As filed with the Securities and Exchange Commission on January 7, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------
F&M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 6711 54-0857462
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
9 Court Square
Winchester, Virginia 22601
(540) 665-4200
(Address,including zip code, and telephone number, including area code of
registrant's principal executive office)
------------------------
Alfred B. Whitt
President and Chief Financial Officers
F&M National Corporation
9 Court Square
Winchester, Virginia 22601
(540) 665-4200
(Name, address, including zip code, and telephone number,
including area code of agent for service)
------------------------
Copies to:
George P. Whitley, Esq. Jody M. Wagner, Esq.
LeClair Ryan, A Professional Corporation Kaufman & Canoles
707 East Main Street, 11th Floor One Commercial Place
Richmond, Virginia 23219 Norfolk, Virginia 20110
------------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
------------------------
CALCULATION OF REGISTRATION FEE
=============================================================================================
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities registered offering price aggregate registration
to be registered (1) per share offering price(2) fee
=============================================================================================
Common Stock, $2.00 par 675,000 N/A $16,624,440 $4,622
value
=============================================================================================
(1) The estimated maximum number of shares to be issued.
(2) Estimated solely for purposes of calculating the registration fee and
calculated in accordance with Rule 457(f)(1) based upon: 978,420 shares
of Security Bank Corporation Common Stock outstanding; 77,100 shares of
Security Common Stock issuable upon the exercise of outstanding stock
options; and a market value of Security Common Stock as of January 4, 1999
of $15.75 per share.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
F&M NATIONAL CORPORATION
CROSS-REFERENCE SHEET
Pursuant to Rule 404(a) of the Securities Act and Item 501(b) of Regulation S-K,
Showing the Location or Heading in the Prospectus and proxy Statement of
the Information Required by Part I of Form S-4
Form S-4 Location or Heading in
Item Number and Caption Prospectus and Proxy Statement
----------------------- ------------------------------
A. Information About the Transaction
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Facing Page of Registration Statement; Cross Reference
Sheet Outside Front Cover Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Table of Contents; Where You Can Find More Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................ Summary; The Special Meeting; The Merger; Market
Prices and Dividends; Security Bank Corporation
4. Terms of the Transaction..................... Summary; The Merger; Comparative Rights of
Shareholders; Description of F&M Capital Stock
5. Pro Forma Financial Information.............. Not Applicable
6. Material Contacts with the Company
Being Acquired............................... Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.................... Not Applicable
8. Interests of Named Experts and Counsel....... Experts; Legal Opinions
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not Applicable
B. Information About the Registrant
10. Information with Respect to S-3 Registrants.. Summary; Market Prices and Dividends; Business of F&M; Description
of F&M Capital Stock; Where You Can Find More Information
Form S-4 Location or Heading in
Item Number and Caption Prospectus and Proxy Statement
----------------------- ------------------------------
11. Incorporation of Certain Information by
Reference.................................... Where You Can Find More Information
12. Information with Respect to S-2 or S-3
Registrants.................................. Not Applicable
13. Incorporation of Certain Information by
Reference.................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants.................. Not Applicable
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies.... Not Applicable
16. Information with Respect to S-2 or S-3
Companies.................................... Summary; Market Prices and Dividends; Security Bank
Corporation; Where You Can Find More Information
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies.................... Not Applicable
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited........... Summary; The Special Meeting; The Merger; Where You Can Find Information
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer......................... Not Applicable
[Security letterhead]
MERGER PROPOSED
Dear Fellow Shareholders:
We cordially invite you to attend a special meeting of shareholders of
Security Bank Corporation to be held at _________________, ___________________,
Manassas, Virginia on _________, ___________, 1999 at ___:___ ___.m.
The purpose of the meeting will be to consider and vote on the Agreement
and Plan of Reorganization, dated as of November 25, 1998 and a related plan of
merger by and among Security, F&M National Corporation and F&M Bank-Northern
Virginia, a subsidiary bank of F&M National Corporation headquartered in
Fairfax. The merger agreement provides for the merger of Security into F&M
Bank-Northern Virginia.
In the merger, you will receive shares of F&M common stock with an
aggregate market value of $17.25 for each share of Security common stock you
own. In general, you will not recognize federal income tax gain or loss for the
F&M common stock you receive.
The market value of F&M common stock will be determined at the date of the
merger based on its average closing price over a ten day period. Accordingly,
the number of F&M shares you will receive in the merger cannot be determined
now. As an example, however, you would have received _____ shares of F&M common
stock for each common share of Security you own based on the $_____ closing
price of F&M common stock on _________, 1999. The closing price of Security
common stock on the same date was $_______. These prices will fluctuate between
now and the merger.
Approval of the merger requires the affirmative vote of more than
two-thirds of the outstanding shares of Security common stock. If approved, we
anticipate the merger will become effective by March 22, 1999.
The accompanying proxy statement/prospectus contains additional
information regarding the merger agreement and the proposed merger. We encourage
you to read this entire document carefully. You can also obtain more information
about F&M in documents it has filed with the Securities and Exchange Commission
and about Security in documents it has filed with the Federal Reserve.
Your Board of Directors has unanimously approved the merger agreement and
the transaction with F&M and believes that they are in the best interests of
Security and you, our shareholders. Accordingly, the Board unanimously
recommends that you VOTE FOR the merger.
We hope you can attend the special meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. If you do not return your card, the effect
will be a vote against the merger.
We look forward to seeing you at the meeting.
Sincerely yours,
Danny R. May
President and Chief Executive Officer
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the F&M common stock to be issued in the merger or
determined if this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
The date of this proxy statement/prospectus is _______, 1999 and it is
first being mailed to shareholders on or about ____________, 1999.
SECURITY BANK CORPORATION
Manassas, Virginia
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
__________ , 1999
-------------------------
A special meeting of shareholders of Security Bank Corporation will be
held on ___________________, ____________ ___, 1999 at ___: ___.m., at
______________________________, Manassas, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
November 25, 1998, by and among Security, F&M National Corporation and F&M
Bank-Northern Virginia and a related plan of merger, providing for the merger of
Security with and into F&M Bank-Northern Virginia upon the terms and conditions
therein, including, among other things, that each issued and outstanding share
of Security common stock will be exchanged for shares of F&M common stock with
an aggregate market value equal to $17.25, with cash being paid instead of
issuing fractional shares. The merger agreement is enclosed as Appendix I to the
accompanying proxy statement/prospectus.
2. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the meeting.
The Board of Directors has fixed ___________, 1999, as the record date for
the special meeting. Only holders of record of Security common stock at the
close of business on that date are entitled to receive notice of and to vote at
the special meeting or any adjournments or postponements of the meeting.
By Order of the Board of Directors
Harry J. Parrish II
Secretary
__________, 1999
Please mark, sign, date and return your proxy promptly, whether or not you
plan to attend the special meeting.
The Board of Directors of Security unanimously recommends that
shareholders vote for the merger agreement.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is Security merging with F&M?
A: Both the Security board and the F&M board believe the merger is in the best
interests of their respective companies and will provide significant benefits to
you, and their customers and employees. The boards' believe the merger will
permit the combined operations of Security and F&M Bank-Northern Virginia to be
better positioned to be a stronger competitor in the highly competitive northern
Virgina banking market. To review the background and reasons for the merger in
greater detail, see pages ____ through ----.
Q: What will I receive in the merger?
A: You will receive the number of shares of F&M common stock that have an
aggregate market value equal to $17.25 in exchange for each share of Security
common stock you hold. The market value of F&M common stock will be its average
closing price as reported on the New York Stock Exchange for each of the ten
consecutive trading days ending on the fifth business day before the date of the
merger.
Because the market price of F&M common stock fluctuates, the number of
shares you will receive in the merger cannot be determined at this time.
As an example, however, based on the $___ closing price of F&M common stock on
______, 1999, you would have received _____ shares of F&M common stock for each
common share of Security you own. The closing price of Security common stock on
that same date was $_______.
Q: What are the tax consequences of the merger to me?
A: We expect that the exchange of shares by you generally will be tax-free to
you for federal income tax purposes. You will, however, have to pay taxes on
cash received for fractional shares. To review the tax consequences to you in
greater detail, see pages ____ and ____.
Your tax consequences will depend on your personal situation. You should consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
Q: Will I receive dividends after the merger?
A: Yes. For more than 56 consecutive years, F&M has paid dividends to its
shareholders. Security never paid a dividend on its common stock. F&M pays a
quarterly dividend of $0.195 per share. After the merger, the F&M board will use
its discretion to decide whether and when to declare dividends and in what
amount.
Q: What am I being asked to vote upon?
A: You are being asked to approve the merger agreement. The merger agreement
provides for the acquisition by F&M of Security through Security's merger
into F&M Bank-Northern Virginia, a wholly-owned subsidiary bank of F&M, and
for the exchange of each of your shares of Security common stock for shares of
F&M common stock that have an aggregate market value of $17.25. F&M
Bank-Northern Virginia will be the surviving company of the merger. Approval of
the proposal requires the affirmative vote of more than two-thirds of the
outstanding shares of Security common stock.
The Security board unanimously approved and adopted the merger agreement
and recommends voting for the approval of the merger agreement.
1
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the merger. If you do not sign and
send in your proxy or you abstain, it will have the effect of a vote against the
merger.
The special meeting will take place at ___:___ ___.m. on _____________,
1999. You may attend the meeting and vote your shares in person, rather than
voting by proxy. In addition, you may withdraw your proxy up to and including
the day of the meeting by following the directions on pages ____ through ____
and either change your vote or attend the meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares of Security common stock only if you
provide instructions on how to vote. You should instruct your broker how to vote
your shares, following the directions your broker provides. If you do not
provide instructions to your broker, your shares will not be voted and this will
have the effect of voting against the merger.
Q: When is the merger expected to be completed?
A: We are working to complete the merger by March 22, 1999.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed we will send you written instructions for
exchanging your Security common stock certificates for F&M common stock
certificates.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
Dianne Kirkman
Assistant Secretary
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
Telephone: (703) 361-1986
2
TABLE OF CONTENTS
Page
Questions and Answers About the MERGER.....................................
Summary....................................................................
The Special Meeting........................................................
The Merger.................................................................
Terms of the Merger.....................................................
Background of and Reasons for the Merger................................
Opinion of Financial Advisor............................................
Effective Date..........................................................
Surrender of Stock Certificates.........................................
Representations and Warranties; Conditions to the Merger................
Regulatory Approvals....................................................
Business Pending the Merger.............................................
No Solicitation; Board Action...........................................
Waiver, Amendment and Termination.......................................
Resales of F&M Common Stock.............................................
Accounting Treatment....................................................
Interests of Certain Persons in the Merger..............................
The Option Agreement....................................................
Material Federal Income Tax Consequences of the Merger..................
Absence of Appraisal Rights.............................................
Certain Differences in Rights of Shareholders...........................
Expenses of the Merger..................................................
Cautionary Statement Concerning Forward-Looking Statements..............
Market Prices and Dividends................................................
Security Bank Corporation..................................................
General.................................................................
History and Business....................................................
Competition.............................................................
Security Ownership of Management........................................
Business of F&M ...........................................................
History and Business....................................................
F&M's Acquisition Program...............................................
Comparative Rights of Shareholders.........................................
Description of F&M Capital Stock...........................................
Other Matters..............................................................
Experts....................................................................
Legal Opinions.............................................................
Where YOu Can Find More Information .......................................
APPENDICES
I Agreement and Plan of Reorganization and Plan of Merger
II Stock Option Agreement
III Opinion of Scott & Stringfellow, Inc.
IV Security's Annual Report on Form 10-KSB for the year ended December 31, 1997
V Security's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998
3
SUMMARY
This summary highlights certain information from this proxy
statement/prospectus and may not contain all the information that is important
to you. For a more complete understanding of the merger and for a more complete
description of the legal terms of the merger, you should read this entire
document carefully, as well as the additional documents to which we refer you,
including the merger agreement. See "Where You Can Find More Information" on
page____.
Exchange Ratio to be Number of Shares of F&M Common Stock with Market Value of
$17.25 for each Security Share (page_)
As a result of the merger, you will receive shares of F&M common stock that
have an aggregate market value equal to $17.25 for each share of Security common
stock you own. The market value of F&M common stock will be its average closing
price as reported on the New York Stock Exchange for each of the ten consecutive
trading days ending on the fifth business day before the date of the
merger. The number of shares of F&M common stock for which each outstanding
share of Security common stock will be exchanged will be established by dividing
$17.25 by the F&M average closing price. This is the "exchange ratio."
Because the market price of F&M common stock fluctuates, the number of
shares you will receive in the merger cannot be determined at this time. As an
example, however, based on the $____ closing price of F&M common stock on _____,
1999, you would have received _____ shares of F&M common stock for each common
share of Security you own. The closing price of Security common stock on that
same date was $_______.
No Federal Income Tax on Shares Received in Merger (page __)
We expect that you will not recognize any gain or loss for federal income
tax purposes as a result of the merger, except with respect to any cash received
instead of fractional share interests. F&M's attorneys will issue a legal
opinion to this effect, the form of which we have included as an exhibit to the
registration statement filed with the Securities and Exchange Commission for the
shares to be issued in the merger. Tax matters are complicated and tax results
may vary among shareholders. We urge you to consult with your own tax advisor as
to the federal, state, and local tax consequences of the merger.
F&M Dividend Policy Following the Merger (page __)
F&M pays quarterly dividends of $0.195 per share of common stock. F&M
expects that it will continue to pay at least this amount in quarterly
dividends, but may change that policy based on business conditions, F&M's
financial condition and earnings and other factors.
F&M's next dividend is payable January 26, 1999 to shareholders of record
on December 24, 1998. F&M anticipates that its next quarterly dividend will be
payable on or about April 27, 1999, with a record date that will be on or about
March 26, 1999. Accordingly, if the merger takes place before the dividend
record date established by the F&M board, you will be entitled to receive that
dividend. No assurance can be given that the merger will take place before the
March dividend record date.
Security Board Recommends Shareholder Approval (page ___)
The Security board unanimously approved the merger and the merger
agreement. The board believes that the merger is fair to you and in your best
interests. The Security board recommends that you VOTE FOR the merger and the
merger agreement. The Security board believes that, as a result of the merger,
Security shareholders will have less financial risk and will experience greater
stock value appreciation than they would if Security remained independent. You
should also refer to the reasons that the Security board considered in
determining whether to approve and adopt the merger agreement on pages ___ and
- ----.
4
Exchange Ratio Fair to Shareholders, According to Investment Bank (page___)
Scott & Stringfellow, Inc. is serving as financial advisor to Security in
connection with the merger and rendered its opinion to the Security board that
the exchange ratio is fair to Security shareholders from a financial point of
view. A copy of the fairness opinion, setting forth the information reviewed,
assumptions made and matters considered, is attached to this proxy
statement/prospectus as Appendix III. If the merger is completed, Scott &
Stringfellow will be paid $__________ in exchange for its advice and for
providing its fairness opinion. You should read the fairness opinion of Scott &
Stringfellow in its entirety.
Meeting to be Held _________, 1999 (page____)
The special shareholders' meeting will be held on ___________, 1999 at
____ __.m. at _______________________, Manassas, Virginia ______.
The Companies (pages ___ and ____)
F&M National Corporation
9 Court Square
Winchester, Virginia 22601
(540) 665-4200
F&M is a multi-bank holding company headquartered in Winchester, Virginia.
F&M has nine subsidiary banks that operate 120 banking offices and offer a full
range of banking services principally to individuals and to small and
medium-sized businesses in the Shenandoah Valley of Virginia, central and
northern Virginia, the eastern panhandle of West Virginia, and the Maryland
portion of the Washington D.C. metropolitan area. At September 30, 1998, F&M had
total assets of $2.8 billion, total deposits of $2.3 billion and total
shareholders' equity of $281.4 million. F&M common stock is listed and traded on
the New York Stock Exchange under the symbol "FMN."
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
(703) 361-1986
Security is a community bank headquartered in Manassas, Virginia. Security
opened for business in 1986 and currently operates two banking offices in
Manassas offering banking services to individuals and small to medium-sized
businesses. Its primary market area is the City of Manassas and the surrounding
area. At September 30, 1998, Security had total assets of $60.4 million, total
deposits of $51.4 million, and total shareholders' equity of $8.1 million.
Security common stock is listed and traded on the Nasdaq SmallCap Market under
the symbol "SBCM."
The Merger (page____)
The merger agreement provides that Security will merge into a subsidiary
bank of F&M, F&M Bank-Northern Virginia, which will be the surviving corporation
of the merger. The merger agreement and the related plan of merger are attached
to this proxy statement/prospectus as Appendix I. We encourage you to read the
merger agreement in its entirety. It is the legal document that governs the
merger.
Two-Thirds Security Shareholder Vote Required (page ____ and ____)
Approval of the merger requires the affirmative vote of more than
two-thirds of the outstanding shares of Security common stock. Your failure to
vote will have the effect of a vote against approval of the merger. Certain
directors and executive officers of Security own about ______ % of the shares
entitled to be cast at the meeting, and we expect them to vote their shares in
favor of the merger.
Brokers who hold shares of Security common stock as nominees will not have
authority to vote such shares with respect to the merger unless shareholders
provide voting instructions.
5
The merger does not require the approval of F&M's shareholders.
Record Date Set at ___________, 1999; One Vote Per Share of Security Stock (page
- ---)
You are entitled to vote at the special meeting if you owned shares at the
close of business on _______, 1999, the record date. At , 1999, there
were _____ holders of record of the ___________ shares of Security common stock
then issued and outstanding.
You will have one vote at the meeting for each share on any matter that
may properly come before the special meeting.
Monetary Benefits to Management in the Merger (page __)
When considering the recommendation of the Security board, you should be
aware that some Security directors and officers have interests in the merger
that differ from the interests of other Security shareholders. Security
directors and officers hold stock options to acquire an aggregate of 77,100
shares of Security common stock at exercise prices ranging from $8.00 to
$13.12 per share. If not exercised before the merger, the options will be
converted into options to acquire shares of F&M common stock.
Mr. Danny R. May, the President and Chief Executive Officer of Security,
will receive a lump sum payment of $________ (one times his annual salary, plus
four months salary) under his employment agreement upon the merger. Mr. May's
employment agreement provides for such a severance allowance if there is a
change of ownership or control of Security and his job duties are substantially
reduced. His agreement also provides that F&M must continue for a two year
period his medical and other insurance coverage. Mr. May has accepted F&M's
offer to join F&M Bank-Northern Virginia as a senior vice president. He will not
have an employment or severance agreement with F&M.
Also, four directors of Security will become directors of F&M
Bank-Northern Virginia and will each earn a fee of $225 for each board meeting
they attend; the other Security directors will be offered positions on F&M
Bank-Northern Virginia's advisory board and will be paid a quarterly fee of $100
for their services.
The Security board was aware of these and other interests and considered
them before approving and adopting the merger agreement.
Conditions that Must be Satisfied for the Merger to Occur (pages___ and ____)
The following conditions must be met for us to complete the merger:
o approval of the merger by Security shareholders;
o approval from the New York Stock Exchange for the listing of the F&M common
stock to be issued;
o the continuing effectiveness of F&M's registration statement filed with the
Securities and Exchange Commission;
o receipt by F&M of a letter from its accountants stating that the merger
qualifies for pooling of interests accounting treatment. (however, this is
not a condition to the merger if F&M takes any action to prevent the merger
from so qualifying); and
o receipt of a legal opinion concerning the tax consequences of the merger.
6
We cannot complete the merger unless we obtain the approval of the Board
of Governors of the Federal Reserve System and the Virginia State Corporation
Commission. On January ____, 1999, applications were filed with the Federal
Reserve and the Virginia State Corporation Commission. While we cannot predict
whether or when we will obtain all required regulatory approvals, we see no
reason why the approvals will not be obtained in a timely manner.
Unless prohibited by law, either Security or F&M could elect to waive a
condition that has not been satisfied and complete the merger anyway.
Termination of the Merger Agreement (page ___)
We can agree to terminate the merger agreement at any time without
completing the merger. Either company may also call off the merger in the
following circumstances:
o the merger is not completed before September 30, 1999; or
o if any event occurs which renders impossible, in a material way, the
satisfaction by one company of one or more of the conditions described above,
unless the other company waives such satisfaction.
Effective Date Expected to be March 22, 1999 (page _____)
The merger will become effective at the date and time stated on the
certificate of merger issued by the Virginia State Corporation Commission. We
anticipate the merger will take place on or about March 22, 1999.
Distribution of Stock Certificates (page _____)
After the merger, you will need to exchange your Security stock
certificates for certificates representing F&M common stock. F&M will have its
exchange agent mail to you instructions on how to exchange your shares. After
turning in your certificates to the exchange agent, you will be mailed
certificates representing shares of F&M common stock.
Option Agreement (page____)
To induce F&M to agree to the merger, and to discourage other companies
from acquiring Security, F&M was granted an irrevocable option to purchase from
Security up to 191,300 shares of Security common stock at a price of $11.00 per
share.
