waiver of Usury, Stay or Extension Laws. The Company
covenants (to the extent that it may lawfully do so) that
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it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, that may affect the covenants or
the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE VI
The Trustee
SECTION 6.01. Certain Duties and Responsibilities. (a) Except during
the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions
that by any provisions hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this
Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(b) In case an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise or use under the circumstances in
the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent
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failure to act, or its own willful misconduct except that:
(i) this Subsection shall not be construed to limit the effect
of Subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance
with the direction of Holders pursuant to Section 5.12 relating to the
time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture with respect to the Securities
of such series.
(d) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if there shall be reasonable grounds for believing that
repayment of such funds or indemnity satisfactory to it against such risk or
liability is not assured to it.
(e) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section.
SECTION 6.02. Notice of Defaults. Within 90 days after actual knowledge
by a Responsible officer of the Trustee of the occurrence of any default
hereunder with respect to the Securities of any series, the Trustee shall
transmit by mail to all Holders of Securities of such series, as their names and
addresses appear in the Securities Register, notice of such default hereunder
known to a Responsible Officer of the Trustee, unless such default shall have
been cured or waived; provided, however, that, except in the case of a default
in the payment of the principal of or interest (including any Additional
Interest) on any Security of such series, the Trustee shall be fully protected
in withholding such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good
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faith determines that the withholding of such notice is in the interests of the
Holders of Securities of such series; and provided, further, however, that, in
the case of any default of the character specified in Section 5.01(3), no such
notice to Holders of Securities of such series shall be given until at least 30
days after the occurrence thereof. For the purpose of this Section, the term
"default" means any event that is, or after notice or lapse of time or both
would become, an Event of Default with respect to Securities of such series.
SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of
Section 6.01:
(a) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, Security or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence is herein specifically prescribed) shall
be entitled to receive and may, in the absence of bad faith on its
part, conclusively rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and
the advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee security or indemnity
satisfactory to
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it against the costs, expenses and liabilities that might be incurred
by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, indenture, Security or other paper or document,
but the Trustee in its discretion may make such inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such inquiry or investigation, it shall
be entitled to examine the books, records and premises of the Company,
personally or by agent or attorney at the reasonable cost of the
Company upon giving reasonable notice to the Company and shall incur no
liability or additional liability of any kind by reason of such inquiry
or investigation;
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder;
(h) the Trustee shall not be under any obligation to take any
action that is discretionary under the provisions of this Indenture;
(i) the Trustee shall not be charged with knowledge of any
Event of Default unless either (1) a Responsible Officer of the Trustee
shall have actual knowledge or (2) the Trustee shall have received
notice thereof in accordance with Section 1.05(1) hereof from the
Company or a Holder;
(j) no permissive power or authority available to the Trustee
shall be construed as a duty; and
(k) the Trustee shall not be liable for any action taken,
suffered or omitted to be taken by it in good faith and reasonably
believed by it to be authorized or within the discretion or rights or
powers conferred upon it by this Indenture.
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, shall be
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taken as the statements of the Company, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Securities or any
offering or disclosure materials prepared in connection therewith. The Trustee
shall not be accountable for the use or application by the Company of the
Securities or the proceeds thereof.
SECTION 6.05. May Hold Securities. The Trustee, any Paying Agent,
Securities Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Paying Agent, Securities Registrar or such
other agent.
SECTION 6.06. Money Held in Trust. Money held by the Trustee in trust
hereunder need not be segregated from other funds except to the extent required
by law. The Trustee shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed in writing with the Company.
SECTION 6.07. Compensation and Reimbursement. The Company, as borrower
on the Securities, agrees:
(1) to pay to the Trustee from time to time such compensation
as the Company and the Trustee shall from time to time agree in writing
for all services rendered by it hereunder (which compensation shall not
be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) to reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by the
Trustee in accordance with any provision of this Indenture (including
the reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense (other than taxes based upon,
measured by or determined by the income of the Trustee) (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel) incurred without negligence or bad faith, arising
out of or in connection with the acceptance or administration of this
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trust or the performance of its duties hereunder, including the costs
and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder.
The obligations of the Company under this Section 6.07 shall survive
the termination of this Indenture or the earlier resignation or removal of the
Trustee.
To secure the Company's payment obligations in this Section, the
Company and the Holders agree that the Trustee shall have a lien prior to the
Securities on all money or property held or collected by the Trustee.
Such lien shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 5.01(4) or (5) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under the Bankruptcy Code of 1978, as amended, or any successor
statute.
The provisions of this Section 6.07 shall survive the termination of
this Indenture.
SECTION 6.08. Disqualification; Conflicting Interests. The Trustee for
the Securities of any series issued hereunder shall be subject to the provisions
of Section 310(b) of the Trust Indenture Act. Nothing herein shall prevent the
Trustee from filing with the Commission the application referred to in the
second-to-last paragraph of Section 310(b) of the Trust Indenture Act.
SECTION 6.09. Corporate Trustee Required; Eligibility. There shall at
all times be a Trustee hereunder that shall be:
(a) a corporation organized and doing business under the laws
of the United States of America or of any state, territory or the
District of Columbia, authorized under such laws to exercise corporate
trust powers and subject to supervision or examination by Federal,
state, territorial or District of Columbia authority, or
(b) a corporation or other Person organized and doing business
under the laws of a foreign government that is permitted to act as
Trustee pursuant to a rule, regulation or order of the Commission,
authorized under such laws to exercise corporate trust powers, and
subject to supervision
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or examination by authority of such foreign government or a political
subdivision thereof substantially equivalent to the supervision or
examination applicable to United States institutional trustees, in
either case having a combined capital and surplus of at least
$50,000,000, subject to supervision of examination by Federal or state
authority. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then, for the purposes of this
Section, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this
Section, it shall resign immediately in the manner and with the effect
hereafter specified in this Article. Neither the Company nor any Person
directly or indirectly controlling, controlled by or under common
control with the Company shall serve as Trustee for the Securities of
any series issued hereunder.
SECTION 6.10. Resignation and Removal, Appointment of Successor. (a) No
resignation or removal of the Trustee and no appointment of a Successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the Successor Trustee under Section 6.11.
(b) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If an instrument of acceptance by a Successor Trustee shall not have
been delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a Successor Trustee with respect to the
Securities of such series.
(c) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal amount
of the Outstanding Securities of such series, delivered to the Trustee and to
the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 6.08 after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for at least six months, or
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(ii) the Trustee shall cease to be eligible under Section 6.09
and shall fail to resign after written request therefor by the Company
or by any such Holder, or
(iii) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case,
(x) the Company, acting pursuant to the authority of a Board
Resolution, may remove the Trustee, or (y) subject to Section 5.14, any
Holder who has been a bona fide Holder of a Security for at least six
months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a Successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause with respect to the Securities of one or more series, the Company, by
a Board Resolution, shall promptly appoint a Successor Trustee with respect to
the Securities of that or those series. If, within one year after such
resignation, removal or incapability, or the occurrence of such vacancy, a
Successor Trustee with respect to the Securities of any series shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series delivered to the Company and the retiring
Trustee, the Successor Trustee so appointed shall, forthwith upon its acceptance
of such appointment, become the Successor Trustee with respect to the Securities
of such series and supersede the Successor Trustee appointed by the Company. If
no Successor Trustee with respect to the Securities of any series shall have
been so appointed by the Company or the Holders and accepted appointment in the
manner hereafter provided, within 30 days of such resignation or removal the
Trustee or any Holder who has been a bona fide Holder of a Security for at least
six months, subject to Section 5.14, on behalf of himself and all others
similarly situated, may petition any court of competent jurisdiction for the
appointment of a Successor Trustee with respect to the Securities of such
series.
(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a Successor Trustee with respect to the Securities of any series
by mailing written notice
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of such event by first-class mail, postage prepaid, to the Holders of Securities
of such series as their names and addresses appear in the Securities Register.
Each notice shall include the name of the Successor Trustee with respect to the
Securities of such series and the address of its Corporate Trust Office.
SECTION 6.11. Acceptance of Appointment Successor. (a) In case of the
appointment hereunder of a Successor Trustee with respect to all Securities,
every such Successor Trustee so appointed shall execute, acknowledge and deliver
to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such Successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Company or the
Successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such Successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such Successor Trustee all property and money held by
such retiring Trustee hereunder.
(b) In case of the appointment hereunder of the Successor
Trustee with respect to the Securities of one or more (but not all) series, the
Company, the retiring Trustee and each Successor Trustee with respect to the
Securities of one or more series shall execute and deliver a written instrument
or an indenture supplemental hereto wherein each Successor Trustee shall accept
such appointment and which (1) shall contain such provisions as shall be
necessary or desirable to transfer and confirm to, and to vest in, each
Successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of such Successor Trustee relates, (2) if the retiring Trustee is
not retiring with respect to all Securities, shall contain such provisions as
shall be deemed necessary or desirable to confirm that all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or those series as to which the retiring Trustee is not retiring shall continue
to be vested in the retiring Trustee, and (3) shall add to or change any of the
provisions of this Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such written instrument or supplemental
indenture shall constitute such Trustees as co-trustees of the same trust and
that each such Trustee
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shall be trustee of a trust or trusts hereunder separate and apart from any
trust or trusts hereunder administered by any other such Trustee, and upon the
execution and delivery of such written instrument or supplemental indenture, the
resignation or removal of the retiring Trustee shall become effective to the
extent provided therein, and each such Successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers,
trusts, and duties of the retiring Trustee with respect to the Securities of
that or those series to which the appointment of such Successor Trustee relates;
but, on request of the Company or any Successor Trustee, such retiring Trustee
shall duly assign, transfer and deliver to such Successor Trustee all property
and money held by such retiring Trustee hereunder with respect to the Securities
of that or those series to which the appointment of such Successor Trustee
relates.
(c) Upon request of any such Successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such Successor Trustee all rights, powers and trusts referred
to in paragraph (a) or (b) of this Section, as the case may be.
(d) No Successor Trustee shall accept its appointment unless
at the time of such acceptance such Successor Trustee shall be qualified and
eligible under this Article. In the event that the Trust Indenture Act applies
to this Indenture at the time that any Successor Trustee is appointed, such
Successor Trustee shall qualify under such Act.
SECTION 6.12. Merger, Conversion, Consolidation or Succession to
Business. Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article (including qualification under the Trust Indenture Act, if applicable),
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated, and in case any
Securities shall not have been authenticated, any successor to the Trustee may
authenticate such Securities either
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in the name of any predecessor Trustee or in the name of such Successor Trustee,
and in all cases the certificate of authentication shall have the full force
that it is provided anywhere in the Securities or in this Indenture that the
certificate of the Trustee shall have.
SECTION 6.13. Preferential Collection of Claims Against Company. If and
when the Trustee shall be or become a creditor of the Company (or any other
obligor upon the Securities), the Trustee shall be subject to the provisions of
the Trust Indenture Act regarding the collection of claims against the Company
(or any such other obligor).
SECTION 6.14. Appointment of Authenticating Agent. The Trustee may
appoint an authenticating agent or agents (each, an "Authenticating Agent") with
respect to one or more series of Securities that shall be authorized to act on
behalf of the Trustee to authenticate Securities of such series issued upon
original issue and upon exchange, registration of transfer or partial redemption
thereof, and Securities so authenticated shall be entitled to the benefits of
this Indenture and shall be valid and obligatory for all purposes as if
authenticated by the Trustee hereunder. Where reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall be acceptable to the
Company and shall at all times be a corporation organized and doing business
under the laws of the United States of America, or of any state, Territory or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of such supervising or examining authority, then
for the purposes of this Section the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any
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corporation resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of an Authenticating Agent
shall be the successor Authenticating Agent hereunder, provided such corporation
shall be otherwise eligible under this Section, without the execution or filing
of any paper or any further act on the part of the Trustee or the Authenticating
Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent that shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 1.06 to all Holders of Securities
of the series with respect to which such Authenticating Agent will serve. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
If an appointment with respect to one or more series is made pursuant
to this Section, the Securities of each series may have endorsed thereon, in
addition to the Trustee's certificate of authentication, an alternative
certificate of authentication in the following form:
This is one of the Securities referred to in the within mentioned
Indenture.
Dated: ___________________________________
Agent Trustee
By:________________________________
As Authenticating Agent
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By:________________________________
Authorized Signatory
SECTION 6.15. Trustee's Rights and Obligations. The Trustee shall have
and be subject to all the duties and responsibilities specified with respect to
an indenture trustee under the Trust Indenture Act. Subject to such provisions,
the Trustee is under no obligation to exercise any of the powers vested in it by
this Indenture at the request of any holder of the Securities, unless offered
indemnity to its satisfaction by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Trustee will not be required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Trustee reasonably believes that repayment
or adequate indemnity is not reasonably assured to it. Notwithstanding the
foregoing, nothing in this Section 6.15 shall be deemed to abrogate any of the
rights, indemnities or protections otherwise provided to the Trustee under this
Indenture.
ARTICLE VII
Holder's Lists and Reports by Trustee and Company
SECTION 7.01. Company to Furnish Trustee Names and Addresses of
Holders. The Company will furnish or cause to be furnished to the Trustee:
(a) quarterly, not more than 15 days after each Regular Record
Date in each year, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date, and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished, excluding from any such list
names and addresses received by the Trustee in its capacity as
Securities Registrar.
SECTION 7.02. Preservation of Information, Communications to Holders.
(a) The Trustee shall preserve, in as current a
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form as is reasonably practicable, the names and addresses of Holders contained
in the most recent list furnished to the Trustee as provided in Section 7.01 and
the names and addresses of Holders received by the Trustee in its capacity as
Securities Registrar. The Trustee may destroy any list furnished to it as
provided in Section 7.01 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders
with respect to their rights under this Indenture or under the Securities, and
the corresponding rights and privileges of the Trustee, shall be as provided in
the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
the disclosure of information as to the names and addresses of the Holders made
pursuant to the Trust Indenture Act.
SECTION 7.03. Reports by Trustee. (a) The Trustee shall transmit to
Holders such reports concerning the Trustee and its actions under this Indenture
as may be required pursuant to the Trust Indenture Act, at the times and in the
manner provided pursuant thereto.
(b) Reports so required to be transmitted at stated intervals
of not more than 12 months shall be transmitted no later than the last calendar
day in ________ of each calendar year, commencing with the last calendar day in
________ of the year following the Original Issue Date.
(c) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each securities exchange
upon which the Securities are listed and also with the Commission. The Company
will notify the Trustee whenever the Securities are listed on any securities
exchange.
SECTION 7.04. Reports by Company. The Company shall file with the
Trustee and with the Commission, and transmit to Holders, such information,
documents and other reports, and such summaries thereof, as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided in
the Trust Indenture Act; provided that any such information, documents or
reports required to be filed with the Commission pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, as amended, shall be filed
with the Trustee within 15 days after the same is required to be filed with the
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Commission. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company shall continue to file with the
Commission and provide the Trustee with the annual reports and the information,
documents and other reports that are specified in Sections 13 and 15(d) of the
Securities Exchange Act of 1934, as amended. The Company also shall comply with
the other provisions of Trust Indenture Act Section 314(a). Delivery of such
reports, information and documents to the Trustee is for informational purposes
only, and the Trustee's receipt of such shall not constitute constructive notice
of any information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates).
ARTICLE VIII
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 8.01. Company May Consolidate Only on Certain Terms. The
Company shall not consolidate with or merge with or into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and no Person shall consolidate with or merge with or into the
Company or convey, transfer or lease its properties and assets substantially as
an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge with
or into another Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, the corporation
formed by such consolidation or into which the Company is merged or the
Person that acquires by conveyance or transfer, or that leases, the
properties and assets of the Company substantially as an entirety shall
be a corporation, partnership or trust organized and existing under the
laws of the United States of America or any State or the District of
Columbia, and shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form satisfactory to
the Trustee, the due and punctual payment of the principal of and
interest (including any Additional Interest) on all the Securities and
the performance of every covenant and every obligation of this
Indenture on the part of the Company to be performed or observed;
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(2) immediately after giving effect to such transaction, no
Event of Default, and no event that, after notice or lapse of time, or
both, would become an Event of Default, shall have occurred and be
continuing;
(3) if at such time Securities of a series issued to a
Southern Financial Capital Trust are Outstanding, such consolidation,
merger, conveyance, transfer or lease is permitted under the related
Trust Agreement and Company Guarantee and does not give rise to any
breach or violation of the related Trust Agreement or Company
Guarantee; and
(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that such
consolidation, merger, conveyance, transfer or lease and any such
supplemental indenture complies with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with; and the Trustee, subject to Section 6.01, may
rely upon such Officers' Certificate and Opinion of Counsel as
conclusive evidence that such transaction complies with this Section
8.01.
SECTION 8.02. Successor Company Substituted. Upon any consolidation or
merger by the Company with or into any other Person, or any conveyance, transfer
or lease by the Company of its properties and assets substantially as an
entirety to any Person in accordance with Section 8.01, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein; and in the event of any such conveyance, transfer or
lease the Company shall be discharged from all obligations and covenants under
the Indenture and the Securities and may be dissolved and liquidated.
Such successor Person may cause to be signed, and may issue either in
its own name or in the name of the Company, any or all of the Securities
issuable hereunder that theretofore shall not have been signed by the Company
and delivered to the Trustee; and, upon the order of such successor Person
instead of the Company and subject to all the terms, conditions and limitations
in this Indenture prescribed, the Trustee shall authenticate and shall make
available for delivery any Securities that previously
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shall have been signed and delivered by the officers of the Company to the
Trustee for authentication pursuant to such provisions and any Securities that
such successor Person thereafter shall cause to be signed and delivered to the
Trustee on its behalf for the purpose pursuant to such provisions. All the
Securities so issued shall in all respects have the same legal rank and benefit
under this Indenture as the Securities theretofore or thereafter issued in
accordance with the terms of this Indenture as though all of such Securities had
been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, conveyance or lease,
such changes in phraseology and form may be made in the Securities thereafter to
be issued as may be appropriate.
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following:
(1) to evidence the succession of another Person to the
Company, and the assumption by any such successor of the covenants of
the Company herein and in the Securities contained;
(2) to convey, transfer, assign, mortgage or pledge any
property to or with the Trustee or to surrender any right or power
herein conferred upon the Company;
(3) to establish the form or terms of Securities of any series
as permitted by Sections 2.01 or 3.01;
(4) to add to the covenants of the Company for the benefit of
the Holders of all or any series of Securities (and if such covenants
are to be for the benefit of less than all series of Securities,
stating that such covenants are expressly being included solely for the
benefit of such series) or to surrender any right or power herein
conferred upon the Company;
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(5) to add any additional Events of Default;
(6) to change or eliminate any of the provisions of this
Indenture; provided that any such change or elimination (a) shall
become effective only when there is no Security Outstanding of any
series created prior to the execution of such supplemental indenture
that is entitled to the benefit of such provision or (b) shall not
apply to any Outstanding Securities;
(7) to cure any ambiguity, to correct or supplement any
provision herein that may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture; provided that such action
pursuant to this clause (7) shall not materially adversely affect the
interest of (a) the Holders of Securities of any series or, (b) in the
case of the Securities of a series issued to a Southern Financial
Capital Trust and for so long as any of the corresponding series of
Capital Securities shall remain outstanding, the holders of such
Capital Securities;
(8) to evidence and provide for the acceptance of appointment
hereunder by a Successor Trustee with respect to the Securities of one
or more series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee,
pursuant to the requirements of Section 6.11(b); or
(9) to comply with the requirements of the Commission in order
to effect or maintain the qualification of this Indenture under the
Trust Indenture Act.
SECTION 9.02. Supplemental Indentures with Consent of Holders. With the
consent of the Holders of not less than a majority in principal amount of the
Outstanding Securities of each series affected by such supplemental indenture,
by Act of such Holders delivered to the Company and the Trustee, the Company,
when authorized by a Board Resolution, and the Trustee may enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the Holders of
Securities of such series under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby,
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(1) except to the extent permitted by Section 3.12 or as
otherwise specified as contemplated by Section 3.01 with respect to the
extension of the interest payment period of the Securities of any
series, change the Stated Maturity of the principal of, or any
installment of interest (including any Additional Interest) on, any
Security, or reduce the principal amount thereof or the rate of
interest thereon, or reduce the amount of principal of a Discount
Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 5.02, or
change the place of payment where, or the coin or currency in which,
any Security or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
date fixed for redemption thereof);
(2) reduce the percentage in principal amount of the
Outstanding Securities of any series, the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture;
(3) modify any of the provisions of this Section, Section 5.13
or Section 10.05, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Security affected
thereby; or
(4) modify the provisions in Article XIII of this Indenture
with respect to the subordination of outstanding Securities of any
series in a manner adverse to the Holders thereof;
provided that, in the case of the Securities of a series issued to a Southern
Financial Capital Trust, so long as any of the corresponding series of Capital
Securities remain outstanding, no such amendment shall be made that adversely
affects the holders of such Capital Securities in any material respect, and no
termination of this Indenture shall occur, and no waiver of any Event of Default
or compliance with any covenant under this Indenture shall be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of such Capital Securities then outstanding unless and
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until the principal of the Securities of such series and all accrued and,
subject to Section 3.08, unpaid interest (including any Additional Interest)
thereon have been paid in full; and provided further, however, that in the case
of the securities of a series issued to a Southern Financial Capital Trust, so
long as any of the corresponding series of Capital Securities remain
outstanding, no amendment shall be made to Section 5.08 of this Indenture that
would impair the rights of the holders of such Capital Securities provided
herein without the prior consent of the holders of each Capital Security then
outstanding unless and until the principal of the Securities of such series and
all accrued and (subject to Section 3.08) unpaid interest (including any
Additional Interest) thereon have been paid in full.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Persons entitled to consent to any indenture
supplemental hereto. If a record date is fixed, the Holders on such record date,
or their duly designated Proxies, and only such Persons, shall be entitled to
consent to such supplemental indenture, whether or not such Holders remain
Holders after such record date; provided, that unless such consent shall have
become effective by virtue of the requisite percentage having been obtained
prior to the date that is 90 days after such record date, any such consent
previously given shall automatically and without further action by any Holder be
canceled and of no further effect.
A supplemental indenture that changes or eliminates any covenant or
other provision of this Indenture that has expressly been included solely for
the benefit of one or more particular series of Securities, or that modifies the
rights of the Holders of Securities of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 9.03. Execution of Supplemental Indentures. In executing or
accepting the additional trusts created by any supplemental indenture permitted
by this Article or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01) shall be fully protected in conclusively relying upon, an Officer's
Certificate and an Opinion of Counsel stating
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that the execution of such supplemental indenture is authorized or permitted by
this Indenture, and that all conditions precedent have been complied with. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture that affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, or that may subject it to liability or be contrary to
applicable law.
SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of
any supplemental indenture under this Article, this Indenture shall be modified
in accordance therewith, and such supplemental indenture shall form a part of
this Indenture for all purposes; and every Holder of Securities theretofore or
thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.05. Conformity with Trust Indenture Act. No supplemental
indenture will be qualified or executed pursuant to the Trust Indenture Act
unless this Indenture is so qualified, or in connection with Capital Securities
that are registered under the Securities Exchange Act of 1934, as amended, upon
the effectiveness of a registration statement. Every supplemental indenture so
qualified or executed shall conform to the requirements of the Trust Indenture
Act as then in effect.
SECTION 9.06. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Company,
bear a notation in form approved by the Company as to any matter provided for in
such supplemental indenture. If the Company shall so determine, new Securities
of any series so modified as to conform, in the opinion of the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities of such Series.
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ARTICLE X
Covenants
SECTION 10.01. Payment of Principal and Interest. The Company covenants
and agrees for the benefit of each series of Securities that it will duly and
punctually pay the principal of and interest on the Securities of that series in
accordance with the terms of such Securities and this Indenture.