F&M may exercise the option only if another party attempts to acquire
control of Security. As of the date of this proxy statement/prospectus, we do
not believe that has occurred. The stock option agreement is attached to this
proxy statement/prospectus as Appendix II.
Effect of the Merger on the Rights of Security Shareholders (page ____)
If the merger takes place, Security shareholders will become shareholders
of F&M, and their rights as such will be governed by the Virginia Stock
Corporation Act and by the articles of incorporation and bylaws of F&M. The
rights of the shareholders of Security are different in certain material
respects from the rights of the shareholders of F&M.
F&M to Use Pooling of Interests Accounting Treatment (page___)
We expect that the merger will be accounted for as a pooling of interests.
This will enhance future earnings by enabling F&M to avoid creating goodwill
relating to the merger and avoid charges against future earnings resulting from
goodwill. This accounting method means that after the merger F&M will report
financial results as if Security had always been combined with F&M.
7
Absence of Dissenters' Rights (page __)
Under Virginia law, you will not have the right to an appraisal of the
fair value of your shares of Security common stock in connection with the
merger.
Comparative Market Prices (page____)
This table provides the closing price per share of F&M common stock on the
NYSE and Security common stock on the Nasdaq SmallCap Market, on November 9,
1998, the last business day before the public announcement of the merger, and
_____________, 1999, the last practicable date before the mailing of this proxy
statement/prospectus:
Market Price Per Share
----------------------------------
F&M Security
Common Stock Common Stock
November 9, 1998..... $29.69 $11.50
________, 1999....... $ $
If the merger had been effective on November 9, 1998, the exchange ratio
would have been 0.581 shares of F&M common stock per share of Security common
stock, using the closing price for F&M common stock on the NYSE on November 9,
1998 ($29.69) as the average closing price. If the merger had been effective on
___________, 1999, the exchange ratio would have been _______ shares of F&M
common stock per share of Security common stock, using the closing price of F&M
common stock on ___________, 1999 ($_________) as the average closing price.
We urge you to obtain current market quotations for F&M common stock. We
expect that the market price of F&M common stock will fluctuate and likely
change before the exchange ratio is fixed and the merger is completed. As a
result, the number of shares of F&M common stock that you will receive in the
merger may increase or decrease prior to the date of the merger. However, the
aggregate value of F&M common stock received by you will still equal $17.25. See
"Market Prices and Dividends" on page ___ for more information.
8
Selected Financial Data
We are providing the following information to help you analyze the
financial aspects of the merger. We derived this information from audited
financial statements for 1993 through 1997 and unaudited financial statements
for the nine months ended September 30, 1998. This information is only a
summary, and you should read it in conjunction with our historical financial
statements and the related notes contained in the annual and quarterly reports
and other documents that we have filed with the Securities and Exchange
Commission (for F&M) and the Federal Reserve (for Security). See "Where You Can
Find More Information" on page ____. You should not rely on the nine-month
information as being indicative of results expected for the entire year.
F&M - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Net interest income... $ 87,002 $ 82,543 $110,391 $102,703 $ 96,909 $ 91,391 $ 79,501
Net income............ 26,829 24,539 32,804 30,902 27,095 25,483 22,267
Diluted earnings per
share................. 1.22 1.11 1.50 1.40 1.23 1.15 1.05
Cash dividends paid per
share................. 0.57 0.54 0.73 0.69 0.61 0.54 0.58
Book value per share.. 12.85 11.74 12.10 11.24 10.76 9.68 9.69
Total assets.......... 2,759,056 2,599,689 2,677,935 2,458,431 2,346,358 2,149,817 2,054,951
Shareholders' equity.. 281,365 253,272 264,851 246,052 236,066 207,931 200,463
SECURITY - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Nine Months Ended
September 30, Year Ended December 31,
-------------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Net interest income....... $ 1,901 $ 1,683 $ 2,293 $ 2,017 $ 1,743 $ 1,475 $ 1,423
Net income................ 256 378 526 641 202 136 219
Diluted earnings per share 0.26 0.39 0.54 0.83 0.36 0.25 0.46
Cash dividends paid per
share.................... -- -- -- -- -- -- --
Book value per share...... 8.44 7.99 8.14 7.57 6.79 6.11 6.11
Total assets.............. 60,436 54,898 56,358 49,771 44,278 40,125 38,636
Shareholders' equity...... 8,116 7,657 7,800 7,251 3,765 3,385 3,166
9
Comparative Per Share Information
We have summarized below the per share information for our companies on a
historical, pro forma combined, and equivalent basis. You should read this
information in conjunction with our historical financial statements and the
related notes contained in the annual and quarterly reports and other documents
that we have filed with the Securities and Exchange Commission (for F&M) and the
Federal Reserve (for Security). See "Where You Can Find More Information" on
page ____. The F&M pro forma information gives effect to the merger accounted
for as a pooling of interests, assuming that .576 shares of F&M common stock are
issued for each outstanding share of Security common stock. The assumed exchange
ratio is based on the closing price of F&M common stock as reported on the NYSE
on January 5, 1999 ($29.9375) as the average closing price. Security pro forma
equivalent share amounts are calculated by multiplying the F&M pro forma
combined basic and diluted earnings per share, and historical book value by the
assumed exchange ratio of .576 shares of F&M common stock so that the per share
amounts equate to the respective values for one share of Security common stock.
You should not rely on the pro forma information as being indicative of
the historical results that we would have had if we had been combined or the
future results that we will experience after the merger, nor should you rely on
the nine-month information as being indicative of results expected for the
entire year. In addition, because the market price of F&M common stock will
fluctuate and likely change before the fixing of the exchange ratio, the pro
forma combined and Security pro forma equivalent amounts are subject to change.
Nine months ended Year ended
September 30 December 31,
-------------------------
1998 1997 1996 1995
---- ---- ---- ----
Earnings Per Common Share
Basic:
Security-historical.............. $ 0.27 $ 0.55 $ 0.84 $ 0.36
F&M-historical................... 1.23 1.51 1.41 1.24
Pro forma combined............... 1.21 1.50 1.41 1.23
Security pro forma equivalent.... 0.70 0.86 0.81 0.71
Diluted:
Security-historical.............. $ 0.26 $ 0.54 $ 0.83 $ 0.36
F&M-historical................... 1.22 1.50 1.40 1.23
Pro forma combined............... 1.19 1.49 1.40 1.22
Security pro forma equivalent.... 0.69 0.86 0.81 0.70
Cash Dividends Declared Per Common
Share
Security-historical.............. $ -- $ -- $ -- $ --
F&M-historical................... 0.57 0.73 0.69 0.61
Pro forma combined............... 0.57 0.73 0.69 0.61
Security pro forma equivalent.... 0.33 0.42 0.40 0.35
September 30, December 31,
1998 1997
---- ----
Book Value Per Common Share
Security-historical.............. $ 8.44 $ 8.14
F&M-historical................... 12.85 12.10
Pro forma combined............... 12.90 12.15
Security pro forma equivalent.... 7.43 7.00
10
THE SPECIAL MEETING
Date, Place and Time
We are furnishing this proxy statement/prospectus and the enclosed form of
proxy to you in connection with the solicitation of proxies by the Board of
Directors of Security for use at a special meeting of shareholders of Security.
The special meeting will be held at the ______________, _________________,
Manassas, Virginia on _________, ___________, 1999 at ____ :____ ____a.m.
Purpose of the Special Meeting
The purpose of the special meeting is to consider and vote upon the
Agreement and Plan of Reorganization, dated as of November 25, 1998, by and
among Security, F&M and F&M Bank-Northern-Virginia and a related plan of merger.
The merger agreement is attached to this proxy statement/prospectus as Appendix
I and is incorporated in this document by this reference. For a description of
the merger agreement, see "The Merger -- Terms of the Merger" on page ___.
Record Date
Only shareholders of record at the close of business on ___________, 1999,
the record date, are entitled to notice of and to vote at the special meeting or
any adjournment thereof. At the close of business on , 1999, there were
_______________ shares of Security common stock issued outstanding held by
approximately _____ shareholders of record.
Vote Required
Each share of Security common stock outstanding on , 1999,
entitles the holder to cast one vote upon each matter properly submitted at the
special meeting. The affirmative vote of the holders of more than two-thirds of
the shares of Security common stock outstanding as of , 1999, in person
or by proxy, is required to approve the merger agreement.
Brokers who hold shares of Security common stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners thereof. Any such shares of Security common stock for
which a broker has submitted an executed proxy but for which the beneficial
owner thereof has not given instructions on voting to such broker are referred
to as "broker non-votes." This is important because abstentions and broker
non-votes will be counted for purposes of establishing the presence of a quorum
at the meeting and also will be counted and will have the effect of a vote
against the proposal to approve the merger agreement.
Because adoption of the merger agreement requires the affirmative vote of
more than two-thirds of the outstanding shares of Security common stock,
abstentions and broker "non-votes" will have the same effect as a vote against
approval of the merger agreement. Accordingly, the Security board urges you to
complete, date and sign the accompanying proxy and return it promptly in the
enclosed envelope.
As of , 1999, directors and executive officers of Security and
their affiliates, beneficially owned an aggregate of ___________ shares of
Security common stock, or ________% of the shares of Security common stock
outstanding on such date, not counting shares that may be acquired pursuant to
the exercise of stock options. We currently expect that all directors and
executive officers of Security will vote their shares of Security common stock
in favor of the merger.
11
Voting and Revocation of Proxies
A form of proxy is enclosed with this proxy statement/prospectus. You are
requested to complete, date and sign the form of proxy and return it promptly to
Security in the enclosed envelope. If a proxy is properly executed and returned
in time for voting, it will be voted in accordance with the instructions
indicated on the proxy. If a proxy is signed and returned without indicating any
voting instructions, shares of Security common stock represented by the proxy
will be voted FOR the merger agreement.
A proxy may be revoked at any time before it is voted. You may revoke a
proxy by giving written notice of revocation to Security, by executing and
delivering a substitute proxy to Security or by attending the special meeting
and voting in person. If you wish to revoke a proxy by written notice, please
mail the notice so that it is received on or before ____________, 1999, to
Assistant Secretary, Security Bank Corporation, 8780 Centreville Road, Manassas,
Virginia 20110.
Solicitation of Proxies
Security will bear the costs of this solicitation of proxies.
Solicitations may be made by mail, telephone, telegraph or personally by
directors, officers and employees at Security, none of whom will receive
additional compensation for performing such services. F&M will pay all of the
expenses of printing and mailing of this proxy statement/prospectus.
Recommendation
The board of directors of Security has unanimously approved the merger
agreement and the transactions contemplated thereby. The Security board
believes that the proposed transaction is fair to and in the best interests of
Security and its shareholders. The Security board unanimously recommends that
you VOTE FOR approval of the merger agreement.
THE MERGER
The following is a summary description of the material terms of the
merger. This description is qualified in its entirety by reference to the merger
agreement which is attached as Appendix I to this proxy statement/prospectus. We
urge you to read the merger agreement in its entirety.
Terms of the Merger
The merger agreement provides that Security will merge into F&M
Bank-Northern Virginia. F&M Bank-Northern Virginia will be the surviving
corporation of the merger. At the date and time the merger is effected, each
outstanding share of Security common stock will be converted into the right to
receive shares of F&M common stock having an aggregate market value of $17.25
per share.
The market value of F&M common stock will be its average closing price as
reported on the NYSE for each of the ten consecutive trading days ending on the
fifth business day prior to the effective date of the merger. The number of
shares of F&M common stock that will be exchanged for each outstanding share of
Security common stock will then be established by dividing $17.25 by the average
closing price of F&M common stock. This will be the "exchange ratio." No
fractional shares of F&M common stock will be issued. Rather, cash, without
interest, will be paid instead of any fractional share interest based on the
average closing price of F&M common stock. The exchange ratio will be adjusted
to reflect any stock split, stock dividend, recapitalization or similar
transaction with respect to F&M common stock.
12
There is no minimum number of shares of F&M common stock that must be
issued in connection with the merger. Security has no right to terminate the
merger or to obtain an adjustment of the consideration to be received solely as
a result of a decrease in the exchange ratio below a specified level. Similarly,
there is no maximum number of shares of F&M common stock which may be issued in
connection with the merger, and F&M has no right to terminate the merger or
obtain an adjustment in the consideration to be paid to you solely as a result
of an increase in the exchange ratio above a specified level. We can give no
assurance as to the average closing price of F&M common stock for the merger, or
the actual exchange ratio at which your shares are exchanged as of the effective
date, or as to the market or trading value of F&M common stock following the
effective date of the merger.
Background of and Reasons for the Merger
Background of the Merger. In late 1997 and early 1998, the board of
directors of Security began considering the strategic options available to
Security to build long-term shareholder value. Because Security's assets had not
increased at the rate anticipated by the board, Security had excess capital.
Furthermore, Security's eranings had not increased as anticipated either.
Accordingly, the board was concerned that Security would have difficulty
generating and sustaining a return on capital comparable to its peer group of
banks and sufficient to build long-term shareholder value. The board reviewed
several ways to utilize the excess capital and improve the return on capital,
including opening branches, investing in technological improvements, and
repurchasing outstanding shares. The board also discussed the relative
advantages and disadvantages of affiliating with another banking institution
through an acquisition, a "merger of equals" or a sale to, or merger with, a
larger institution.
The board also realized that changes in the banking industry would make it
difficult for a bank of Security's size to compete, particularly in the highly
competitive northern Virginia banking market. These changes include the trend
towards consolidation, more focus on fee-based products, changing customer
preferences and the emergence of new technologies. The board also believed that
transforming Security to be competitive in this changing banking industry would
require significant costs and risk.
In mid-1998, Security was approached and had preliminary discussions with
a community bank about a possible merger that resulted in Security receiving a
merger offer. The board selected the investment banking firm of Scott &
Stringfellow to assist in analyzing the merger and conducting due diligence.
After extensive discussion, analysis of the merger and further study, the board
determined that a merger with this community bank was not in the best interests
of Security's shareholders.
This proposed transaction, however, further intensified the board's
concern about Security's future and its ability to build long-term shareholder
value. The board decided that this issue would be the major focus of Security's
strategic planning retreat to be held in late October 1998.
13
As background for the strategic planning retreat, and based on its
previous performance, the board asked Scott & Stringfellow to analyze the
strategic alternatives available to Security to build long-term shareholder
value. The board asked that this analysis include consideration of Security
remaining independent, merging with another bank, branching and/or engaging in
non-traditional financial services. On September 10, 1998, representatives from
Scott & Stringfellow met with the board and reviewed the available options.
Scott & Stringfellow concluded that it was unlikely that Security would find a
suitable merger-of-equals partner that would help increase shareholder value
over the short-term, but that Security had excellent prospects of merging with a
larger community bank or regional bank that would result in increased
shareholder value immediately and provide long-term value. In addition, Scott &
Stringfellow discouraged Security from acquiring a mortgage company, engaging in
non-traditional financial services or opening another branch until Security
could make its Sudley branch profitable.
On September 22, 1998, a representative from another investment banking
firm met with the Security executive committee to provide its views of
Security's opportunities. At that meeting, the investment banking firm
recommended that Security consider a strategic merger with a specific
out-of-state banking organization. The committee expressed interest and
following the meeting the investment banking firm contacted the out-of-state
bank. Subsequently, representatives of the Security board met with
representatives of the out-of-state bank. Following that meeting, this bank made
a verbal offer through the investment banking firm at a price the firm advised
Security was too low for serious consideration.
In early 1998, Mr. Danny R. May, President and Chief Executive Officer of
Security asked Mr. Charles E. Curtis, Vice Chairman and Chief Administrative
Officer of F&M, who Mr. May knew very well, what a regional organization like
F&M would pay to acquire a bank like Security. Mr. May made this inquiry for
planning purposes only and no further discussions ensued with F&M until ten
months later. In mid-October 1998, F&M expressed an interest in a merger with
Security, and as a result of discussions with Scott & Stringfellow, F&M extended
a written offer, by letter dated October 15, 1998, to affiliate with Security.
F&M offered to acquire 100% of the outstanding stock of Security at a fixed
price, payable in F&M common stock. Mr. May arranged a meeting at the office of
Security's Chairman, John O. Gregory, on October 16th. Messrs. May and Gregory
together with Mr. Danny G. Snow, Vice Chairman of the Security board, met,
reviewed the letter in detail and agreed that it should be presented at a
meeting of all of the directors for consideration. Mr. May talked with the
remaining board members by telephone that weekend and scheduled a meeting.
On October 23, 1998, Security had a special board meeting to review the
offers from F&M and the out-of-state bank. The board consulted by telephone
conference call with a representative of the investment banking firm through
which the out-of-state bank had made a verbal offer. Representatives of this
firm indicated that, in their opinion, they thought the out-of-state bank would
be willing to increase the value of its offer. The board then consulted by
telephone conference call with representatives of Scott & Stringfellow. In that
conference call, Scott & Stringfellow furnished the board with an in-depth
analysis of F&M and five other potential merger candidates, which included the
out-of-state bank.
At the conclusion of the conference calls, the board employed Scott &
Stringfellow to study both the F&M and out-of-state bank offers and evaluate
other potential alternatives available to Security, including having discussions
with or studying the possibility of merging with other banking organizations or
remaining independent.
14
On November 4, 1998, the board held another meeting to discuss Security's
options. Scott & Stringfellow presented to the board an analysis of the two
offers, one from F&M and one from the out-of-state bank, an analysis of Security
merged with several other banking organizations, and an analysis of Security's
prospects if it remained independent. In addition, representatives from F&M,
made a brief presentation to the board discussing F&M, its offer, and the
advantages of an affiliation with F&M. Similar discussions had already been held
with the out-of-state bank. The board engaged in an extensive discussion
comparing the offers by F&M and the out-of-state bank, as well as other
potential alternatives available to Security. At this meeting, the board
employed Scott & Stringfellow as Security's exclusive investment banker to
negotiate with both F&M and the out-of-state bank.
On November 6, 1998, Scott & Stringfellow attended another meeting of the
board. Scott & Stringfellow again presented a thorough analysis of the offers by
F&M and the out-of-state bank, as well as a report on the financial performance
of each institution. Based upon discussions Scott & Stringfellow had with both
F&M and the out-of-state bank, Scott & Stringfellow presented the terms under
which both F&M and the out-of-state bank each indicated it would acquire
Security, including the respective financial terms and the integration of
Security into the respective companies. At that time, F&M offered to pay a fixed
dollar amount of $17.00 per share in F&M common stock. The out-of-state bank had
revised the structure of its offer to a fixed dollar amount of $17.75 per share
payable in common stock.
Unlike the F&M offer, however, the out-of-state bank's offer contained a
fixed maximum and minimum number of shares that could be issued in the event its
stock falls below or rises above the price limits. Accordingly, the value of the
out-of-state bank's offer could fluctuate and be more or less than $17.75 to the
extent its stock price was outside the price limits leading up to the closing
date when the exchange ratio would be established.
Scott & Stringfellow discussed with the board the volatility of the stock
market over the preceding few months, reports from several stock market analysts
and economists expressing concern over the possible continued volatility in the
stock market and the direction of the United States economy in general, and the
board concluded that the out-of-state bank's offer involved a significantly high
level of market risk. Based on the information, the board was concerned with the
uncertainty over whether the actual value of the transaction would end up being
less than $17.75 per share, or even less than the F&M offer, when the exchange
ratio was subsequently established at the closing. In making this assessment,
the board also took into consideration the fact that the then current market
price of the out-of-state bank's stock had to fall only seven percent before it
dropped below the low end of the price limits and that several other announced
bank mergers had been recently terminated due to a decline in the stock market
generally and bank stocks specifically. The board decided to continue
negotiations with F&M due in large part to the board's serious concern over the
market risk associated with the out-of-state bank's offer.
The board approved a motion to authorize Scott & Stringfellow to request
$17.50 in F&M common stock. Security further authorized Scott & Stringfellow to
negotiate an offer of no lower than $17.25 per share. The board understood that
F&M would pay for Security's stock with registered shares of F&M common stock.
On November 6, 1998, Scott & Stringfellow called Mr. May to report that
F&M had agreed to $17.25 per share payable in F&M common stock, subject to the
completion of a due diligence investigation. Mr. May notified Mr. Snow that
night, as Mr. Snow was leaving the country the next morning. The next day, Mr.
May notified all other directors by telephone that F&M had agreed to $17.25 per
share payable in F&M common stock.
On November 10, 1998, F&M completed its due diligence investigation of
Security. Also, on November 10, 1998, the board held another meeting that Scott
& Stringfellow and legal counsel for Security attended. Scott & Stringfellow and
counsel presented the board with an agreement in principle prepared by F&M. The
board, legal counsel and Scott & Stringfellow carefully reviewed the agreement
and asked for certain changes. These changes were discussed with F&M and all
changes were made. Scott & Stringfellow then again reviewed the financial
considerations associated with the F&M offer and indicated that the offer was
fair from a financial point of view to Security's shareholders. The board then
unanimously approved the merger and the related stock option agreement. The
press release was issued by F&M at approximately 5:00 p.m.