SECTION 10.02. Maintenance of Office or Agency. The Company will
maintain in each Place of Payment for any series, an office or agency where
Securities of that series may be presented or surrendered for payment and an
office or agency where Securities may be surrendered for transfer or exchange
and where notices and demand to or upon the Company in respect of the Securities
and this Indenture may be served. The Company initially appoints the Trustee,
acting through its Corporate Trust Office, as its agent for such purposes. The
Company will give prompt written notice to the Trustee of any change in the
location of any such office or agency. If at any time the Company shall fail to
maintain such office or agency or shall fall to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all of such purposes, and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in each
Place of Payment for Securities of any series for such purposes. The Company
will give prompt written notice to the Trustee of any such designation and any
change in the location of any such office or agency.
SECTION 10.03. Money for Security Payments to be Held in Trust. If the
Company shall at any time act as its own Paying Agent with respect to any series
of Securities, it will, on or before each due date of the principal of or
interest on any of the Securities of such series, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal or interest so becoming due until such sums shall be paid to such
Persons or otherwise disposed of as herein
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provided, and will promptly notify the Trustee of its failure so to act.
Whenever the Company shall have one or more Paying Agents, it will,
prior to 10:00 a.m. Richmond, Virginia time on each due date of the principal of
or interest on any Securities, deposit with a Paying Agent a sum sufficient to
pay the principal or interest so becoming due, such sum to be held in trust for
the benefit of the Persons entitled to such principal or interest, and (unless
such Paying Agent is the Trustee) the Company will promptly notify the Trustee
of its failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and make available for delivery to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal
of or interest on Securities in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee written notice of any default by the
Company (or any other obligor upon the Securities) in the making of any
payment of principal or interest;
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent; and
(4) comply with the provisions of the Trust Indenture Act
applicable to it as a Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by the Company or any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
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Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of or interest on any
Security and remaining unclaimed for two years after such principal or interest
has become due and payable shall (unless otherwise required by mandatory
provision of applicable escheat or abandoned or unclaimed property law) be paid
on Company Request to the Company, or (if then held by the Company) shall
(unless otherwise required by mandatory provision of applicable escheat or
abandoned or unclaimed property law) be discharged from such trust; and the
Holder of such Security shall thereafter, as an unsecured general creditor, look
only to the Company for payment thereof, and all liability of the Trustee or
such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of the Company cause to be published once, in a newspaper
published in the English language, customarily published on each Business Day
and of general circulation in the Borough of Manhattan, the City of New York,
notice that such money remains unclaimed and that, after a date specified
therein, that shall not be less than 30 days from the date of such publication,
any unclaimed balance of such money then remaining will be repaid to the
Company.
SECTION 10.04. Statement as to Compliance. The Company shall deliver to
the Trustee, within 120 days after the end of such calendar year of the Company
commencing after the date hereof, an Officers' Certificate executed by
authorized officers at least one of whom shall be the principal executive,
financial or accounting officer of the Company covering the preceding calendar
year, stating whether or not to the best knowledge of the signers thereof the
Company is in default in the performance, observance or fulfillment of or
compliance with any of the material terms, provisions covenants and conditions
of this Indenture, and if the Company shall be in such default, specifying all
such defaults and the nature and status thereof of which they may have
knowledge. For the purpose of this Section 10.04, compliance shall be determined
without regard to any grace period (other than an Extension Period) or
requirement of notice provided pursuant to the terms of this Indenture.
SECTION 10.05. Waiver of Certain Covenants. The Company may omit in any
particular instance to comply with any covenant or condition as specified as
contemplated by Section 3.01 with respect to the Securities of any series, if
before or after the time for such compliance the Holders of at least a majority
in
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principal amount of the outstanding Securities of such series shall, by Act of
such Holders, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Company in
respect of any such covenant or condition shall remain in full force and effect.
SECTION 10.06. Payment of the Trusts' Costs and Expenses. Since the
Southern Financial Capital Trusts are being formed solely to facilitate the
investment in the Securities, the Company, as borrower on the Securities, hereby
covenants to pay all debts and obligations (other than with respect to the
payment of principal and interest on the Trust Securities) and all costs and
expenses of such Trusts (including, but not limited to, all costs and expenses
relating to the organization of such Trusts, the fees and expenses of the
Trustees and all costs and expenses relating to the operation of such Trusts)
and to pay any and all taxes, duties, assessments or other governmental charges
of whatever nature (other than United States withholding taxes) imposed on such
Trusts by the United States, or any other taxing authority (such payments of
amounts in connection with taxes being herein referred to as "Additional Sums"),
so that the net amounts received and retained by such Trusts and their
respective Property Trustees after paying such expenses or Additional Sums will
be equal to the amounts such Trusts and Property Trustees would have received
had no such costs, expenses or taxes, duties, assessments or other governmental
charges been incurred by or imposed on such Trusts. The foregoing obligations of
the Company are for the benefit of, and shall be enforceable by, any person to
whom such debts, obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice thereof. Any such Creditor may
enforce such obligations of the Company hereunder directly against the Company,
and the Company hereby irrevocably waives any right or remedy to require that
any such Creditor take any action against any Trust or any other person before
proceeding against the Company. The Company also agrees hereby to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
SECTION 10.07. Additional Covenants. The Company covenants and agrees
with each Holder of Securities of a series issued to a Southern Financial
Capital Trust that it will not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any shares of the Company's capital stock (which includes common and
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preferred stock), or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of the Company
(including Other Debentures) that rank pari passu with or junior in interest to
the Securities of such series or (iii) make any guarantee payments with respect
to any guarantee by the Company of debt securities of any subsidiary of the
Company (including Other Guarantees) if such guarantee ranks pari passu with or
junior in interest to the Securities (other than (a) dividends or distributions
in Common Stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Company Guarantee, (d) purchases
or acquisitions of shares of the Company's Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plan
or other contractual obligation of the Company (other than a contractual
obligation ranking pari passu with or junior in interest to these Securities),
(e) as a result of a reclassification of the Company's capital Stock or the
exchange or conversion of one class or series of the Company's capital stock for
another class or series of the Company's capital stock or (f) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged), if at such time (i) there shall have occurred an Event
of Default, (ii) the Company shall be in default with respect to its payment of
any obligations under the related Company Guarantee or (iii) the Company shall
have given notice of its election to begin an Extension Period as provided
herein and shall not have rescinded such notice, or such Extension Period, or
any extension thereof, shall be continuing.
The Company also covenants with each Holder of Securities of a series
issued to a Southern Financial Capital Trust (i) to maintain directly, or
indirectly through a wholly owned Subsidiary, 100% ownership of the Common
Securities of such Southern Financial Capital Trust; provided, however, that any
permitted successor of the Company hereunder may succeed to the Company's
ownership of such Common Securities, (ii) not to voluntarily terminate, wind-up
or liquidate such Southern Financial Capital Trust, except (a) in connection
with a distribution of the Securities of such series to the holders of Capital
Securities in liquidation of such Southern Financial Capital Trust or (b) in
connection with certain mergers, consolidations or amalgamations permitted by
the related Trust Agreement and (iii) to use its reasonable best efforts,
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consistent with the terms and provisions of such Trust Agreement, (x) not to
adversely affect such Southern Financial Capital Trust's status as a grantor
trust and (y) not to cause such Southern Financial Capital Trust to be
classified as an association taxable as a corporation for United States Federal
income tax purposes.
SECTION 10.08. Information Returns. For each year during which any
Securities are outstanding, the Company shall furnish to each Paying Agent on a
timely basis such information as may be reasonably requested by each Paying
Agent in order that such Paying Agent may prepare the information that it is
required to report for such year on Internal Revenue Service Forms 1096 and
1099. Such information shall include the amount of original issue discount, if
any, includible in income for each $1,000 of principal amount at Stated Maturity
of outstanding Securities during such year.
SECTION 10.09. Statement by Officers as to Default. The Company shall
deliver to the Trustee, within five days after the Company becomes aware of the
occurrence of any Event of Default, an Officers' Certificate setting forth the
details of such Event of Default and the action that the Company proposes to
take with respect thereto, if known at such time.
SECTION 10.10 Delivery of Certain Information. If specified as
contemplated by Section 3.01 with respect to a series of Securities, at any time
when the Company is not subject to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, upon the request of a Holder of a Security,
the Company will promptly furnish or cause to be furnished Rule 144A Information
(as defined below) to such Holder, to a prospective purchaser who is a
"qualified institutional buyer", within the meaning of Rule 144A under the
Securities Act, of such Security designated by such Holder in order to permit
compliance by such Holder with Rule 144A in connection with the resale of such
Security by such Holder; provided, however, that unless otherwise specified as
contemplated by Section 3.01, the Company shall not be required to furnish such
information in connection with any request made on or after the date that is two
years from the later of (i) the date such Security (or any predecessor Security)
was acquired from the Company or (ii) the date such Security (or any predecessor
Security) was last acquired from an "affiliate" of the Company within the
meaning of Rule 144 under the Securities Act. "Rule 144A Information" shall be
such information as is specified pursuant to Rule 144A(d)(4) under the
Securities Act as in effect on the date hereof.
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ARTICLE XI
Redemption or Prepayment of Securities
SECTION 11.01. Applicability of This Article. Redemption of Securities
(whether by operation of a sinking fund or otherwise) as permitted or required
by any form of Security issued pursuant to this Indenture shall be made in
accordance with such form of Security and this Article; provided, however, that
if any provision of any such form of security shall conflict with any provision
of this Article, the provision of such form of Security shall govern. Except as
otherwise set forth in the form of Security for such series, each Security shall
be subject to partial redemption only in an amount not less than $100,000 or, in
the case of the Securities of a series issued to a Southern Financial Capital
Trust, an amount not less than $100,000, or multiples of $1,000 in excess
thereof.
SECTION 11.02. Election To Redeem: Notice to Trustee. The election of
the Company to redeem any Securities shall be evidenced by or pursuant to a
Board Resolution. In case of any redemption at the election of the Company of
any Securities of any particular series and having the same terms, the Company
shall, not less than 30 nor more than 60 days prior to the date fixed for
redemption (unless a shorter notice shall be satisfactory to the Trustee),
notify the Trustee and, in the case of Securities held by or on behalf of a
Southern Financial Capital Trust, the Property Trustee of such date and of the
principal amount of Securities of that series to be redeemed. In the case of any
redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities, the Company shall furnish
the Trustee with an Officers' Certificate and an Opinion of Counsel evidencing
compliance with such restriction. Any such notice given to the Trustee hereunder
shall include the information required by Section 11.04 hereof.
SECTION 11.03. Selection of Securities to be Redeemed. If less than all
the Securities of any series are to be redeemed (unless all the Securities of
such series and of a specified tenor are to be redeemed or unless such
redemption affects only a single Security all as designated to the Trustee by
the Company), the particular Securities to be redeemed shall be selected not
more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of such series not previously
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called for redemption, by such method as the Trustee shall deem fair and
appropriate and that may provide for the selection for redemption of a portion
of the principal amount of any Security of such series; provided that the
unredeemed portion of the principal amount of any Security shall be in an
authorized denomination (which shall not be less than the minimum authorized
denomination) for such Security. If less than all the Securities of such series
and of a specified tenor are to be redeemed (unless such redemption affects only
a single Security), the particular Securities to be redeemed shall be selected
not more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of such series and specified tenor not previously called
for redemption in accordance with the preceding sentence.
The Trustee shall promptly notify the Company in writing of the
Securities selected for partial redemption and the principal amount thereof to
be redeemed. For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security that has been or is to be
redeemed. If the Company shall so direct, Securities registered in the name of
the Company, any Affiliate or any Subsidiary thereof shall not be included in
the Securities selected for redemption.
SECTION 11.04. Notice of Redemption. Notice of redemption (other than
at the Stated Maturity) shall be given by first-class mail, postage prepaid,
mailed not later than the thirtieth day, and not earlier than the sixtieth day,
prior to the date fixed for redemption, to each Holder of Securities to be
redeemed, at the address of such Holder as it appears in the Securities
Register.
With respect to Securities of each series to be redeemed, each notice
of redemption shall state:
(a) the Redemption Date for Securities of such series;
(b) the Redemption Price or, if the Redemption Price cannot be
calculated prior to the time the notice is required to be sent, the
estimate of the Redemption Price provided pursuant to this Indenture
together with a statement that it is an estimate and that the actual
Redemption Price will be calculated on the third Business Day prior to
the Redemption Date (if such an estimate of the
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Redemption Price is given, a subsequent notice shall be given as set
forth above setting forth the Redemption Price promptly following the
calculation thereof);
(c) if less than all Outstanding Securities of such particular
series and having the same terms are to be redeemed, the identification
(and, in the case of partial redemption, the respective principal
amounts) of the particular Securities to be redeemed;
(d) that on the date fixed for redemption, the redemption
price at which such Securities are to be redeemed will become due and
payable upon each such Security or portion thereof, and that interest
thereon, if any, shall cease to accrue on and after such date;
(e) the place or places where such Securities are to be
surrendered for payment of the Redemption Price;
(f) that the redemption is for a sinking fund, if such is the
case;
(g) such other provisions as may be required in respect of the
terms of a particular series of Securities; and
(h) the CUSIP number if any.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall not be
irrevocable. The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice. In any case, a failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
SECTION 11.05. Deposit of Redemption Price. Prior to 10:00 a.m.
Richmond, Virginia time on the Redemption Date specified in the notice of
redemption given as provided in Section 11.04, the Company will deposit with the
Trustee or with one or more Paying Agents an amount of money sufficient to
redeem on the Redemption Date all the Securities so called for redemption at the
applicable Redemption Price.
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SECTION 11.06. Payment of Securities Called for Redemption. If any
notice of redemption has been given as provided in Section 11.04, the Securities
or portion of Securities with respect to which such notice has been given shall
become due and payable on the date and at the place or places stated in such
notice at the applicable Redemption Price. On presentation and surrender of such
Securities at a place of payment in such notice specified, such Securities or
the specified portions thereof shall be paid and redeemed by the Company at the
applicable Redemption Price.
Upon presentation of any Security redeemed in part only, the Company
shall execute and the Trustee shall authenticate and deliver to the Holder
thereof, at the expense of the Company, a new Security or Securities of that
same series, of authorized denominations, in aggregate principal amount equal to
the unredeemed portion of the Security so presented and having the same Original
Issue Date, Stated Maturity and terms. If the Global Security is so surrendered,
such new Security will (subject to Section 3.06) also be a new Global Security.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal of such Security shall, until
paid, bear interest from the Redemption Date at the rate prescribed therefor in
the Security.
SECTION 11.07. Company's Right of Redemption. Unless otherwise
specified as contemplated by Section 3.01 with respect to the Securities of a
particular series and notwithstanding any additional redemption rights that may
be so specified, the Company, at its option, may redeem the Securities, subject
to the Company having received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve,
(i) on or after the date specified in such Securities, in whole at any time or
in part from time to time, or (ii) upon the occurrence and during the
continuation of a Tax Event, an Investment Company Event or a Capital Treatment
Event, at any time within 90 days following the occurrence and during the
continuation of such Tax Event, Investment Company Event or Capital Treatment
Event, in whole (but not in part), in each case at a Redemption Price specified
in such Securities, together with accrued interest (including Additional
Interest) to the Redemption Date.
If less than all the Securities of any such series are to be redeemed,
the aggregate principal amount of such Securities
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remaining Outstanding after giving effect to such redemption shall be sufficient
to satisfy any provisions of the Declaration of Trust related to the Southern
Financial Capital Trust to which such Securities were issued.
ARTICLE XII
Sinking Funds
SECTION 12.01. Applicability of Article. The provisions of this Article
shall be applicable to any sinking fund for the retirement of Securities of any
series except as otherwise specified as contemplated by Section 3.01 for such
Securities.
The minimum amount of any sinking fund payment provided for by the
terms of any Securities of any series is herein referred to as a "mandatory
sinking fund payment", and any sinking fund payment in excess of such minimum
amount that is permitted to be made by the terms of such Securities of any
series is herein referred to as an "optional sinking fund payment". If provided
for by the terms of any Securities of any series, the case amount of any sinking
fund payment may be subject to reduction as provided in Section 13.02. Each
sinking fund payment shall be applied to the redemption (or purchase by tender
or otherwise) of Securities of any series as provided for by the terms of such
Securities.
SECTION 12.02. Satisfaction of Sinking Fund Payments with Securities.
In lieu of making all or any part of a mandatory sinking fund payment with
respect to any Securities of a series in cash, the Company may at its option, at
any time no more than 16 months and no less than 45 days prior to the date on
which such sinking fund payment is due, deliver to the Trustee Securities of
such series (together with the unmatured Coupons, if any, appertaining thereto)
theretofore purchased or otherwise acquired by the Company, except Securities of
such series that have been redeemed through the application of mandatory or
optional sinking fund payments pursuant to the terms of the Securities of such
series, accompanied by a Company Order instructing the Trustee to credit such
obligations and stating that the Securities of such series were originally
issued by the Company by way of bona fide sale or other negotiation for value;
provided that the Securities to be so credited have not been previously so
credited. The Securities to be so credited shall be received and credited for
such purpose by the Trustee at the redemption price for such Securities, as
specified in the
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Securities so to be redeemed, for redemption through operation of the sinking
fund, and the amount of such sinking fund payment shall be reduced accordingly.
SECTION 12.03. Redemption of Securities Sinking Fund. Not less than 45
days prior to each sinking fund payment date for any series of securities, the
Company will deliver to the Trustee an Officers' Certificate specifying the
amount of the next ensuing sinking fund payment for such Securities pursuant to
the terms of such Securities, the portion thereof, if any, that is to be
satisfied by payment of cash in the currency in which the Securities of such
series are payable (except as provided pursuant to Section 3.01) and the portion
thereof, if any, that is to be satisfied by delivering and crediting Securities
pursuant to Section 13.02 and will also deliver to the Trustee any Securities to
be so delivered. Such Certificate shall be irrevocable and upon its delivery the
Company shall be obligated to make the cash payment or payments therein referred
to, if any, on or before the succeeding sinking fund payment date. In the case
of the failure of the Company to deliver such Certificate (or, as required by
this Indenture, the Securities and coupons, if any, specified in such
Certificate) by the due date therefor, the sinking fund payment due on the
succeeding sinking fund payment date for such series shall be paid entirely in
cash and shall be sufficient to redeem the principal amount of the Securities of
such series subject to a mandatory sinking fund payment without the right to
deliver or credit securities as provided in Section 13.02 and without the right
to make the optional sinking fund payment with respect to such series at such
time.
Any sinking fund payment or payments (mandatory or optional) made in
cash plus any unused balance of any preceding sinking fund payments made with
respect to the Securities of any particular series shall be applied by the
Trustee (or by the Company if the Company is acting as its own Paying Agent) on
the sinking fund payment date on which such payment is made (or, if such payment
is made before a sinking fund payment date, on the sinking fund payment date
immediately following the date of such payment) to the redemption of Securities
of such series at the redemption price specified in such Securities with respect
to the sinking fund. Any sinking fund moneys not so applied or allocated by the
Trustee (or by the Company if the Company is acting as its own Paying Agent), in
which case such moneys shall be segregated and held in trust as provided in
Section 10.03) for such series and together with such payment (or such amount so
segregated) shall be applied in accordance with the provisions of
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this Section 12.03. Any and all sinking fund moneys with respect to the
Securities of any particular series held by the Trustee (or if the Company is
acting as its own Paying Agent, segregated and held in trust as provided in
Section 10.03) on the last sinking fund payment date with respect to Securities
of such series and not held for the payment or redemption of particular
Securities of such series shall be applied by the Trustee (or by the Company if
the Company is acting as its own Paying Agent), together with other moneys, if
necessary, to be deposited (or segregated) sufficient for the purpose, to the
payment of the principal of the Securities of such series at Maturity. The
Trustee shall select the Securities to be redeemed upon such sinking fund
payment date in the manner specified in Section 11.03 and cause notice of the
redemption thereof to be given in the name of and at the expense of the Company
in the manner provided in Section 11.04. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Section 11.06. On or before each sinking fund payment date, the
Company shall pay to the Trustee (or, if the Company is acting as its own Paying
Agent, the Company shall segregate and hold in trust as provided in Section
10.03) in cash a sum in the currency in which Securities of such series are
payable (except as provided pursuant to Section 3.01) equal to the principal and
any interest accrued to the redemption date for Securities or portions thereof
to be redeemed on such sinking fund payment date pursuant to this Section 12.03.
Neither the Trustee nor the Company shall redeem any Securities of a
series with sinking fund moneys or mail any notice of redemption of Securities
of such series by operation of the sinking fund for such series during the
continuance of a default in payment of interest, if any, on any Securities of
such series or of any Event of Default (other than an Event of Default occurring
as a consequence of this paragraph) with respect to the Securities of such
series, except that if the notice of redemption shall have been provided in
accordance with the provisions hereof, the Trustee (or the Company if the
Company is then acting as its own Paying Agent) shall redeem such Securities if
cash sufficient for that purpose shall be deposited with the Trustee (or
segregated by the Company) for that purpose in accordance with the terms of this
Article XII. Except as aforesaid, any moneys in the sinking fund for such series
at the time when any such default or Event of Default shall occur and any moneys
thereafter paid into such sinking fund shall, during the continuance of such
default or Event of Default, be held as security for the payment of the
Securities and coupons, if any,
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of such series; provided, however, that in case such default or Event of Default
shall have been cured or waived herein, such moneys shall thereafter be applied
on the next sinking fund payment date for the Securities of such series on which
such moneys may be applied pursuant to the provisions of this Section 12.03.
ARTICLE XIII
Subordination of Securities
SECTION 13.01. Securities Subordinate to Senior Debt. The Company
covenants and agrees, and each Holder of a Security, by its acceptance thereof,
likewise covenants and agrees, that, to the extent and in the manner hereafter
set forth in this Article, the payment of the principal of and interest
(including any Additional Interest) on each and all of the Securities are hereby
expressly made subordinate and junior in right of payment to the prior payment
in full of all amounts then due and payable in respect of all Senior Debt.
SECTION 13.02. Payment Over of Proceeds upon Dissolution. In the event
of (a) any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company, its creditors or its property, (b) any proceeding for the
liquidation, dissolution, or other winding up of the Company, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings, (c)
any assignment by the Company for the benefit of creditors or (d) any other
marshaling of the assets of the Company (each such event, if any, herein
sometimes referred to as a "Proceeding"), then the holders of Senior Debt shall
be entitled to receive payment in full of principal of and interest, if any, on
such Senior Debt, or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior Debt,
before the Holders of the Securities are entitled to receive or retain any
payment or distribution of any kind or character, whether in cash, property or
securities (including any payment by distribution that may be payable or
deliverable by reason of the payment of any other debt of the Company (including
any series of the Securities) subordinated to the payment of the Securities,
such payment or distribution being hereafter referred to as a "Junior
Subordinated Payment"), on account of principal of or interest (including any
Additional Interest) on the Securities or on account of the purchase or other
acquisition of Securities by the
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Company or any Subsidiary and to that end the holders of Senior Debt shall be
entitled to receive, for application to the payment thereof, any payment or
distribution of any kind or character, whether in cash, property or securities,
including any Junior Subordinated Payment, that may be payable or deliverable in
respect of the Securities in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, including any Junior Subordinated
Payment, before all Senior Debt is paid in full or payment thereof is provided
for in cash or cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Debt, and if such fact shall, at or prior to the time of such
payment or distribution, have been made known to a Responsible Officer of the
Trustee or, as the case may be, such Holder, then and in such event such payment
or distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Senior Debt remaining unpaid, to the extent necessary to
pay all Senior Debt in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt.