15
Immediately thereafter, Mr. May met with all Security officers and
announced the intent to merge with F&M. This meeting was followed by a meeting
with the full staff of Security and the proposed affiliation was again
announced. The staff was especially appreciative that they were assured they
would be offered positions at comparable salaries with F&M Bank-Northern
Virginia.
On November 12, 1998, Security held a regular board meeting. Mr. May
reported that the definitive merger agreement with F&M was being drafted by
F&M's counsel and would be reviewed by Security's counsel prior to being
submitted to the Security board for approval.
On November 24, 1998, the board held another special board meeting. The
board selected Messrs. Snow, Parrish, DeBell and Martin, based on seniority, to
serve on the board of F&M Bank-Northern Virginia. Legal counsel joined the
meeting and the board reviewed the merger agreement. The board unanimously
approved these documents, subject to minor changes agreed to by Mr. Gregory and
Mr. May after consulting legal counsel. On November 25, 1998, F&M signed the
merger agreement. Due to the intervening Thanksgiving holiday and travel
schedules of Security Board members, Mr. Gregory signed the merger agreement on
Monday, November 30, 1998.
Security's Reasons for the Merger. The Security board discussed both the
financial aspects of the proposed merger, including the benefits of the
transaction to Security's shareholders, as well as the potential effect of the
merger on Security's management, employees, customers and the community in which
Security is located, without assigning relative weights to the various
constituencies and factors considered. Relying on the opinion of Scott &
Stringfellow and after consultation with management and legal counsel, the
Security board determined that the merger is fair from a financial point of view
to, and are in the best interests of, Security and its shareholders. In reaching
this determination the board considered the following:
(i) The board was concerned with ways to improve Security's financial
performance and, prior to receiving the offer from F&M, had begun
to study options to utilize Security's excess capital in a manner
that could be expected to maintain or enhance shareholder
returns. Possible uses for the capital included, but were not
limited to, opening branches, investing in technological
innovation, or affiliating with a bank of similar size. Security
asked Scott & Stringfellow, to analyze the changes in the
industry, the industry's financial performance, the trend to
industry consolidation, and the competitive environment of its
market in northern Virginia. Scott & Stringfellow issued a report
and discussed it with the board indicating that Security did not
have the critical mass to be competitive in the northern Virginia
market and that the recommended option would be to consider an
affiliation.
(ii) The compatibility of Security and F&M, including community bank
operating philosophies and similarity of products and customer
orientation.
(iii) The terms of the merger agreement and the merger, including the
exchange ratio.
16
(iv) The current and prospective economic and competitive environment
facing the banking industry generally, and Security in
particular, including the continued pace of consolidation in the
industry, the perceived importance of operational scale in
enhancing efficiency and profitability and remaining competitive
over the long term, and the benefits of increased geographic
diversification. In this regard, the board noted that the
combined bank resulting from the merger will have over 30 offices
in northern Virginia and will possess the financial resources and
economies of scale necessary to compete more effectively in the
financial services industry in the future.
(v) The presentation of Scott & Stringfellow to the board on
November 10, 1998, that as of such date, the exchange ratio was
fair from a financial point of view to the Security shareholders.
(vi) The expectation that the merger will be tax-free for federal
income tax purposes to Security and its shareholders, except for
cash paid in lieu of fractional shares.
(vii) The generally favorable impact that the merger could be expected
to have on the shareholders, customers, employees, and
communities of Security.
(viii) The terms of the stock option agreement between F&M and Security,
including the risk that it might discourage third parties from
offering to acquire Security by increasing the cost of such an
acquisition, and recognizing that the execution of the stock
option agreement was a condition to F&M's willingness to agree
to the merger.
Additionally, in considering the opinion of Scott & Stringfellow, the
board was advised that in arriving at such opinion, Scott & Stringfellow
relied upon median estimates of F&M's and Security's 1998 and 1999 earnings per
share and earnings per share growth rates.
Based on its discussion and consideration of the factors discussed above,
the Security board voted unanimously to approve the merger and the related stock
option agreement as being in the best interests of Security, its shareholders,
employees and customers.
THE SECURITY BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER.
Opinion of Financial Advisor
Pursuant to an engagement letter dated as of November 5, 1998, Security
retained Scott & Stringfellow as its financial advisor in connection with
Security's consideration of a possible business combination with F&M. In
connection therewith, the Security board requested Scott & Stringfellow to
render its opinion as to the fairness, from a financial point of view, of the
consideration from F&M to the holders of Security common stock. At the November
10, 1998 meeting at which Security's board considered and approved the
agreement, Scott & Stringfellow delivered to Security's board both its oral and
written opinion that as of such date, the consideration to be received from F&M
was fair, from a financial point of view, to the holders of shares of Security
common stock. Scott & Stringfellow has reconfirmed its opinion dated the date of
this proxy statement/prospectus, to the effect that, as of the date thereof, the
consideration was fair to the holders of shares of Security common stock from a
financial point of view. Scott & Stringfellow is a regional investment banking
firm and was selected by Security based on the firm's reputation and experience
in investment banking, its extensive experience and knowledge of the Virginia
banking market, its recognized expertise in the valuation of commercial banking
businesses and because of its familiarity with, and prior work for Security.
Scott & Stringfellow, through its investment banking business and specifically
through its Financial Institutions Group specializes in commercial banking
institutions and is continually engaged in the valuation of such businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings and other corporate transactions.
17
The full text of Scott & Stringfellow's opinion, dated the date of this
proxy statement/prospectus, which sets forth the assumptions made, procedures
followed, matters considered and limits on the review undertaken, is attached as
Appendix III to this proxy statement/prospectus. The description of the Scott &
Stringfellow opinion set forth herein is qualified in its entirety by reference
to Appendix III. The Scott & Stringfellow opinion is provided for the
information of Security shareholders because it was provided to the Security
board in connection with its consideration of the merger.
In developing its opinion, Scott & Stringfellow reviewed and analyzed:
o the merger agreement;
o this proxy statement/prospectus;
o Security's audited financial statements for the three years ended December
31, 1997;
o Security's unaudited financial statements for the nine months ended September
30, 1998 and 1997, and other internal information relating to Security
prepared by Security's management;
o information regarding the trading market for Security common stock and F&M
common stock and the price ranges within which the respective stocks have
traded;
o the relationship of prices paid to relevant financial data such as net worth,
earnings, deposits and assets in certain bank and bank holding company
mergers and acquisitions in recent years;
o F&M's annual reports to shareholders and its audited financial statements for
the three years ended December 31, 1997;
o F&M's unaudited financial statements for the nine months ended September 30,
1998 and 1997 and other internal information relating to F&M prepared by
F&M's management; and
o conducted such other studies, analysis and investigations particularly of the
banking industry, and considered such other information as it deemed
appropriate, the material portion of which is described below.
o Scott & Stringfellow also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuations and
knowledge of the commercial banking industry generally.
o Scott & Stringfellow also has discussed with members of Security's and F&M's
management past and current business operations, the background of the
merger, the reasons and basis for the merger, results of regulatory
examinations, and the business and future prospects of Security and F&M
individually and as a combined entity, as well as other matters relevant to
its inquiry.
18
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of Security and F&M as to the future financial
performance of Security and F&M, respectively. Scott & Stringfellow did not make
an independent evaluation or appraisal of the assets or liabilities of Security
and F&M nor was it furnished with any such appraisal.
In connection with rendering its opinion, Scott & Stringfellow performed a
variety of financial analyses. Scott & Stringfellow evaluated the financial
terms of the transaction using standard valuation methods, including comparable
acquisition analysis, pro forma merger analysis, present value analysis, ability
to pay analysis and comparable company analysis, among others. The following is
a summary of the material analyses presented by Scott & Stringfellow to the
Security board in connection with its fairness opinion dated as of such date.
Summary of Proposal. Scott & Stringfellow reviewed the terms of the
proposed transaction, including the $17.25 of consideration to be received from
F&M. Based on such consideration, Scott & Stringfellow calculated the premium
over the closing price of Security common stock on November 9, 1998, price to
book, price to tangible book, implied core deposit premium (defined as the
transaction value minus the tangible book value divided by core deposits) and
price to trailing twelve months' earnings multiple for Security. This analysis
yielded a premium over the closing price of Security common stock on November 9,
1998 of 50.0%, a price to book value multiple of 2.82x, a price to tangible book
value multiple of 2.86x, an implied core deposit premium of 26.40% and a price
to trailing twelve months' earnings multiple of 41.07x.
Comparable Acquisition Analysis. Scott & Stringfellow reviewed 12 merger
and acquisition transactions announced from January 1, 1997 to November 9, 1998
involving community commercial banking institutions in Virginia ("Comparable
Transactions"). Scott & Stringfellow compared the price to book value, price to
tangible book value, price to last twelve months' earnings, price to deposits,
price to assets, the implied core deposit premium, and the premium over the
seller's prior day closing price at the announcement date for such Comparable
Transactions to the proposed merger at announcement. In its analysis, Scott &
Stringfellow noted that Security had significantly more equity capital relative
to its assets than the acquired banks in the Comparable Transactions.
Accordingly, Scott & Stringfellow adjusted Security's equity such that its
equity-to-assets ratio equaled that of the aforementioned acquired banks.
The price to book, price to tangible book, and implied core deposit premium
reflect this adjustment.
F&M/ Comparable
Security Transactions
-------- ------------
Deal Price/Book Value 2.82x 2.56x
Deal Price/Tangible Book 2.86x 2.59x
Deal Price/LTM Earnings 41.07x 22.82x
Deal Price/Deposits 33.93% 30.85%
Deal Price/Assets 28.85% 26.33%
Tangible Book Premium/Core
Deposits 26.40% 21.83%
Deal Price/Seller's Prior Day
Closing Price 50.00% 24.83%
Pro Forma Merger Analysis. Scott & Stringfellow analyzed certain pro forma
effects of the merger based upon earnings forecasts of Security and F&M, as well
as estimated cost savings and revenue enhancements totaling $300,000 expected to
result from the merger. This analysis indicated that the transaction would be
dilutive to earnings per share of F&M in 1999 and accretive in each year
thereafter, once the projected cost savings and projected revenue enhancements
are realized, and that the merger would be modestly accretive to F&M's book
value and tangible book value per share. The actual results achieved by F&M may
vary from projected results.
19
1998 EPS Accretion (Dilution) (0.66%)
1999 EPS Accretion (Dilution) (0.60%)
Book Value Accretion 0.33%
Tangible Book Value Accretion 0.43%
Present Value Analysis. Scott & Stringfellow performed an analysis to
determine a range of present values per share of Security common stock assuming
Security continued to operate as an independent community bank. This range was
determined by present valuing the estimated value of Security common stock at
the end of year 2003. Scott & Stringfellow used earnings estimates available
from Security's management for 1998. The net income projections were grown using
an earnings growth rate of 8% for years 1999 through 2003. The future value of
Security common stock at the end of year 2003 was determined by applying a range
of price-to-earnings multiples (15.0x to 17.0x) to year 2003 projected earnings.
These values were discounted to present value using discount rates of 11% to
13%, which Scott & Stringfellow viewed as the appropriate discount rate range
for a commercial bank with Security's risk characteristics. Based upon the above
assumptions, the value of Security common stock ranged from approximately $8.05
to $9.97 per share on a stand-alone basis.
Terminal Price/Earnings Multiple
-------------------------------------------------------
Discount
Rate 15.0x 15.5x 16.0x 16.5x 17.0x
---- ----- ----- ----- ----- -----
11.00% $8.80 $9.09 $9.38 $9.68 $9.97
11.50 8.60 8.89 9.18 9.46 9.75
12.00 8.41 8.69 8.97 9.25 9.53
12.50 8.23 8.50 8.78 9.05 9.32
13.00 8.05 8.31 8.58 8.85 9.12
Ability to Pay Analysis. Scott & Stringfellow performed an analysis
comparing the merger to hypothetical acquisitions of Security by five banking
institutions other than F&M for consideration equivalent in value to the value
of the consideration proposed in the merger and reviewed certain publicly
available information with respect to such hypothetical acquirors. The analyses
used IBES median earnings estimates for the hypothetical acquirors and assumed
cost savings identical to those for F&M. Scott & Stringfellow analyzed the
effect of such transactions on the hypothetical acquirors' 1998 earnings. Scott
& Stringfellow calculated the earnings dilution effect to such hypothetical
acquirors, ranging between 0.21% and 4.68% dilution to 1998 earnings.
Bank A Bank B Bank C Bank D Bank E
-------------------------------------------------------
1998 EPS Accretion (Dilution) (0.21%) (0.36%) (0.57%) (2.04%) (4.68%)
Analysis of Selected Comparable Companies. Scott & Stringfellow analyzed
the performance and financial condition of F&M relative to a group of commercial
banks consisting of FCNB Corp., F&M Bancorp, First Virginia Banks, Inc., Fulton
Financial Corporation, Keystone Financial, Inc., Mercantile Bankshares
Corporation, One Valley Bancorp, Inc., Sandy Spring Bancorp, Inc., Susquehanna
Bancshares, Inc., Union Bankshares Corporation, and United Bankshares, Inc. (the
"Bank Peer Group"). The financial ratios shown in the table below are as of
September 30, 1998; the market price multiples are based on market prices as of
November 9, 1998.
20
Bank Peer
F&M Group Average
--- -------------
Last 12 Months Net Interest Margin 4.70% 4.52%
Last 12 Months Efficiency Ratio 59.81 57.13
Last 12 Months Return on Avg. 1.30 1.31
Assets
Last 12 Months Return on Avg. 12.96 13.17
Equity
Tangible Equity / Assets 9.86 8.99
Equity / Assets 10.20 9.79
Risk Based Capital Ratio 16.83 15.14
Nonperforming Assets / Assets 1.15 0.45
Reserves / Nonperforming Assets 69.44 239.39
Market Price / Last 12 Months 19.55x 18.19x
Earnings
Market Price / 1998 Estimated 17.55x 16.40x
Earnings
Market Price / 1999 Estimated 15.92x 14.61x
Earnings
Market Price / Book Value 2.27x 2.25x
Current Dividend Yield 2.78% 2.75%
Other Analyses. Scott & Stringfellow also reviewed, among other things,
selective investment research reports on, and earnings estimates for F&M and
analyzed available information regarding the ownership of F&M common stock. In
addition, Scott & Stringfellow prepared an overview of F&M's business, prepared
a summary of the historical financial performance of F&M, summarized F&M's
financial goals and objectives, and, based on publicly available information,
analyzed F&M's deposit market share and branch presence in the states in which
it operates.
In connection with its opinion dated as of the date of this proxy
statement, Scott & Stringfellow performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith.
The summary set forth above includes all the material factors considered
by Scott & Stringfellow in developing its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefor, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed above, Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analysis and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. As a
whole, these various analyses contributed to Scott & Stringfellow's opinion that
the consideration is fair from a financial point of view to Security's
shareholders.
Pursuant to an engagement letter dated November 5, 1998 between Security
and Scott & Stringfellow, in exchange for its services, Security has agreed to
pay Scott & Stringfellow a transaction fee of $__, which is payable and
contingent upon the consummation of the merger. In the past, Scott &
Stringfellow has provided investment banking services to Security for which
services Scott & Stringfellow received customary fees. In the ordinary course of
its business, Scott & Stringfellow may actively trade the equity securities of
Security for its own account or the account of its customers, and, accordingly,
may at any time hold a long or short position in such securities.
21
Effective Date
If the merger is approved by the shareholders of Security, all required
governmental and other consents are obtained and the other conditions to the
merger are satisfied or waived, the merger will be consummated and made
effective on the date and at the time indicated on the certificate of merger
issued by the Virginia State Corporation Commission pursuant to the Virginia
Stock Corporation Act. See "The Merger -- Conditions to the Merger."
It is anticipated that the effective date of the merger will occur on or
about March 22, 1999.
Surrender of Stock Certificates
As soon as practicable after the merger, F&M will cause American Stock
Transfer & Trust Company, its exchange agent, to mail to you a letter of
transmittal and instructions for use to surrender the certificates representing
shares of Security common stock in exchange for certificates representing shares
of F&M common stock.
Security shareholders should not send in their certificates until they
receive such instructions.
Promptly after surrender of one or more certificates for Security common
stock, together with a properly completed letter of transmittal, you will
receive a certificate or certificates representing the number of shares of F&M
common stock to which you are entitled and, where applicable, a check for the
amount payable in cash instead of issuing a fractional share. Lost, stolen,
mutilated or destroyed certificates will be treated in accordance with the
existing procedures of F&M.
After the effective date of the merger, you will be entitled to vote the
number of shares of F&M common stock into which your Security common stock has
been converted, regardless of whether you have surrendered your Security
certificates. The merger agreement provides, however, that no dividend or
distribution payable to the holders of record of F&M common stock at or as of
any time after the effective date of the merger will be paid to the holder of
any Security certificate until such holder physically surrenders such
certificate, promptly after which time all such dividends or distributions will
be paid (without interest).
Representations and Warranties; Conditions to the Merger
The merger agreement contains representations and warranties by F&M and
Security, including representations and warranties with respect to their
individual organizations, authorizations to enter into the merger agreement,
capitalization, financial statements and pending and threatened litigation.
These representations and warranties (except as otherwise provided in the merger
agreement) will not survive the effective date of the merger.
The obligations of F&M and Security to consummate the merger are subject
to the following conditions, among, others:
22
1. approval and adoption of the merger agreement by the requisite
shareholder vote;
2. receipt of all necessary regulatory approvals not conditioned or
restricted in a manner that, in the judgment of the boards of directors
of F&M or Security, materially adversely affects the economic or
business benefits of the merger so as to render inadvisable or unduly
burdensome consummation of the merger;
3. the absence of certain actual or threatened proceedings before a court
or other governmental body relating to the merger;
4. receipt of a fairness opinion from Scott & Stringfellow; and
5. the receipt of an opinion of counsel as to certain federal income tax
consequences of the merger.
Also, under the terms of the merger agreement, F&M agreed that, following
the merger, it will indemnify those persons associated with Security who are
entitled to indemnification as of the effective date of the merger.
In addition, each company's obligation to effect the merger, unless
waived, is subject to performance by the other company of its obligations under
the merger agreement, the accuracy, in all material respects, of the
representations and warranties of the other company contained in the merger
agreement, and the receipt of certain opinions and certificates from the other
company.
Regulatory Approvals
As indicated above, the consummation of the merger is conditioned on the
prior approval of the merger by the Board of Governors of the Federal Reserve
System and the Virginia State Corporation Commission. On January ___, 1999,
applications were filed with the Federal Reserve and the Virginia State
Corporation Commission. The applications were accepted but no approvals have
been obtained. While we cannot predict whether or when we will obtain all
required regulatory approvals, we see no reason why the approvals will not be
obtained in a timely manner. However, there can be no assurance that the
necessary approvals will be obtained, or that any approval will not be
conditioned in a manner which makes consummation of the merger, in the judgment
of the board of directors of F&M or Security, inadvisable or unduly burdensome.
Business Pending the Merger
Except with the prior consent of F&M, until the effective date of the
merger Security may not:
o conduct its operations except only in the ordinary and usual course,
consistent with past practice and to use its best efforts to maintain its
business organizations, employees and business relationships and retain the
services of its officers and key employees;
o take any action, engage in any transactions or enter into any agreements
which would adversely affect or delay in any material respect the ability of
F&M or Security to obtain the necessary approvals, consents or waivers
required to effect the merger or to perform its covenants and agreements on a
timely basis;
o issue any capital stock, except upon exercise of warrants or options issued
pursuant to existing employee benefits plans, programs or arrangements or
effect any stock split or otherwise change its capitalization;
23
o enter into or amend any written employment or severance agreement or similar
arrangement with any of its directors, officers or employees, or grant any
salary or wage increase or increase any employee compensation, except for
normal individual increases to employees made in the ordinary course of
business consistent with past practice;
o enter into or amend, except as required by law, any employee benefit,
incentive or welfare arrangement, or any related trust agreement, relating to
any of its directors, officers or employees;
o incur any obligation or liability, make any pledge, or encumber any of its
assets, nor dispose of any of its assets in any other manner, except in the
ordinary course of business and for adequate value, or as otherwise
permitted in the merger agreement;
o change its lending, investment, asset/liability management or other material
banking policies in any material respect, except as may be required by law;
o amend its articles of incorporation or bylaws;
o declare or pay dividends on its capital stock; or
o purchase or redeem any of its capital stock.
Pending consummation of the merger, F&M has agreed that F&M and its
subsidiary banks will operate their respective businesses in the ordinary course
and use their best efforts to preserve their respective properties, business and
customer and employee relationships.
No Solicitation; Board Action
Security has agreed not to solicit or encourage inquiries or proposals
with respect to, furnish any information relating to, or participate in any
negotiations regarding any merger, consolidation, share exchange, joint venture,
business combination or similar transaction involving Security, or any purchase
of all or any material portion of the assets of Security (an "Acquisition
Transaction").