For purposes of this Article only, the words "any payment or
distribution of any kind or character, whether in cash, property or securities"
shall not be deemed to include shares of stock of the Company as reorganized or
readjusted, or securities of the Company or any other corporation provided for
by a plan or reorganization or readjustment, in each case, which securities are
subordinated in right of payment to all then outstanding Senior Debt to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. The consolidation of the
Company with, or the merger of the Company into, another Person or the
liquidation or dissolution of the Company following the sale of all or
substantially all of its properties and assets as an entirety to another Person
or the liquidation or dissolution of the Company following the sale of all or
substantially all of its properties and assets as an entirety to another Person
upon the terms and conditions set forth in Article VIII shall not be deemed a
Proceeding for the purposes of this Section if the Person formed by such
consolidation or into which the Company is merged or the Person that acquires by
sale such properties and assets substantially as an entirety, as the case may
be, shall, as a
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part of such consolidation, merger, or sale comply with the conditions set forth
in Article VIII.
SECTION 13.03. Prior Payment to Senior Debt Upon Acceleration of
Securities. In the event that any Securities are declared due and payable before
their Stated Maturity, then and in such event the holders of the Senior Debt
outstanding at the time such Securities so become due and payable shall first be
entitled to receive payment in full of all amounts due on or in respect of such
Senior Debt (including any amounts due upon acceleration), or provision shall be
made for such payment in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Debt, before the Holders of the Securities
will be entitled to receive or retain any payment or distribution of any kind or
character, whether in cash, property or securities (including any Junior
Subordinated Payment) by the Company on account of the principal of or interest
(including any Additional Interest) on the Securities or on account of the
purchase or other acquisition of Securities by the Company or any Subsidiary;
provided, however, that nothing in this Section shall prevent the satisfaction
of any sinking fund payment in accordance with this Indenture or as otherwise
specified as contemplated by Section 3.01 for the Securities of any series by
delivering and crediting pursuant to Section 12.02 or as otherwise specified as
contemplated by Section 3.01 for the Securities of any series of Securities that
have been acquired (upon redemption or otherwise) prior to such declaration of
acceleration.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to a Responsible Officer of the
Trustee or, as the case may be, such Holder, then and in such event such payment
shall be paid over and delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 13.02 would be applicable.
SECTION 13.04. No Payment When Senior Debt in Default. (a) In the event
and during the continuation of any default by the Company in the payment of
principal of or interest, if any, on any Senior Debt, or in the event that any
event of default with respect to any Senior Debt shall have occurred and be
continuing and shall have resulted in such Senior Debt becoming or being
declared due and payable prior to the date on which it
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would otherwise have become due and payable, unless and until such event of
default shall have been cured or waived or shall have ceased to exist and such
acceleration shall have been rescinded or annulled, or (b) in the event any
judicial proceeding shall be pending with respect to any such default in payment
or event of default, then no direct or indirect payment or distribution of any
kind or character, whether in cash, property or securities (including any Junior
Subordinated Payment), by set-off or otherwise, shall be made or agreed to be
made by the Company on account of principal or interest (including any
Additional Interest) on the Securities or on account of any redemption,
repayment, retirement, purchase or other acquisition of any Securities by the
Company or any Subsidiary; provided, however, that nothing in this Section shall
prevent the satisfaction of any sinking fund payment in accordance with this
Indenture or as otherwise specified as contemplated by Section 3.01 for the
Securities of any series by delivering and crediting pursuant to Section 12.02
or as otherwise specified as contemplated by Section 3.01 for the Securities of
any series of Securities that have been acquired (upon redemption or otherwise)
prior to such default in payment or event of default.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to a Responsible Officer of the
Trustee or, as the case may be, such Holder, then and in such event such payment
shall be paid over and delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 13.02 would be applicable.
SECTION 13.05. Payment Permitted If No Default. Nothing contained in
this Article or elsewhere in this Indenture or in any of the Securities shall
prevent (a) the Company, at any time except during the pendency of any
Proceeding referred to in Section 13.02 or under the conditions described in
Sections 13.03 and 13.04, from making payments at any time of principal of or
interest (including any Additional Interest) on the Securities, or (b) the
application by the Trustee of any money deposited with it hereunder to the
payment of or on account of the principal of or interest (including any
Additional Interest) on the Securities or the retention of such payment by the
Holders, if, at the time of such payment by the Company or application by the
Trustee, as
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the case may be, it did not have knowledge that such payment or application, as
the case may be, would have been prohibited by the provisions of this Article.
SECTION 13.06. Subrogation to Rights of Holders of Senior Debt. Subject
to the payment in full of all amounts due on all Senior Debt to the extent
required under Sections 13.02 and 13.03 of this Indenture, or the provision for
such payment in cash or cash equivalents or otherwise in a manner satisfactory
to the holders of Senior Debt, the Holders of the Securities shall be subrogated
to the extent of the payments or distributions made to the holders of such
Senior Debt pursuant to the provisions of this Article (equally and ratably with
the holders of all indebtedness of the Company that by its express terms is
subordinated to Senior Debt of the Company to substantially the same extent as
the Securities are subordinated to the Senior Debt and is entitled to like
rights of subrogation by reason of any payments or distributions made to holders
of such Senior Debt) to the rights of the holders of such Senior Debt to receive
payments and distributions of cash, property and securities applicable to the
Senior Debt until the principal of and interest on the Securities shall be paid
in full. For purposes of such subrogation or assignment, no payments or
distributions to the holders of the Senior Debt of any cash, property or
securities to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior Debt by
Holders of the Securities or the Trustee, shall, as among the Company, its
creditors other than holders of Senior Debt, and the Holders of the Securities,
be deemed to be a payment or distribution by the Company to or on account of the
Senior Debt.
SECTION 13.07. Provisions Solely to Define Relative Rights. The
provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Debt on the other hand. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall (a) impair, as between the Company and the Holders of the Securities, the
obligations of the Company, which are absolute and unconditional, to pay to the
Holders of the Securities the principal of and interest (including any
Additional Interest) on the Securities as and when the same shall become due and
payable in accordance with their terms; or (b) affect the relative rights
against the Company of the Holders of the Securities and creditors of the
Company other than their rights in relation to
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the holders of Senior Debt; or (c) prevent the Trustee or the Holder of any
Security from exercising all remedies otherwise permitted by applicable law upon
default under this Indenture including, without limitation, filing and voting
claims in any Proceeding, subject to the rights, if any, under this Article of
the holders of Senior Debt to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder.
SECTION 13.08. Trustee to Effectuate Subordination. Each Holder of a
Security by his or her acceptance thereof authorizes and directs the Trustee on
his or her behalf to take such action as may be necessary or appropriate to
acknowledge or effectuate the subordination provided in this Article and
appoints the Trustee his or her attorney-in-fact for any and all such purposes.
SECTION 13.09. No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Debt to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Indenture, regardless of any knowledge
thereof that any such holder may have or be otherwise charged with.
SECTION 13.10. Notice to Trustee. The Company shall give prompt written
notice to the Trustee of any fact known to the Company that would prohibit the
making of any payment to or by the Trustee in respect of the Securities.
Notwithstanding the provisions of this Article or any other provision of this
Indenture, the Trustee shall not be charged with knowledge of the existence of
any facts that would prohibit the making of any payment to or by the Trustee in
respect of the Securities, unless and until the Trustee shall have received
written notice thereof from the Company or a holder of Senior Debt or from any
trustee, agent or representative therefor (whether or not the facts contained in
such notice are true); provided, however, that if the Trustee shall not have
received the notice provided for in this Section at least two Business Days
prior to the date upon which by the terms hereof any monies may become payable
for any purpose (including, without limitation, the payment of the principal of
or interest (including any Additional Interest) on any Security), then, anything
herein contained to the contrary notwithstanding, the Trustee shall have full
power and authority to receive such monies and to apply the same to the purpose
for
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which they were received and shall not be affected by any notice to the contrary
that may be received by it within two Business Days prior to such date.
SECTION 13.11. Reliance on Judicial Order or Certificate of Liquidating
Agent. Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Article VI, and the
Holders of the Securities shall be entitled to conclusively rely upon any order
or decree entered by any court of competent jurisdiction in which such
Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of creditors, agent or
other Person making such payment or distribution, delivered to the Trustee or to
the Holders of Securities, for the purpose of ascertaining the Persons entitled
to participate in such payment or distribution, the holders of the Senior Debt
and other indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article.
SECTION 13.12. Trustee Not Fiduciary for Holders of Senior Debt. The
Trustee, in its capacity as trustee under this Indenture, shall not be deemed to
owe any fiduciary duty to the holders of Senior Debt and shall not be liable to
any such holders if it shall in good faith mistakenly pay over or distribute to
Holders of Securities or to the Company or to any other Person cash, property or
securities to which any holders of Senior Debt shall be entitled by virtue of
this Article or otherwise.
SECTION 13.13. Rights of Trustee as Holder of Senior Debt: Preservation
of Trustee's Rights. The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article with respect to any Senior Debt that
may at any time be held by it, to the same extent as any other holder of Senior
Debt, and nothing in this Indenture shall deprive the Trustee of any of its
rights as such holder.
SECTION 13.14. Article Applicable to Paying Agents. In case at any time
any Paying Agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article shall
in such case (unless the context otherwise requires) be construed as extending
to and including such Paying Agent within its meaning as fully for all intents
and purposes as if such Paying Agent were named in this Article in addition to
or in place of the Trustee.
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SECTION 13.15. Certain Conversions or Exchanges Deemed Payment. For
purposes of this Article XIII only, (a) the issuance and delivery of junior
securities (as defined below) upon conversion or exchange of Securities shall
not be deemed to constitute a payment or distribution on account of the
principal of or interest (including any Additional Interest) on the Securities
or on account of the purchase or other acquisition of Securities, and (b) the
payment, issuance or delivery of cash, property or securities (other than junior
securities) upon conversion or exchange of a Security shall be deemed to
constitute payment on account of the principal of such Security. For the
purposes of this Section, the term "junior securities" means (i) shares of any
stock of any class of the Company and (ii) securities of the Company that are
subordinated in right of payment to all Senior Debt that may be outstanding at
the time of issuance or delivery of such securities to substantially the same
extent as, or to a greater extent than, the Securities are so subordinated as
provided in this Article.
This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first written above.
SOUTHERN FINANCIAL BANCORP, INC.
By:________________________________
Name:
Title:
[Seal]
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WILMINGTON TRUST COMPANY,
as Trustee
By:_______________________________
Name: Donald G. MacKelcan
Title: Vice President
[Seal]
<PAGE>
EXHIBIT A
[Form of Restricted Securities Certificate]
RESTRICTED SECURITIES CERTIFICATE
(For transfers pursuant to Section 3.05 and Section 3.06
of the Junior Subordinated Indenture)
[_________________________],
as Security Registrar
[address]
Re: Junior Subordinated Debt Securities of Southern Financial Bancorp, Inc.
(the "Company") (the "Securities")
Reference is made to the Junior Subordinated Indenture, dated as of
____________ (the "Indenture"), between Southern Financial Bancorp, Inc. and
Wilmington Trust Company, as trustee (the "Trustee"). Terms used herein and
defined in the Indenture or in Regulation D, Rule 144A or Rule 144 under the
U.S. Securities Act of 1933, as amended (the "Securities Act"), are used herein
as so defined.
This certificate relates to $____________ aggregate principal amount of
Securities, that are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). __________________________________________
CERTIFICATE No(s). ____________________________________
CURRENTLY IN BOOK-ENTRY FORM: __Yes __No (check one)
The person in whose name this certificate is executed below (the "undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial owners
of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security,
<PAGE>
they are held through the Depositary in the name of the Undersigned, as or on
behalf of the Owner. If the Specified Securities are not represented by a Global
Security, they are registered in the name of the Undersigned, as or on behalf of
the Owner.
The Owner has requested that the Specified Securities be transferred to
a person (the "Transferee") who will take delivery in the form of a Restricted
Security. In connection with such transfer, the Owner hereby certifies that,
unless such transfer is being effected pursuant to an effective registration
statement under the Securities Act, it is being effected in accordance with one
of the following as indicated (check one):
___ (1) transferred to the Company; or
___ (2) exchanged for the undersigned's own account without transfer;
or
___ (3) transferred pursuant to and in compliance with Rule 144A under
the Securities Act; or
___ (4) to an institutional "accredited investor" within the meaning
of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the
Securities Act that is acquiring the Securities for its own
account, or for the account of such an institutional
"accredited investor," for investment purposes and not with a
view to, or for offer or sale in connection with, any
distribution in violation of the Securities Act; or
___ (5) transferred pursuant to another available exemption from the
registration requirements of the Securities Act.
Unless such transfer is being effected in accordance with one of the above, the
Securities Registrar will refuse to register any of the Securities evidenced by
this certificate in the name of any person other than the Holder thereof;
provided, however, that if (4) or (5) is applicable, the Securities Registrar
may require, prior to registering any such transfer of the Securities such legal
opinions, certifications and other information as the Company has reasonably
requested to confirm that such transfer is being made pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act, such as the exemption provided by Rule 144 under such Act;
provided, further, that if box (3) is checked, the transferee must also certify
that it is a qualified institutional buyer as defined in Rule 144A.
-2-
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
Dated: ____________________________________
(Print the name of the Undersigned,
as such term is defined in the
second paragraph of this
certificate.)
By:_________________________________
Name:
Title:
(If the Undersigned is a
corporation, partnership or
fiduciary, the title of the person
signing on behalf of the Undersigned
must be stated.)
-3-
Exhibit 4.7
EXECUTION COPY
================================================================================
GUARANTEE AGREEMENT
Between
SOUTHERN FINANCIAL BANCORP, INC.
(as Guarantor)
and
WILMINGTON TRUST COMPANY
(as Trustee)
Dated as of
_______ __, 2000
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
Section of Trust Indenture Section of
Act of 1939, as amended Guarantee Agreement
- ----------------------- -------------------
310(a) .......................................... 4.01(a)
310(b) .......................................... 4.01(c), 2.08
310(c) .......................................... Inapplicable
311(a) .......................................... 2.02(b)
311(b) .......................................... 2.02(b)
311(c) .......................................... Inapplicable
312(a) .......................................... 2.02(a)
312(b) .......................................... 2.02(b)
313(a) .......................................... 2.03
313(b) .......................................... 2.03
313(c) .......................................... 2.03
313(d) .......................................... 2.03
314(a) .......................................... 2.04
314(b) .......................................... Inapplicable
314(c) .......................................... 2.05
314(d) .......................................... Inapplicable
314(e) .......................................... 1.01, 2.05, 3.02
314(f) .......................................... 2.01, 3.02
315(a) .......................................... 3.01(d)
315(b) .......................................... 2.07
315(c) .......................................... 3.01(c)
315(d) .......................................... 3.01(d)
316(a) .......................................... 1.01, 2.06, 5.04
316(b) .......................................... 5.03, 5.04
316(c) .......................................... 8.02
317(a) .......................................... Inapplicable
317(b) .......................................... Inapplicable
318(a) .......................................... 2.01(b)
- ------------
* This Cross-Reference Table does not constitute part of the Guarantee
Agreement and shall not affect the interpretation of any of its terms or
provisions.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I -- Definitions..........................................................................................1
SECTION 1.01. Definitions......................................................................................1
ARTICLE II -- Trust Indenture Act.................................................................................4
SECTION 2.01. Trust Indenture Act; Application.................................................................4
SECTION 2.02. List of Holders..................................................................................4
SECTION 2.03. Reports by the Guarantee Trustee.................................................................5
SECTION 2.04. Periodic Reports to the Guarantee Trustee........................................................5
SECTION 2.05. Evidence of Compliance with Conditions Precedent.................................................5
SECTION 2.06. Events of Default; Waiver........................................................................5
SECTION 2.07. Event of Default; Notice.........................................................................5
SECTION 2.08. Conflicting Interests............................................................................6
ARTICLE III -- Powers, Duties and Rights of the Guarantee Trustee.................................................6
SECTION 3.01. Powers and Duties of the Guarantee Trustee.......................................................6
SECTION 3.02. Certain Rights of Guarantee Trustee..............................................................7
SECTION 3.03. Indemnity........................................................................................9
SECTION 3.04. Expenses.........................................................................................9
ARTICLE IV -- Guarantee Trustee...................................................................................9
SECTION 4.01. Guarantee Trustee: Eligibility...................................................................9
SECTION 4.02. Appointment, Removal and Resignation of the Guarantee Trustee...................................10
ARTICLE V -- Guarantee...........................................................................................10
SECTION 5.01. Guarantee.......................................................................................10
SECTION 5.02. Waiver of Notice and Demand.....................................................................11
SECTION 5.03. Obligations Not Affected........................................................................11
SECTION 5.04. Rights of Holders...............................................................................12
SECTION 5.05. Guarantee of Payment............................................................................12
SECTION 5.06. Subrogation.....................................................................................12
SECTION 5.07. Independent Obligations.........................................................................12
ARTICLE VI -- Covenants and Subordination........................................................................13
SECTION 6.01. Subordination...................................................................................13
SECTION 6.02. Pari Passu Guaranty.............................................................................13
ARTICLE VII -- Termination.......................................................................................13
SECTION 7.01. Termination.....................................................................................13
ARTICLE VIII -- Miscellaneous....................................................................................13
SECTION 8.01. Successors and Assigns..........................................................................13
SECTION 8.02. Amendments......................................................................................14
SECTION 8.03. Notices.........................................................................................14
SECTION 8.04. Benefit.........................................................................................15
SECTION 8.05. Interpretation..................................................................................15
SECTION 8.06. Governing Law...................................................................................15
</TABLE>
<PAGE>
GUARANTEE AGREEMENT (this "Guarantee
Agreement"), dated as of __________ __, 2000,
executed and delivered by SOUTHERN FINANCIAL BANCORP,
INC., a bank holding company (the "Guarantor") having
its principal office at 37 East Main Street,
Warrenton, Virginia 20186, and WILMINGTON TRUST
COMPANY, a Delaware corporation (the "Guarantee
Trustee"), for the benefit of the Holders (as defined
herein) from time to time of the Trust Securities (as
defined herein) of SOUTHERN FINANCIAL CAPITAL TRUST
I, a Delaware statutory business trust (the
"Issuer").
WHEREAS pursuant to an Amended and Restated Declaration of Trust (the
"Declaration of Trust"), dated as of _____ __, 2000, among the Trustees named
therein, the Guarantor, as Depositor, and the Holders from time to time of
undivided beneficial ownership interests in the assets of the Issuer, the Issuer
is issuing $_________ aggregate Liquidation Amount of its Capital Trust
Securities, Liquidation Amount $10.00 per security (the "Capital Securities"),
and $_________ aggregate Liquidation Amount of its Common Securities,
Liquidation Amount $10.00 per security (the "Common Securities" and collectively
with the Capital Securities, the "Trust Securities"), representing undivided
beneficial ownership interests in the assets of the Issuer and having the terms
set forth in the Declaration of Trust;
WHEREAS the Trust Securities will be issued by the Issuer and the
proceeds thereof will be used by the Issuer to purchase the Junior Subordinated
Debt Securities due _______ __, 2030 (as defined in the Declaration of Trust)
(the "Junior Subordinated Debt Securities") of the Guarantor, which will be held
by Wilmington Trust Company, as Property Trustee under the Declaration of Trust,
as trust assets; and
WHEREAS, as incentive for the Holders to purchase Trust Securities, the
Guarantor desires irrevocably and unconditionally to agree, to the extent set
forth herein, to pay to the Holders the Guarantee Payments (as defined herein)
and to make certain other payments on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the purchase of Trust Securities by
each Holder, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the
benefit of the Holders from time to time of the Trust Securities.
ARTICLE I
Definitions
SECTION 1.01. Definitions. As used in this Guarantee Agreement, the
terms set forth below shall, unless the context otherwise requires, have the
following meanings.
<PAGE>
Capitalized or otherwise defined terms used but not otherwise defined herein
shall have the meanings assigned to such terms in the Declaration of Trust as in
effect on the date hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Guarantor shall not be deemed to include the Issuer. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Capital Securities" shall have the meaning specified in the first
recital of this Guarantee Agreement.
"Common Securities" shall have the meaning specified in the first
recital of this Guarantee Agreement.
"Declaration of Trust" shall have the meaning specified in the first
recital of this Guarantee Agreement.
"Event of Default" means a default by the Guarantor on any of its
payment or other obligations under this Guarantee Agreement; provided, however,
that, except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default and shall not have cured such
default within 60 days after receipt of such notice; provided, further, that no
Event of Default shall occur unless an Event of Default (as defined in the
Indenture or the Declaration of Trust) shall have occurred and be continuing.
"Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Trust Securities, to the extent not
paid or made by or on behalf of the Issuer: (i) any accrued and unpaid
Distributions required to be paid on the Trust Securities, to the extent that
the Issuer shall have funds on hand available therefor at such time, (ii) the
redemption price, including all accrued and unpaid Distributions to the date of
redemption (the "Redemption Price"), with respect to the Trust Securities called
for redemption by the Issuer to the extent that the Issuer shall have funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
termination, winding-up or liquidation of the Issuer, unless Junior Subordinated
Debt Securities are distributed to the Holders or all of the Capital Securities
are redeemed, the lesser of (a) the aggregate of the Liquidation Amount of $10
per Trust Security plus accrued and unpaid Distributions on the Trust Securities
to the date of payment to the extent that the Issuer shall have funds on hand
available to make such payment at such time and (b) the amount of assets of the
Issuer remaining available for distribution to Holders in liquidation of the
Issuer after satisfaction of liabilities to creditors of the Issuer as required
by applicable law (in either case, the "Liquidation Distribution"). If an Event
of Default under the Declaration of Trust has occurred and is continuing, no
Guarantee Payments with respect to the Common Securities or any guarantee
payment under any Other Guarantees (as defined in the
2
<PAGE>
Indenture) with respect to Common Securities of any other Southern Financial
Capital Trust (as defined in the Indenture), if any, shall be made until the
Holders of Capital Securities shall be paid in full the Guarantee Payments to
which they are entitled under this Guarantee Agreement. Subordination of
Guarantee Payments on the Common Securities following such an Event of Default
under the Declaration of Trust shall be analogous to the subordination of the
Common Securities provided for in Section 4.03 of the Declaration of Trust.
"Guarantee Trustee" means Wilmington Trust Company, until a Successor
Guarantee Trustee has been appointed and has accepted such appointment pursuant
to the terms of this Guarantee Agreement and thereafter means each such
Successor Guarantee Trustee.
"Guarantor" shall have the meaning specified in the first recital of
this Guarantee Agreement.
"Holder" means a person in whose name a Trust Security or Trust
Securities is registered on the books and records of the Issuer; provided,
however, that in determining whether the holders of the requisite percentage of
Trust Securities have given any request, notice, consent or waiver hereunder,
"Holder" shall not include the Guarantor, the Guarantee Trustee, or any
Affiliate of the Guarantor or the Guarantee Trustee.
"Indenture" means the Junior Subordinated Indenture dated as of ______
__, 2000, as supplemented and amended between the Guarantor and Wilmington Trust
Company, as trustee, relating to the issuance of the Junior Subordinated Debt
Securities.
"Issuer" shall have the meaning specified in the first recital of this
Guarantee Agreement.
"List of Holders" has the meaning specified in Section 2.02(a).
"Majority in Liquidation Amount of the Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the aggregate Liquidation Amount of all then
Outstanding Capital Securities.
"Officers' Certificate" means, with respect to any Person, a
certificate signed by the Chairman and Chief Executive Officer, President or a
Vice President, and by the Treasurer, an Associate Treasurer, an Assistant
Treasurer, the Controller, the Secretary or an Assistant Secretary of such
Person, and delivered to the Guarantee Trustee. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Guarantee Agreement shall include:
(a) a statement that each officer signing the Officers'
Certificate has read the covenant or condition and the definitions
relating thereto;
(b) a brief statement of the nature and scope of the
examination or investigation undertaken by each officer in rendering
the Officers' Certificate;
3
<PAGE>
(c) statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable
such officer to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each officer,
such condition or covenant has been complied with.
"Responsible Officer" when used with respect to the Guarantee Trustee
means any officer assigned to the Corporate Trust Office, including any managing
director, vice president, assistant vice president, assistant treasurer,
assistant secretary or any other officer of the Guarantee Trustee customarily
performing functions similar to those performed by any of the above designated
officers and having direct responsibility for the administration of this
Guarantee Agreement, and also, with respect to a particular matter, any other
officer to whom such matter is referred because of such officer's knowledge of
and familiarity with the particular subject.
"Senior Debt" shall have the meaning specified in the Indenture.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.
"Trust Indenture Act" has the meaning specified in Section 1.01 of the
Indenture.
"Trust Securities" shall have the meaning specified in the first
recital of this Guarantee Agreement.
ARTICLE II
Trust Indenture Act
SECTION 2.01. Trust Indenture Act; Application. (a) This Guarantee
Agreement will not be qualified under the Trust Indenture Act except upon the
effectiveness of a registration statement with respect to this Guarantee
Agreement.
(b) Upon qualification under the Trust Indenture Act as
contemplated in clause (a) above, if and to the extent that any provision of
this Guarantee Agreement limits, qualifies or conflicts with the duties imposed
by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed
duties shall control.
SECTION 2.02. List of Holders. (a) The Guarantor shall furnish or cause
to be furnished to the Guarantee Trustee (i) semiannually, not more than 15 days
after January 15 and July 15 of each year, a list, in such form as the Guarantee
Trustee may reasonably require, of the names and addresses of the Holders ("List
of Holders") as of a date not more than 15 days prior to the delivery thereof,
and (ii) at such other times as the Guarantee Trustee may request in writing,
within 30 days after the receipt by the Guarantor of any such request, a List of
Holders
4
<PAGE>
as of a date not more than 15 days prior to the time such list is furnished, in
each case to the extent such information is in the possession or control of the
Guarantor and is not identical to a previously supplied list of Holders or has
not otherwise been received by the Guarantee Trustee in its capacity as such.
The Guarantee Trustee may destroy any List of Holders previously given to it on
receipt of a new List of Holders.
(b) The Guarantee Trustee shall comply with its obligations
under Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture
Act.
SECTION 2.03. Reports by the Guarantee Trustee. Not later than the last
calendar day in August of each calendar year, commencing with the last calendar
day in August, 2000, the Guarantee Trustee shall provide to the Holders such
reports, if any, as are required by Section 313 of the Trust Indenture Act in
the form and in the manner provided by Section 313 of the Trust Indenture Act.
The Guarantee Trustee shall also comply with the requirements of Section 313(d)
of the Trust Indenture Act.
SECTION 2.04. Periodic Reports to the Guarantee Trustee. The Guarantor
shall provide to the Guarantee Trustee, the Securities and Exchange Commission
and the Holders such documents, reports and information, if any, as required by
Section 314 of the Trust Indenture Act and the compliance certificate required
by Section 314 of the Trust Indenture Act, in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.
SECTION 2.05. Evidence of Compliance with Conditions Precedent. The
Guarantor shall provide to the Guarantee Trustee such evidence of compliance
with such conditions precedent, if any, provided for in this Guarantee Agreement
that relate to any of the matters set forth in Section 314(c) of the Trust
Indenture Act. Any certificate or opinion required to be given by any officer
pursuant to Section 314(c)(1) may be given in the form of an Officers'
Certificate.
SECTION 2.06. Events of Default; Waiver. The Holders of a Majority in
Liquidation Amount of the Securities may, by vote, on behalf of the Holders,
waive any past Event of Default and its consequences. Upon such waiver, any such
Event of Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured, for every purpose of this
Guarantee Agreement, but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent therefrom.
SECTION 2.07. Event of Default; Notice. (a) The Guarantee Trustee
shall, within 90 days after the occurrence of an Event of Default, transmit by
mail, first class postage prepaid, to the Holders, notices of all Events of
Default known to the Guarantee Trustee, unless such Events of Default have been
cured before the giving of such notice; provided that, except in the case of a
default in the payment of a Guarantee Payment, the Guarantee Trustee shall be
protected in withholding such notice if and so long as the Board of Directors,
the executive committee or a trust committee of directors and/or a Responsible
Officer in good faith determines that the withholding of such notice is in the
interests of the Holders.
5
<PAGE>
(b) The Guarantee Trustee shall not be deemed to have
knowledge of any Event of Default unless a Responsible Officer charged with the
administration of the Declaration of Trust shall have received written notice of
such Event of Default.
SECTION 2.08. Conflicting Interests. The Declaration of Trust shall be
deemed to be specifically described in this Guarantee Agreement for the purposes
of clause (i) of the first proviso contained in Section 310(b) of the Trust
Indenture Act.
ARTICLE III
Powers, Duties and Rights of the
Guarantee Trustee
SECTION 3.01. Powers and Duties of the Guarantee Trustee. (a) This
Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of
the Holders, and the Guarantee Trustee shall not transfer this Guarantee
Agreement to any Person except a Holder exercising his or her rights pursuant to
Section 5.04(iv) or to a Successor Guarantee Trustee on acceptance by such
Successor Guarantee Trustee of its appointment to act as Successor Guarantee
Trustee. The right, title and interest of the Guarantee Trustee shall
automatically vest in any Successor Guarantee Trustee, upon acceptance by such
Successor Guarantee Trustee of its appointment hereunder, and such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered pursuant to the appointment of such Successor
Guarantee Trustee.
(b) If an Event of Default has occurred and is continuing, the
Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the
Holders.
(c) The Guarantee Trustee, before the occurrence of any Event
of Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Guarantee Agreement, and no implied covenants shall be read into this
Guarantee Agreement against the Guarantee Trustee. In case an Event of Default
has occurred (that has not been cured or waived pursuant to Section 2.06), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.
(d) No provision of this Guarantee Agreement shall be
construed to relieve the Guarantee Trustee from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(i) prior to the occurrence of any Event of Default and after
the curing or waiving of all such Events of Default that may have
occurred:
6
<PAGE>
(A) the duties and obligations of the Guarantee
Trustee shall be determined solely by the express provisions
of this Guarantee Agreement, and the Guarantee Trustee shall
not be liable except for the performance of such duties and
obligations as are specifically set forth in this Guarantee
Agreement; and
(B) in the absence of bad faith on the part of the
Guarantee Trustee, the Guarantee Trustee may conclusively
rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon any certificates or
opinions furnished to the Guarantee Trustee and conforming to
the requirements of this Guarantee Agreement; but in the case
of any such certificates or opinions that by any provision
hereof or of the Trust Indenture Act are specifically required
to be furnished to the Guarantee Trustee, the Guarantee
Trustee shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this
Guarantee Agreement;
(ii) the Guarantee Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer of the
Guarantee Trustee, unless it shall be proved that the Guarantee Trustee
was negligent in ascertaining the pertinent facts upon which such
judgment was made;
(iii) the Guarantee Trustee shall not be liable with respect
to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a
Majority in Liquidation Amount of the Securities relating to the time,
method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee, or exercising any trust or power conferred
upon the Guarantee Trustee under this Guarantee Agreement; and
(iv) no provision of this Guarantee Agreement shall require
the Guarantee Trustee to expend or risk its own funds or otherwise
incur personal financial liability in the performance of any of its
duties or in the exercise of any of its rights or powers if the
Guarantee Trustee shall have reasonable grounds for believing that the
repayment of such funds or liability is not assured to it under the
terms of this Guarantee Agreement or indemnity satisfactory to it
against such risk or liability is not reasonably assured to it.
SECTION 3.02. Certain Rights of Guarantee Trustee. (a) Subject to the
provisions of Section 3.01:
(i) The Guarantee Trustee may conclusively rely and shall be
fully protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note,
other evidence of indebtedness or other paper or document reasonably
believed by it to be genuine and to have been signed, sent or presented
by the proper party or parties.
7
<PAGE>
(ii) Any direction or act of the Guarantor contemplated by
this Guarantee Agreement shall be sufficiently evidenced by an
Officers' Certificate unless otherwise prescribed herein.
(iii) Whenever, in the administration of this Guarantee
Agreement, the Guarantee Trustee shall deem it desirable that a matter
be proved or established before taking, suffering or omitting to take
any action hereunder, the Guarantee Trustee (unless other evidence is
herein specifically prescribed) may, in the absence of bad faith on its
part, request and conclusively rely upon an Officers' Certificate
which, upon receipt of such request from the Guarantee Trustee, shall
be promptly delivered by the Guarantor.
(iv) The Guarantee Trustee may consult with legal counsel, and
the advice or written opinion of such legal counsel with respect to
legal matters shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted to be taken by it
hereunder in good faith and in accordance with such advice or opinion.
Such legal counsel may be legal counsel to the Guarantor or any of its
Affiliates and may be one of its employees. The Guarantee Trustee shall
have the right at any time to seek instructions concerning the
administration of this Guarantee Agreement from any court of competent
jurisdiction.
(v) The Guarantee Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Guarantee
Agreement at the request or direction of any Holder, unless such Holder
shall have provided to the Guarantee Trustee such security and
indemnity reasonably satisfactory to it, against the costs, expenses
(including attorneys' fees and expenses) and liabilities that might be
incurred by it in complying with such request or direction, including
such reasonable advances as may be requested by the Guarantee Trustee;
provided, that nothing contained in this Section 3.02(a)(v) shall be
taken to relieve the Guarantee Trustee, upon the occurrence of an Event
of Default, of its obligation to exercise the rights and powers vested
in it by this Guarantee Agreement.
(vi) The Guarantee Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Guarantee Trustee, in
its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit.
(vii) The Guarantee Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through its agents or attorneys, and the Guarantee Trustee shall not
be responsible for any misconduct or negligence on the part of any such
agent or attorney appointed with due care by it hereunder.
(viii) Whenever in the administration of this Guarantee
Agreement the Guarantee Trustee shall deem it desirable to receive
instructions with respect to enforcing any remedy or right or taking
any other action hereunder, the Guarantee Trustee (A) may request
instructions from the Holders, (B) may refrain from enforcing such
remedy or
8
<PAGE>
right or taking such other action until such instructions are received
and (C) shall be fully protected in acting in accordance with such
instructions.
(ix) The Guarantee Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through agents or attorneys, and the Guarantee Trustee shall not be
responsible for any misconduct or negligence on the part of any agent
or attorney appointed with due care by it hereunder.
(b) No provision of this Guarantee Agreement shall be deemed
to impose any duty or obligation on the Guarantee Trustee to perform any act or
acts or exercise any right, power, duty or obligation conferred or imposed on it
in any jurisdiction in which it shall be illegal, or in which the Guarantee
Trustee shall be unqualified or incompetent in accordance with applicable law,
to perform any such act or acts or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Guarantee Trustee
shall be construed to be a duty to act in accordance with such power and
authority.
SECTION 3.03. Indemnity. The Guarantor agrees to indemnify the
Guarantee Trustee, and to hold it harmless against, any loss, liability or
expense including taxes (other than taxes based upon, measured by or determined
by the income of the Guarantee Trustee) incurred without negligence or bad faith
on the part of the Guarantee Trustee, arising out of or in connection with the
acceptance or administration of this Guarantee Agreement, including the costs
and expenses of defending itself against any claim or liability in connection
with the exercise or performance of any of its powers or duties hereunder. The
Guarantee Trustee will not claim or exact any lien or charge on any Guarantee
Payments as a result of any amount due to it under this Guarantee Agreement.
This indemnity shall survive the termination of this Guarantee Agreement or the
resignation or removal of the Guarantee Trustee.
SECTION 3.04. Expenses. The Guarantor, as obligor on the Junior
Subordinated Debt Securities, shall from time to time reimburse the Guarantee
Trustee for such expenses and costs incurred in connection with the performance
of its duties hereunder as shall be agreed to in writing from time to time by
the Guarantor and the Guarantee Trustee.
ARTICLE IV
Guarantee Trustee
SECTION 4.01. Guarantee Trustee: Eligibility. (a) There shall at all
times be a Guarantee Trustee that shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a Person that is eligible pursuant to the Trust
Indenture Act to act as such and has a combined capital and surplus of
at least $50,000,000, and shall be a corporation meeting the
requirements of Section 310(c) of the Trust Indenture Act. If
9
<PAGE>
such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of the supervising or examining
authority, then, for the purposes of this Section and to the extent
permitted by the Trust Indenture Act, the combined capital and surplus
of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so
published.
(b) If at any time the Guarantee Trustee shall cease to be
eligible to so act under Section 4.10(a), the Guarantee Trustee shall
immediately resign in the manner and with the effect set out in Section 4.02(c).
(c) If the Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply
with the provisions of Section 310(b) of the Trust Indenture Act.
SECTION 4.02. Appointment, Removal and Resignation of the Guarantee
Trustee. (a) Subject to Section 4.02(b), in the absence of the existence of an
Event of Default, the Guarantee Trustee may be appointed or removed without
cause at any time by the Guarantor.
(b) The Guarantee Trustee shall not be removed until a
Successor Guarantee Trustee has been appointed and has accepted such appointment
by written instrument executed by such Successor Guarantee Trustee and delivered
to the Guarantor.
(c) The Guarantee Trustee appointed hereunder shall hold
office until a Successor Guarantee Trustee shall have been appointed or until
its removal or resignation. The Guarantee Trustee may resign from office
(without need for prior or subsequent accounting) by an instrument in writing
executed by the Guarantee Trustee and delivered to the Guarantor, which
resignation shall not take effect until a Successor Guarantee Trustee has been
appointed and has accepted such appointment by instrument in writing executed by
such Successor Guarantee Trustee and delivered to the Guarantor and the
resigning Guarantee Trustee.
(d) If no Successor Guarantee Trustee shall have been
appointed and accepted appointment as provided in this Section 4.02 within 30
days after delivery to the Guarantor of an instrument of resignation, the
resigning Guarantee Trustee may petition, at the expense of the Guarantor, any
court of competent jurisdiction for appointment of a Successor Guarantee
Trustee. Such court may thereupon, after prescribing such notice, if any, as it
may deem proper, appoint a Successor Guarantee Trustee.
ARTICLE V
Guarantee
SECTION 5.01. Guarantee. The Guarantor irrevocably and unconditionally
agrees to pay in full to the Holders the Guarantee Payments (without duplication
of amounts theretofore
10
<PAGE>
paid by or on behalf of the Issuer), as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer may have or assert. The
Guarantor's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders. The Guarantor shall give written
notice to the Guarantee Trustee as promptly as practicable in the event it makes
any direct payment hereunder.
SECTION 5.02. Waiver of Notice and Demand. The Guarantor hereby waives
notice of acceptance of the Guarantee Agreement and of any liability to which it
applies or may apply, presentment, demand for payment, any right to require a
proceeding first against the Guarantee Trustee, Issuer or any other Person
before proceeding against the Guarantor, protest, notice of nonpayment, notice
of dishonor, notice of redemption and all other notices and demands.
SECTION 5.03. Obligations Not Affected. The obligations, covenants,
agreements and duties of the Guarantor under this Guarantee Agreement shall in
no way be affected or impaired by reason of the happening from time to time of
any of the following:
(a) the release or waiver, by operation of law or otherwise,
of the performance or observance by the Issuer of any express or
implied agreement, covenant, term or condition relating to the Trust
Securities to be performed or observed by the Issuer;
(b) the extension of time for the payment by the Issuer of all
or any portion of the Distributions (other than any extension of time
for payment of Distributions that results from the extension of any
interest payment period on the Junior Subordinated Debt Securities as
so provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Trust
Securities or the extension of time for the performance of any other
obligation arising under, out of or in connection with the Trust
Securities;
(c) any failure, omission, delay or lack of diligence on the
part of the Holders to enforce, assert or exercise any right,
privilege, power or remedy conferred on the Holders pursuant to the
terms of the Trust Securities, or any action on the part of the Issuer
granting indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution,
sale of any collateral, receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization, arrangement,
composition or readjustment of debt of, or other similar proceedings
affecting, the Issuer or any of the assets of the Issuer;
(e) any invalidity of, or defect or deficiency in, the Trust
Securities;
(f) the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or
11
<PAGE>
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it
being the intent of this Section 5.03 that the obligations of the
Guarantor hereunder shall be absolute and unconditional under any and
all circumstances.
There shall be no obligation of the Holders to give notice to,
or obtain the consent of, the Guarantor with respect to the happening of any of
the foregoing.
SECTION 5.04. Rights of Holders. The Guarantor expressly acknowledges
that: (i) this Guarantee Agreement will be deposited with the Guarantee Trustee
to be held for the benefit of the Holders; (ii) the Guarantee Trustee has the
right to enforce this Guarantee Agreement on behalf of the Holders; (iii) the
Holders of a Majority in Liquidation Amount of the Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of this Guarantee Agreement or
exercising any trust or power conferred upon the Guarantee Trustee under this
Guarantee Agreement; and (iv) any Holder may institute a legal proceeding
directly against the Guarantor to enforce its rights under this Guarantee
Agreement, without first instituting a legal proceeding against the Issuer or
any other Person.
SECTION 5.05. Guarantee of Payment. This Guarantee Agreement creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged except by payment of the Guarantee Payments in full (without
duplication of amounts theretofore paid by the Issuer) or upon distribution of
Junior Subordinated Debt Securities to Holders as provided in the Declaration of
Trust.
SECTION 5.06. Subrogation. The Guarantor shall be subrogated to all (if
any) rights of the Holders against the Issuer in respect of any amounts paid to
the Holders by the Guarantor under this Guarantee Agreement and shall have the
right to waive payment by the Issuer pursuant to Section 5.01; provided,
however, that the Guarantor shall not (except to the extent required by
mandatory provisions of law) be entitled to enforce or exercise any rights that
it may acquire by way of subrogation or any indemnity, reimbursement or other
agreement, in all cases as a result of payment under this Guarantee Agreement,
if at the time of any such payment, any amounts are due and unpaid under this
Guarantee Agreement. If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.
SECTION 5.07. Independent Obligations. The Guarantor acknowledges that
its obligations hereunder are independent of the obligations of the Issuer with
respect to the Trust Securities and that the Guarantor shall be liable as
principal and as debtor hereunder to make Guarantee Payments pursuant to the
terms of this Guarantee Agreement notwithstanding the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.03.
12
<PAGE>
ARTICLE VI
Covenants and Subordination
SECTION 6.01. Subordination. This Guarantee Agreement will constitute
an unsecured obligation of the Guarantor and will rank subordinate and junior in
right of payment to all Senior Debt of the Guarantor, to the same extent and in
the same manner that the Junior Subordinated Debt Securities are subordinated to
Senior Debt pursuant to the Indenture, it being understood that the terms of
Article XIII of the Indenture shall apply to the obligations of the Guarantor
under this Guarantee Agreement as if (x) such Article XIII were set forth herein
in full and (y) such obligations were substituted for the term "Securities"
appearing in such Article XIII.
SECTION 6.02. Pari Passu Guaranty. This Guarantee Agreement shall rank
pari passu with any similar guarantee agreements issued by the Guarantor on
behalf of the holders of trust securities issued by a trust created by the
Guarantor similar to Southern Financial Capital Trust I.
ARTICLE VII
Termination
SECTION 7.01. Termination. This Guarantee Agreement shall terminate and
be of no further force and effect upon (i) full payment of the Redemption Price
of all Trust Securities, (ii) the distribution of Junior Subordinated Debt
Securities to the Holders in exchange for all of the Trust Securities or (iii)
full payment of the amounts payable in accordance with the Declaration of Trust
upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee
Agreement will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must repay any sums paid with respect to Trust
Securities or this Guarantee Agreement.
ARTICLE VIII
Miscellaneous
SECTION 8.01. Successors and Assigns. All guarantees and agreements
contained in this Guarantee Agreement shall bind the successors, assigns,
receivers, trustees and representatives of the Guarantor and shall inure to the
benefit of the Holders then outstanding. Except in connection with a
consolidation, merger or sale involving the Guarantor that is permitted under
Article VIII of the Indenture and pursuant to which the assignee agrees in
writing to perform the Guarantor's obligations hereunder, the Guarantor shall
not assign its obligations hereunder.
13
<PAGE>
SECTION 8.02. Amendments. Except with respect to any changes that do
not adversely affect the rights of the Holders in any material respect (in which
case no consent of the Holders will be required), this Guarantee Agreement may
only be amended with the prior approval of the Holders of not less than a
Majority in Liquidation Amount of the Securities. The provisions of Article VI
of the Declaration of Trust concerning meetings of the Holders shall apply to
the giving of such approval.
SECTION 8.03. Notices. Any notice, request or other communication
required or permitted to be given hereunder shall be in writing, duly signed by
the party giving such notice, and delivered, telecopied (confirmed by delivery
of the original) or mailed by first class mail as follows:
(a) if given to the Guarantor, to the address set forth below
or such other address, facsimile number or to the attention of such
other Person as the Guarantor may give notice to the Holders:
SOUTHERN FINANCIAL BANCORP, INC.
37 East Main Street
Warrenton, Virginia 20186
(b) if given to the Issuer, in care of the Guarantee Trustee,
at the Issuer's (and the Guarantee Trustee's) address set forth below
or such other address as the Guarantee Trustee on behalf of the Issuer
may give notice to the Holders:
SOUTHERN FINANCIAL
37 East Main Street
Warrenton, Virginia 20186
with a copy to:
Wilmington Trust Company
1100 North Market Street
Attn: Corporate Trust Administration
Wilmington, Delaware 19890
Facsimile No.: (302) 651-8882
(c) if given to the Guarantee Trustee:
Wilmington Trust Company
1100 North Market Street
Attn: Corporate Trust Administration
Wilmington, Delaware 19890
Facsimile No.: (302) 651-8882
14
<PAGE>
(d) if given to any Holder, at the address set forth on the
books and records of the Issuer.
All notices hereunder shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.
SECTION 8.04. Benefit. This Guarantee Agreement is solely for the
benefit of the Holders and is not separately transferable from the Trust
Securities.
SECTION 8.05. Interpretation. In this Guarantee Agreement, unless the
context otherwise requires:
(a) a term defined anywhere in this Guarantee Agreement has
the same meaning throughout;
(b) all references to "the Guarantee Agreement" or "this
Guarantee Agreement" are to this Guarantee Agreement as modified,
supplemented or amended from time to time;
(c) all references in this Guarantee Agreement to Articles and
Sections are to Articles and Sections of this Guarantee Agreement
unless otherwise specified;
(d) a term defined in the Trust Indenture Act has the same
meaning when used in this Guarantee Agreement unless otherwise defined
in this Guarantee Agreement or unless the context otherwise requires;
(e) a reference to the singular includes the plural and vice
versa; and
(f) the masculine, feminine or neuter genders used herein
shall include the masculine, feminine and neuter genders.
SECTION 8.06. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH
OF VIRGINIA WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
15
<PAGE>
THIS GUARANTEE AGREEMENT is executed as of the day and year first above
written.
WILMINGTON TRUST COMPANY, as
Guarantee Trustee
By:_____________________________
Name: Donald G. MacKelcan
Title: Vice President
SOUTHERN FINANCIAL BANCORP,
INC., as Guarantor
By:_____________________________
Name: Georgia S. Derrico
Title: Chairman
16
Exhibit 4.8
ESCROW AGREEMENT
This Escrow Agreement made and entered into as of the ____ day of
_______, 2000, by and among McKINNON & COMPANY, INC., a Virginia corporation
(the "Underwriter"), SOUTHERN FINANCIAL CAPITAL TRUST I, a statutory business
trust organized under Delaware law (the "Trust") and SOUTHERN FINANCIAL BANCORP,
INC., a Virginia corporation (the "Company" and, together with the Trust, the
"Offerors"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation (the
"Escrow Agent").