Notwithstanding the above-described non-solicitation provision, the
Security board may furnish information to, or enter into discussions or
negotiations with, any person or entity that makes an unsolicited, written bona
fide proposal regarding an Acquisition Transaction if, and only to the extent
that:
o the Security board concludes in good faith, after consultation with and based
upon the advice of outside counsel, that it is required to furnish such
information or enter into such discussions or negotiations in order to comply
with its fiduciary duties to shareholders under applicable law;
o prior to taking such action, Security receives from such person or entity an
executed confidentiality agreement; and
o the Security board concludes in good faith that the proposal regarding the
Acquisition Transaction contains an offer of consideration that is superior
to the consideration set forth in the merger agreement.
24
Security has also agreed that it shall immediately notify F&M orally and
in writing of the receipt by it of any proposal or inquiry regarding an
Acquisition Transaction, the material terms and conditions of such proposal or
inquiry, and the identity of the person making any such proposal or inquiry.
Waiver, Amendment and Termination
At any time on or before the effective date of the merger, any term or
condition of the merger, except for the general conditions set forth in Section
5.1(a) - (d) of the merger agreement, may be waived by the party which is
entitled to the benefits thereof, without shareholder approval, to the extent
permitted under applicable law. The merger agreement may be amended at any time
before the merger by agreement of the parties whether before or after the
special meeting (except that the exchange ratio shall not be changed after
approval of the merger agreement by the Security shareholders). Any material
change in a material term of the merger agreement would require a resolicitation
of Security's shareholders. Such a material change would include, but not be
limited to, a change in the tax consequences to Security's shareholders.
The merger agreement may be terminated by F&M or Security, whether before
or after the approval of the merger agreement by the shareholders of Security:
o by mutual consent of Security and F&M;
o unilaterally by Security or F&M, if the effective date has not occurred on or
before September 30, 1999, except that the party whose failure to perform any
obligation under the merger agreement is the cause of the delay may not
terminate the merger based upon the delay; or
o unilaterally by Security or F&M if the satisfaction in any material respect
of one or more conditions to the obligation of that party is rendered
impossible of satisfaction. In the event of termination, the merger agreement
shall become null and void, except that certain provisions thereof relating
to expenses and confidentiality of information exchanged between the parties
shall survive any such termination.
Resales of F&M Common Stock
All shares of F&M common stock received by you in connection with the
merger will be freely transferable, except that F&M common stock received by
persons who are deemed to be "affiliates" of Security for purposes of Rule 145
under the Securities Act of 1933, as amended. To the best knowledge of Security
and F&M, the only persons who may be deemed to be affiliates of Security subject
to these limitations are the directors and executive officers of Security.
Accounting Treatment
We anticipate that the merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, recorded assets and liabilities of F&M and Security are carried
forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Security for the entire fiscal year
in which the merger occurs, and the reported income of the separate corporations
for prior periods will be combined. No recognition of goodwill in the
combination is required of any party to the merger.
25
For the merger to qualify as a pooling of interests, it must satisfy a
number of conditions including that substantially all of the Security common
stock be exchanged for F&M common stock. If any of the conditions to pooling of
interests accounting is not satisfied, then the merger would not qualify for
pooling of interests accounting treatment, and a condition to the obligation of
F&M to consummate the merger would not be satisfied (unless, F&M took action
which prevented the merger from qualifying as a pooling of interests, in which
case it will not be a condition to the merger). Each of F&M and Security have
agreed that they will use their respective best efforts to ensure that the
merger will qualify for pooling of interests accounting treatment. In addition,
certain affiliates of F&M and Security have agreed that they will not sell any
F&M common stock or Security common stock within 30 days before the effective
date of the merger, nor sell any F&M common stock until such time as F&M has
published financial results covering at least 30 days of the combined operations
of F&M and Security after the merger.
Interests of Certain Persons in the Merger
Certain members of Security's management, as well as certain members of
the Security board of directors, have interests in the merger in addition to
their interests as shareholders of Security. These include, provisions in the
merger agreement relating to indemnification of directors and officers of
Security, the treatment of outstanding options with respect to Security common
stock, and eligibility for certain F&M employee benefits. In each case, the
Security board was aware of these potential interests, and considered them,
among other matters, in approving the merger agreement and the transactions
contemplated thereby.
Indemnification. F&M has generally agreed to indemnify, for a period of
six years after the merger, the officers and directors of Security against
certain liabilities arising before the merger. F&M has also agreed to provide
directors' and officers' liability insurance for the present officers and
directors of Security for a period of three years after the merger.
Directors of F&M Bank-Northern Virginia. Four of the current directors of
Security will become directors of F&M Bank-Northern Virginia upon consummation
of the merger or as soon thereafter as practicable. Those directors will each
receive $225 for every board meeting they attend. Directors of Security who are
not appointed to the board of directors of F&M Bank-Northern Virginia will be
offered a position on F&M Bank-Northern Virginia's advisory board and will be
paid a quarterly fee of $100 for their services.
Stock Options. Certain directors and officers of Security hold stock
options under Security's 1996 Director Stock Option Plan and Security's 1996
Employee Stock Option Plan to acquire an aggregate of 77,100 shares of Security
common stock at exercise prices ranging from $8.00 to $13.12 per share. These
options, if not exercised before the merger, will be converted into options to
acquire shares of F&M common stock, appropriately adjusted to reflect the
exchange ratio.
Employment Agreement. Mr. Danny R. May, the President and Chief Executive
Officer of Security, will receive a lump sum payment of $________ (one times his
annual salary, plus four months salary) under his employment agreement upon the
merger. Mr. May's employment agreement provides for such a severance allowance
if there is a change of ownership or control of Security and his job duties are
substantially reduced. His agreement also provides that F&M must continue for a
two year period his medical and other insurance coverage. Mr. May has accepted
F&M's offer to join F&M Bank-Northern Virginia as a senior vice president. He
will not have an employment or severance agreement with F&M.
Employee and Benefit Plans. The merger agreement provides that all
officers and employees of Security will be offered positions with F&M Bank-
Northern Virginia at not less than the salaries they have with Security prior to
the merger. As soon as administratively practicable following the merger,
employees of Security will be entitled to participate in the F&M pension, health
and welfare benefit and similar plans on the same terms and conditions as
employees of F&M. Employees of Security will receive credit for their years of
service to Security for participation and vesting purposes only.
26
The Option Agreement
The option agreement was entered into as a condition to F&M's willingness
to enter into an agreement in principle with Security as to the terms of the
merger and to increase the probability of the merger. Exercise of the F&M option
may make the acquisition of a controlling interest in Security more expensive to
any prospective acquiror other than F&M, even if such an acquisition would be
beneficial to you. The existence of the F&M option is intended to make it less
likely that a prospective acquiror, other than F&M, will seek a business
combination with Security. The following is a brief summary of the option
agreement and is qualified in its entirety by reference to the option agreement,
a copy of which is attached to this proxy statement/prospectus as Appendix II
and incorporated by reference herein.
The option agreement permits the exercise by F&M of an option to acquire
up to 191,300 shares of Security common stock at a price of $11.00 per share,
subject to adjustment upon the occurrence of certain events described below. The
shares subject to the F&M option represent approximately 19.9% of the
outstanding shares of Security common stock as of the date of the option
agreement, November 10, 1998.
F&M may exercise its option, in whole or in part, at any time or from time
to time, upon or after the occurrence of a "Purchase Event." As used in the
option agreement, a "Purchase Event" means:
o Security shall have entered into an agreement with a person (other than F&M
or its affiliates) to: (i) acquire, merge or consolidate with, or enter into
any similar transaction with Security, (ii) purchase, lease or otherwise
acquire all or substantially all of the assets of Security, or (iii) purchase
or otherwise acquire (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing more than 10% of
the voting power of Security;
o any person shall have acquired beneficial ownership of more than 20% of the
outstanding shares of Security common stock; or
o a bona fide proposal is made by any person (other than F&M or its affiliates)
by public announcement or written communication that is or becomes the
subject of public disclosure to acquire, merge or consolidate with, or enter
into any similar transaction with Security, and following such proposal the
shareholders of Security vote not to approve the merger agreement.
Security is required to notify F&M upon the occurrence of a transaction,
offer or event giving rise to a Purchase Event. In the event F&M wishes to
exercise the option, it must send Security written notice specifying (i) the
total number of shares it will purchase and (ii) the place and date not earlier
than three business days nor later than 60 business days after the date on which
such notice is given for the closing of such purchase. If prior notification to,
or approval of, any federal or state regulatory agency is required, F&M will
promptly file the required notice or application for approval and the period of
time that otherwise would run pursuant to such notice period will run instead
from the date on which the last required notification period has expired or has
been terminated or such approvals have been obtained and any requisite waiting
period has passed.
27
F&M's option will expire and terminate, to the extent not previously
exercised, upon the earlier of:
o the effective date of the merger;
o the date on which the merger agreement is terminated, other than a
termination based upon a material breach by Security of any covenant in the
merger agreement or the failure of Security to obtain shareholder approval of
the transactions contemplated by the merger agreement by the vote required by
applicable law, in either case following the occurrence of a Purchase Event;
or
o twelve months after the merger agreement is terminated based upon a material
breach by Security of certain specified covenants or the failure of Security
to obtain shareholder approval of the transactions contemplated by the merger
agreement by the vote required under applicable law, in either case following
the occurrence of a Purchase Event.
If Security's capitalization changes by reason of stock dividend, split-up
merger, recapitalization, combination, exchange of shares or the like, the
number of shares subject to the option and the purchase price per share thereof
will be adjusted so that the economic value of the option remains unaltered.
Material Federal Income Tax Consequences of the Merger
The following is a discussion of all material federal income tax
consequences of the merger under the Internal Revenue Code of 1986, as amended
(the "Code"), to Security shareholders who receive F&M common stock solely in
exchange for Security common stock and cash instead of fractional shares. The
discussion does not deal with all aspects of federal taxation that may be
relevant to particular Security shareholders. Certain tax consequences of the
merger may vary depending upon the particular circumstances of each Security
shareholder and other factors.
You are urged to consult with your tax advisor to determine the particular
tax consequences to you of the merger (the application and effect of state and
local income and other tax laws).
This summary is based on current law and the advice of LeClair Ryan, legal
counsel to F&M. The advice in this summary is based on, among other things,
certain customary assumptions and representations relating to certain facts and
circumstances of, and the intentions of the parties to, the merger. Neither F&M
nor Security has requested a ruling from the Internal Revenue Service in
connection with the merger. To meet a condition to consummation of the merger,
F&M and Security will receive from LeClair Ryan, counsel to F&M, an opinion as
to certain federal income tax consequences of the merger. Such opinion is not
binding on the Internal Revenue Service.
In the opinion of counsel, the merger will constitute a tax-free
reorganization under Section 368(a) of the Code, if consummated in the manner
set forth in the merger agreement. Accordingly, among other things, in the
opinion of such counsel:
1. The merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
2. No gain or loss will be recognized by F&M or Security as a result of
the merger;
28
3. No gain or loss will be recognized by a Security shareholder to the
extent he or she receives F&M common stock solely in exchange for
his Security common stock pursuant to the merger;
4. The tax basis of the F&M common stock received by each Security
shareholder will be the same as the tax basis of the Security common
stock surrendered in exchange therefor; and
5. The holding period for each share of F&M common stock received by
each Security shareholder in exchange for Security common stock will
include the period for which such shareholder held the Security
common stock exchanged therefor, provided such Security common stock
is a capital asset in the hands of such holder at the effective
date.
Any cash received by you instead of fractional shares could result in
taxable income to you. The receipt of such cash will generally be treated as a
sale or exchange of the stock resulting in capital gain or loss measured by the
difference between the cash received and an allocable portion of the basis of
the stock relinquished. The receipt of such cash may be treated as a dividend
and taxed as ordinary income in certain limited situations.
Absence of Appraisal Rights
Under Section 6.1-43 of the Virginia Banking Act, shareholders of Security
will not be entitled to dissent from the merger and obtain the judicially
determined fair value of their shares of Security.
Certain Differences in Rights of Shareholders
Both F&M and Security are corporations subject to the provisions of the
Virginia SCA. Your shareholder rights are presently governed by Security's
articles of incorporation and bylaws. Upon consummation of the merger and your
becoming a shareholder of F&M, your shareholder rights will be governed by the
articles of incorporation and bylaws of F&M.
There are no material differences between the rights of a Security
shareholder under Security's articles of incorporation and bylaws, on the one
hand, and the rights of an F&M shareholder under the articles of incorporation
and bylaws of F&M, on the other hand, except as disclosed in the section
"Comparative Rights of Shareholders" on page __.
Expenses of the Merger
In general, whether or not the merger is consummated, Security and F&M
will pay their own expenses incident to preparing, entering into and carrying
out the merger agreement, and preparing and filing the Registration Statement of
which this proxy statement/prospectus is a part. F&M will, however, pay the
expenses of printing and mailing this proxy statement/prospectus, and may make
payment under circumstances involving willful and material breaches of certain
provisions of the merger agreement.
If either party willfully and materially breaches the merger agreement,
that party must pay the costs associated with this transaction incurred by the
non-breaching party. If the merger agreement is terminated by Security because
it is not approved by Security shareholders, Security must pay 50% of F&M's
costs in this transaction, up to $50,000.
29
Cautionary Statement Concerning Forward-Looking Statements
This proxy statement/prospectus (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and businesses of each of F&M and Security. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
o competitive pressure in the banking industry increases significantly;
o changes in the interest rate environment reduce margins;
o general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality;
o changes occur in the regulatory environment;
o changes occur in business conditions and inflation; and
o changes occur in the securities markets.
MARKET PRICES AND DIVIDENDS
Market Prices
F&M common stock is listed and traded on the NYSE under the symbol "FMN."
Since June 24, 1996, Security common stock has been listed and traded on the
Nasdaq SmallCap Market under the symbol "SBCM." Prior thereto, Security common
stock was quoted on the OTC Bulletin Board.
The following tables provide: (i) in the case of F&M, the high and low
closing sales prices for F&M common stock on the NYSE for the periods indicated,
and (ii) in the case of Security, the high and low closing sales prices on the
Nasdaq SmallCap Market.
F&M
Closing Sales Prices
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
High Low High Low High Low
1st Quarter (through______) $36.25 $31.75 $22.88 $19.63
2nd Quarter................ -- -- 34.31 32.00 26.38 19.88
3rd Quarter................ -- -- 31.56 26.13 30.44 26.00
4th Quarter................ -- -- 31.69 25.06 36.25 28.56
The closing price of F&M common stock on the NYSE on November 9, 1998, the
last full trading day preceding the public announcement of the proposed merger,
was $29.69 per share. The closing price of F&M common stock on the NYSE on
________, 1999, the latest practicable date before the date of this proxy
statement/prospectus was $________ per share.
30
Security
Closing Sales Prices
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
High Low High Low High Low
1st Quarter (through______) $ $ $13.75 $12.50 $13.88 $9.75
2nd Quarter ............... -- -- 13.50 12.00 10.00 9.38
3rd Quarter................ -- -- 12.38 11.25 10.00 9.13
4th Quarter................ -- -- 16.00 10.50 10.00 9.00
As of December 31, 1998, there were 8,190 record holders of F&M common
stock. As of the record date, there were ______ record holders of Security
common stock.
Dividends
The following table reflects the cash dividends per share paid during each
quarter on F&M common stock for the periods indicated. Security has not declared
and paid any cash dividends.
The information may vary for certain periods from the dividends declared
during the stated quarter in cases where the dividend was paid in the quarter
following its declaration. In addition, the amounts shown for F&M have not been
restated and adjusted to reflect the acquisition on April 1, 1998, of Peoples
Bank of Virginia and the acquisition on June 1, 1998, of The Bank of Alexandria.
See "Selected Financial Data" for such restated dividend information for F&M.
F&M
1999 1998 1997
---- ---- ----
1st Quarter........................... $ 0.185 $0.180
2nd Quarter........................... --- 0.185 0.180
3rd Quarter........................... --- 0.195 0.185
4th Quarter........................... --- 0.195 0.185
F&M or F&M Bank-Winchester has paid regular cash dividends for more than
56 consecutive years.
F&M is a legal entity separate and distinct from its subsidiaries, and its
revenues depend primarily on the payment of dividends from its subsidiary banks.
F&M's subsidiary banks are subject to certain legal restrictions on the amount
of dividends they are permitted to pay to F&M. For example, a Virginia chartered
bank, of which there are seven within the F&M system, is prohibited from paying
a dividend that would impair its paid-in capital. In addition, the Virginia SCC
may limit the payment by any Virginia chartered bank if it determines that the
limitation is in the public interest and is necessary to ensure the bank's
financial soundness.
Under current federal law, insured depository institutions, such as F&M's
bank subsidiaries, are prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the institution
would become "undercapitalized" (as such term is defined in federal law). Based
on F&M's subsidiary banks' current financial condition, F&M does not expect that
this provision will have any impact on its ability to obtain dividends from its
insured depository institution subsidiaries.
As a result of these legal restrictions, there can be no assurance that
dividends would be paid in the future by F&M's bank subsidiaries. The final
determination of the timing, amount and payment of dividends on F&M common stock
is at the discretion of F&M's Board of Directors and will depend upon the
earnings of F&M and its subsidiaries, principally its subsidiary banks, the
financial condition of F&M and other factors, including general economic
conditions and applicable governmental regulations and policies.
31
SECURITY BANK CORPORATION
General
Financial and other information relating to Security is included in
Security's Annual Report on Form 10-KSB for the year ended December 31, 1997,
and its Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998, copies of which are attached as Appendices IV and V. The audited financial
statements of Security as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 are included in Security's
Annual Report on Form 10-KSB. See "Where You Can Find More Information."
History and Business
Security was organized in 1986. As of September 30, 1998, Security had
total assets of $60.4 million, total deposits of $51.4 million, and total
shareholder's equity of $8.1 million.
Security is a locally oriented community bank which seeks to serve the
needs of small and medium size businesses, professionals and consumers in the
City of Manassas and the surrounding area, which area constitutes Security's
primary service area. Security offers a wide range of commercial banking
services to businesses and professionals in its service area, as well as
comprehensive deposit and lending services for consumers. Security's deposits
are insured to the fullest extent provided by law by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation.
Security operates two branch locations in Manassas, Virginia. Each branch
has an automated teller machine (ATM). At September 30, 1998, Security employed
23 full-time and 6 part-time employees.
Competition
In attracting deposits and making loans, Security encounters competition
from other institutions, including larger commercial banking organizations,
savings banks, credit unions, other financial institutions and non-bank
financial service companies serving Security's service area. Competitors include
major financial companies whose substantially greater resources may afford them
a marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. Because of the
deregulation of the financial service industry and the absence of interest rate
controls on deposits, Security anticipates that it will face continuing
competition from all of these institutions in the future. Additionally, as a
result of state and federal legislation regarding reduced restrictions on
interstate banking, Security has faced additional competition from institutions
outside Virginia which have taken advantage of such legislation to acquire or
establish banks or branches in Virginia. Additional changes in the financial
services industry, including rapid technology changes, may act as a catalyst for
further basic structural change within the financial services industry and may
result in additional competition.
Security Ownership of Management
The following table provides information as of December 31, 1998 regarding
the number of shares of Security common stock beneficially owned by (i) all
directors and executive officers of Security, (ii) those persons or groups that
own five percent or more of the outstanding shares of Security common stock, and
(iii) all directors and executive officers as a group. For the purposes of this
table, beneficial ownership has been determined in accordance with the
provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
under which, in general, a person is deemed to be a beneficial owner of a
security if he has or shares the power to vote or direct the voting of the
security or the power to dispose or direct disposition of the security, or if he
has the right to acquire beneficial ownership of the security within 60 days.
32
Common Stock
Name Beneficially Owned Percent of Class
- ------ ------------------ ----------------
Director
John T. DeBell, Sr...... 11,832 (1) 1.20%
John O. Gregory......... 36,060 (2) 3.66
Michael C. Martin....... 9,417 (3) 0.96
Danny R. May............ 33,305 (4) 3.34
Harry J. Parrish II..... 14,580 (5) 1.48
Richard J. Ratcliffe.... 10,059 (6) 1.02
Danny G. Snow........... 133,486 (7) 13.56
Kenneth B. Swenson...... 270,128 (8) 1.18
All executive officers and
directors as a group
(10 persons).......... 270,128 25.77
Robert H. Digges
1700 N. Albemarle Street
McLean, Virginia 22101.. 54,934 (9) 5.73
Financial Institution
Partners, L.P., and
Hovde Capital, Inc.
1629 Colonial Parkway
Inverness, Illinois 60067 68,780 7.17
- ------------------------
(1) Includes 2,206 shares held by Mr. DeBell in a self-directed IRA, 6,000
vested option shares, and 2,240 shares held by Bengtson, DeBell and Elkin
for which Mr. DeBell exercises voting and investment power. Does not
include 976 shares held by Mr. DeBell's spouse and 2,679 shares held by
Mr. DeBell's spouse in a self-directed IRA.