R E C I T A L S :
A. The Offerors propose to sell up to $____ million of $_____ Capital
Securities, liquidation amount of $10.00 per preferred security (the "Capital
Securities") to the public at a price of $10.00 per Capital Security (the
"Offering") and $______ of Common Securities to the Company.
B. The Offerors have retained the Underwriter, as selling agent for the
Offerors on a best efforts basis, to sell the Capital Securities in the
Offering, and the Underwriter has agreed to sell the Capital Securities as the
Offerors' selling agent on a best efforts basis in the Offering, and the
Underwriter has agreed to serve in this capacity, the terms of which
relationship are set forth in an Underwriting Agreement between the Offerors and
the Underwriter, the form of which is attached hereto as Exhibit A (the
"Underwriting Agreement").
C. The Underwriter will enter into agreements with other
brokers/dealers (the "Selected Dealers" or individually, the "Selected Dealer")
to assist in the sale of the Capital Securities.
D. The Offerors have agreed to pay the Underwriter a commission of up
to $________.
E. The Escrow Agent is willing to hold the proceeds in escrow pursuant
to this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, it is hereby agreed as
follows:
1. Establishment of the Escrow Account. On or prior to the
date of commencement of the Offering, the parties shall establish a
non-interest-bearing account with the Escrow Agent, which escrow account shall
be entitled "Southern Financial Capital Trust I, Escrow Account" (the "Escrow
Account"). The Offerors shall make payment for the Common Securities and the
Underwriter's commission, and the Underwriter shall instruct its clearing agent
to remit payment for the Capital Securities by wire transfer of immediately
available funds as follows:
Fed. Funds to be wired to:
Wilmington Trust Company
Wilmington, Delaware
ABA No. 031100092
for credit to the account of
Southern Financial Capital Trust I-Escrow
Account No. _______________
Attention: _______________, Corporate Trust Administration
Telephone No. 302-_______________
Fax No. 302-_______________
<PAGE>
The Offerors will make payment of the Underwriter's commission as
provided above.
2. Deposits into the Escrow Account. Funds received from the
Underwriter, purchasers and Selected Dealers shall be deposited in the Escrow
Account. All monies so deposited in the Escrow Account are hereinafter referred
to as the "Escrow Amount." The Escrow Account shall be a non-interest-bearing
account.
3. Escrow Period. The escrow period (the "Escrow Period")
shall begin on _________ __, 2000 and shall terminate at 5:00 p.m. on _______
__, 2000, or such other time as shall be mutually agreed upon in writing by the
parties. During the Escrow Period, the Offerors acknowledge that they are not
entitled to any funds received into escrow and no amounts deposited by the
Escrow Agent shall become property of the Offerors or any other entity, or be
subject to the debts of the Offerors or any other entity.
4. Delivery of Escrow Account Proceeds. At the Closing as
defined in the Underwriting Agreement, the Underwriter and Offerors shall
provide the Escrow Agent with written directions for the distribution of the
Escrow Account, and the Escrow Agent agrees to distribute the Escrow Account
pursuant to such written directions. If no direction is received on or before
5:00 p.m., ________ __, 2000 (unless such time shall be extended by written
agreement of the Underwriter, Offerors and the Escrow Agent), the Escrow Agent
shall return the Escrow Amount to the parties that made payments to the Escrow
Account and this Agreement shall be of no further force or effect.
5. Closing Date. The "Closing" and "Closing Time" shall be
that date specified in the Underwriting Agreement.
6. Duties and Rights of the Escrow Agent. The foregoing
agreements and obligations of the Escrow Agent are subject to the following
provisions:
(a) The Escrow Agent's duties hereunder are limited
solely to the safekeeping of the Escrow Account in accordance with the terms of
this Agreement. It is agreed that the Escrow Agent shall have no other duties or
obligations hereunder except as expressly set forth herein, shall be responsible
only for the performance of such duties and obligations, shall not be required
to take any action otherwise than in accordance with the terms hereof, shall not
be required to perform any acts that may violate any applicable laws, and shall
not be liable or responsible in any manner for any loss or damage arising by
reason of any act or omission to act hereunder or in connection with any of the
transactions contemplated hereby, including, but not limited to, any loss or
damage that may occur by reason of forgery, false representation, the exercise
of its discretion in any particular manner or for any other reason, except any
loss or damage arising by reason of its gross negligence or willful misconduct.
(b) The Escrow Agent may rely upon, and shall be
protected in acting or refraining from acting upon, any written instructions
furnished to it hereunder and in good faith believed by it to be genuine or
presented by the proper party or parties, and the Escrow Agent may assume that
any person or entity purporting to give instructions in connection with
provisions hereof has been duly authorized to do so. The Escrow Agent may at any
time request written instructions from the Underwriter and the Offerors with
respect to the interpretation of this Agreement or of any action to be taken or
suffered or not taken hereunder.
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<PAGE>
(c) In the event that the Escrow Agent shall be
uncertain about the interpretation of this Escrow Agreement or about its rights
or obligations hereunder or the propriety of any action contemplated hereunder,
or if the Escrow Agent shall receive instructions with respect to the Escrow
Account that are in its opinion in conflict with any other instructions with
respect to the Escrow Account that it has received or in conflict with any
provision of this Agreement, (i) the Escrow Agent promptly shall notify the
Underwriter and the Offerors (and any other involved parties, if necessary) of
such uncertainty or inconsistent instructions, (ii) the Escrow Agent shall be
entitled to refrain from taking any action other than to keep safely the Escrow
Account until it shall be directed otherwise in writing signed by the
Underwriter and the Offerors (any other involved parties, if necessary) or by a
final order or judgment of a court of competent jurisdiction, and (iii) if the
Escrow Agent does not receive a notice signed by the Underwriter and the
Offerors (and any other involved parties, if necessary) resolving such
uncertainty or inconsistent instructions within a reasonable time, the Escrow
Agent shall have the right (but not the obligation) to file suit in interpleader
and obtain an order or judgment from a court of competent jurisdiction requiring
all persons involved to interplead and litigate in such court their several
claims and rights among themselves and, upon the conclusion thereof, to act in
accordance with the resolution of such litigation.
7. Indemnification and Fees of the Escrow Agent. The
Underwriter and the Offerors hereby jointly and severally agree to indemnify,
defend and save harmless the Escrow Agent from and against any and all losses,
expenses (including without limitation, reasonable fees, disbursements and other
expenses of counsel), assessments, liabilities, claims, damages, actions, suits
or other charges incurred by or assessed against the Escrow Agent for anything
done or omitted by it in the performance of its duties hereunder other than as a
result of its gross negligence or willful misconduct. In addition to the
foregoing, the Underwriter and the Offerors hereby agree that the Escrow Agent
shall deduct from the Escrow Account prior to distributing or delivering the
Escrow Account in accordance with Section 8 hereof reasonable compensation for
the services rendered by the Escrow Agent hereunder.
8. Resignation and Replacement of the Escrow Agent.
(a) The Escrow Agent may resign at any time and
thereupon be discharged of its duties and obligations as escrow agent hereunder
by giving five (5) days' prior written notice thereof to the Underwriter and
Offerors. Upon expiration of such five day period, the Escrow Agent shall take
no further action until the Underwriter and the Offerors have jointly appointed
a successor escrow agent. Upon receipt of written instructions signed by the
Underwriter and the Offerors, the Escrow Agent shall promptly turn over the
Escrow Account to the successor escrow agent. The Escrow Agent shall thereafter
have no further duties or obligations hereunder.
(b) The Escrow Agent may be removed and discharged
from its duties and obligations as escrow agent hereunder upon the mutual
agreement of the Underwriter and the Offerors by delivering a written notice
executed by the Underwriter and the Offerors of such removal to the Escrow Agent
specifying the date when such removal shall be effective (but such a removal
shall in no event be effective prior to the appointment of a successor escrow
agent). In the event of such removal, the Underwriter and the Offerors shall,
within thirty (30) days after such notice, jointly appoint a successor escrow
agent and, upon receipt of written instructions signed by the Underwriter and
the Offerors, the Escrow Agent shall promptly turn over the Escrow Account to
such successor escrow agent. The Escrow Agent shall thereafter have no further
duties or obligations hereunder.
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<PAGE>
9. Notices. It is further agreed as follows:
(a) All notices given hereunder will be in writing,
served by registered or certified mail, return receipt requested, postage
prepaid, or by hand-delivery, to the parties at the following addresses:
To the Offerors:
Southern Financial Capital Trust I
Southern Financial Bancorp, Inc.
37 E. Main Street
Warrenton, VA 20186
Attention: R. Roderick Porter
To the Underwriter:
McKinnon & Company, Inc.
1609 First Virginia Tower
555 Main Street
Norfolk, Virginia 23510
Attention: William J. McKinnon, Jr.
To the Escrow Agent:
Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
Attention: _____________________
10. Miscellaneous.
(a) This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parries hereto and their respective
successors and assigns.
(b) If any provision of this Agreement shall be held
invalid by any court of competent jurisdiction, such holding shall not
invalidate any other provision hereof.
(c) This Agreement shall be governed by the
applicable laws of the State of Delaware.
(d) This Agreement may not be modified except in
writing signed by the parties hereto.
(e) All demands, notices, approvals, consents,
requests and other communications hereunder shall be given in the manner
provided in this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their respective names, all as of the date first above written.
McKINNON & COMPANY, INC.
By: __________________________________
William J. McKinnon, Jr.
President
SOUTHERN FINANCIAL CAPITAL TRUST I
By: __________________________________
Administrative Trustee
By: __________________________________
Administrative Trustee
SOUTHERN FINANCIAL BANCORP, INC.
By: __________________________________
Georgia S. Derrico
Chairman and Chief Executive Officer
WILMINGTON TRUST COMPANY
By: __________________________________
Donald G. MacKelcan
Vice President
-5-
Exhibit 5.1
[WILLIAMS, MULLEN, CLARK & DOBBINS LETTERHEAD]
January ___, 2000
Southern Financial Bancorp, Inc.
37 East Main Street
Warrenton, VA 20186
Re: Southern Financial Capital Trust I
Ladies and Gentlemen:
We have acted as counsel to Southern Financial Bancorp, Inc. (the
"Corporation") in connection with the registration by the Corporation of (i) an
aggregate of $13,800,000 of its junior subordinated debt securities (the "Debt
Securities") and (ii) the guarantee of the Capital Securities of Southern
Financial Capital Trust I (the "Guarantee"), a business trust created under the
laws of the State of Delaware (the "Trust"), to be executed and delivered by the
Corporation for the benefit of the holders of the Capital Securities, each as
set forth in the Registration Statement on Form S-1, File Nos. __________ and
__________ (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") by the Corporation and the Trust pursuant to the
Securities Act of 1933, as amended. This opinion letter is Exhibit 5.1 to the
Registration Statement.
We have relied upon an officer's certificate as to corporate action
heretofore taken with respect to the Debt Securities and the Guarantee.
We have also assumed (i) the due incorporation and valid existence of
the Corporation, (ii) that the Corporation has the requisite corporate power and
authority to enter into and perform its obligations under the Trust Agreement,
dated December 28, 1999 as amended by the Amended and Restated Declaration of
Trust, dated __________, 2000 (collectively, the "Declaration") among the
Corporation, as Depositor, the individuals named therein as Administrative
Trustees and Wilmington Trust Company, as Property Trustee and Delaware Trustee,
and the holders from time to time of undivided beneficial interests in the
assets of the Trust, the form of Indenture (the "Indenture") between the
Corporation and Wilmington Trust Company, as trustee, the Debt Securities and
the Guarantee and (iii) the due authorization, execution and delivery of the
Declaration, the Indenture, the Debt Securities and the Guarantee by the
Corporation.
<PAGE>
Based on the foregoing, and subject to the qualifications herein
stated, we are of the opinion that when (i) the Registration Statement is
declared effective by order of the Commission and (ii) the Declaration, the
Indenture and the Guarantee have been duly authorized, executed and delivered by
the parties thereto:
1. The Debt Securities, when duly authenticated by the Trustee pursuant
to the terms of the Indenture, and delivered and paid for in accordance with the
terms of the Indenture and as contemplated by the Registration Statement, will
be validly issued and will constitute the legally binding obligations of the
Corporation, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
2. The Guarantee will constitute the legally binding obligation of the
Corporation, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
In rendering this opinion, we are not expressing an opinion as to the
laws of any jurisdiction other than the Commonwealth of Virginia and we express
no opinion as to the applicability of the laws of any other jurisdiction to the
subject matter hereof or to the effects of such laws thereon.
This opinion is rendered to you and for your benefit solely in
connection with the transactions described herein. This opinion may not be
relied on by you for any other purpose and may not be relied upon by, nor may
copies thereof be provided to, any other person, firm, corporation or entity for
any purposes whatsoever without our prior written consent. We hereby consent to
be named in the Registration Statement and in each of the Prospectuses as
attorneys who passed upon the legality of the Debt Securities and the Guarantee
and to the filing of a copy of this opinion as Exhibit 5.1 to the Registration
Statement. Our opinion is expressed as of the date hereof, and we do not assume
any obligation to update or supplement our opinion to reflect any fact or
circumstance subsequently arising or any change in law subsequently occurring.
Our opinion is limited to the matters expressly stated; no opinion is implied or
may be inferred beyond such matters. Unless the prior written consent of our
firm is obtained, this opinion is not to be quoted or otherwise referred to in
any written report, proxy statement or other registration statement, nor is it
to be filed with or furnished to any other governmental agency or other person,
except as otherwise required by law.
Very truly yours,
WILLIAMS, MULLEN, CLARK & DOBBINS
By__________________________________
A Shareholder
Exhibit 5.2
[RICHARDS, LAYTON & FINGER LETTERHEAD]
January 10, 2000
Southern Financial Capital Trust I
c/o Southern Financial Bancorp, Inc.
37 East Main Street
Warrenton, VA 20186
Re: Southern Financial Capital Trust I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Southern Financial
Bancorp, Inc., a Virginia corporation (the "Company) and Southern Financial
Capital Trust I, a Delaware business trust (the "Trust"), in connection with the
matters set forth herein. At your request, this opinion is being furnished to
you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust (the "Certificate"), as
filed in the office of the Secretary of State of the State of Delaware (the
"Secretary of State") on December 28, 1999;
(b) The Trust Agreement of the Trust, dated as of December 28,
1999, between the Company and the Trustee;
(c) The Registration Statement (the "Registration Statement") on
Form S-1, including a preliminary prospectus with respect to the Trust (the
"Prospectus"), relating to the Capital Securities of the Trust representing
preferred interests in the Trust (each, a "Capital Security" and collectively,
the "Capital Securities"), as filed by the Company and the Trust with the
Securities and Exchange Commission on or about January 10, 2000;
<PAGE>
(d) A form of Amended and Restated Declaration of Trust for the
Trust, to be entered into among the Company, the trustees of the Trust, and the
holders, from time to time, of undivided beneficial interests in the assets of
such Trust (including the exhibits) (the "Declaration"), attached as an exhibit
to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated January
10, 2000; obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Declaration.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (e) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our own
but rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Declaration and the Certificate of Trust
are in full force and effect and have not been amended, (ii) except to the
extent provided in paragraph 1 below, the due creation or due organization or
due formation, as the case may be, and valid existence in good standing of each
party to the documents examined by us under the laws of the jurisdiction
governing its creation, organization or formation, (iii) the legal capacity of
natural persons who are parties to the documents examined by us, (iv) that each
of the parties to the documents examined by us has the power and authority to
execute and deliver, and to perform its obligations under, such documents, (v)
the due authorization, execution and delivery by all parties thereto of all
documents examined by us, (vi) the receipt by each Person to whom a Capital
Security is to be issued by the Trust (collectively, the "Capital Security
Holders") of a Capital Security Certificate for such Capital Security and the
payment for the Capital Security, in accordance with the Declarations and the
Registration Statement, and (vii) that the Capital Securities are issued and
sold to the Capital Security Holders in accordance with the Declaration
<PAGE>
and the Registration Statement. We have not participated in the preparation of
the Registration Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Business Trust Act, 12 Del.
C.ss.3801, et seq.
2. The Capital Securities of the Trust will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, as beneficial owners of the
Trust, will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Capital Security
Holders may be obligated to make payments as set forth in the Declaration.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Validity of Securities"
in the Prospectus. In giving the foregoing consents, 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, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other person for any purpose.
Very truly yours,
GCK/wrm
Exhibit 8.1
[WILLIAMS, MULLEN, CLARK & DOBBINS LETTERHEAD]
____________, 2000
McKinnon & Company, Inc.
555 Main Street
Norfolk, VA 23510
Re: Southern Financial Capital Trust I
Ladies and Gentlemen:
We have acted as counsel to Southern Financial Bancorp. Inc. (the
"Corporation") and Southern Financial Capital Trust I, a statutory business
trust formed under the laws of Delaware (the "Trust") in connection with the
preparation and filing with the Securities and Exchange Commission of the
Registration Statement on Form S-1, as amended to the date hereof (the
"Registration Statement"), under the Securities Act of 1933, as amended, and the
Prospectus that is a part thereof (the "Prospectus") with respect to the
issuance by the Trust of up to $12.0 million of its $______ Capital Securities
(the "Capital Securities").
In connection with this opinion, we have examined (i) the Registration
Statement, (ii) the Prospectus, (iii) the Declaration of Trust of the Trust,
dated as of December 28, 1999, between the Corporation and Wilmington Trust
Company, as Trustee, (iv) the Amended and Restated Declaration of Trust, dated
as of _________, 2000, among the Corporation, Wilmington Trust Company, as
Property Trustee and Delaware Trustee, and the Administrative Trustees named
therein and (v) such other corporate records, agreements, documents and other
instruments as we have deemed necessary as a basis for the opinion hereinafter
set forth ((i) (ii), (iii), (iv) and (v) collectively the "Offering Documents").
We assume the correctness of the factual matters contained in such reliance
sources and have made no independent investigation for the purpose of confirming
that such factual matters are correct. We have assumed that the operative
documents described in the Prospectus will be performed in accordance with the
terms described therein.
We have assumed (i) the genuineness of all signatures on the Offering
Documents, (ii) the due authorization, execution, and delivery of all documents
and the validity and binding effect thereof, (iii) the authenticity of all
documents submitted to us as originals, (iv) the
<PAGE>
conformity to the originals of all documents submitted to us as copies and the
authenticity of the originals from which the copies were made, and (v) the legal
capacity of natural persons.
Based on the foregoing, we hereby confirm to you our opinion as set
forth in the Prospectus under the heading "Certain United States Federal Income
Tax Consequences," subject to the limitations set forth therein.
In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code, Treasury Regulations promulgated thereunder,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service, and other authorities we have considered relevant. Our opinion is
limited to the federal tax law of the United States of America and is expressed
as of the date hereof. We do not assume any obligation to update or supplement
our opinion to reflect any fact or circumstance which hereafter comes to our
attention or any change in law which hereafter occurs. Our opinions are limited
to the matters expressly stated; no opinion is implied or may be inferred beyond
such matters.
This opinion is rendered to you and for your benefit solely in
connection with the transactions described herein. We hereby consent to the
filing of this opinion as an exhibit to the Registration Statement, which has
been filed by the Corporation and the Trust with the Securities and Exchange
Commission and to the reference of our firm under the caption "Certain Federal
Income Tax Consequences" in the Prospectus. This opinion may not, without our
prior consent, be otherwise distributed or relied upon by any other person, or
filed with any other government agency or quoted in any other document.
Very truly yours,
WILLIAMS, MULLEN, CLARK &
DOBBINS
By:____________________________________
Exhibit 12.1
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Year
Nine Months Ended Year Ended Ended Ended
September 30, December 31, December 31, June 30,
1999 1998 1998 1997 1996 1995 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income $ 2,251 $ 1,962 $ 2,659 $ 2,206 $ 954 $ 735 $ 1,301
Provision for income taxes 945 772 1,084 1,022 470 414 833
Fixed charges including interest on deposits (1) 7,703 7,584 10,205 9,043 7,775 3,629 5,931
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 10,899 10,318 13,948 12,271 9,199 4,778 8,065
Fixed charges excluding interest on deposits (2) 424 164 270 334 342 190 698
Ratio of earnings to fixed charges:
Excluding interest on deposits (3) 8.54 17.67 14.86 10.66 5.16 7.05 4.06
Including interest on deposits (4) 1.41 1.36 1.37 1.36 1.18 1.32 1.36
</TABLE>
(1) Fixed charges including interest on deposits is equal to gross interest
expense.
(2) Fixed charges excluding interest on deposits consist of interest on
advances from the FHLB of Atlanta.
(3) Ratio of earnings to fixed charges excluding interest on deposits is
computed by dividing the total of net income, provison for income taxes,
and fixed charges excluding interest on deposits by fixed charges
excluding interest on deposits.
(4) Ratio of earnings to fixed charges including interest on deposits is
computed by dividing the total of net income, provison for income taxes,
and fixed charges including interest on deposits by fixed charges
including interest on deposits.
Exhibit 23.1
The Board of Directors
Southern Financial Bancorp, Inc.
We consent to the use of our report dated February 2, 1999, with respect to the
consolidated balance sheets of Southern Financial Bancorp, Inc. as of December
31, 1998 and 1997, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for the
years then ended, and to the reference to our firm under the heading
"Accountants" in the Prospectus.
/s/ KPMG LLP
Richmond, Virginia
January 10, 2000
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Southern Financial Bancorp, Inc.
We consent to the inclusion in the Form S-1 Registration Statement of Southern
Financial Bancorp, Inc. of our report dated January 29, 1999 relating to the
balance sheets of The Horizon Bank of Virginia as of December 31, 1998, and
1997, and the related statements of operations, other comprehensive income,
changes in stockholders equity, and cash flows for the years then ended.
In addition, we consent to the reference to our firm under the heading
"Accountants" in the Registration Statement.
/s/ Thompson, Greenspon & Co. P.C.
Fairfax, Virginia
January 11, 2000
Registration No.:
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SOUTHERN FINANCIAL BANCORP, INC.
(Exact name of obligor as specified in its charter)
Virginia 54-1779978
(State of incorporation) (I.R.S. employer identification no.)
37 East Main Street
Warrenton, VA 20186
(Address of principal executive offices) (Zip Code)
Junior Subordinated Debt Securities of Southern Financial Bancorp, Inc.
(Title of the indenture securities)
================================================================================
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor
is not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which
includes the certificate of authority of Wilmington Trust
Company to commence business and the authorization of
Wilmington Trust Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section
321(b) of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 10th day
of January, 2000.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Patricia A. Evans By: /s/ Donald G. MacKelcan
----------------------------- -----------------------------
Assistant Secretary Name: Donald G. MacKelcan
Title: Vice President
-2-
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "Wilmington Trust Company" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington,
County of New Castle; the name of its resident agent is Wilmington
Trust Company whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains
and operates branch offices in the City of Newark, New Castle
County, Delaware, the Town of Newport, New Castle County, Delaware,
at Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate
branch offices at Ninth and Shipley Streets, 418 Delaware Avenue,
2120 Market Street, and 3605 Market Street, all in the City of
Wilmington, New Castle County, Delaware, and such other branch
offices or places of business as may be authorized from time to time
by the agency or agencies of the government of the State of Delaware
empowered
-3-
<PAGE>
to confer such authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this
Corporation are to do any or all of the things herein mentioned as
fully and to the same extent as natural persons might or could do
and in any part of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of
law or equity and to make and use a common seal, and alter
the seal at pleasure, to hold, purchase, convey, mortgage or
otherwise deal in real and personal estate and property, and
to appoint such officers and agents as the business of the
Corporation shall require, to make by-laws not inconsistent
with the Constitution or laws of the United States or of
this State, to discount bills, notes or other evidences of
debt, to receive deposits of money, or securities for money,
to buy gold and silver bullion and foreign coins, to buy and
sell bills of exchange, and generally to use, exercise and
enjoy all the powers, rights, privileges and franchises
incident to a corporation which are proper or necessary for
the transaction of the business of the Corporation hereby
created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of
such property, real or personal, against any claim or
claims, adverse to his interest therein, and to prepare and
give certificates of title for any lands or premises in the
State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the
receipt, collection, custody, investment and management of
funds, and the purchase, sale, management and disposal of
property of all descriptions, and to prepare and execute all
papers which may be necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds,
leases, conveyances, mortgages, bonds and legal papers of
every description, and to carry on the business of
conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property
of every sort and kind, from executors, administrators,
guardians, public officers, courts, receivers, assignees,
trustees, and from all fiduciaries, and from all other
persons and individuals, and from all corporations whether
state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of
registering, issuing, certificating, countersigning,
transferring or underwriting the stock, bonds or other
obligations of any corporation, association, state or
municipality, and may
-4-
<PAGE>
receive and manage any sinking fund therefor on such terms
as may be agreed upon between the two parties, and in like
manner may act as Treasurer of any corporation or
municipality.