(2) Includes 22,089 shares held jointly by Mr. Gregory and his spouse, 3,805
shares held by Mr. Gregory in a self-directed IRA, and 6,000 vested option
shares. Does not include 3,600 shares held by Mr. Gregory's spouse.
(3) Includes 332 shares held as custodian for a minor child, 1,693 shares
held by Mr. Martin in a self-directed IRA, and 6,000 vested option shares.
(4) Includes 12,580 shares held in Mr. May's self-directed IRA and 20,000
vested option shares.
(5) Includes 2,160 shares held as custodian for a minor child, 6,000 vested
option shares, and 420 shares held by a minor child. Does not include
1,440 shares held by Mr. Parrish's spouse.
(6) Includes 3,000 shares held jointly by Mr. Ratcliffe and his spouse, 300
shares held jointly by Mr. Ratcliffe and Ann R. Harrover, 134 shares held
as custodian for a minor child, 625 shares held in Mr. Ratcliffe's
self-directed IRA, and 6,000 vested option shares.
(7) Includes 38,667 shares held in Mr. Snow's self-directed IRA, 6,000 vested
option shares, 2,500 shares held jointly by Mr. Snow and Lynne Snow,
20,835 shares held by Ice Components, Inc. for which Mr. Snow exercises
voting and investment power.
(8) Includes 4,225 shares held jointly by Mr. Swenson and his spouse and 6,000
vested option shares.
(9) All shares are held in Mr. Digges' Keough account. Does not include 10,000
shares held by Mr. Digges' spouse.
BUSINESS OF F&M
History and Business
F&M was formed in 1969 to serve as the parent holding company of its then
sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired eighteen banks, which expanded its market area
and increased market share in Virginia and West Virginia. F&M has nine
subsidiary banks that operate 120 banking offices offering a full range of
banking services, principally to individuals and small and middle-market
businesses in the Shenandoah Valley, central and northern Virginia, Southside
Virginia, the eastern panhandle of West Virginia, and the Maryland portion of
the Washington, D.C. metropolitan area.
33
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of the subsidiary banks. F&M has consolidated the operations of the trust
departments of its subsidiary banks in Virginia in F&M Trust Company. F&M also
operates Big Apple Mortgage which engages in residential mortgage origination
and servicing in the Shenandoah Valley and the eastern panhandle of West
Virginia.
F&M has maintained its community orientation by allowing its subsidiary
banks latitude to tailor products and services to meet community and customer
needs. While F&M has preserved the autonomy of its subsidiary banks, it has
established system-wide policies governing, among other things, lending
practices, credit analysis and approval procedures, as well as guidelines for
deposit pricing and investment portfolio management. In addition, F&M has
established a centralized loan review team that regularly performs a detailed,
on-site review and analysis of each subsidiary bank's loan portfolio to ensure
the consistent application of credit policies and procedures system-wide. One or
more senior holding company officers serve on the board of directors of each
subsidiary bank to monitor operations and to serve as a liaison to F&M.
F&M currently operates in seven market regions: the Shenandoah Valley and
Loudoun County; the eastern panhandle of West Virginia;
Charlottesville/Albemarle County and surrounding areas; Greenville County in
southside Virginia; suburban Richmond, primarily Henrico and Chesterfield
Counties; the northern Virginia area that includes the City of Alexandria, the
eastern portions of Fairfax and Prince William Counties, Loudoun County; the
Warrenton and surrounding Fauquier County area; and Montgomery and Prince
George's Counties in Maryland of the Washington, D.C. suburban area.
At September 30, 1998, F&M had total consolidated assets of approximately
$2.8 billion, total consolidated deposits through its banking subsidiaries of
approximately $2.3 billion and consolidated shareholders' equity of
approximately $281.4 million.
F&M's Acquisition Program
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since 1988, F&M has acquired
approximately $1.4 billion in assets and approximately $1.2 billion in deposits
through fifteen bank acquisitions. Management believes there are additional
opportunities to acquire financial institutions or to acquire assets and
deposits that will allow F&M to enter new markets or increase market share in
existing markets. Management intends to pursue acquisition opportunities in
strategic markets where its managerial, operational and capital resources will
enhance the performance of acquired institutions and may, after the date of this
proxy statement/prospectus, enter into agreements to acquire one or more
financial institutions. There can be no assurance that F&M will be able to
successfully effect any additional acquisition activity, or that any such
acquisition activity will have a positive effect on the value of shares of F&M
common stock.
For additional information about F&M's business, see "Where You Can Find
More Information" on page ____.
COMPARATIVE RIGHTS OF SHAREHOLDERS
General
F&M and Security are corporations subject to the provisions of the
Virginia Stock Corporation Act (the "Virginia SCA"). Your rights as a
shareholder of Security are governed by Security's articles of incorporation and
bylaws and by the Virginia SCA. Upon consummation of the merger, you will become
a shareholder of F&M, and as such your shareholder rights will then be governed
by the articles of incorporation and bylaws of F&M and by the Virginia SCA.
34
The following is a summary of the material differences in the rights of
shareholders of Security and F&M. This summary is qualified in its entirety by
reference to the articles of incorporation and bylaws of F&M and Security and to
the Virginia SCA.
Authorized Capital
F&M. F&M is authorized to issue 30,000,000 shares of common stock, par
value $2.00 per share, of which 21,871,674 shares were issued and outstanding as
of December 31, 1998, and 5,000,000 shares of serial preferred stock, without
par value, of which no shares were issued and outstanding as of December 31,
1998. F&M's articles of incorporation authorize the F&M board, without
shareholder approval, to fix the preferences, limitations and relative rights of
the preferred stock and to establish series of such preferred stock and
determine the variations between each series. If any shares of preferred stock
are issued, the rights of holders of F&M common stock would be subject to the
rights and preferences conferred to holders of such preferred stock. See
"Description of F&M Capital Stock" on page ____ for additional information.
Security. Security is authorized to issue 3,000,000 shares of Security
common stock, par value $5.00 per share, of which 978,420 shares were issued and
outstanding as of December 31, 1998. Security does not have an authorized class
of preferred stock.
Dividend Rights
F&M. The holders of F&M common stock are entitled to share ratably in
dividends when and as declared by the F&M board of directors out of legally
available funds. One of the principal sources of income to F&M is dividends from
its subsidiary banks. For a description of certain restrictions on the payment
of dividends by banks, see "Market Prices and Dividends" on page ___. F&M's
articles of incorporation permit the F&M Board to issue preferred stock with
terms set by the F&M Board, which terms may include the right to receive
dividends ahead of the holders of F&M common stock. No shares of preferred stock
are presently outstanding.
Security. The holders of Security common stock also are entitled to share
ratably in dividends when and as declared by the Security board of directors out
of legally available funds. For a description of certain restrictions on the
payment of dividends by banks, see "Market Prices and Dividends" on page ____.
Voting Rights
The holders of both F&M and Security common stock have one vote for each
share held on any matter presented for consideration at a shareholder meeting.
Neither the holders of F&M nor Security common stock are entitled to cumulative
voting in the election of directors.
Directors and Classes of Directors
F&M. All of F&M's directors are elected each year. F&M's articles of
incorporation do not include a provision relating to the removal of directors.
Accordingly, the removal of F&M directors is governed by the Virginia SCA which
provides that shareholders may remove directors with or without cause if, in the
case of F&M, the number of votes cast to remove him constitutes a majority of
the outstanding shares of F&M common stock.
35
Security. All of Security's directors are elected each year. Pursuant to
Security's bylaws, Security's directors may be removed with or without cause by
a majority vote of the Security shareholders, or by a unanimous vote of the
remaining directors.
Anti-Takeover Provisions
Certain provisions of the Virginia SCA and the articles of incorporation
and bylaws of F&M may discourage an attempt to acquire control of F&M that a
majority of F&M's shareholders determined was in their best interests. These
provisions also may render the removal of one or all directors more difficult or
deter or delay corporate changes of control that the F&M board did not approve.
Authorized Preferred Stock. The articles of incorporation of F&M authorize
the issuance of preferred stock. The F&M board may, subject to applicable law
and the rules of the NYSE, authorize the issuance of preferred stock at such
times, for such purposes and for such consideration as it may deem advisable
without further shareholder approval. The issuance of preferred stock under
certain circumstances may have the effect of discouraging an attempt by a third
party to acquire control of F&M by, for example, authorizing the issuance of a
series of preferred stock with rights and preferences designed to impede the
proposed transaction.
Supermajority Voting Provisions. The Virginia SCA provides that, unless a
corporation's articles of incorporation provide for a higher or lower vote,
certain significant corporate actions must be approved by the affirmative vote
of the holders of more than two-thirds of the votes entitled to be cast on the
matter. Corporate actions requiring a two-thirds vote include amendments to a
corporation's articles of incorporation, adoption of plans of merger or
exchange, sales of all or substantially all of a corporation's assets other than
in the ordinary course of business and adoption of plans of dissolution
("Fundamental Actions"). The Virginia SCA provides that a corporation's articles
may either increase the vote required to approve Fundamental Actions or may
decrease the required vote to not less than a majority of the votes entitled to
be cast.
The articles of incorporation of F&M provide that a Fundamental Action
shall be approved by a vote of a majority of all votes entitled to be cast on
such transactions by each voting group entitled to vote on the transaction,
provided that the transaction has been approved and recommended by at least
two-thirds of the directors in office at the time of such approval and
recommendation. If the transaction is not so approved and recommended, then the
transaction shall be approved by the vote of 80% or more of all votes entitled
to be cast on such transactions by each voting group entitled to vote on the
transaction.
The provisions of the articles of incorporation of F&M and the Virginia
SCA could tend to make the acquisition of F&M more difficult to accomplish
without the cooperation or favorable recommendation of the F&M board.
Shareholder Meetings. Shareholders of F&M may not request that a special
meeting of shareholders be called, while shareholders owning 25% or more of the
issued and outstanding shares of Security may call a special meeting of
shareholders.
Virginia Anti-Takeover Statutes. Virginia has two anti-takeover
statutes in force, the Affiliated Transaction Statute and the Control Share
Acquisitions Statute.
Affiliated Transactions. The Virginia SCA contains provisions governing
"affiliated transactions." These include various transactions such as mergers,
share exchanges, sales, leases, or other dispositions of material assets,
issuances of securities, dissolutions, and similar transactions with an
"interested shareholder." An interested shareholder is generally the beneficial
owner of more than 10% of any class of a corporation's outstanding voting
36
shares. During the three years following the date a shareholder becomes an
interested shareholder, any affiliated transaction with the interested
shareholder must be approved by both a majority of the "disinterested directors"
(those directors who were directors before the interested shareholder became an
interested shareholder or who were recommended for election by a majority of
disinterested directors) and by the affirmative vote of the holders of
two-thirds of the corporation's voting shares other than shares beneficially
owned by the interested shareholder. The foregoing requirements do not apply to
affiliated transactions if, among other things, a majority of the disinterested
directors approve the interested shareholder's acquisition of voting shares
making such a person an interested shareholder before such acquisition.
Beginning three years after the shareholder becomes an interested shareholder,
the corporation may engage in an affiliated transaction with the interested
shareholder if:
o the transaction is approved by the holders of two-thirds of the corporation's
voting shares, other than shares beneficially owned by the interested
shareholder,
o the affiliated transaction has been approved by a majority of the
disinterested directors, or
o subject to certain additional requirements, in the affiliated transaction the
holders of each class or series of voting shares will receive consideration
meeting specified fair price and other requirements designed to ensure that
all shareholders receive fair and equivalent consideration, regardless of
when they tendered their shares.
Control Share Acquisitions. Under the Virginia SCA's control share
acquisitions law, voting rights of shares of stock of a Virginia corporation
acquired by an acquiring person or other entity at ownership levels of 20%, 33
1/3%, and 50% of the outstanding shares may, under certain circumstances, be
denied. The voting rights may be denied:
o unless conferred by a special shareholder vote of a majority of the
outstanding shares entitled to vote for directors, other than shares held by
the acquiring person and officers and directors of the corporation, or
o among other exceptions, such acquisition of shares is made pursuant to a
merger agreement with the corporation or the corporation's articles of
incorporation or by-laws permit the acquisition of such shares before the
acquiring person's acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws,
the statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than 50% of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value."
The provisions of the Affiliated Transactions Statute and the Control
Share Acquisition Statute are only applicable to public corporations that have
more than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but
F&M has not done so.
Director and Officer Exculpation
The Virginia SCA provides that in any proceeding brought by or in the
right of a corporation or brought by or on behalf of shareholders of the
corporation, the damages assessed against an officer or director arising out of
37
a single transaction, occurrence or course of conduct may not exceed the lesser
of (i) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
as a limitation on or elimination of the liability of the officer or director,
or (ii) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
The articles of incorporation of F&M provide that to the full extent that
the Virginia SCA permits the limitation or elimination of the liability of
directors or officers, a director or officer of F&M shall not be liable to F&M
or its shareholders for monetary damages in excess of one dollar ($1.00). There
is no similar provision in the articles of incorporation of Security.
Indemnification
The articles of incorporation of F&M provide that to the full extent
permitted by the Virginia SCA and any other applicable law, F&M is required to
indemnify a director or officer of F&M who is or was a party to any proceeding
by reason of the fact that he is or was such a director or officer or is or was
serving at the request of the corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. The F&M board of directors is
empowered, by majority vote of a quorum of disinterested directors, to contract
in advance to indemnify any director or officer.
The articles of incorporation of Security do not include a provision with
respect to the indemnification of officers and directors. However, as permitted
by Security's bylaws, each director of Security has entered into an
indemnification agreement with Security whereby Security is required to
indemnify a director who is, or becomes a party, or is threatened to be made a
party to, any legal proceeding by reason of the fact the he is or was a director
of Security.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue 30,000,000 shares of common stock, par value
$2.00 per share, and 5,000,000 shares of serial preferred stock, without par
value, which may be issued in series with such powers, designations, and rights
as may be established from time to time by the Board of Directors. On December
31, 1998, F&M had issued and outstanding 21,871,674 shares of F&M common stock
held by 8,190 shareholders of record. All outstanding shares of F&M common stock
are fully paid and nonassessable. No shares of preferred stock have been issued.
Common Stock
Holders of shares of F&M common stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
therefor. F&M's ability to pay dividends is dependent upon its earnings and
financial condition and certain legal requirements. Specifically, the
Federal Reserve has stated that bank holding companies should not pay dividends
except out of current earnings and unless the prospective rate of earnings
retention by the company appears consistent with its capital needs, asset
quality and overall financial condition. In addition, Virginia law precludes any
distribution to shareholders if, after giving it effect, (a) F&M would not be
able to pay its debts as they become due in the usual course of business; or (b)
F&M's total assets would be less than the sum of its total liabilities plus the
amount that would be needed, if F&M were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
38
distribution. Upon the liquidation, dissolution or winding up of F&M, whether
voluntary or involuntary, holders of F&M common stock are entitled to share
ratably, after satisfaction in full of all liabilities, in all remaining assets
of F&M available for distribution. The dividend and liquidation rights of F&M
common stock are subject to the rights of any preferred stock that may be issued
and outstanding.
Holders of F&M common stock are entitled to one vote per share on all
matters submitted to shareholders. There are no cumulative voting rights in the
election of directors or preemptive rights to purchase additional shares of any
class of F&M's capital stock. Holders of F&M common stock have no conversion or
redemption rights. The shares of F&M common stock presently outstanding are, and
those shares of F&M common stock to be issued in connection with the merger will
be when issued, fully paid and nonassessable. F&M common stock is listed and
traded on the NYSE.
Preferred Stock
The board of directors of F&M is empowered to authorize the issuance, in
one or more series, of shares of preferred stock at such times, for such
purposes and for such consideration as it may deem advisable without shareholder
approval. The F&M board is also authorized to fix the designations, voting,
conversion, preference and other relative rights, qualifications and limitations
of any such series of preferred stock.
The F&M board of directors, without shareholder approval, may authorize
the issuance of one or more series of preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of F&M
common stock and, under certain circumstances, discourage an attempt by others
to gain control of F&M.
The creation and issuance of any series of preferred stock, and the
relative rights, designations and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
F&M, then existing market conditions and other factors that, in the judgment of
the F&M board, might warrant the issuance of preferred stock.
OTHER MATTERS
The Security board does not intend to bring any matter before the special
meeting other than as specifically set forth in the notice of special meeting of
shareholders, nor does it know of any matter to be brought before the special
meeting by others. If, however, any other matters properly come before the
special meeting, it is the intention of each of the proxyholders to vote such
proxy in accordance with the decision of a majority of the Security board of
directors.
EXPERTS
The consolidated financial statements of F&M incorporated in this proxy
statement/prospectus by reference to F&M's Annual Report on Form 10-K for the
year ended December 31, 1997 have been so incorporated in reliance upon the
report of Yount, Hyde & Barbour, P.C., independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as experts
in auditing and accounting.
The financial statements of Security incorporated in this proxy
statement/prospectus by reference to Security's Annual Report on Form 10-KSB for
the year ended December 31, 1997, and included herein as Appendix IV has been so
incorporated in reliance upon the report of Yount, Hyde & Barbour, P.C.,
independent certified public accountants, incorporated by reference herein, and
upon the authority of such firm as experts in auditing and accounting.
39
LEGAL OPINIONS
The validity of the shares of F&M common stock offered hereby is being
passed upon for F&M by LeClair Ryan, A Professional Corporation, Richmond,
Virginia. LeClair Ryan will deliver an opinion to F&M and Security concerning
certain federal income tax consequences of the merger. See "The Merger --
Certain Federal Income Tax Consequences" on page ___.
Certain matters relating to the merger will be passed upon for Security by
Kaufman & Canoles, Norfolk, Virginia.
WHERE YOU CAN FIND MORE INFORMATION
F&M and Security file reports, proxy statements and other information with
the Securities and Exchange Commission in the case of F&M and the Board of
Governors of the Federal Reserve System in the case of Security. You may read
and copy any reports, statements or other information that F&M files at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. The information on F&M is also
available from the Commission over the Internet at http://www.sec.gov. In
addition, F&M common stock is listed and traded on the New York Stock Exchange.
Reports, proxy statements and other information about F&M may be inspected at
the offices of the NYSE, 20 Broad Street, New York, New York 10005. You may read
and copy reports, proxy statements and other information concerning Security at
the Federal Reserve, Division of Banking Supervision and Regulation, 20th Street
and Constitution, Washington, D.C. 20551. The information may also be obtained
from the Federal Reserve by writing to the referenced address or by calling
(202) 452-3244.
F&M has filed a Registration Statement on Form S-4 to register with the
Commission the shares of F&M common stock to be issued to you in the merger.
This document is a part of the Registration Statement and constitutes a
prospectus of F&M and a proxy statement of Security for the special meeting.
As allowed by Commission rules, this document does not contain all the
information that shareholders can find in the Registration Statement or the
exhibits to the Registration Statement.
The Commission permits F&M and Security to "incorporate by reference"
information into this proxy statement/prospectus, which means that the companies
can disclose important information to you by referring you to another document
filed separately with the Commission and the Federal Reserve. The information
incorporated by reference is deemed to be a part of this proxy
statement/prospectus, except for any information superseded by information
contained directly in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that F&M and Security have previously filed with the Commission and the Federal
Reserve. These documents contain important business information about the
companies and their financial condition.
F&M's Commission Filings (File No. 0-05929) Period
Annual Report on Form 10-K......................Year ended December 31, 1997
Quarterly Reports on Form 10-Q..................Quarters ended September 30,
1998, June 30, 1998, and
March 31, 1998
Current Reports on Form 8-K.....................Dated November 9, 1998, June 1,
1998 and April 3, 1998 (two
reports)
40
Security's Federal Reserve Filings Period
Annual Report on Form 10-KSB....................Year ended December 31, 1997
Quarterly Reports on Form 10-QSB................Quarters ended September 30,
1998, June 30, 1998 and
March 31, 1998
Current Report on Form 8-K......................Dated November 24, 1998
F&M and Security incorporate by reference additional documents that either
may file with the Commission or the Federal Reserve between the date of this
document and the date of the special meeting. These include periodic reports,
such as annual reports, quarterly reports and current reports, as well as proxy
statements.
F&M has supplied all information contained or incorporated by reference in
this document relating to F&M and Security has supplied all such information
relating to Security.
Security may have sent you some of the documents incorporated by reference
by Security, but you can obtain any of them through Security or the Federal
Reserve. Documents incorporated by reference by F&M are available through the
Commission or the Commission's Internet site stated above or from F&M without
charge, excluding all exhibits unless specifically incorporated by reference as
an exhibit to this document. Shareholders of F&M or Security may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from F&M or Security at the following addresses:
F&M NATIONAL CORPORATION
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
SECURITY BANK CORPORATION
8780 Centreville Road
Manassas, Virginia 20110
Telephone: (703) 361-1986
Attention: Assistant Secretary
If you would like to request documents from either F&M or Security, please
do so at least five business days before the date of the special meeting in
order to receive timely delivery of such documents prior to the special meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting. F&M and
Security have not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
____________, 1999. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to shareholders nor the issuance of F&M common stock in
the merger creates any implication to the contrary.