(7) To act as Trustee under any deed of trust, mortgage,
bond or other instrument issued by any state, municipality,
body politic, corporation, association or person, either
alone or in conjunction with any other person or persons,
corporation or corporations.
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any
trust, office, duty, contract or agreement, either by itself
or in conjunction with any other person, or persons,
corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment,
suit, order, or decree to be entered in any court of record
within the State of Delaware or elsewhere, or which may now
or hereafter be required by any law, judge, officer or court
in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian, bailee, or
in any other trust capacity in the receiving, holding,
managing, and disposing of any and all estates and property,
real, personal or mixed, and to be appointed as such
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee
by any persons, corporations, court, officer, or authority,
in the State of Delaware or elsewhere; and whenever this
Corporation is so appointed by any person, corporation,
court, officer or authority such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other
trust capacity, it shall not be required to give bond with
surety, but its capital stock shall be taken and held as
security for the performance of the duties devolving upon it
by such appointment.
(10) And for its care, management and trouble, and the
exercise of any of its powers hereby given, or for the
performance of any of the duties which it may undertake or
be called upon to perform, or for the assumption of any
responsibility the said Corporation may be entitled to
receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without
the State of Delaware, or of the Government of the United
States, or of any state, territory, colony, or possession
thereof, or of any foreign government or country;
-5-
<PAGE>
to receive, collect, receipt for, and dispose of interest,
dividends and income upon and from any of the bonds,
mortgages, debentures, notes, shares of capital stock,
securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages,
debentures, notes, shares of capital stock, securities,
obligations, contracts, evidences of indebtedness and other
property, any and all the rights, powers and privileges of
individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of
the Corporation upon such securities and in such manner as
it may think fit and proper, and from time to time to vary
or realize such investments; to issue bonds and secure the
same by pledges or deeds of trust or mortgages of or upon
the whole or any part of the property held or owned by the
Corporation, and to sell and pledge such bonds, as and when
the Board of Directors shall determine, and in the promotion
of its said corporate business of investment and to the
extent authorized by law, to lease, purchase, hold, sell,
assign, transfer, pledge, mortgage and convey real and
personal property of any name and nature and any estate or
interest therein.
(b) In furtherance of, and not in limitation, of the powers
conferred by the laws of the State of Delaware, it is hereby
expressly provided that the said Corporation shall also have the
following powers:
(1) To do any or all of the things herein set forth, to the
same extent as natural persons might or could do, and in any
part of the world.
(2) To acquire the good will, rights, property and
franchises and to undertake the whole or any part of the
assets and liabilities of any person, firm, association or
corporation, and to pay for the same in cash, stock of this
Corporation, bonds or otherwise; to hold or in any manner to
dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any
part of any business so acquired, and to exercise all the
powers necessary or convenient in and about the conduct and
management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien,
and to lease, sell, exchange, transfer, or in any manner
whatever dispose of property, real, personal or mixed,
wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or
corporation, and, without limit as to amount, to draw, make,
accept, endorse, discount, execute and issue promissory
notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable
instruments.
(5) To have one or more offices, to carry on all or any of
its operations and businesses, without restriction to the
same extent as natural persons might or
-6-
<PAGE>
could do, to purchase or otherwise acquire, to hold, own, to
mortgage, sell, convey or otherwise dispose of, real and
personal property, of every class and description, in any
State, District, Territory or Colony of the United States,
and in any foreign country or place.
(6) It is the intention that the objects, purposes and
powers specified and clauses contained in this paragraph
shall (except where otherwise expressed in said paragraph)
be nowise limited or restricted by reference to or inference
from the terms of any other clause of this or any other
paragraph in this charter, but that the objects, purposes
and powers specified in each of the clauses of this
paragraph shall be regarded as independent objects, purposes
and powers.
Fourth: - (a) The total number of shares of all classes of stock
which the Corporation shall have authority to issue is forty-one
million (41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par
value $10.00 per share (hereinafter referred to as
"Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par
value $1.00 per share (hereinafter referred to as "Common
Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board
of Directors each of said series to be distinctly designated. All
shares of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time
outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article Fourth, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by
resolution or resolutions adopted prior to the issuance of any
shares of a particular series of Preferred Stock, the voting powers
and the designations, preferences and relative, optional and other
special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of
the foregoing, the following:
(1) The distinctive designation of, and the number of shares
of Preferred Stock which shall constitute such series, which
number may be increased (except where otherwise provided by
the Board of Directors) or decreased (but not below the
number of shares thereof then outstanding) from time to time
by like action of the Board of Directors;
(2) The rate and times at which, and the terms and
conditions on which, dividends, if any, on Preferred Stock
of such series shall be paid, the extent of the
-7-
<PAGE>
preference or relation, if any, of such dividends to the
dividends payable on any other class or classes, or series
of the same or other class of stock and whether such
dividends shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of
such series to convert the same into or exchange the same
for, shares of any other class or classes or of any series
of the same or any other class or classes of stock of the
Corporation and the terms and conditions of such conversion
or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices
and the time or times at which, and the terms and conditions
on which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of
such series; and
(7) The voting powers, if any, of the holders of such series
of Preferred Stock which may, without limiting the
generality of the foregoing include the right, voting as a
series or by itself or together with other series of
Preferred Stock or all series of Preferred Stock as a class,
to elect one or more directors of the Corporation if there
shall have been a default in the payment of dividends on any
one or more series of Preferred Stock or under such
circumstances and on such conditions as the Board of
Directors may determine.
(c) (1) After the requirements with respect to preferential
dividends on the Preferred Stock (fixed in accordance with the
provisions of section (b) of this Article Fourth), if any, shall
have been met and after the Corporation shall have complied with all
the requirements, if any, with respect to the setting aside of sums
as sinking funds or redemption or purchase accounts (fixed in
accordance with the provisions of section (b) of this Article
Fourth), and subject further to any conditions which may be fixed in
accordance with the provisions of section (b) of this Article
Fourth, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to
time by the Board of Directors.
(2) After distribution in full of the preferential amount,
if any, (fixed in accordance with the provisions of section
(b) of this Article Fourth), to be distributed to the
holders of Preferred Stock in the event of voluntary or
involuntary liquidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation, the holders
of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and
intangible, of
-8-
<PAGE>
whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common
Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be
adopted by the Board of Directors pursuant to section (b) of
this Article Fourth, each holder of Common Stock shall have
one vote in respect of each share of Common Stock held on
all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock
or of options, warrants or other rights to purchase shares of any
class or series of stock or of other securities of the Corporation
shall have any preemptive right to purchase or subscribe for any
unissued stock of any class or series or any additional shares of
any class or series to be issued by reason of any increase of the
authorized capital stock of the Corporation of any class or series,
or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of the
Corporation of any class or series, or carrying any right to
purchase stock of any class or series, but any such unissued stock,
additional authorized issue of shares of any class or series of
stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of
pursuant to resolution of the Board of Directors to such persons,
firms, corporations or associations, whether such holders or others,
and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case,
be as fixed from time to time by the Board of Directors in the
resolution or resolutions adopted pursuant to authority granted in
section (b) of this Article Fourth and the consent, by class or
series vote or otherwise, of the holders of such of the series of
Preferred Stock as are from time to time outstanding shall not be
required for the issuance by the Board of Directors of any other
series of Preferred Stock whether or not the powers, preferences and
rights of such other series shall be fixed by the Board of Directors
as senior to, or on a parity with, the powers, preferences and
rights of such outstanding series, or any of them; provided,
however, that the Board of Directors may provide in the resolution
or resolutions as to any series of Preferred Stock adopted pursuant
to section (b) of this Article Fourth that the consent of the
holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting
thereon shall be required for the issuance of any or all other
series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series
of Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and
for such consideration as shall be fixed by the Board of Directors.
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(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of
directors constituting the entire Board shall be not less than five
nor more than twenty-five as fixed from time to time by vote of a
majority of the whole Board, provided, however, that the number of
directors shall not be reduced so as to shorten the term of any
director at the time in office, and provided further, that the
number of directors constituting the whole Board shall be
twenty-four until otherwise fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office
for a term expiring at the next succeeding annual meeting, directors
of the second class shall be elected to hold office for a term
expiring at the second succeeding annual meeting and directors of
the third class shall be elected to hold office for a term expiring
at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any newly created directorships
resulting from any increase in the directors, may be filled by the
Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen
shall hold office until the next annual election of directors. At
such election, the stockholders shall elect a successor to such
director to hold office until the next election of the class for
which such director shall have been chosen and until his successor
shall be elected and qualified. No decrease in the number of
directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the By-Laws of the Corporation),
any director or the entire Board of Directors of the Corporation may
be removed at any time without cause, but only by the affirmative
vote of the holders of two-thirds or more of the outstanding shares
of capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as one class)
cast at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the
Board of Directors or by any stockholder entitled to vote for the
election of directors. Such nominations shall
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be made by notice in writing, delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the
Corporation not less than 14 days nor more than 50 days prior to any
meeting of the stockholders called for the election of directors;
provided, however, that if less than 21 days' notice of the meeting
is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later
than the close of the seventh day following the day on which notice
of the meeting was mailed to stockholders. Notice of nominations
which are proposed by the Board of Directors shall be given by the
Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each
nominee proposed in such notice, (ii) the principal occupation or
employment of such nominee and (iii) the number of shares of stock
of the Corporation which are beneficially owned by each such
nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be
taken without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
Sixth: - The Directors shall choose such officers, agents and
servants as may be provided in the By-Laws as they may from time to
time find necessary or proper.
Seventh: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority
of the whole Board, may designate any of their number to constitute
an Executive Committee, which Committee, to the extent provided in
said resolution, or in the By-Laws of the Company, shall have and
may exercise all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and shall
have power to authorize the seal of the Corporation to be affixed to
all papers which may require it.
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Eleventh: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
Twelfth: - The Corporation may transact business in any part of the
world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation
by a vote of the majority of the entire Board. The stockholders may
make, alter or repeal any By-Law whether or not adopted by them,
provided however, that any such additional By-Laws, alterations or
repeal may be adopted only by the affirmative vote of the holders of
two-thirds or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class).
Fourteenth: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be
from time to time designated by them.
Fifteenth: - (a) (1) In addition to any affirmative vote required by
law, and except as otherwise expressly provided in sections (b) and
(c) of this Article Fifteenth:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation,
would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair
market value of $1,000,000 or more, or
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for cash, securities
or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation, or
(E) any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
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Corporation with any of its Subsidiaries or any similar
transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect,
directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested
Stockholder, or any Affiliate of any Interested Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this
Article Fifteenth shall mean any transaction which is
referred to in any one or more of clauses (A) through
(E) of paragraph 1 of the section (a).
(b) The provisions of section (a) of this Article Fifteenth
shall not be applicable to any particular business
combination and such business combination shall require only
such affirmative vote as is required by law and any other
provisions of the Charter or Act of Incorporation or By-Laws
if such business combination has been approved by a majority
of the whole Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any
Subsidiary) who or which as of the record date for the determination
of stockholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time
within two years prior thereto was the beneficial owner,
directly or indirectly, of not less than 10% of the then
outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any
share of capital stock of the Corporation which were at any
time within two years prior thereto beneficially owned by
any Interested Stockholder, and such assignment or
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succession shall have occurred in the course of a
transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and
Associates (as hereafter defined) beneficially own, directly
or indirectly, or
(B) which such person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote
pursuant to any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or
any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock
of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Securities Exchange Act of
1934, as in effect on December 31, 1981) is owned, directly or
indirectly, by the Corporation; provided, however, that for the
purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty
to determine for the purposes of this Article Fifteenth on
the basis of information known to them, (1) the number of
Voting Shares beneficially owned by any person (2) whether a
person is an Affiliate or Associate of another, (3) whether
a person has an agreement, arrangement or understanding with
another as to the matters referred to in paragraph (3) of
section (c), or (4) whether the assets subject to any
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business combination or the consideration received for the
issuance or transfer of securities by the Corporation, or
any Subsidiary has an aggregate fair market value of
$1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
Sixteenth: Notwithstanding any other provision of this Charter or
Act of Incorporation or the By-Laws of the Corporation (and in
addition to any other vote that may be required by law, this Charter
or Act of Incorporation by the By-Laws), the affirmative vote of the
holders of at least two-thirds of the outstanding shares of the
capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class)
shall be required to amend, alter or repeal any provision of
Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter
or Act of Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable
to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Laws as the same exists or
may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph
shall not adversely affect any right or protection of a
Director of the Corporation existing hereunder with respect
to any act or omission occurring prior to the time of such
repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
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BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each share of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or
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elsewhere in its discretion at such times to be determined by a majority of its
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall
be necessary to constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal,
inability to act, or disqualification of any director, the Board of Directors,
although less than a quorum, shall have the right to elect the successor who
shall hold office for the remainder of the full term of the class of directors
in which the vacancy occurred, and until such director's successor shall have
been duly elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or divisions of the Company as it may deem
advisable.
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ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of
not more than nine members who shall be selected by the Board of Directors from
its own members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the
powers of the Board of Directors when it is not in session to transact all
business for and in behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the
principal office of the Company or elsewhere in its discretion at such times to
be determined by a majority of its members, or at the call of the Chairman of
the Executive Committee or at the call of the Chairman of the Board of
Directors. The majority of its members shall be necessary to constitute a quorum
for the transaction of business. Special meetings of the Executive Committee may
be held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive
Committee shall be kept and submitted to the Board of Directors at its next
meeting.
(E) The Executive Committee shall advise and
superintend all investments that may be made of the funds of the Company, and
shall direct the disposal of the same, in accordance with such rules and
regulations as the Board of Directors from time to time make.
(F) In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Company by its directors and officers as contemplated by these
By-Laws any two available members of the Executive Committee as constituted
immediately prior to such disaster shall constitute a quorum of that Committee
for the full conduct and management of the affairs and business of the Company
in accordance with the provisions of Article III of these By-Laws; and if less
than three members of the Trust Committee is constituted immediately prior to
such disaster shall be available for the transaction of its business, such
Executive Committee shall also be empowered to exercise all of the powers
reserved to the Trust Committee under Article III Section 2 hereof. In the event
of the unavailability, at such time, of a minimum of two members of such
Executive Committee, any three available directors shall constitute the
Executive Committee for the full conduct and management of the affairs and
business of the Company in accordance with the foregoing provisions of this
Section. This By-Law shall be subject to implementation by Resolutions of the
Board of Directors presently existing or hereafter passed from time to time for
that purpose, and any provisions of these By-Laws (other than this Section) and
any resolutions which are contrary to the provisions of this Section or to the
provisions of any such implementary Resolutions shall
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be suspended during such a disaster period until it shall be determined by any
interim Executive Committee acting under this section that it shall be to the
advantage of the Company to resume the conduct and management of its affairs and
business under all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not
more than thirteen members who shall be selected by the Board of Directors, a
majority of whom shall be members of the Board of Directors and who shall hold
office during the pleasure of the Board.
(B) The Trust Committee shall have general
supervision over the Trust Department and the investment of trust funds, in all
matters, however, being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members or at the call of its chairman. A
majority of its members shall be necessary to constitute a quorum for the
transaction of business.
(D) Minutes of each meeting of the Trust Committee
shall be kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to
appoint Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five
members who shall be selected by the Board of Directors from its own members,
none of whom shall be an officer of the Company, and shall hold office at the
pleasure of the Board.
(B) The Audit Committee shall have general
supervision over the Audit Division in all matters however subject to the
approval of the Board of Directors; it shall consider all matters brought to its
attention by the officer in charge of the Audit Division, review all reports of
examination of the Company made by any governmental agency or such independent
auditor employed for that purpose, and make such recommendations to the Board of
Directors with respect thereto or with respect to any other matters pertaining
to auditing the Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and
wherever the majority of its members shall deem it to be proper for the
transaction of its business, and a majority of its Committee shall constitute a
quorum.
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Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of
not more than five (5) members who shall be selected by the Board of Directors
from its own members who are not officers of the Company and who shall hold
office during the pleasure of the Board.
(B) The Compensation Committee shall in general
advise upon all matters of policy concerning the Company brought to its
attention by the management and from time to time review the management of the
Company, major organizational matters, including salaries and employee benefits
and specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be
called at any time by the Chairman of the Compensation Committee, the Chairman
of the Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be
elected by the Board of Directors as an associate director, to serve during the
pleasure of the Board.
(B) An associate director shall be entitled to
attend all directors meetings and participate in the discussion of all matters
brought to the Board, with the exception that he would have no right to vote. An
associate director will be eligible for appointment to Committees of the
Company, with the exception of the Executive Committee, Audit Committee and
Compensation Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any
member of any Committee created under Article III of the By-Laws of this
Company, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
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ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at
all meetings of the Board and shall have such further authority and powers and
shall perform such duties as the Board of Directors may from time to time confer
and direct. He shall also exercise such powers and perform such duties as may
from time to time be agreed upon between himself and the President of the
Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors. In the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President
as designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of
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the Company and shall report to the Board of Directors at each regular meeting
of the condition of the Company, and perform such other duties as may be
assigned to him from time to time by the Board of Directors of the Executive
Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller
officers however denominated, who may perform the duties of the Controller and
such duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit
Officers, however denominated, who may perform all the duties of the Auditor and
such duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank
to all Vice Presidents with such functional titles as shall be determined from
time to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the
Company shall be those usually pertaining to their respective offices, subject
to the direction of the Board of Directors, the Executive Committee, Chairman of
the Board of Directors or the President and the officer in charge of the
department or division to which they are assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of
the Company and a transfer book shall be kept in which all transfers of stock
shall be recorded.
Section 2. Certificates of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly
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<PAGE>
endorsed. Any certificate of stock surrendered to the Company shall be cancelled
at the time of transfer, and before a new certificate or certificates shall be
issued in lieu thereof. Duplicate certificates of stock shall be issued only
upon giving such security as may be satisfactory to the Board of Directors or
the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to
fix in advance a record date for the determination of the stockholders entitled
to notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the
following form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner circle
the words "Wilmington, Delaware."
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar
year.
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation
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<PAGE>
by the Board of Directors or the Executive Committee, and any and all such
instruments shall have the same force and validity as though expressly
authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to
the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred
in defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred by a Director or officer in his
capacity as a Director or officer in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the Director or
officer to repay all amounts advanced if it should be ultimately determined that
the Director or officer is not entitled to be indemnified under this Article or
otherwise.
(C) If a claim for indemnification or payment of
expenses, under this Article X is not paid in full within ninety days after a
written claim therefor has been received by the Corporation the claimant may
file suit to recover the unpaid amount of such claim and, if
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<PAGE>
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the claimant was not entitled to the requested indemnification
of payment of expenses under applicable law.
(D) The rights conferred on any person by this
Article X shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing
provisions of this Article X shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in
whole or in part, and any new By-Law or By-Laws adopted at any regular or
special meeting of the Board of Directors by a vote of the majority of all the
members of the Board of Directors then in office.
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<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: January 10, 2000 By: /s/ Donald G. MacKelcan
------------------------ ------------------------------------
Name: Donald G. MacKelcan
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and
savings banks with state publication requirements. It has not
been approved by any state banking authorities. Refer to your
appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- -------------------------------------------------- ----------------------------
Name of Bank City
in the State of DELAWARE , at the close of business on September 30, 1999.
-------------
<TABLE>
<CAPTION>
ASSETS Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................................................182,666
Interest-bearing balances................................................................................0
Held-to-maturity securities..................................................................................34,128
Available-for-sale securities.............................................................................1,644,067
Federal funds sold and securities purchased under agreements to resell......................................259,962
Loans and lease financing receivables:
Loans and leases, net of unearned income...............4,251,934
LESS: Allowance for loan and lease losses................71,014
LESS: Allocated transfer risk reserve.........................0
Loans and leases, net of unearned income, allowance, and reserve.................................4,180,920
Assets held in trading accounts...................................................................................0
Premises and fixed assets (including capitalized leases)....................................................138,196
Other real estate owned.........................................................................................976
Investments in unconsolidated subsidiaries and associated companies...........................................1,452
Customers' liability to this bank on acceptances outstanding......................................................0
Intangible assets.............................................................................................5,092
Other assets................................................................................................142,444
Total assets..............................................................................................6,589,903
CONTINUED ON NEXT PAGE
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<PAGE>
LIABILITIES
Deposits:
In domestic offices.......................................................................................4,886,770
Noninterest-bearing..................1,084,581
Interest-bearing.....................3,802,189
Federal funds purchased and Securities sold under agreements to repurchase..................................387,343
Demand notes issued to the U.S. Treasury.....................................................................69,491
Trading liabilities (from Schedule RC-D)..........................................................................0
Other borrowed money:.......................................................................................///////
With original maturity of one year or less.........................................................655,000
With original maturity of more than one year........................................................43,000
Bank's liability on acceptances executed and outstanding..........................................................0
Subordinated notes and debentures.................................................................................0
Other liabilities (from Schedule RC-G).......................................................................84,722
Total liabilities.........................................................................................6,126,326
EQUITY CAPITAL
Perpetual preferred stock and related surplus.....................................................................0
Common Stock....................................................................................................500
Surplus (exclude all surplus related to preferred stock).....................................................62,118
Undivided profits and capital reserves......................................................................417,321
Net unrealized holding gains (losses) on available-for-sale securities.....................................(16,362)
Total equity capital........................................................................................463,577
Total liabilities, limited-life preferred stock, and equity capital.......................................6,589,903
</TABLE>
-29-
Registration No.:
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SOUTHERN FINANCIAL CAPITAL TRUST I
SOUTHERN FINANCIAL BANCORP, INC.
(Exact name of obligor as specified in its charter)
Delaware [Applied For]
Virginia 54-1779978
(State of incorporation) (I.R.S. employer identification no.)