41
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
AND
PLAN OF MERGER
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 25, 1998, by and among F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), F&M BANK-NORTHERN VIRGINIA, a wholly-owned
Virginia banking subsidiary of F&M ("F&M Bank-Northern Virginia"), and SECURITY
BANK CORPORATION, a Virginia banking corporation ("SBC").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and SBC have approved
the affiliation of their companies through the merger of SBC with and into F&M
Bank-Northern Virginia, pursuant to and subject to the terms and conditions of
this Agreement and the Plan of Merger in the form attached hereto as Exhibit A
(the "Plan of Merger"); and
WHEREAS, the parties desire to provide for certain conditions,
representations, warranties and agreements in connection with the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements set forth herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE 1
THE MERGER AND RELATED MATTERS
1.1 The Merger
Subject to the terms and conditions of this Agreement, at the Effective
Date as defined in Section 1.5 hereof, SBC shall be merged with and into F&M
Bank-Northern Virginia pursuant to the Plan of Merger attached hereto as Exhibit
A and made a part hereof (the "Merger"). The separate corporate existence of SBC
shall thereupon cease, and F&M Bank-Northern Virginia will be the surviving
corporation in the Merger and its name shall remain F&M Bank-Northern Virginia
(F&M Bank-Northern Virginia as existing on and after the Effective Date is
sometimes referred to as the "Continuing Bank"). From and after the Effective
Date, the Merger shall have the effect set forth in Section 13.1-721 of the
Virginia Stock Corporation Act (the "VSCA").
1.2 Conversion of SBC Stock
(a) At the Effective Date, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $5.00
per share, of SBC ("SBC Common Stock") issued and outstanding immediately prior
to the Effective Date shall cease to be outstanding and shall be converted into
and exchanged for shares of common stock, par value $2.00 per share, of F&M
("F&M Common Stock"), whose aggregate market value equals $17.25, plus cash for
fractional shares, pursuant to the terms and conditions set forth in the Plan of
Merger (the "Exchange Ratio").
(b) In the event F&M changes (or establishes a record date for changing)
the number of shares of F&M Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding F&M Common Stock and the
record date therefor shall be prior to the Effective Date, appropriate and
proportional adjustments will be made to the Exchange Ratio.
1.3 Board of Directors of the Continuing Bank; Officers and Employees
(a) At the Effective Date, the Board of Directors of the Continuing Bank
shall consist of all the current directors of F&M Bank-Northern Virginia and
four of the current directors of SBC designated by SBC and approved by F&M. All
current directors of SBC who are not appointed to the Board of Directors of the
Continuing Bank will be offered a position on the Continuing Bank's Advisory
Board.
(b) The officers and employees of SBC will be offered positions with the
Continuing Bank at salaries not less than the salaries such persons shall have
with SBC immediately prior to the Effective Date.
1.4 SBC Stock Options
From and after the Effective Date, all employee and director stock options
to purchase shares of SBC Common Stock (each, a "SBC Stock Option"), that are
then outstanding and unexercised, shall be converted into and become options to
purchase shares of F&M Common Stock, and F&M shall assume each such SBC Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that from and after the Effective Date (i) each
such SBC Stock Option assumed by F&M may be exercised solely to purchase shares
of F&M Common Stock, (ii) the number of shares of F&M Common Stock purchasable
upon exercise of such SBC Stock Option shall be equal to the number of shares of
SBC Common Stock that were purchasable under such SBC Stock Option immediately
prior to the Effective Date multiplied by the Exchange Ratio and rounding down
to the nearest whole share, with cash being paid for any fractional share
interest that otherwise would be purchasable, and (iii) the per share exercise
price under each such SBC Stock Option shall be adjusted by dividing the per
share exercise price of each such SBC Stock Option by the Exchange Ratio, and
rounding down to the nearest cent. The terms of each SBC Stock Option shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction with respect to F&M Common Stock on or subsequent to the Effective
Date.
1.5 Closing; The Effective Date
The Merger shall become effective on the date and at the time shown on the
Certificate of Merger issued by the Virginia State Corporation Commission
effecting the Merger (the "Effective Date"). Subject to the satisfaction or
waiver of the conditions set forth in Article V, the parties shall use their
reasonable best efforts to cause the Effective Date to occur on the first day of
the month following the month in which the conditions set forth in Article V
have been satisfied or waived in accordance with the terms of this Agreement or
on such other date as the parties may agree in writing. All documents required
by this Agreement to be delivered at or prior to the Effective Date will
exchanged by the parties at the closing of the Merger (the "Merger Closing"),
which shall be held on or before the Effective Date. At or after the Merger
Closing, F&M, F&M Bank-Northern Virginia and SBC shall execute and deliver to
the Virginia State Corporation Commission Articles of Merger containing the Plan
of Merger.
1.6 Definitions
Any term defined in this Agreement and the Plan of Merger shall have the
meaning ascribed to it for purposes of this Agreement. In addition:
(a) The term "Knowledge" means the knowledge, after due inquiry, of any
"Executive Officer" of such party, as such term is defined in Regulation O (12
C.F.R. 215).
(b) The term "Material Adverse Effect" means, with respect to a party, any
effect that (i) has or is reasonably likely to have a material and adverse
effect upon the financial position, results of operations or business of the
party and its subsidiaries, taken as a whole, or (ii) would materially impair
the party's ability to perform its obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the Merger;
provided that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, or (b) changes in
generally accepted accounting principles or regulatory requirements applicable
to financial institutions.
(c) The term "Previously Disclosed" shall mean information set forth in a
schedule (a "Disclosure Schedule", which shall be arranged in sections
corresponding to the sections of this Agreement) from one party to the other
party delivered and dated on the same date hereof, setting forth, among other
things, items the disclosure of which is necessary or appropriate in relation to
any or all of such party's representations and warranties. Any matter included,
whether aggregated or not, in the SBC Financial Statements or the F&M Financial
Statements, as the case may be, shall be deemed to be Previously Disclosed.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SBC
SBC represents and warrants to F&M as follows:
2.1 Organization, Standing and Power of SBC
SBC is a Virginia chartered banking corporation duly organized, validly
existing and in good standing under the laws of Virginia. SBC has the corporate
power and authority to carry on its business in Virginia as now conducted and to
own and operate its assets, properties and business; and SBC has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and the Stock Option Agreement dated November 10, 1998, by and between
SBC and F&M (the "Option Agreement"), and to consummate the transactions
contemplated hereby and thereby (subject to receipt of the approval of the
shareholders of SBC of this Agreement and the Plan of Merger).
2.2 Authorized and Effective Agreements
(a) Subject to receipt of the approval of the shareholders of SBC of this
Agreement and the Plan of Merger, this Agreement, the Plan of Merger and the
Option Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action on the part of SBC on or prior to
the date hereof. Subject also to receipt of the approval of the shareholders of
SBC of this Agreement and the Plan of Merger, this Agreement, the Plan of Merger
and the Option Agreement are valid and legally binding obligations of SBC,
enforceable against SBC in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws affecting the enforcement
of rights of creditors or by general principles of equity).
(b) Neither the execution and delivery of this Agreement, the Plan of
Merger and the Option Agreement, nor the consummation of the transactions
contemplated herein or therein, nor compliance by SBC with any of the provisions
hereof or thereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of SBC; (ii) except as Previously
Disclosed in its Disclosure Schedule, constitute or result in the breach of any
term, condition or provision of, or constitute a default under, or give rise to
any right of termination, cancellation or acceleration with respect to, or
result in the creation of any lien, charge or encumbrance upon, any property or
asset of SBC pursuant to any (A) note, bond, mortgage, indenture, or (B)
material license, agreement or other instrument or obligation; or (iii) subject
to the receipt of all required regulatory and shareholder approvals, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to SBC.
2.3 Capital Structure
The authorized capital stock of SBC consists of 3,000,000 shares of common
stock, par value $5.00 per share, of which 967,236 shares were issued and
outstanding as of November 20, 1998. All outstanding shares of SBC Common Stock
have been duly authorized and validly issued, are fully paid and nonassessable
and have not been issued in violation of the preemptive rights of any person. As
of November 20, 1998, there are options held by employees and directors of SBC
that represent rights to purchase a total of 77,100 shares of SBC Common Stock
and there are outstanding warrants held by certain individuals that represent
rights to purchase a total of 12,241 shares of SBC Common Stock.
2.4 Rights
As of the date of this Agreement, there are not any shares of capital
stock of SBC reserved for issuance, or any outstanding or authorized options,
warrants, rights, agreements, convertible or exchangeable securities, or other
commitments, contingent or otherwise, relating to its capital stock pursuant to
which SBC is or may become obligated to issue shares of capital stock or any
securities convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of its capital stock (collectively, "Rights"), except
as contemplated by the Option Agreement and as Previously Disclosed in its
Disclosure Schedule (which shall include copies of the stock option plans and
individual stock option agreements pursuant to which employees and directors of
SBC may exercise stock options and a list of those persons that hold outstanding
warrants to purchase SBC Common Stock).
2.5 Financial Statements; Books and Records; Minute Books
The SBC Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the financial position of SBC as of the
dates indicated and the results of operations, changes in stockholders' equity
and statements of cash flows for the periods or as of the dates set forth
therein (subject, in the case of unaudited interim statements, to normal
recurring audit adjustments that are not material in amount or effect) in
conformity with generally accepted accounting principles applicable to financial
institutions applied on a consistent basis. The books and records of SBC fairly
reflect in all material respects the transactions to which it is a party or by
which its properties are subject or bound. Such books and records have been
properly kept and maintained and are in compliance in all material respects with
all applicable legal and accounting requirements. The minute books of SBC
contain accurate records of all corporate actions of its shareholders and Board
of Directors (including committees of its Board of Directors). The SBC Financial
Statements shall mean (i) the statements of financial condition of SBC as of
December 31, 1997 and 1996 and the related statements of income, stockholders'
equity and cash flows for each of the three years ended December 31, 1997, 1996
and 1995 (including related notes and schedules, if any) and (ii) the balance
sheets of SBC and related statements of income, stockholders' equity and cash
flows (including related notes and schedules, if any) with respect to quarterly
periods ended subsequent to December 31, 1997.
2.6 Absence of Material Changes and Events
Since September 30, 1998 and except as Previously Disclosed in its
Disclosure Schedule, there has not been any change in the financial condition or
results of operations of SBC which, individually or in the aggregate, has had or
is reasonably likely to have a Material Adverse Effect. Notwithstanding the
foregoing, any adjustments after the date hereof to the allowance for loan
losses of SBC made at the request of F&M in order to bring the allowance for
loan losses of SBC into compliance with F&M's loan policies shall not be deemed
a material change or event.
2.7 Absence of Undisclosed Liabilities
SBC has not incurred any liability (contingent or otherwise) that is
material to SBC that, when combined with all similar liabilities, would be
material to SBC, except as Previously Disclosed in its Disclosure Schedule or as
disclosed in the SBC Financial Statements and except for liabilities incurred in
the ordinary course of business consistent with past practice since the date of
the most recent SBC Financial Statements.
2.8 Legal Proceedings; Compliance with Laws
Except as Previously Disclosed in its Disclosure Schedule, there are no
actions, suits or proceedings instituted or pending or, to the Knowledge of SBC,
threatened against SBC or against any property, asset, interest or right of SBC,
or against any officer, director or employee of SBC that would, if determined
adversely to SBC, have a Material Adverse Effect on SBC. To the Knowledge of
SBC, it has complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to its business (including
environmental laws, ordinances, requirements, regulations or orders).
2.9 Tax Matters
SBC has filed all federal, state and local tax returns and reports ("Tax
Returns") required to be filed, and all such Tax Returns were correct and
complete in all material respects. All Taxes (as defined below) owed by SBC have
been paid, are reflected as a liability in the SBC Financial Statements, or are
being contested in good faith and have been Previously Disclosed in its
Disclosure Schedule. Except as Previously Disclosed, no tax return or report of
SBC is under examination by any taxing authority or the subject of any
administrative or judicial proceeding, and no unpaid tax deficiency has been
asserted against SBC by any taxing authority. As used herein, "Taxes" mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, all income, gross receipts, sales, use, ad valorem, goods and
services, capital, transfer, franchise, profits, license, withholding, payroll,
employment, employer health, excise, estimated, severance, stamp, occupation,
property or other taxes, custom duties, fees, assessments or chargers of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority.
2.10 Property
Except as Previously Disclosed in its Disclosure Schedule or reserved
against in the SBC Financial Statements, SBC has good and marketable title free
and clear of all material liens, encumbrances, charges, defaults or equitable
interests to all of the properties and assets, real and personal, reflected in
the balance sheet included in the SBC Financial Statements as of September 30,
1998 or acquired after such date. To the Knowledge of SBC, all buildings, and
all fixtures, equipment, and other property and assets that are material to its
business, held under leases or subleases, are held under valid instruments
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws. To the Knowledge of
SBC, the buildings, structures, and appurtenances owned, leased, or occupied by
it are in good operating condition and in a state of good maintenance and repair
and comply with applicable zoning and other municipal laws and regulations, and
there are no latent defects therein.
2.11 Employee Benefit Plans
(a) SBC has Previously Disclosed in its Disclosure Schedule all employee
benefit plans and programs, including without limitation: (i) all retirement,
savings and other pension plans; (ii) all health, severance, insurance,
disability and other employee welfare plans; and (iii) all employment, vacation
and other similar plans, all bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other employee
benefit plans, programs or arrangements, and all employment or compensation
arrangements, in each case for the benefit of or relating to current and former
employees of SBC (collectively, the "SBC benefit Plans").
(b) None of the SBC Benefit Plans is a "multi-employer plan" as defined in
section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(c) Except as Previously Disclosed in its Disclosure Schedule, all SBC
Benefit Plans are in compliance in all material respects with applicable laws
and regulations, and SBC has administered the SBC Benefit Plans in accordance
with applicable laws and regulations in all material respects.
(d) Each SBC Benefit Plan that is intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code") has been
determined by the Internal Revenue Service to be so qualified, as reflected in a
current favorable determination letter.
(e) SBC has made available to F&M copies of all SBC Benefit Plans and,
where applicable, summary plan descriptions, and annual reports required to be
filed within the last three years pursuant to ERISA or the Code with respect to
the SBC Benefit Plans.
(f) To the Knowledge of SBC, it has not engaged in any prohibited
transactions, as defined in Code section 4975 or ERISA section 406, with respect
to any SBC Employee Benefit Plan that is a pension plan as defined in Section
3(2) of ERISA.
(g) There are no actions, suits, investigations or claims pending,
threatened or anticipated (other than routine claims for benefits) with respect
to any SBC Benefit Plans.
(h) No compensation or benefit that is or will be payable in connection
with the transactions contemplated by this Agreement will be characterized as an
"excess parachute payment" within the meaning of Code section 280G. Except as
Previously Disclosed in its Disclosure Schedule, no SBC Benefit Plan contains
any provision which would give rise to any severance, termination or other
payments or liabilities as a result of the transactions contemplated by this
Agreement.
(i) SBC has not established and does not maintain a welfare plan, as
defined in ERISA section 3(1), that provides benefits to an employee at the
expense of SBC after a termination of employment, except as required by the
Consolidated Omnibus Budget Reconciliation Act of 1985.
2.12 Insurance
SBC currently maintains insurance in amounts reasonably necessary for its
operations and, to the Knowledge of SBC, similar in scope and coverage to that
maintained by other entities similarly situated. Since January 1, 1998 and
except as Previously Disclosed, SBC has not received any notice of a premium
increase or cancellation or a failure to renew with respect to any insurance
policy or bond and, within the last three fiscal years, and SBC has not been
refused any insurance coverage sought or applied for, and SBC has no reason to
believe that existing insurance coverage cannot be renewed as and when the same
shall expire upon terms and conditions as favorable as those presently in
effect, other than possible increases in premiums or unavailability of coverage
that do not result from any extraordinary loss experience on the part of SBC.
2.13 Loans; Allowance for Loan Losses
(a) Except as Previously Disclosed in its Disclosure Schedule, to the
Knowledge of SBC each loan reflected as an asset in the SBC Financial Statements
(i) is evidenced by notes, agreements or evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, (iii)
is the legal, valid and binding obligation of the obligor and any guarantor,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, and no defense,
offset or counterclaim has been asserted with respect to any such loan which if
successful could have a Material Adverse Effect, and (iv) in all material
respects was made in accordance with SBC's standard loan policies.
(b) SBC has Previously Disclosed in its Disclosure Schedule the aggregate
amounts as of a recent date of all loans, losses, advances, credit enhancements,
other extensions of credit, commitments and interest-bearing assets of SBC that
have been classified by any bank examiner (whether regulatory or internal) as
"Other Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful,"
"Loss," "Classified" or words of similar import, and SBC shall promptly on a
periodic basis inform F&M of any such classification arrived at any time after
the date hereof.
(c) The real property classified as other real estate owned ("OREO")
included in non-performing assets is carried net of reserve at the lower of cost
or market value based on independent appraisals.
(d) The allowance for loan losses reflected on the statements of financial
condition included in the SBC Financial Statements, as of their respective
dates, is adequate in all material respects under the requirements of generally
accepted accounting principles and regulatory accounting principles to provide
for reasonably anticipated losses on outstanding loans; provided, however, the
parties acknowledge and agree that F&M may request SBC to make certain
adjustments after the date hereof to its allowance for loan losses in order to
bring the allowance for loan losses of SBC into compliance with F&M's loan
policies.
2.14 Environmental Matters
(a) Except as Previously Disclosed in its Disclosure Schedule, SBC is in
substantial compliance with all Environmental Laws (as defined below). SBC has
not received any communication alleging that SBC is not in such compliance and
there are no present circumstances that would prevent or interfere with the
continuation of such compliance.
(b) SBC has not received notice of pending, and is not aware of any
threatened, legal, administrative, arbitral or other proceedings, asserting
Environmental Claims (as defined below) or other claims, causes of action or
governmental investigations of any nature, seeking to impose, or that could
result in the imposition of, any material liability arising under any
Environmental Laws upon (i) SBC, (ii) any person or entity whose liability for
any Environmental Claim SBC has or may have retained either contractually or by
operation of law, (iii) any real or personal property owned or leased by SBC, or
any real or personal property which SBC has been, or is, judged to have managed
or to have supervised or to have participated in the management of, or (iv) any
real or personal property in which SBC holds a security interest securing a loan
recorded on the books of SBC. SBC is not subject to any agreement, order,
judgment, decree or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any such liability.
(c) With respect to all real and personal property owned or leased by SBC,
or all real and personal property which SBC has been, or is, judged to have
managed or to have supervised or to have participated in the management of, SBC
will promptly provide F&M with access to copies of any environmental audits,
analyses and surveys that have been prepared relating to such properties (a list
of which will be Previously Disclosed in its Disclosure Schedule). SBC is in
compliance in all material respects with all recommendations contained in any
such environmental audits, analyses and surveys.
(d) To the best of SBC's Knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents that could reasonably
form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Laws against SBC or against any person or entity
whose liability for any Environmental Claim SBC has or may have retained or
assumed either contractually or by operation of law.
(e) For purposes of this Agreement, the following terms shall have the
following meanings:
(1) "Environmental Claim" means any written notice from any
governmental authority or third party alleging potential liability
(including, without limitation, potential liability for investigatory
costs, clean-up, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) arising out of, based
upon, or resulting from the presence, or release into the environment, of
any Materials of Environmental Concern.
(2) "Environmental Laws" means all applicable federal, state and
local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate
to pollution or protection of human health or the environment.
(3) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products
and any other materials regulated under Environmental Laws.
2.15 Takeover Laws; No Dissenters Rights
SBC has taken all action necessary to exempt this Agreement, the Stock
Option Agreement and the transactions contemplated hereby and thereby from the
requirements of any "control share," "fair price," "affiliate transaction" or
other anti-takeover laws and regulations of any state, including without
limitation Sections 13.1-725 through 13.1-728 of the VSCA (because a majority of
SBC's disinterested directors approved such transactions for such purposes prior
to any "determination date" with respect to F&M) and Sections 13.1-728.1 through
13.1-728.9 of the VSCA. Holders of SBC Common Stock do not have dissenters'
rights in connection with the Merger.
2.16 Brokers
Other than the financial advisory services performed for SBC by Scott &
Stringfellow, Inc. (on terms disclosed to F&M), neither SBC nor any of its
subsidiaries, nor any of their respective officers, directors or employees has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with transactions contemplated by this
Agreement.
2.17 Securities Reports
SBC has filed with the Board of Governors of the Federal Reserve System
(the "FRB") all required forms, reports and documents required under the
Securities Exchange Act or 1934, as amended (the "Exchange Act"). SBC's Annual
Report on Form 10-KSB for the year ended December 31, 1997, and all other
reports, definitive proxy statements or documents filed or to be filed by it
subsequent to December 31, 1997 under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, in the form filed, or to be filed, with the FRB (i) complied or
will comply in all material respects as to form with the applicable requirements
under the Exchange Act and (ii) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.18 Statements True and Correct
When the Registration Statement on Form S-4 (the "Registration Statement")
to be filed by F&M with the SEC shall become effective, and at all times
subsequent thereto up to and including the SBC shareholders' meeting called to
vote upon the Merger, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein furnished
by SBC relating to SBC, (i) shall comply in all material respects with the
applicable provisions of the federal and state securities laws, and (ii) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF F&M
F&M represents and warrants to SBC as follows:
3.1 Organization, Standing and Power
F&M is a corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia. F&M has the corporate power and
authority to carry on its business as now conducted and to own and operate its
assets, properties and business; and F&M has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. F&M is duly registered as a
bank holding company under the Bank Holding Company Act of 1956.
3.2 Organization, Standing and Power of F&M Subsidiaries
Each subsidiary of F&M (the "F&M Subsidiaries" and, collectively with F&M,
the "F&M Companies") is a duly organized corporation, validly existing and in
good standing in their respective states of incorporation. Each F&M Subsidiary
(i) has full corporate power and authority to carry on its business as now
conducted and (ii) is duly qualified to do business in the states where its
ownership or leasing of property or the conduct of its business requires such
qualification and where the failure to so qualify would have a material adverse
effect on F&M on a consolidated basis. The outstanding shares of capital stock
of each of the F&M Subsidiaries are validly issued and outstanding, fully paid
and nonassessable and all such shares are directly or indirectly owned by F&M
free and clear of all liens, claims and encumbrances or preemptive rights of any
person.
3.3 Authorized and Effective Agreement
(a) This Agreement and the Plan of Merger and the transactions
contemplated hereby and thereby have been authorized by all necessary corporate
action on the part of F&M. This Agreement and the Plan of Merger are valid and
legally binding obligations of F&M, enforceable against F&M in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws affecting the enforcement of rights of creditors or by general
principles of equity).
(b) Neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by F&M with any of the
provisions hereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of F&M or any F&M Subsidiary; (ii)
constitute or result in the breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon, any property or asset of F&M or any F&M
Subsidiary pursuant to any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation that would have a Material Adverse Effect on
F&M, or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to F&M or any F&M Subsidiary.
3.4 Capital Structure
The authorized capital stock of F&M consists of: (i) 5,000,000 shares of
preferred stock, no par value per share, of which none are issued and
outstanding; and (ii) 30,000,000 shares of common stock, par value $2.00 per
share, of which 21,893,800 shares were issued and outstanding on September 30,
1998. All outstanding shares of F&M Common Stock have been duly issued and are
validly outstanding, fully paid and nonassessable and have not been issued in
violation of the preemptive rights of any person. The shares of F&M Common Stock
to be issued in exchange for shares of SBC Common Stock upon consummation of the
Merger will have been duly authorized and, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable,
will not be issued in violation of the preemptive rights of any person, and will
be duly registered under the applicable federal and state securities laws.
3.5 Financial Statements; Books and Records; Minute Books
The F&M Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of F&M
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods or as of the
dates set forth therein (subject, in the case of unaudited interim statements,
to normal recurring audit adjustments that are not material in amount or effect)
in conformity with generally accepted accounting principles applicable to
financial institutions applied on a consistent basis. The books and records of
the F&M Companies fairly reflect in all material respects the transactions to
which each company is a party or by which its properties are subject or bound.
Such books and records have been properly kept and maintained and are in
compliance in all material respects with all applicable legal and accounting
requirements. The minute books of the F&M Companies contain accurate records of
all corporate actions of their respective shareholders and Boards of Directors
(including committees of its Board of Directors). The F&M Financial Statements
shall mean (i) the consolidated balance sheets of F&M as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years ended December 31, 1997, 1996 and
1995 (including related notes and schedules, if any) and (ii) the consolidated
balance sheets of F&M and related consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) with respect to quarterly periods ended subsequent to December 31, 1997.
3.6 Absence of Material Changes or Events
Since September 30, 1998, there has not been any change in the financial
condition or results of operations of F&M or the F&M Subsidiaries which,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect.
3.7 Absence of Undisclosed Liabilities
Neither F&M nor any F&M Subsidiary has any liability (contingent or
otherwise) that is material to F&M on a consolidated basis or that, when
combined with all similar liabilities, would be material to F&M on a
consolidated basis, except as disclosed in the F&M Financial Statements and
except for liabilities incurred in the ordinary course of business consistent
with past practice since the date of the most recent F&M Financial Statements.
3.8 Legal Proceedings; Compliance with Laws
There are no actions, suits or proceedings instituted or pending or, to
the Knowledge of F&M, threatened against any of the F&M Companies or against any
property, asset, interest or right of any of the F&M Companies or against any
officer, director or employee of any of the F&M Companies that would, if
determined adversely to F&M or any F&M Subsidiary, have a Material Adverse
Effect on F&M on a consolidated basis. To the Knowledge of F&M, the F&M
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or orders).
3.9 Tax Matters
The F&M Companies have filed all Tax Returns required to be filed, and all
such Tax Returns were correct and complete in all material respects. All Taxes
owed by the F&M Companies have been paid, are reflected as a liability in the
F&M Financial Statements, or are being contested in good faith and have been
Previously Disclosed in its Disclosure Schedule. Except as Previously Disclosed,
no tax return or report of the F&M Companies is under examination by any taxing
authority or the subject of any administrative or judicial proceeding, and no
unpaid tax deficiency has been asserted against the F&M Companies by any taxing
authority.
3.10 Employee Benefit Plans
(a) All F&M employee benefit plans are in compliance with the applicable
terms of ERISA and the Code and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to F&M on a consolidated basis.
(b) No F&M employee benefit plan subject to ERISA that is a defined
benefit pension plan has any "unfunded current liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, and the present fair market value of
the assets of any such plan exceeds the plan's `benefit liabilities,' as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan was terminated in accordance with all
applicable legal requirements.
3.11 Insurance
Each of the F&M Companies currently maintains insurance in amounts
reasonably necessary for its operations and, to the Knowledge of F&M, similar in
scope and coverage to that maintained by other entities similarly situated.
Since January 1, 1998 and except as Previously Disclosed, none of the F&M
Companies has received any notice of a premium increase or cancellation or a
failure to renew with respect to any insurance policy or bond and, within the
last three fiscal years, none of the F&M Companies has been refused any
insurance coverage sought or applied for, and F&M has no reason to believe that
existing insurance coverage cannot be renewed as and when the same shall expire
upon terms and conditions as favorable as those presently in effect, other than
possible increases in premiums or unavailability of coverage that do not result
from any extraordinary loss experience on the part of the F&M Companies.
3.12 Allowance for Loan Losses
The allowance for loan losses reflected on the balance sheets included in
the F&M Financial Statements, as of their respective dates, is adequate in all
material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
3.13 Environmental Matters
To the Knowledge of F&M, the F&M Companies are in substantial compliance
with all Environmental Laws. None of the F&M Companies has received any
communication alleging that F&M or any F&M Subsidiary is not in such compliance
and, to the Knowledge of F&M, there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
3.14 Securities Reports
F&M has filed with the SEC all required forms, reports and documents
required under the Exchange Act. F&M's Annual Report on Form 10-K for the year
ended December 31, 1997, and all other reports, definitive proxy statements or
documents filed or to be filed by it subsequent to December 31, 1997 under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed, or to
be filed, with the Securities and Exchange Commission (the "SEC") (i) complied
or will comply in all material respects as to form with the applicable
requirements under the Exchange Act and (ii) did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading.
3.15 Statements True and Correct
When the Registration Statement to be filed by F&M with the SEC shall
become effective, and at all times subsequent thereto up to and including the
SBC shareholders' meeting called to consider and vote on the approval of the
Merger, such Registration Statement and all amendments or supplements thereto,
with respect to all information set forth therein furnished by F&M relating to
F&M (i) shall comply in all material respects with the applicable provisions of
the federal and state securities laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading.
ARTICLE 4
COVENANTS AND AGREEMENTS
4.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, F&M and SBC agree
to use their reasonable best efforts in good faith to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary or
desirable, or advisable under applicable laws, so as to permit consummation of
the Merger as promptly as practicable and shall cooperate fully with the other
party hereto to that end.
4.2 Access to Information; Notice of Certain Matters; Confidentiality
(a) F&M and SBC each will keep the other advised of all material
developments relevant to its business and to consummation of the transactions
contemplated herein. F&M and SBC each may make or cause to be made such further
investigation of the operational, financial and legal condition of the other as
such party reasonably deems necessary or advisable in connection with the
Merger, provided, however, that such investigation shall not interfere
unnecessarily with normal operations. F&M and SBC agree to furnish the other and
the other's advisors with such financial data and other information with respect
to its business and properties as such other party shall from time to time
reasonably request. No investigation pursuant to this Section 4.2 shall affect
or be deemed to modify any representation or warranty made by, or the conditions
to the obligations to consummate the Merger of, such party hereto.
(b) F&M and SBC shall give prompt notice to the other of any fact, event
or circumstance known to it that (i) is reasonably likely, individually or taken
together with all other facts, events and circumstances known to it, to result
in any Material Adverse Effect with respect to it or (ii) would cause or
constitute a material breach of any of its representations, warranties,
covenants or agreements contained herein.
(c) Each party shall, and shall cause each of its directors, officers,
attorneys and advisors, to maintain the confidentiality of all information
obtained in such investigation which is not otherwise publicly disclosed by the
other party, such undertaking with respect to confidentiality to survive any
termination of this Agreement. In the event of the termination of this
Agreement, each party shall return to the furnishing party or, at the request of
the furnishing party, destroy and certify the destruction of all confidential
information previously furnished in connection with the transactions
contemplated by this Agreement.
4.3 Registration Statement; Shareholder Approval
(a) F&M and SBC agree to cooperate in the preparation of the Registration
Statement to be filed by F&M with the SEC in connection with the issuance of F&M
Common Stock in the Merger (including the proxy statement and prospectus and
other proxy solicitation materials of F&M and SBC constituting a part thereof
(the "Proxy Statement") and all related documents). F&M and SBC agree to use all
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act of 1933, as amended (the "Securities Act"), as promptly
as reasonably practicable after filing thereof. F&M shall also take any action
required to be taken under state securities or "Blue Sky" laws in connection
with the issuance of F&M Common Stock pursuant to the Merger.
(b) SBC shall submit this Agreement and the Plan of Merger to its
shareholders at a special meeting to be held as promptly as practicable after
the Registration Statement is declared effective for the purpose of approving
the Merger. The Board of Directors of SBC shall recommend such approval, and SBC
shall take all reasonable lawful action to solicit such approval by its
shareholders; provided, however, that if the Board of Directors of SBC shall
have reasonably determined in good faith (after consultation with its counsel)
that such recommendation is reasonably likely to constitute a breach of its
fiduciary duties to the shareholders of SBC, then the Board of Directors of SBC
shall not be obligated to recommend the approval of this Agreement and Plan of
Merger.
4.4 Operation of the Business of SBC
SBC agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by F&M, during the period from the
date hereof to the Effective Date:
(a) SBC will conduct its operations only in the ordinary and usual course
of business consistent with past practice (subject, in any event, to the
provisions of paragraph (c) below) and will use its best efforts to keep
available the services of its officers and employees and maintain satisfactory
relationships with customers, suppliers, employees and others having business
relationships with them.
(b) SBC shall not take any action, engage in any transactions or enter
into any agreement which would adversely affect or delay in any material respect
the ability of F&M or SBC to obtain any necessary approvals, consents or waivers
of any governmental authority or third party required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely basis
under this Agreement.
(c) SBC will not:
(1) Other than pursuant to stock options and stock warrants
Previously Disclosed in its Disclosure Schedule and currently outstanding
as of the date hereof: (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of
capital stock, any stock appreciation rights or any Rights; (ii) enter
into any agreement with respect to the foregoing; or (iii) permit any
additional shares of capital stock to become subject to new grants of
employee stock options, stock appreciation rights, or similar stock-based
employee rights;
(2) Enter into or amend any written employment agreement, severance
or similar agreements or arrangements with any of its directors, officers
or employees, or grant any salary or wage increase or increase any
employee benefit (including incentive or bonus payments), except for
normal individual increases in compensation to employees in the ordinary
course of business consistent with past practice;
(3) Enter into or amend (except as may be required by applicable
law) any pension, retirement, stock option, stock purchase, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance
or other employee benefit, incentive, welfare contract, plan or
arrangement, or any trust agreement related thereto, in respect of any
directors, officers or employees, including without limitation taking any
action that accelerates the vesting or exercise of any benefits payable
thereunder;
(4) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or
encumber any of its assets, nor dispose of any of its assets in any other
manner, except in the ordinary course of its business and for adequate
value, or as otherwise specifically permitted in this Agreement;
(5) Change its lending, investment, asset/liability management or
other material banking policies in any material respect, except as may be
required by applicable law;
(6) Alter, amend or repeal its bylaws or articles of incorporation;
(7) Take any other action which would make any representation or
warranty in Article 2 hereof untrue; or
(8) Agree or commit to do anything prohibited by this Section 4.4.
4.5 Operation of the Business of F&M
F&M agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by SBC, during the period from the
date hereof to the Effective Date:
(a) F&M will and will cause each of the F&M Subsidiaries to conduct their
respective operations only in the ordinary and usual course of business
consistent with past practice and will use its best efforts to preserve intact
their respective business organizations, keep available the services of their
officers and employees and maintain satisfactory relationships with customers,
suppliers, employees and others having business relationships with them.
(b) F&M shall not, and shall not permit any of the F&M Subsidiaries to,
take any action, engage in any transactions or enter into any agreement which
would adversely affect or delay in any material respect the ability of F&M or
SBC to obtain any necessary approvals, consents or waivers of any governmental
authority or third party required for the transactions contemplated hereby or to
perform its covenants and agreements on a timely basis under this Agreement.
4.6 No Dividends
SBC will not declare or pay any cash dividend or make any other
distribution in respect of SBC Common Stock prior to the Effective Date.
4.7 No Solicitation of Other Offers
Without the prior consent of F&M, SBC shall not, and shall cause its
officers, directors, agents, advisors and affiliates not to, solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, an
Acquisition Transaction (as hereinafter defined); provided, however, that
nothing contained in this Section 4.7 shall prohibit the Board of Directors of
SBC from furnishing information to, or entering into discussions or negotiations
with, any person or entity that makes an unsolicited, written bona fide proposal
regarding an Acquisition Transaction if, and only to the extent that (A) the
Board of Directors of SBC concludes in good faith, after consultation with and
based upon the advice of outside counsel, that it is required to furnish such
information or enter into such discussions or negotiations in order to comply
with its fiduciary duties to shareholders under applicable law, (B) prior to
taking such action, SBC receives from such person or entity an executed
confidentiality agreement, and (C) the Board of Directors of SBC concludes in
good faith that the proposal regarding the Acquisition Transaction contains an
offer of consideration that is superior to the consideration set forth herein.
SBC shall immediately notify F&M orally and in writing of its receipt of any
such proposal or inquiry, of the material terms and conditions thereof, and of
the identity of the person making such proposal or inquiry. For purposes of this
Agreement, "Acquisition Transaction" means any merger, consolidation, share
exchange, joint venture, business combination or similar transaction involving
SBC or any purchase of all or any material portion of the assets of SBC.
4.8 Regulatory Filings
F&M and SBC shall use their reasonable best efforts to prepare and file as
soon as practicable after the date hereof all required applications for
regulatory approval of the Merger. F&M shall use its best efforts to obtain
prompt approval of each required application.
4.9 Public Announcements
Each party will consult with the other before issuing any press release or
otherwise making any public statements with respect to the Merger and shall not
issue any such press release or make any such public statement prior to such
consultations, except as may be required by law.
4.10 Accounting Treatment
F&M and SBC shall each use their best efforts to ensure that the Merger
qualifies for pooling-of-interests accounting treatment under generally accepted
accounting principles and, as of the date hereof, F&M is aware of no reason why
the Merger may not be accounted for as a pooling-of-interests.
4.11 Affiliate Agreements
SBC has identified to F&M all persons who are, as of the date hereof,
directors or executive officers of SBC (the "Affiliates"). SBC has delivered a
written letter agreement in the form of Exhibit B hereto from each Affiliate.
4.12 Benefit Plans
Upon consummation of the Merger, as soon as administratively practicable,
employees of SBC shall be entitled to participate in the F&M pension, health and
welfare benefit and similar plans on the same terms and conditions as employees
of the F&M Companies, giving effect to years of service for purposes of
eligibility to participate, eligibility for benefits, and vesting with SBC as if
such service were with F&M. Prior to the consummation of the Merger, the
Security Bank Corporation 401(k) Profit Sharing Plan will be terminated. As of
the Effective Date, F&M will assume and honor the terms of all deferred
compensation plans of SBC.
4.13 NYSE Listing
F&M shall use its reasonable best efforts to list, as of the Effective
Date, on the New York Stock Exchange upon official notice of issuance, the
shares of F&M Common Stock to be issued in the Merger.
4.14 Indemnification
Following the Effective Date and for a period of six years thereafter, F&M
shall indemnify, defend and hold harmless any person who has rights to
indemnification from SBC, to the same extent and on the same conditions as such
person is entitled to indemnification pursuant to applicable law and SBC's
Articles of Incorporation or Bylaws, as in effect on the date of this Agreement,
to the extent legally permitted to do so with respect to matters occurring on or
prior to the Effective Date; provided, however, that F&M's obligation to provide
such indemnification shall not apply to material litigation, proceeding or
controversy required to be Previously Disclosed in the SBC Disclosure Schedule
that is not included in such Disclosure Schedule. Without limiting the
foregoing, in any case in which corporate approval may be required to effectuate
any indemnification, F&M shall direct, at the election of the party to be
indemnified, that the determination of permissibility of indemnification shall
be made by independent counsel mutually agreed upon between F&M and the
indemnified party. F&M shall use its reasonable best efforts to maintain SBC's
existing directors' and officers' liability policy, or some other policy,
including F&M's existing policy, providing at least comparable coverage,
covering persons who are currently covered by such insurance of SBC for a period
of three years after the Effective Date on terms no less favorable than those in
effect on the date hereof.
ARTICLE 5
CONDITIONS TO THE MERGER
5.1 General Conditions
The respective obligations of each of F&M and SBC to effect the Merger
shall be subject to the fulfillment or waiver at or prior to the Effective Date
of the following conditions:
(a) Corporate Action. All corporate action necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby shall have been duly and validly taken,
including without limitation the approval of the shareholders of SBC.
(b) Registration Statement; NYSE Listing. The Registration Statement shall
have been declared effective under the Securities Act, and F&M shall have
received all state securities laws or "blue sky" permits and other
authorizations or there shall be exemptions from registration requirements
necessary to issue F&M Common Stock in connection with the Merger, and neither
the Registration Statement nor any such permit or authorization shall be subject
to a stop order or any threatened stop order of the SEC or any state securities
commissioner. The shares of F&M Common Stock to be issued in connection with the
Merger shall have been approved for listing on the New York Stock Exchange.
(c) Regulatory Approvals. F&M and SBC shall have received all regulatory
approvals required in connection with the transactions contemplated by this
Agreement, all notice periods and waiting periods required after the granting of
any such approvals shall have passed, and all such approvals shall be in effect;
provided, however, that no such approvals shall have imposed any condition or
requirement which, in the reasonable opinion of the Boards of Directors of F&M
or SBC, would so materially adversely impact the economic or business benefits
of the transactions contemplated by this Agreement as to render consummation of
the Merger inadvisable or unduly burdensome.
(d) Tax Opinion. F&M and SBC shall have received the opinion of LeClair
Ryan, A Professional Corporation, counsel to F&M, in form and substance
satisfactory to F&M and SBC and dated as of the Effective Date to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code and that no gain or loss will be recognized by the
shareholders of SBC to the extent they receive F&M Common Stock solely in
exchange for their SBC Common Stock in the Merger. In rendering its opinions,
such counsel may rely upon representations contained in certificates of officers
of F&M, SBC and others.
(e) Opinions of Counsel. SBC shall have delivered to F&M and F&M shall
have delivered to SBC opinions of counsel, dated as of the Effective Date, as to
such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) Legal Proceedings. Neither F&M nor SBC shall be subject to any order,
decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Merger.
5.2 Conditions to Obligations of F&M
The obligations of F&M to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
SBC set forth in Article 2 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. SBC shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) Officers' Certificate. SBC shall have delivered to F&M a certificate,
dated the Effective Date and signed by its Chairman or President, to the effect
that the conditions set forth in Sections 5.1(a), 5.2(a) and 5.2(b) have been
satisfied.
(d) Accountants' Letter. F&M shall have received a letter, dated as of the
Effective Date, from Yount, Hyde & Barbour, P.C., satisfactory in form and
substance to F&M, that the Merger will qualify for pooling-of-interests
accounting treatment; provided, however, that such letter shall not be a
condition to the consummation of the Merger if F&M takes any action which would
prevent the Merger from qualifying for pooling-of-interests accounting
treatment.