37 East Main Street
Warrenton, VA 20186
(Address of principal executive offices) (Zip Code)
Capital Securities of Southern Financial Capital Trust I
(Title of the indenture securities)
================================================================================
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust
powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor
is not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which
includes the certificate of authority of Wilmington Trust
Company to commence business and the authorization of
Wilmington Trust Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section
321(b) of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 10th day
of January, 2000.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Patricia A. Evans By: /s/ Donald G. MacKelcan
----------------------------- -----------------------------
Assistant Secretary Name: Donald G. MacKelcan
Title: Vice President
-2-
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "Wilmington Trust Company" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington,
County of New Castle; the name of its resident agent is Wilmington
Trust Company whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains
and operates branch offices in the City of Newark, New Castle
County, Delaware, the Town of Newport, New Castle County, Delaware,
at Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate
branch offices at Ninth and Shipley Streets, 418 Delaware Avenue,
2120 Market Street, and 3605 Market Street, all in the City of
Wilmington, New Castle County, Delaware, and such other branch
offices or places of business as may be authorized from time to time
by the agency or agencies of the government of the State of Delaware
empowered
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<PAGE>
to confer such authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this
Corporation are to do any or all of the things herein mentioned as
fully and to the same extent as natural persons might or could do
and in any part of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of
law or equity and to make and use a common seal, and alter
the seal at pleasure, to hold, purchase, convey, mortgage or
otherwise deal in real and personal estate and property, and
to appoint such officers and agents as the business of the
Corporation shall require, to make by-laws not inconsistent
with the Constitution or laws of the United States or of
this State, to discount bills, notes or other evidences of
debt, to receive deposits of money, or securities for money,
to buy gold and silver bullion and foreign coins, to buy and
sell bills of exchange, and generally to use, exercise and
enjoy all the powers, rights, privileges and franchises
incident to a corporation which are proper or necessary for
the transaction of the business of the Corporation hereby
created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of
such property, real or personal, against any claim or
claims, adverse to his interest therein, and to prepare and
give certificates of title for any lands or premises in the
State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the
receipt, collection, custody, investment and management of
funds, and the purchase, sale, management and disposal of
property of all descriptions, and to prepare and execute all
papers which may be necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds,
leases, conveyances, mortgages, bonds and legal papers of
every description, and to carry on the business of
conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property
of every sort and kind, from executors, administrators,
guardians, public officers, courts, receivers, assignees,
trustees, and from all fiduciaries, and from all other
persons and individuals, and from all corporations whether
state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of
registering, issuing, certificating, countersigning,
transferring or underwriting the stock, bonds or other
obligations of any corporation, association, state or
municipality, and may
-4-
<PAGE>
receive and manage any sinking fund therefor on such terms
as may be agreed upon between the two parties, and in like
manner may act as Treasurer of any corporation or
municipality.
(7) To act as Trustee under any deed of trust, mortgage,
bond or other instrument issued by any state, municipality,
body politic, corporation, association or person, either
alone or in conjunction with any other person or persons,
corporation or corporations.
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any
trust, office, duty, contract or agreement, either by itself
or in conjunction with any other person, or persons,
corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment,
suit, order, or decree to be entered in any court of record
within the State of Delaware or elsewhere, or which may now
or hereafter be required by any law, judge, officer or court
in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian, bailee, or
in any other trust capacity in the receiving, holding,
managing, and disposing of any and all estates and property,
real, personal or mixed, and to be appointed as such
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee
by any persons, corporations, court, officer, or authority,
in the State of Delaware or elsewhere; and whenever this
Corporation is so appointed by any person, corporation,
court, officer or authority such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other
trust capacity, it shall not be required to give bond with
surety, but its capital stock shall be taken and held as
security for the performance of the duties devolving upon it
by such appointment.
(10) And for its care, management and trouble, and the
exercise of any of its powers hereby given, or for the
performance of any of the duties which it may undertake or
be called upon to perform, or for the assumption of any
responsibility the said Corporation may be entitled to
receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without
the State of Delaware, or of the Government of the United
States, or of any state, territory, colony, or possession
thereof, or of any foreign government or country;
-5-
<PAGE>
to receive, collect, receipt for, and dispose of interest,
dividends and income upon and from any of the bonds,
mortgages, debentures, notes, shares of capital stock,
securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages,
debentures, notes, shares of capital stock, securities,
obligations, contracts, evidences of indebtedness and other
property, any and all the rights, powers and privileges of
individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of
the Corporation upon such securities and in such manner as
it may think fit and proper, and from time to time to vary
or realize such investments; to issue bonds and secure the
same by pledges or deeds of trust or mortgages of or upon
the whole or any part of the property held or owned by the
Corporation, and to sell and pledge such bonds, as and when
the Board of Directors shall determine, and in the promotion
of its said corporate business of investment and to the
extent authorized by law, to lease, purchase, hold, sell,
assign, transfer, pledge, mortgage and convey real and
personal property of any name and nature and any estate or
interest therein.
(b) In furtherance of, and not in limitation, of the powers
conferred by the laws of the State of Delaware, it is hereby
expressly provided that the said Corporation shall also have the
following powers:
(1) To do any or all of the things herein set forth, to the
same extent as natural persons might or could do, and in any
part of the world.
(2) To acquire the good will, rights, property and
franchises and to undertake the whole or any part of the
assets and liabilities of any person, firm, association or
corporation, and to pay for the same in cash, stock of this
Corporation, bonds or otherwise; to hold or in any manner to
dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any
part of any business so acquired, and to exercise all the
powers necessary or convenient in and about the conduct and
management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien,
and to lease, sell, exchange, transfer, or in any manner
whatever dispose of property, real, personal or mixed,
wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or
corporation, and, without limit as to amount, to draw, make,
accept, endorse, discount, execute and issue promissory
notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable
instruments.
(5) To have one or more offices, to carry on all or any of
its operations and businesses, without restriction to the
same extent as natural persons might or
-6-
<PAGE>
could do, to purchase or otherwise acquire, to hold, own, to
mortgage, sell, convey or otherwise dispose of, real and
personal property, of every class and description, in any
State, District, Territory or Colony of the United States,
and in any foreign country or place.
(6) It is the intention that the objects, purposes and
powers specified and clauses contained in this paragraph
shall (except where otherwise expressed in said paragraph)
be nowise limited or restricted by reference to or inference
from the terms of any other clause of this or any other
paragraph in this charter, but that the objects, purposes
and powers specified in each of the clauses of this
paragraph shall be regarded as independent objects, purposes
and powers.
Fourth: - (a) The total number of shares of all classes of stock
which the Corporation shall have authority to issue is forty-one
million (41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par
value $10.00 per share (hereinafter referred to as
"Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par
value $1.00 per share (hereinafter referred to as "Common
Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board
of Directors each of said series to be distinctly designated. All
shares of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time
outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article Fourth, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by
resolution or resolutions adopted prior to the issuance of any
shares of a particular series of Preferred Stock, the voting powers
and the designations, preferences and relative, optional and other
special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of
the foregoing, the following:
(1) The distinctive designation of, and the number of shares
of Preferred Stock which shall constitute such series, which
number may be increased (except where otherwise provided by
the Board of Directors) or decreased (but not below the
number of shares thereof then outstanding) from time to time
by like action of the Board of Directors;
(2) The rate and times at which, and the terms and
conditions on which, dividends, if any, on Preferred Stock
of such series shall be paid, the extent of the
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<PAGE>
preference or relation, if any, of such dividends to the
dividends payable on any other class or classes, or series
of the same or other class of stock and whether such
dividends shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of
such series to convert the same into or exchange the same
for, shares of any other class or classes or of any series
of the same or any other class or classes of stock of the
Corporation and the terms and conditions of such conversion
or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices
and the time or times at which, and the terms and conditions
on which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of
such series; and
(7) The voting powers, if any, of the holders of such series
of Preferred Stock which may, without limiting the
generality of the foregoing include the right, voting as a
series or by itself or together with other series of
Preferred Stock or all series of Preferred Stock as a class,
to elect one or more directors of the Corporation if there
shall have been a default in the payment of dividends on any
one or more series of Preferred Stock or under such
circumstances and on such conditions as the Board of
Directors may determine.
(c) (1) After the requirements with respect to preferential
dividends on the Preferred Stock (fixed in accordance with the
provisions of section (b) of this Article Fourth), if any, shall
have been met and after the Corporation shall have complied with all
the requirements, if any, with respect to the setting aside of sums
as sinking funds or redemption or purchase accounts (fixed in
accordance with the provisions of section (b) of this Article
Fourth), and subject further to any conditions which may be fixed in
accordance with the provisions of section (b) of this Article
Fourth, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to
time by the Board of Directors.
(2) After distribution in full of the preferential amount,
if any, (fixed in accordance with the provisions of section
(b) of this Article Fourth), to be distributed to the
holders of Preferred Stock in the event of voluntary or
involuntary liquidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation, the holders
of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and
intangible, of
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<PAGE>
whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common
Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be
adopted by the Board of Directors pursuant to section (b) of
this Article Fourth, each holder of Common Stock shall have
one vote in respect of each share of Common Stock held on
all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock
or of options, warrants or other rights to purchase shares of any
class or series of stock or of other securities of the Corporation
shall have any preemptive right to purchase or subscribe for any
unissued stock of any class or series or any additional shares of
any class or series to be issued by reason of any increase of the
authorized capital stock of the Corporation of any class or series,
or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of the
Corporation of any class or series, or carrying any right to
purchase stock of any class or series, but any such unissued stock,
additional authorized issue of shares of any class or series of
stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of
pursuant to resolution of the Board of Directors to such persons,
firms, corporations or associations, whether such holders or others,
and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case,
be as fixed from time to time by the Board of Directors in the
resolution or resolutions adopted pursuant to authority granted in
section (b) of this Article Fourth and the consent, by class or
series vote or otherwise, of the holders of such of the series of
Preferred Stock as are from time to time outstanding shall not be
required for the issuance by the Board of Directors of any other
series of Preferred Stock whether or not the powers, preferences and
rights of such other series shall be fixed by the Board of Directors
as senior to, or on a parity with, the powers, preferences and
rights of such outstanding series, or any of them; provided,
however, that the Board of Directors may provide in the resolution
or resolutions as to any series of Preferred Stock adopted pursuant
to section (b) of this Article Fourth that the consent of the
holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting
thereon shall be required for the issuance of any or all other
series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series
of Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and
for such consideration as shall be fixed by the Board of Directors.
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(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of
directors constituting the entire Board shall be not less than five
nor more than twenty-five as fixed from time to time by vote of a
majority of the whole Board, provided, however, that the number of
directors shall not be reduced so as to shorten the term of any
director at the time in office, and provided further, that the
number of directors constituting the whole Board shall be
twenty-four until otherwise fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office
for a term expiring at the next succeeding annual meeting, directors
of the second class shall be elected to hold office for a term
expiring at the second succeeding annual meeting and directors of
the third class shall be elected to hold office for a term expiring
at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any newly created directorships
resulting from any increase in the directors, may be filled by the
Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen
shall hold office until the next annual election of directors. At
such election, the stockholders shall elect a successor to such
director to hold office until the next election of the class for
which such director shall have been chosen and until his successor
shall be elected and qualified. No decrease in the number of
directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the By-Laws of the Corporation),
any director or the entire Board of Directors of the Corporation may
be removed at any time without cause, but only by the affirmative
vote of the holders of two-thirds or more of the outstanding shares
of capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as one class)
cast at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the
Board of Directors or by any stockholder entitled to vote for the
election of directors. Such nominations shall
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be made by notice in writing, delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the
Corporation not less than 14 days nor more than 50 days prior to any
meeting of the stockholders called for the election of directors;
provided, however, that if less than 21 days' notice of the meeting
is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later
than the close of the seventh day following the day on which notice
of the meeting was mailed to stockholders. Notice of nominations
which are proposed by the Board of Directors shall be given by the
Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each
nominee proposed in such notice, (ii) the principal occupation or
employment of such nominee and (iii) the number of shares of stock
of the Corporation which are beneficially owned by each such
nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be
taken without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
Sixth: - The Directors shall choose such officers, agents and
servants as may be provided in the By-Laws as they may from time to
time find necessary or proper.
Seventh: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority
of the whole Board, may designate any of their number to constitute
an Executive Committee, which Committee, to the extent provided in
said resolution, or in the By-Laws of the Company, shall have and
may exercise all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and shall
have power to authorize the seal of the Corporation to be affixed to
all papers which may require it.
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Eleventh: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
Twelfth: - The Corporation may transact business in any part of the
world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation
by a vote of the majority of the entire Board. The stockholders may
make, alter or repeal any By-Law whether or not adopted by them,
provided however, that any such additional By-Laws, alterations or
repeal may be adopted only by the affirmative vote of the holders of
two-thirds or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class).
Fourteenth: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be
from time to time designated by them.
Fifteenth: - (a) (1) In addition to any affirmative vote required by
law, and except as otherwise expressly provided in sections (b) and
(c) of this Article Fifteenth:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation,
would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair
market value of $1,000,000 or more, or
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for cash, securities
or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation, or
(E) any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
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Corporation with any of its Subsidiaries or any similar
transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect,
directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested
Stockholder, or any Affiliate of any Interested Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this
Article Fifteenth shall mean any transaction which is
referred to in any one or more of clauses (A) through
(E) of paragraph 1 of the section (a).
(b) The provisions of section (a) of this Article Fifteenth
shall not be applicable to any particular business
combination and such business combination shall require only
such affirmative vote as is required by law and any other
provisions of the Charter or Act of Incorporation or By-Laws
if such business combination has been approved by a majority
of the whole Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any
Subsidiary) who or which as of the record date for the determination
of stockholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time
within two years prior thereto was the beneficial owner,
directly or indirectly, of not less than 10% of the then
outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any
share of capital stock of the Corporation which were at any
time within two years prior thereto beneficially owned by
any Interested Stockholder, and such assignment or
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succession shall have occurred in the course of a
transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and
Associates (as hereafter defined) beneficially own, directly
or indirectly, or
(B) which such person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote
pursuant to any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or
any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock
of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Securities Exchange Act of
1934, as in effect on December 31, 1981) is owned, directly or
indirectly, by the Corporation; provided, however, that for the
purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty
to determine for the purposes of this Article Fifteenth on
the basis of information known to them, (1) the number of
Voting Shares beneficially owned by any person (2) whether a
person is an Affiliate or Associate of another, (3) whether
a person has an agreement, arrangement or understanding with
another as to the matters referred to in paragraph (3) of
section (c), or (4) whether the assets subject to any
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business combination or the consideration received for the
issuance or transfer of securities by the Corporation, or
any Subsidiary has an aggregate fair market value of
$1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
Sixteenth: Notwithstanding any other provision of this Charter or
Act of Incorporation or the By-Laws of the Corporation (and in
addition to any other vote that may be required by law, this Charter
or Act of Incorporation by the By-Laws), the affirmative vote of the
holders of at least two-thirds of the outstanding shares of the
capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class)
shall be required to amend, alter or repeal any provision of
Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter
or Act of Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable
to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Laws as the same exists or
may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph
shall not adversely affect any right or protection of a
Director of the Corporation existing hereunder with respect
to any act or omission occurring prior to the time of such
repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
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BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each share of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or
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elsewhere in its discretion at such times to be determined by a majority of its
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall
be necessary to constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal,
inability to act, or disqualification of any director, the Board of Directors,
although less than a quorum, shall have the right to elect the successor who
shall hold office for the remainder of the full term of the class of directors
in which the vacancy occurred, and until such director's successor shall have
been duly elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or divisions of the Company as it may deem
advisable.
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ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of
not more than nine members who shall be selected by the Board of Directors from
its own members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the
powers of the Board of Directors when it is not in session to transact all
business for and in behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the
principal office of the Company or elsewhere in its discretion at such times to
be determined by a majority of its members, or at the call of the Chairman of
the Executive Committee or at the call of the Chairman of the Board of
Directors. The majority of its members shall be necessary to constitute a quorum
for the transaction of business. Special meetings of the Executive Committee may
be held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive
Committee shall be kept and submitted to the Board of Directors at its next
meeting.
(E) The Executive Committee shall advise and
superintend all investments that may be made of the funds of the Company, and
shall direct the disposal of the same, in accordance with such rules and
regulations as the Board of Directors from time to time make.
(F) In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Company by its directors and officers as contemplated by these
By-Laws any two available members of the Executive Committee as constituted
immediately prior to such disaster shall constitute a quorum of that Committee
for the full conduct and management of the affairs and business of the Company
in accordance with the provisions of Article III of these By-Laws; and if less
than three members of the Trust Committee is constituted immediately prior to
such disaster shall be available for the transaction of its business, such
Executive Committee shall also be empowered to exercise all of the powers
reserved to the Trust Committee under Article III Section 2 hereof. In the event
of the unavailability, at such time, of a minimum of two members of such
Executive Committee, any three available directors shall constitute the
Executive Committee for the full conduct and management of the affairs and
business of the Company in accordance with the foregoing provisions of this
Section. This By-Law shall be subject to implementation by Resolutions of the
Board of Directors presently existing or hereafter passed from time to time for
that purpose, and any provisions of these By-Laws (other than this Section) and
any resolutions which are contrary to the provisions of this Section or to the
provisions of any such implementary Resolutions shall
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be suspended during such a disaster period until it shall be determined by any
interim Executive Committee acting under this section that it shall be to the
advantage of the Company to resume the conduct and management of its affairs and
business under all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not
more than thirteen members who shall be selected by the Board of Directors, a
majority of whom shall be members of the Board of Directors and who shall hold
office during the pleasure of the Board.
(B) The Trust Committee shall have general
supervision over the Trust Department and the investment of trust funds, in all
matters, however, being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members or at the call of its chairman. A
majority of its members shall be necessary to constitute a quorum for the
transaction of business.
(D) Minutes of each meeting of the Trust Committee
shall be kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to
appoint Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five
members who shall be selected by the Board of Directors from its own members,
none of whom shall be an officer of the Company, and shall hold office at the
pleasure of the Board.
(B) The Audit Committee shall have general
supervision over the Audit Division in all matters however subject to the
approval of the Board of Directors; it shall consider all matters brought to its
attention by the officer in charge of the Audit Division, review all reports of
examination of the Company made by any governmental agency or such independent
auditor employed for that purpose, and make such recommendations to the Board of
Directors with respect thereto or with respect to any other matters pertaining
to auditing the Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and
wherever the majority of its members shall deem it to be proper for the
transaction of its business, and a majority of its Committee shall constitute a
quorum.
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Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of
not more than five (5) members who shall be selected by the Board of Directors
from its own members who are not officers of the Company and who shall hold
office during the pleasure of the Board.
(B) The Compensation Committee shall in general
advise upon all matters of policy concerning the Company brought to its
attention by the management and from time to time review the management of the
Company, major organizational matters, including salaries and employee benefits
and specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be
called at any time by the Chairman of the Compensation Committee, the Chairman
of the Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be
elected by the Board of Directors as an associate director, to serve during the
pleasure of the Board.
(B) An associate director shall be entitled to
attend all directors meetings and participate in the discussion of all matters
brought to the Board, with the exception that he would have no right to vote. An
associate director will be eligible for appointment to Committees of the
Company, with the exception of the Executive Committee, Audit Committee and
Compensation Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any
member of any Committee created under Article III of the By-Laws of this
Company, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
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ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at
all meetings of the Board and shall have such further authority and powers and
shall perform such duties as the Board of Directors may from time to time confer
and direct. He shall also exercise such powers and perform such duties as may
from time to time be agreed upon between himself and the President of the
Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors. In the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President
as designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of
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the Company and shall report to the Board of Directors at each regular meeting
of the condition of the Company, and perform such other duties as may be
assigned to him from time to time by the Board of Directors of the Executive
Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller
officers however denominated, who may perform the duties of the Controller and
such duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit
Officers, however denominated, who may perform all the duties of the Auditor and
such duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank
to all Vice Presidents with such functional titles as shall be determined from
time to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the
Company shall be those usually pertaining to their respective offices, subject
to the direction of the Board of Directors, the Executive Committee, Chairman of
the Board of Directors or the President and the officer in charge of the
department or division to which they are assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of
the Company and a transfer book shall be kept in which all transfers of stock
shall be recorded.
Section 2. Certificates of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly
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<PAGE>
endorsed. Any certificate of stock surrendered to the Company shall be cancelled
at the time of transfer, and before a new certificate or certificates shall be
issued in lieu thereof. Duplicate certificates of stock shall be issued only
upon giving such security as may be satisfactory to the Board of Directors or
the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to
fix in advance a record date for the determination of the stockholders entitled
to notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the
following form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner circle
the words "Wilmington, Delaware."
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar
year.
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation
-24-
<PAGE>
by the Board of Directors or the Executive Committee, and any and all such
instruments shall have the same force and validity as though expressly
authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to
the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred
in defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred by a Director or officer in his
capacity as a Director or officer in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the Director or
officer to repay all amounts advanced if it should be ultimately determined that
the Director or officer is not entitled to be indemnified under this Article or
otherwise.
(C) If a claim for indemnification or payment of
expenses, under this Article X is not paid in full within ninety days after a
written claim therefor has been received by the Corporation the claimant may
file suit to recover the unpaid amount of such claim and, if
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<PAGE>
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the claimant was not entitled to the requested indemnification
of payment of expenses under applicable law.
(D) The rights conferred on any person by this
Article X shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing
provisions of this Article X shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in
whole or in part, and any new By-Law or By-Laws adopted at any regular or
special meeting of the Board of Directors by a vote of the majority of all the
members of the Board of Directors then in office.
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<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: January 10, 2000 By: /s/ Donald G. MacKelcan
------------------------ ------------------------------------
Name: Donald G. MacKelcan
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and
savings banks with state publication requirements. It has not
been approved by any state banking authorities. Refer to your
appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- -------------------------------------------------- ----------------------------
Name of Bank City
in the State of DELAWARE , at the close of business on September 30, 1999.
-------------
<TABLE>
<CAPTION>
ASSETS Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................................................182,666
Interest-bearing balances................................................................................0
Held-to-maturity securities..................................................................................34,128
Available-for-sale securities.............................................................................1,644,067
Federal funds sold and securities purchased under agreements to resell......................................259,962
Loans and lease financing receivables:
Loans and leases, net of unearned income...............4,251,934
LESS: Allowance for loan and lease losses................71,014
LESS: Allocated transfer risk reserve.........................0
Loans and leases, net of unearned income, allowance, and reserve.................................4,180,920
Assets held in trading accounts...................................................................................0
Premises and fixed assets (including capitalized leases)....................................................138,196
Other real estate owned.........................................................................................976
Investments in unconsolidated subsidiaries and associated companies...........................................1,452
Customers' liability to this bank on acceptances outstanding......................................................0
Intangible assets.............................................................................................5,092
Other assets................................................................................................142,444
Total assets..............................................................................................6,589,903
CONTINUED ON NEXT PAGE
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<PAGE>
LIABILITIES
Deposits:
In domestic offices.......................................................................................4,886,770
Noninterest-bearing..................1,084,581
Interest-bearing.....................3,802,189
Federal funds purchased and Securities sold under agreements to repurchase..................................387,343
Demand notes issued to the U.S. Treasury.....................................................................69,491
Trading liabilities (from Schedule RC-D)..........................................................................0
Other borrowed money:.......................................................................................///////
With original maturity of one year or less.........................................................655,000
With original maturity of more than one year........................................................43,000
Bank's liability on acceptances executed and outstanding..........................................................0
Subordinated notes and debentures.................................................................................0
Other liabilities (from Schedule RC-G).......................................................................84,722
Total liabilities.........................................................................................6,126,326
EQUITY CAPITAL
Perpetual preferred stock and related surplus.....................................................................0
Common Stock....................................................................................................500
Surplus (exclude all surplus related to preferred stock).....................................................62,118
Undivided profits and capital reserves......................................................................417,321
Net unrealized holding gains (losses) on available-for-sale securities.....................................(16,362)
Total equity capital........................................................................................463,577
Total liabilities, limited-life preferred stock, and equity capital.......................................6,589,903
</TABLE>
-29-
Registration No.:
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SOUTHERN FINANCIAL BANCORP, INC.
(Exact name of obligor as specified in its charter)
Virginia 54-1779978
(State of incorporation) (I.R.S. employer identification no.)
37 East Main Street
Warrenton, VA 20186
(Address of principal executive offices) (Zip Code)
Guarantee of Southern Financial Bancorp, Inc. as to the
Capital Securities of Southern Financial Capital Trust I
(Title of the indenture securities)
================================================================================
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust
powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor
is not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which
includes the certificate of authority of Wilmington Trust
Company to commence business and the authorization of
Wilmington Trust Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section
321(b) of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 10th day
of January, 2000.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Patricia A. Evans By: /s/ Donald G. MacKelcan
----------------------------- -----------------------------
Assistant Secretary Name: Donald G. MacKelcan
Title: Vice President
-2-
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "Wilmington Trust Company" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington,
County of New Castle; the name of its resident agent is Wilmington
Trust Company whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains
and operates branch offices in the City of Newark, New Castle
County, Delaware, the Town of Newport, New Castle County, Delaware,
at Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate
branch offices at Ninth and Shipley Streets, 418 Delaware Avenue,
2120 Market Street, and 3605 Market Street, all in the City of
Wilmington, New Castle County, Delaware, and such other branch
offices or places of business as may be authorized from time to time
by the agency or agencies of the government of the State of Delaware
empowered
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<PAGE>
to confer such authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this
Corporation are to do any or all of the things herein mentioned as
fully and to the same extent as natural persons might or could do
and in any part of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of
law or equity and to make and use a common seal, and alter
the seal at pleasure, to hold, purchase, convey, mortgage or
otherwise deal in real and personal estate and property, and
to appoint such officers and agents as the business of the
Corporation shall require, to make by-laws not inconsistent
with the Constitution or laws of the United States or of
this State, to discount bills, notes or other evidences of
debt, to receive deposits of money, or securities for money,
to buy gold and silver bullion and foreign coins, to buy and
sell bills of exchange, and generally to use, exercise and
enjoy all the powers, rights, privileges and franchises
incident to a corporation which are proper or necessary for
the transaction of the business of the Corporation hereby
created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of
such property, real or personal, against any claim or
claims, adverse to his interest therein, and to prepare and
give certificates of title for any lands or premises in the
State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the
receipt, collection, custody, investment and management of
funds, and the purchase, sale, management and disposal of
property of all descriptions, and to prepare and execute all
papers which may be necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds,
leases, conveyances, mortgages, bonds and legal papers of
every description, and to carry on the business of
conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property
of every sort and kind, from executors, administrators,
guardians, public officers, courts, receivers, assignees,
trustees, and from all fiduciaries, and from all other
persons and individuals, and from all corporations whether
state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of
registering, issuing, certificating, countersigning,
transferring or underwriting the stock, bonds or other
obligations of any corporation, association, state or
municipality, and may
-4-
<PAGE>
receive and manage any sinking fund therefor on such terms
as may be agreed upon between the two parties, and in like
manner may act as Treasurer of any corporation or
municipality.
(7) To act as Trustee under any deed of trust, mortgage,
bond or other instrument issued by any state, municipality,
body politic, corporation, association or person, either
alone or in conjunction with any other person or persons,
corporation or corporations.
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any
trust, office, duty, contract or agreement, either by itself
or in conjunction with any other person, or persons,
corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment,
suit, order, or decree to be entered in any court of record
within the State of Delaware or elsewhere, or which may now
or hereafter be required by any law, judge, officer or court
in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian, bailee, or
in any other trust capacity in the receiving, holding,
managing, and disposing of any and all estates and property,
real, personal or mixed, and to be appointed as such
trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee
by any persons, corporations, court, officer, or authority,
in the State of Delaware or elsewhere; and whenever this
Corporation is so appointed by any person, corporation,
court, officer or authority such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other
trust capacity, it shall not be required to give bond with
surety, but its capital stock shall be taken and held as
security for the performance of the duties devolving upon it
by such appointment.
(10) And for its care, management and trouble, and the
exercise of any of its powers hereby given, or for the
performance of any of the duties which it may undertake or
be called upon to perform, or for the assumption of any
responsibility the said Corporation may be entitled to
receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without
the State of Delaware, or of the Government of the United
States, or of any state, territory, colony, or possession
thereof, or of any foreign government or country;
-5-
<PAGE>
to receive, collect, receipt for, and dispose of interest,
dividends and income upon and from any of the bonds,
mortgages, debentures, notes, shares of capital stock,
securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages,
debentures, notes, shares of capital stock, securities,
obligations, contracts, evidences of indebtedness and other
property, any and all the rights, powers and privileges of
individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of
the Corporation upon such securities and in such manner as
it may think fit and proper, and from time to time to vary
or realize such investments; to issue bonds and secure the
same by pledges or deeds of trust or mortgages of or upon
the whole or any part of the property held or owned by the
Corporation, and to sell and pledge such bonds, as and when
the Board of Directors shall determine, and in the promotion
of its said corporate business of investment and to the
extent authorized by law, to lease, purchase, hold, sell,
assign, transfer, pledge, mortgage and convey real and
personal property of any name and nature and any estate or
interest therein.
(b) In furtherance of, and not in limitation, of the powers
conferred by the laws of the State of Delaware, it is hereby
expressly provided that the said Corporation shall also have the
following powers:
(1) To do any or all of the things herein set forth, to the
same extent as natural persons might or could do, and in any
part of the world.
(2) To acquire the good will, rights, property and
franchises and to undertake the whole or any part of the
assets and liabilities of any person, firm, association or
corporation, and to pay for the same in cash, stock of this
Corporation, bonds or otherwise; to hold or in any manner to
dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any
part of any business so acquired, and to exercise all the
powers necessary or convenient in and about the conduct and
management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien,
and to lease, sell, exchange, transfer, or in any manner
whatever dispose of property, real, personal or mixed,
wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or
corporation, and, without limit as to amount, to draw, make,
accept, endorse, discount, execute and issue promissory
notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable
instruments.
(5) To have one or more offices, to carry on all or any of
its operations and businesses, without restriction to the
same extent as natural persons might or
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<PAGE>
could do, to purchase or otherwise acquire, to hold, own, to
mortgage, sell, convey or otherwise dispose of, real and
personal property, of every class and description, in any
State, District, Territory or Colony of the United States,
and in any foreign country or place.
(6) It is the intention that the objects, purposes and
powers specified and clauses contained in this paragraph
shall (except where otherwise expressed in said paragraph)
be nowise limited or restricted by reference to or inference
from the terms of any other clause of this or any other
paragraph in this charter, but that the objects, purposes
and powers specified in each of the clauses of this
paragraph shall be regarded as independent objects, purposes
and powers.
Fourth: - (a) The total number of shares of all classes of stock
which the Corporation shall have authority to issue is forty-one
million (41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par
value $10.00 per share (hereinafter referred to as
"Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par
value $1.00 per share (hereinafter referred to as "Common
Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board
of Directors each of said series to be distinctly designated. All
shares of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time
outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article Fourth, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by
resolution or resolutions adopted prior to the issuance of any
shares of a particular series of Preferred Stock, the voting powers
and the designations, preferences and relative, optional and other
special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of
the foregoing, the following:
(1) The distinctive designation of, and the number of shares
of Preferred Stock which shall constitute such series, which
number may be increased (except where otherwise provided by
the Board of Directors) or decreased (but not below the
number of shares thereof then outstanding) from time to time
by like action of the Board of Directors;
(2) The rate and times at which, and the terms and
conditions on which, dividends, if any, on Preferred Stock
of such series shall be paid, the extent of the
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<PAGE>
preference or relation, if any, of such dividends to the
dividends payable on any other class or classes, or series
of the same or other class of stock and whether such
dividends shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of
such series to convert the same into or exchange the same
for, shares of any other class or classes or of any series
of the same or any other class or classes of stock of the
Corporation and the terms and conditions of such conversion
or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices
and the time or times at which, and the terms and conditions
on which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of
such series; and
(7) The voting powers, if any, of the holders of such series
of Preferred Stock which may, without limiting the
generality of the foregoing include the right, voting as a
series or by itself or together with other series of
Preferred Stock or all series of Preferred Stock as a class,
to elect one or more directors of the Corporation if there
shall have been a default in the payment of dividends on any
one or more series of Preferred Stock or under such
circumstances and on such conditions as the Board of
Directors may determine.
(c) (1) After the requirements with respect to preferential
dividends on the Preferred Stock (fixed in accordance with the
provisions of section (b) of this Article Fourth), if any, shall
have been met and after the Corporation shall have complied with all
the requirements, if any, with respect to the setting aside of sums
as sinking funds or redemption or purchase accounts (fixed in
accordance with the provisions of section (b) of this Article
Fourth), and subject further to any conditions which may be fixed in
accordance with the provisions of section (b) of this Article
Fourth, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to
time by the Board of Directors.
(2) After distribution in full of the preferential amount,
if any, (fixed in accordance with the provisions of section
(b) of this Article Fourth), to be distributed to the
holders of Preferred Stock in the event of voluntary or
involuntary liquidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation, the holders
of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and
intangible, of
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<PAGE>
whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common
Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be
adopted by the Board of Directors pursuant to section (b) of
this Article Fourth, each holder of Common Stock shall have
one vote in respect of each share of Common Stock held on
all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock
or of options, warrants or other rights to purchase shares of any
class or series of stock or of other securities of the Corporation
shall have any preemptive right to purchase or subscribe for any
unissued stock of any class or series or any additional shares of
any class or series to be issued by reason of any increase of the
authorized capital stock of the Corporation of any class or series,
or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of the
Corporation of any class or series, or carrying any right to
purchase stock of any class or series, but any such unissued stock,
additional authorized issue of shares of any class or series of
stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of
pursuant to resolution of the Board of Directors to such persons,
firms, corporations or associations, whether such holders or others,
and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case,
be as fixed from time to time by the Board of Directors in the
resolution or resolutions adopted pursuant to authority granted in
section (b) of this Article Fourth and the consent, by class or
series vote or otherwise, of the holders of such of the series of
Preferred Stock as are from time to time outstanding shall not be
required for the issuance by the Board of Directors of any other
series of Preferred Stock whether or not the powers, preferences and
rights of such other series shall be fixed by the Board of Directors
as senior to, or on a parity with, the powers, preferences and
rights of such outstanding series, or any of them; provided,
however, that the Board of Directors may provide in the resolution
or resolutions as to any series of Preferred Stock adopted pursuant
to section (b) of this Article Fourth that the consent of the
holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting
thereon shall be required for the issuance of any or all other
series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series
of Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and
for such consideration as shall be fixed by the Board of Directors.
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(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of
directors constituting the entire Board shall be not less than five
nor more than twenty-five as fixed from time to time by vote of a
majority of the whole Board, provided, however, that the number of
directors shall not be reduced so as to shorten the term of any
director at the time in office, and provided further, that the
number of directors constituting the whole Board shall be
twenty-four until otherwise fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office
for a term expiring at the next succeeding annual meeting, directors
of the second class shall be elected to hold office for a term
expiring at the second succeeding annual meeting and directors of
the third class shall be elected to hold office for a term expiring
at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any newly created directorships
resulting from any increase in the directors, may be filled by the
Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen
shall hold office until the next annual election of directors. At
such election, the stockholders shall elect a successor to such
director to hold office until the next election of the class for
which such director shall have been chosen and until his successor
shall be elected and qualified. No decrease in the number of
directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the By-Laws of the Corporation),
any director or the entire Board of Directors of the Corporation may
be removed at any time without cause, but only by the affirmative
vote of the holders of two-thirds or more of the outstanding shares
of capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as one class)
cast at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the
Board of Directors or by any stockholder entitled to vote for the
election of directors. Such nominations shall
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be made by notice in writing, delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the
Corporation not less than 14 days nor more than 50 days prior to any
meeting of the stockholders called for the election of directors;
provided, however, that if less than 21 days' notice of the meeting
is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later
than the close of the seventh day following the day on which notice
of the meeting was mailed to stockholders. Notice of nominations
which are proposed by the Board of Directors shall be given by the
Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each
nominee proposed in such notice, (ii) the principal occupation or
employment of such nominee and (iii) the number of shares of stock
of the Corporation which are beneficially owned by each such
nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be
taken without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
Sixth: - The Directors shall choose such officers, agents and
servants as may be provided in the By-Laws as they may from time to
time find necessary or proper.
Seventh: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority
of the whole Board, may designate any of their number to constitute
an Executive Committee, which Committee, to the extent provided in
said resolution, or in the By-Laws of the Company, shall have and
may exercise all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and shall
have power to authorize the seal of the Corporation to be affixed to
all papers which may require it.
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Eleventh: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
Twelfth: - The Corporation may transact business in any part of the
world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation
by a vote of the majority of the entire Board. The stockholders may
make, alter or repeal any By-Law whether or not adopted by them,
provided however, that any such additional By-Laws, alterations or
repeal may be adopted only by the affirmative vote of the holders of
two-thirds or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class).
Fourteenth: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be
from time to time designated by them.
Fifteenth: - (a) (1) In addition to any affirmative vote required by
law, and except as otherwise expressly provided in sections (b) and
(c) of this Article Fifteenth:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation,
would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair
market value of $1,000,000 or more, or
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for cash, securities
or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation, or
(E) any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
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Corporation with any of its Subsidiaries or any similar
transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect,
directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested
Stockholder, or any Affiliate of any Interested Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this
Article Fifteenth shall mean any transaction which is
referred to in any one or more of clauses (A) through
(E) of paragraph 1 of the section (a).
(b) The provisions of section (a) of this Article Fifteenth
shall not be applicable to any particular business
combination and such business combination shall require only
such affirmative vote as is required by law and any other
provisions of the Charter or Act of Incorporation or By-Laws
if such business combination has been approved by a majority
of the whole Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any
Subsidiary) who or which as of the record date for the determination
of stockholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time
within two years prior thereto was the beneficial owner,
directly or indirectly, of not less than 10% of the then
outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any
share of capital stock of the Corporation which were at any
time within two years prior thereto beneficially owned by
any Interested Stockholder, and such assignment or
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succession shall have occurred in the course of a
transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and
Associates (as hereafter defined) beneficially own, directly
or indirectly, or
(B) which such person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote
pursuant to any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or
any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock
of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Securities Exchange Act of
1934, as in effect on December 31, 1981) is owned, directly or
indirectly, by the Corporation; provided, however, that for the
purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty
to determine for the purposes of this Article Fifteenth on
the basis of information known to them, (1) the number of
Voting Shares beneficially owned by any person (2) whether a
person is an Affiliate or Associate of another, (3) whether
a person has an agreement, arrangement or understanding with
another as to the matters referred to in paragraph (3) of
section (c), or (4) whether the assets subject to any
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business combination or the consideration received for the
issuance or transfer of securities by the Corporation, or
any Subsidiary has an aggregate fair market value of
$1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
Sixteenth: Notwithstanding any other provision of this Charter or
Act of Incorporation or the By-Laws of the Corporation (and in
addition to any other vote that may be required by law, this Charter
or Act of Incorporation by the By-Laws), the affirmative vote of the
holders of at least two-thirds of the outstanding shares of the
capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class)
shall be required to amend, alter or repeal any provision of
Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter
or Act of Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable
to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Laws as the same exists or
may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph
shall not adversely affect any right or protection of a
Director of the Corporation existing hereunder with respect
to any act or omission occurring prior to the time of such
repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
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BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each share of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or
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elsewhere in its discretion at such times to be determined by a majority of its
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall
be necessary to constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal,
inability to act, or disqualification of any director, the Board of Directors,
although less than a quorum, shall have the right to elect the successor who
shall hold office for the remainder of the full term of the class of directors
in which the vacancy occurred, and until such director's successor shall have
been duly elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or divisions of the Company as it may deem
advisable.
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ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of
not more than nine members who shall be selected by the Board of Directors from
its own members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the
powers of the Board of Directors when it is not in session to transact all
business for and in behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the
principal office of the Company or elsewhere in its discretion at such times to
be determined by a majority of its members, or at the call of the Chairman of
the Executive Committee or at the call of the Chairman of the Board of
Directors. The majority of its members shall be necessary to constitute a quorum
for the transaction of business. Special meetings of the Executive Committee may
be held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive
Committee shall be kept and submitted to the Board of Directors at its next
meeting.
(E) The Executive Committee shall advise and
superintend all investments that may be made of the funds of the Company, and
shall direct the disposal of the same, in accordance with such rules and
regulations as the Board of Directors from time to time make.
(F) In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Company by its directors and officers as contemplated by these
By-Laws any two available members of the Executive Committee as constituted
immediately prior to such disaster shall constitute a quorum of that Committee
for the full conduct and management of the affairs and business of the Company
in accordance with the provisions of Article III of these By-Laws; and if less
than three members of the Trust Committee is constituted immediately prior to
such disaster shall be available for the transaction of its business, such
Executive Committee shall also be empowered to exercise all of the powers
reserved to the Trust Committee under Article III Section 2 hereof. In the event
of the unavailability, at such time, of a minimum of two members of such
Executive Committee, any three available directors shall constitute the
Executive Committee for the full conduct and management of the affairs and
business of the Company in accordance with the foregoing provisions of this
Section. This By-Law shall be subject to implementation by Resolutions of the
Board of Directors presently existing or hereafter passed from time to time for
that purpose, and any provisions of these By-Laws (other than this Section) and
any resolutions which are contrary to the provisions of this Section or to the
provisions of any such implementary Resolutions shall
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be suspended during such a disaster period until it shall be determined by any
interim Executive Committee acting under this section that it shall be to the
advantage of the Company to resume the conduct and management of its affairs and
business under all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not
more than thirteen members who shall be selected by the Board of Directors, a
majority of whom shall be members of the Board of Directors and who shall hold
office during the pleasure of the Board.
(B) The Trust Committee shall have general
supervision over the Trust Department and the investment of trust funds, in all
matters, however, being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members or at the call of its chairman. A
majority of its members shall be necessary to constitute a quorum for the
transaction of business.
(D) Minutes of each meeting of the Trust Committee
shall be kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to
appoint Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five
members who shall be selected by the Board of Directors from its own members,
none of whom shall be an officer of the Company, and shall hold office at the
pleasure of the Board.
(B) The Audit Committee shall have general
supervision over the Audit Division in all matters however subject to the
approval of the Board of Directors; it shall consider all matters brought to its
attention by the officer in charge of the Audit Division, review all reports of
examination of the Company made by any governmental agency or such independent
auditor employed for that purpose, and make such recommendations to the Board of
Directors with respect thereto or with respect to any other matters pertaining
to auditing the Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and
wherever the majority of its members shall deem it to be proper for the
transaction of its business, and a majority of its Committee shall constitute a
quorum.
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Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of
not more than five (5) members who shall be selected by the Board of Directors
from its own members who are not officers of the Company and who shall hold
office during the pleasure of the Board.
(B) The Compensation Committee shall in general
advise upon all matters of policy concerning the Company brought to its
attention by the management and from time to time review the management of the
Company, major organizational matters, including salaries and employee benefits
and specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be
called at any time by the Chairman of the Compensation Committee, the Chairman
of the Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be
elected by the Board of Directors as an associate director, to serve during the
pleasure of the Board.
(B) An associate director shall be entitled to
attend all directors meetings and participate in the discussion of all matters
brought to the Board, with the exception that he would have no right to vote. An
associate director will be eligible for appointment to Committees of the
Company, with the exception of the Executive Committee, Audit Committee and
Compensation Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any
member of any Committee created under Article III of the By-Laws of this
Company, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
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ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at
all meetings of the Board and shall have such further authority and powers and
shall perform such duties as the Board of Directors may from time to time confer
and direct. He shall also exercise such powers and perform such duties as may
from time to time be agreed upon between himself and the President of the
Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors. In the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President
as designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of
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the Company and shall report to the Board of Directors at each regular meeting
of the condition of the Company, and perform such other duties as may be
assigned to him from time to time by the Board of Directors of the Executive
Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller
officers however denominated, who may perform the duties of the Controller and
such duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit
Officers, however denominated, who may perform all the duties of the Auditor and
such duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank
to all Vice Presidents with such functional titles as shall be determined from
time to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the
Company shall be those usually pertaining to their respective offices, subject
to the direction of the Board of Directors, the Executive Committee, Chairman of
the Board of Directors or the President and the officer in charge of the
department or division to which they are assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of
the Company and a transfer book shall be kept in which all transfers of stock
shall be recorded.
Section 2. Certificates of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly
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<PAGE>
endorsed. Any certificate of stock surrendered to the Company shall be cancelled
at the time of transfer, and before a new certificate or certificates shall be
issued in lieu thereof. Duplicate certificates of stock shall be issued only
upon giving such security as may be satisfactory to the Board of Directors or
the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to
fix in advance a record date for the determination of the stockholders entitled
to notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the
following form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner circle
the words "Wilmington, Delaware."
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar
year.
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation
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<PAGE>
by the Board of Directors or the Executive Committee, and any and all such
instruments shall have the same force and validity as though expressly
authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to
the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred
in defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred by a Director or officer in his
capacity as a Director or officer in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the Director or
officer to repay all amounts advanced if it should be ultimately determined that
the Director or officer is not entitled to be indemnified under this Article or
otherwise.
(C) If a claim for indemnification or payment of
expenses, under this Article X is not paid in full within ninety days after a
written claim therefor has been received by the Corporation the claimant may
file suit to recover the unpaid amount of such claim and, if
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<PAGE>
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the claimant was not entitled to the requested indemnification
of payment of expenses under applicable law.
(D) The rights conferred on any person by this
Article X shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing
provisions of this Article X shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in
whole or in part, and any new By-Law or By-Laws adopted at any regular or
special meeting of the Board of Directors by a vote of the majority of all the
members of the Board of Directors then in office.
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<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: January 10, 2000 By: /s/ Donald G. MacKelcan
------------------------ ------------------------------------
Name: Donald G. MacKelcan
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and
savings banks with state publication requirements. It has not
been approved by any state banking authorities. Refer to your
appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- -------------------------------------------------- ----------------------------
Name of Bank City
in the State of DELAWARE , at the close of business on September 30, 1999.
-------------
<TABLE>
<CAPTION>
ASSETS Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................................................182,666
Interest-bearing balances................................................................................0
Held-to-maturity securities..................................................................................34,128
Available-for-sale securities.............................................................................1,644,067
Federal funds sold and securities purchased under agreements to resell......................................259,962
Loans and lease financing receivables:
Loans and leases, net of unearned income...............4,251,934
LESS: Allowance for loan and lease losses................71,014
LESS: Allocated transfer risk reserve.........................0
Loans and leases, net of unearned income, allowance, and reserve.................................4,180,920
Assets held in trading accounts...................................................................................0
Premises and fixed assets (including capitalized leases)....................................................138,196
Other real estate owned.........................................................................................976
Investments in unconsolidated subsidiaries and associated companies...........................................1,452
Customers' liability to this bank on acceptances outstanding......................................................0
Intangible assets.............................................................................................5,092
Other assets................................................................................................142,444
Total assets..............................................................................................6,589,903
CONTINUED ON NEXT PAGE
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<PAGE>
LIABILITIES
Deposits:
In domestic offices.......................................................................................4,886,770
Noninterest-bearing..................1,084,581
Interest-bearing.....................3,802,189
Federal funds purchased and Securities sold under agreements to repurchase..................................387,343
Demand notes issued to the U.S. Treasury.....................................................................69,491
Trading liabilities (from Schedule RC-D)..........................................................................0
Other borrowed money:.......................................................................................///////
With original maturity of one year or less.........................................................655,000
With original maturity of more than one year........................................................43,000
Bank's liability on acceptances executed and outstanding..........................................................0
Subordinated notes and debentures.................................................................................0
Other liabilities (from Schedule RC-G).......................................................................84,722
Total liabilities.........................................................................................6,126,326
EQUITY CAPITAL
Perpetual preferred stock and related surplus.....................................................................0
Common Stock....................................................................................................500
Surplus (exclude all surplus related to preferred stock).....................................................62,118
Undivided profits and capital reserves......................................................................417,321
Net unrealized holding gains (losses) on available-for-sale securities.....................................(16,362)
Total equity capital........................................................................................463,577
Total liabilities, limited-life preferred stock, and equity capital.......................................6,589,903
</TABLE>
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