5.3 Conditions to Obligations of SBC
The obligations of SBC to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
F&M set forth in Article 3 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. F&M shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) Officers' Certificate. F&M shall have delivered to SBC a certificate,
dated the Effective Date and signed by its Chairman or President, to the effect
that the conditions set forth in Sections 5.1(a), 5.1(b), 5.1(c), 5.3(a) and
5.3(b) have been satisfied.
(d) Investment Banking Letter. SBC shall have received an updated fairness
opinion from Scott & Stringfellow, Inc., financial advisor to SBC, addressed to
SBC and dated on or about the date the Proxy Statement is mailed to shareholders
of SBC, to the effect that the terms of the Merger are fair to the shareholders
of SBC from a financial point of view.
ARTICLE 6
TERMINATION
6.1 Termination
This Agreement and the Plan of Merger may be terminated at any time before
the Effective Date, whether before or after approval thereof by the shareholders
of SBC at the SBC Meeting, as provided below:
(a) Mutual Consent. By the mutual consent in writing of F&M and SBC.
(b) Closing Delay. At the election of either party, evidenced by written
notice, if the Effective Date shall not have occurred on or before September 30,
1999, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 6.1(b) shall
not be available to either party whose failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the
Effective Date to occur on or before such date.
(c) Conditions to F&M Performance Not Met. By F&M upon delivery of written
notice of termination to SBC if any event occurs which renders impossible the
satisfaction in any material respect of one or more of the conditions to the
obligations of F&M to effect the Merger set forth in Sections 5.1 and 5.2, and
such noncompliance is not waived by F&M.
(d) Conditions to SBC Performance Not Met. By SBC upon delivery of written
notice of termination to F&M if any event occurs which renders impossible the
satisfaction in any material respect of one or more of the conditions to the
obligations of SBC to effect the Merger set forth in Sections 5.1 and 5.3, and
such noncompliance is not waived by SBC.
6.2 Effect of Termination
In the event this Agreement is terminated pursuant to Section 6.1 hereof,
both this Agreement and the Plan of Merger shall become void and have no effect,
except that (i) the provisions hereof relating to confidentiality, press
releases and expenses set forth in Sections 4.2, 4.9 and 6.4, respectively,
shall survive any such termination and (ii) a termination pursuant to 6.1(c) or
6.1(d) hereof shall not relieve the breaching party from liability for an
uncured intentional breach of any provision of this Agreement giving rise to
such termination.
6.3 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement and the
Plan of Merger shall not survive the Effective Date and shall be terminated and
extinguished at the Effective Date. From and after the Effective Date, the
parties hereto shall have no liability to the other on account of any breach of
any of those representations, warranties and covenants; provided, however, that
the foregoing clause shall not (i) apply to agreements of the parties which by
their terms are intended to be performed after the Effective Date, and (ii)
shall not relieve any person for liability for fraud, deception or intentional
misrepresentation.
6.4 Fees and Expenses
(a) Except as provided below, each of the parties shall bear and pay all
costs and expenses incurred by it in connection with the transactions
contemplated herein, including fees and expenses of its own financial
consultants, accountants and counsel, except that printing expenses shall be
shared equally between F&M and SBC.
(b) Notwithstanding any provision in this Agreement to the contrary, if
for any reason the Merger is not approved by SBC's shareholders at the SBC
Meeting or any adjournment thereof, then SBC shall reimburse F&M for one-half of
its reasonable out-of-pocket and other expenses incurred by F&M in connection
with entering into this Agreement and the transactions contemplated hereunder,
provided that the maximum amount that SBC shall be responsible to F&M under this
Section 6.4(b) shall be limited to $50,000.
(c) If this Agreement is terminated by F&M or SBC because of a willful and
material breach by the other of any representation, warranty, covenant,
undertaking or restriction set forth herein, and provided that the terminating
party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall reimburse the other party for all
reasonable out-of-pocket expenses incurred by it in connection with the
transactions contemplated by this Agreement and the enforcement of its rights
hereunder.
(d) Final settlement with respect to the reimbursement of such fees and
expenses by the parties shall be made within thirty days after the termination
of this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 Entire Agreement
This Agreement contains the entire agreement among F&M and SBC with
respect to the Merger and the related transactions and supersedes all prior
arrangements or understandings with respect thereto.
7.2 Binding Effect; No Third Party Rights
This Agreement shall bind F&M and SBC and their respective successors and
assigns. Other than Section 4.14, nothing in this Agreement is intended to
confer upon any person, other than the parties hereto or their respective
successors, any rights or remedies under or by reason of this Agreement.
7.3 Waiver and Amendment
Any term or provision of this Agreement may be waived in writing at any
time by the party that is, or whose shareholders are, entitled to the benefits
thereof, and this Agreement may be amended or supplemented by a written
instrument duly executed by the parties hereto at any time, whether before or
after the later of the date of the SBC Meeting, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
7.4 Governing Law
This Agreement shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Virginia without regard to the conflict of law
principles thereof.
7.5 Notices
All notices or other communications that are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
registered or certified mail, postage prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
38 Rouss Avenue
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282
Copy to:
George P. Whitley, Esquire
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003
If to SBC:
Danny R. May
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
Tele: (703) 361-1986
Copy to:
Jody M. Wagner, Esq.
Kaufman & Canoles
One Commercial Place
Post Office Box 3037
Norfolk, Virginia 23514
Tele: (757) 624-3000
7.6 Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but such counterparts together shall constitute one
and the same agreement.
7.7 Severability
In the event that any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provisions hereof. Any provision of
this Agreement held invalid or unenforceable only in part or degree shall remain
in full force and effect to the extent not held invalid or unenforceable.
Further, the parties agree that a court of competent jurisdiction may reform any
provision of this Agreement held invalid or unenforceable so as to reflect the
intended agreement of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
Winchester, Virginia
By: /s/ Alfred B. Whitt
-------------------
Alfred B. Whitt
Vice Chairman, President and
Chief Financial Officer
F&M BANK-NORTHERN VIRGINIA
Fairfax, Virginia
By: /s/ T. Earl Rogers
------------------
T. Earl Rogers
President
SECURITY BANK CORPORATION
Manassas, Virginia
By: /s/ John O. Gregory
-------------------
John O. Gregory
Chairman of the Board
EXHIBIT A
To the Agreement and
Plan of Reorganization
PLAN OF MERGER
BETWEEN
F&M BANK-NORTHERN VIRGINIA
AND
SECURITY BANK CORPORATION
Pursuant to this Plan of Merger ("Plan of Merger"), Security Bank
Corporation, a Virginia banking corporation ("SBC"), shall merge with and into
F&M Bank-Northern Virginia, a wholly-owned Virginia banking subsidiary of F&M
National Corporation.
ARTICLE I
TERMS OF THE MERGER
1.1 The Merger
Subject to the terms and conditions of the Agreement and Plan of
Reorganization, dated as of November 25, 1998, by and among F&M National
Corporation, a Virginia corporation ("F&M"), F&M Bank-Northern Virginia, and SBC
(the "Agreement"), at the Effective Date SBC shall be merged with and into F&M
Bank-Northern Virginia (the "Merger") in accordance with the provisions of
Virginia law and with the effect specified in Section 13.1-721 of the Virginia
Stock Corporation Act. F&M Bank-Northern Virginia shall be the surviving
corporation of the Merger, and its name shall remain F&M Bank-Northern Virginia
(F&M Bank-Northern Virginia as existing on and after the Effective Date is
sometimes referred to as the "Continuing Bank"). The Merger shall become
effective on such date and time as may be determined in accordance with Section
1.5 of the Agreement (the "Effective Date").
1.2 Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of F&M Bank-Northern Virginia in
effect immediately prior to the consummation of the Merger shall remain in
effect following the Effective Date until otherwise amended or repealed.
ARTICLE II
MANNER OF CONVERTING SHARES
2.1 Conversion of Shares
Upon and by reason of the Merger becoming effective and except as set
forth in Section 2.3 below, no cash shall be allocated to the shareholders of
SBC and stock shall be issued and allocated as follows:
(a) Each share of common stock, par value $5.00 per share, of SBC ("SBC
Common Stock") issued and outstanding immediately prior to the Effective Date
shall, by operation of law, be automatically exchanged for the number of shares
of common stock, par value $2.00 per share, of F&M ("F&M Common Stock"), whose
aggregate market value equals $17.25. The market value of F&M Common Stock will
be its average closing price as reported on the New York Stock Exchange (the
"NYSE") for each of the ten full trading days ending on the fifth day prior to
the Effective Date (the "Average Closing Price") (the ten full trading day
period during which the Exchange Ratio will be determined is referred to as the
"Exchange Ratio Determination Period"). The ratio of shares of F&M Common Stock
that will be exchanged for each outstanding share of SBC Common Stock shall be
referred to herein as the "Exchange Ratio," which shall be rounded to the
nearest third decimal point. Notwithstanding the foregoing, in the event: (A)
F&M shall have entered into an agreement with any person to (i) acquire, merge
or consolidate, or enter into any similar transaction, with F&M, (ii) purchase,
lease or otherwise acquire all or substantially all of the assets of F&M or
(iii) purchase or otherwise acquire securities representing 10% or more of the
voting power of F&M; or (B) any person shall have made a bona fide proposal to
F&M by public announcement or written communication that is or becomes the
subject of public disclosure to acquire F&M by merger, share exchange,
consolidation, purchase of all or substantially all of its assets or any similar
transaction, the Average Closing Price will be based on the average closing
price of F&M Common Stock for each of the ten trading days immediately preceding
the public announcement of a transaction or event described in either (A) or
(B).
(b) Each holder of a certificate representing shares of SBC Common Stock
upon the surrender of his SBC stock certificates to the Exchange Agent (as
defined in Section 2.2), duly endorsed for transfer in accordance with Section
2.2 below, will be entitled to receive in exchange therefor a certificate or
certificates representing the number of shares of F&M Common Stock that his
shares shall be converted into pursuant to the Exchange Ratio. Each such holder
of SBC Common Stock shall have the right to receive the consideration described
in this Section 2.1 and Section 2.3 upon the surrender of such certificate in
accordance with Section 2.2. In the event F&M changes (or establishes a record
date for changing) the number of shares of F&M Common Stock issued and
outstanding prior to the Effective Date as a result of any stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding shares of F&M Common Stock and the record date therefor shall be
prior to the Effective Date, appropriate and proportional adjustments will be
made to the Exchange Ratio.
(c) Each share of common stock of F&M Bank-Northern Virginia issued and
outstanding immediately prior to the Effective Date shall continue unchanged as
an outstanding share of common stock of the Continuing Bank.
(d) From and after the Effective Date, all employee and director stock
options to purchase shares of SBC Common Stock (each, a "SBC Stock Option") that
are then outstanding and unexercised, shall be converted into and become options
to purchase shares of F&M Common Stock, and F&M shall assume each such SBC Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that from and after the Effective Date (i) each
such SBC Stock Option assumed by F&M may be exercised solely to purchase shares
of F&M Common Stock, (ii) the number of shares of F&M Common Stock purchasable
upon exercise of such SBC Stock Option shall be equal to the number of shares of
SBC Common Stock that were purchasable under such SBC Stock Option immediately
prior to the Effective Date multiplied by the Exchange Ratio and rounding down
to the nearest whole share, with cash being paid for any fractional share
interest that otherwise would be purchasable, and (iii) the per share exercise
price under each such SBC Stock Option shall be adjusted by dividing the per
share exercise price of each such SBC Stock Option by the Exchange Ratio, and
rounding down to the nearest cent. The terms of each SBC Stock Option shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction with respect to F&M Common Stock on or subsequent to the Effective
Date. It is intended that the foregoing assumption shall be effected in a manner
that is consistent with the requirements of Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code") as to any SBC Stock Option that is an
"incentive stock option" (as defined in Section 422 of the Code).
2.2 Manner of Exchange of SBC Common Stock Certificates
As promptly as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent ("Exchange
Agent"), to send to each former holder of record of SBC Common Stock immediately
prior to the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of SBC Common Stock for the consideration set forth
in Section 2.1 above. Any dividends paid on any shares of F&M Common Stock that
such shareholder shall be entitled to receive prior to the delivery to the
Exchange Agent of such shareholder's certificates representing all of such
shareholder's shares of SBC Common Stock, will be delivered to such shareholder
only upon delivery to the Exchange Agent of the certificates representing all of
such shares (or indemnity satisfactory to F&M and the Exchange Agent, in their
judgment, if any of such certificates are lost, stolen or destroyed). No
interest will be paid on any such dividends to which the holder of such shares
shall be entitled to receive upon such delivery.
2.3 No Fractional Shares
No certificates or scrip for fractional shares of F&M Common Stock will be
issued. In lieu thereof, F&M will pay the value of such fractional shares in
cash on the basis of the Average Closing Price of F&M Common Stock.
2.4 Dividends
No dividend or other distribution payable to the holders of record of F&M
Common Stock at or as of any time after the Effective Date shall be paid to the
holder of any certificate representing shares of SBC Common Stock issued and
outstanding at the Effective Date until such holder physically surrenders such
certificate for exchange as provided in Section 2.2 of this Plan of Merger,
promptly after which time all such dividends or distributions shall be paid
(without interest).
ARTICLE III
BOARD OF DIRECTORS
At the Effective Date, the Board of Directors of the Continuing Bank shall
consist of all the current directors of F&M Bank-Northern Virginia and four of
the current directors of SBC designated by SBC and approved by F&M.
ARTICLE IV
CONDITIONS PRECEDENT
The obligations of F&M, F&M Bank-Northern Virginia and SBC to effect the
Merger as herein provided shall be subject to satisfaction, unless duly waived,
of the conditions set forth in the Agreement.
ARTICLE V
TERMINATION
This Plan of Merger may be terminated at any time prior to the Effective
Date by the parties hereto as provided in Article 6 of the Agreement.
APPENDIX II
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of November 10, 1998 (the "Option
Agreement"), by and between SECURITY BANK CORPORATION, a Virginia banking
corporation ("Security"), and F&M NATIONAL CORPORATION, a Virginia corporation
("F&M").
WITNESSETH
WHEREAS, the Board of Directors of the parties hereto approved a letter of
intent (the "Letter of Intent") dated as of the date hereof, setting forth the
principal terms and conditions to be included in a definitive Agreement and Plan
of Reorganization and a related Plan of Merger (together referred to herein as
the "Merger Agreements"), providing for the merger of Security with and into F&M
Bank-Northern Virginia, a wholly-owned Virginia banking subsidiary of F&M (the
"Merger"); and
WHEREAS, as a condition to and as consideration for F&M's entry into the
Letter of Intent and to induce such entry and the subsequent entry into the
Merger Agreements, Security has agreed to grant to F&M the option set forth
herein to acquire authorized but unissued shares of common stock of Security
("Security Common Stock").
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions
Capitalized terms used in this Option Agreement shall have the meanings
ascribed to them herein.
2. Grant of Option
Subject to the terms and conditions set forth herein, Security hereby
grants to F&M an option (the "Option") to acquire up to 191,300 shares of
Security Common Stock at a price of $11.00 per share (the "Exercise Price") in
exchange for the consideration provided in Section 4 hereof; provided, however,
that in the event Security issues or agrees to issue any shares of Security
Common Stock (other than as permitted under the Merger Agreements) at a price
less than $11.00 per share (as adjusted pursuant to Section 6 hereof), the
Exercise Price shall be equal to such lesser price. Notwithstanding anything
else in this Option Agreement to the contrary, the number of shares of Security
Common Stock subject to the Option shall be reduced if and to the extent
necessary so that the number of shares for which this Option is exercisable
shall not exceed 19.9% of the issued and outstanding shares of Security Common
Stock, before giving effect to the exercise of the Option. The number of shares
of Security Common Stock that may be received upon the exercise of the Option is
subject to adjustment as set forth herein.
3. Exercise of Option
(a) Subject to compliance with applicable law and regulation, F&M may
exercise the Option, in whole or part, at any time or from time to time if a
Purchase Event (as defined below) shall have occurred and be continuing.
(b) Security shall notify F&M promptly in writing of the occurrence of any
transaction, offer or event giving rise to a Purchase Event. If more than one of
the transactions, offers or events giving rise to a Purchase Event is undertaken
or effected by the same person or occurs at the same time, then all such
transactions, offers and events shall give rise only to one Purchase Event,
which Purchase Event shall be deemed continuing for all purposes hereof until
all such transactions are terminated or abandoned by such person and all such
events have ceased or ended.
(c) In the event that F&M wishes to exercise the Option, it shall send
Security a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of shares it will acquire
pursuant to such exercise, and (ii) a place and date not earlier than three
business days nor later than 60 business days from the Notice Date for the
closing of such transaction (the "Closing Date"); provided that if prior
notification to or approval of any federal or state regulatory agency is
required in connection with such acquisition, F&M shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification period has
expired or been terminated or such approval has been obtained and any requisite
waiting period shall have passed.
(d) The Option shall expire and terminate, to the extent not previously
exercised, upon the earlier of:
(1) upon the termination of the Letter of Intent as provided for
therein, except that if Security breaches the non-solicitation covenant
set forth in Paragraph 8 of the Letter of Intent prior to such termination
date, then this Option shall continue in full force and effect through
April 15, 1999, after which date it shall expire and terminate; or
(2) if the Merger Agreements have been entered into by the parties
hereto, (A) the date shown on the Certificate of Merger issued by the
Virginia State Corporation Commission effecting the Merger; (B) upon
termination of the Merger Agreements in accordance with the provisions
thereof, other than a termination based upon, following or in connection
with either (i) a material breach by Security of a Specified Covenant (as
defined below) or (ii) the failure of Security to obtain shareholder
approval of the Merger Agreements by the vote required under applicable
law, in the case that either (i) or (ii) follow the occurrence of a
Purchase Event; or (C) 12 months after termination of the Merger
Agreements based upon a material breach by Security of a Specified
Covenant or the failure of Security to obtain shareholder approval of the
Merger Agreements by the vote required under applicable law, in either
case following the occurrence of a Purchase Event.
(e) As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(1) Security, without having received F&M's prior written consent,
shall have entered into an agreement with any person to (i) acquire, merge
or consolidate, or enter into any similar transaction, with Security, (ii)
purchase, lease or otherwise acquire all or substantially all of the
assets of Security, or (iii) purchase or otherwise acquire directly from
Security securities representing 10% or more of the voting power of
Security;
(2) any person shall have acquired beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the outstanding shares
of Security Common Stock after the date hereof (the term "beneficial
ownership" for purposes of this Option Agreement having the meaning
assigned thereto in Section 13(d) of the Securities Exchange Act of 1934,
as amended, and the regulations promulgated thereunder); or
(3) any person shall have made a bona fide proposal to Security by
public announcement or written communication that is or becomes the
subject of public disclosure to acquire Security by merger, share
exchange, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, and following such bona fide
proposal the shareholders of Security vote not to approve the Merger
Agreements.
(f) As used herein, "Specified Covenant" means any covenant or agreement
contained in the Merger Agreements.
4. Payment and Delivery of Certificates
(a) At the Closing Date, F&M shall tender certified funds in an amount
equal to the aggregate Exercise Price for the number of shares with respect to
which F&M is exercising the Option.
(b) At such closing, Security shall deliver to F&M a certificate or
certificates representing the number of shares of Security Common Stock
exchanged for the Exercise Price and F&M shall deliver to Security a letter
agreeing that F&M will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Option Agreement.
5. Representations
Security hereby represents, warrants and covenants to F&M as follows:
(a) Security shall at all times maintain sufficient authorized but
unissued shares of Security Common Stock so that the Option may be exercised
without authorization of additional shares of Security Common Stock.
(b) The shares to be issued upon due exercise, in whole or in part, of the
Option, when paid for as provided herein, will be duly authorized, validly
issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization
In the event of any change in Security Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of Security Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement or pursuant to the exercise of warrants or
options to acquire shares of Security Common Stock outstanding as of the date of
the Merger Agreements or that may be issued after the date of the Merger
Agreements without constituting a breach thereof), the number of shares of
Security Common Stock subject to the Option shall be adjusted so that, after
such issuance, it equals 19.9% of the number of shares of Security Common Stock
then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option or any shares issued pursuant to the exercise of
options to acquire shares of Security Common Stock outstanding as of the date of
the Merger Agreements or that may be issued after the date of the Merger
Agreements without constituting a breach thereof. Nothing contained in this
Section 6 shall be deemed to authorize Security to breach any provision of the
Merger Agreements.
7. Severability
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option Agreement will not permit the holder to
acquire the full number of shares of Security Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of Security to allow the holder to acquire, or to require Security to repurchase
to the extent permitted under applicable law, such number of shares as may be
necessary to comply with such court or regulatory agency's determination of the
permissible number of shares, without any amendment or modification hereof.
8. Miscellaneous
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
Option Agreement contains the entire agreement between the parties with respect
to the transactions contemplated hereunder and supersedes all prior arrangements
or understandings with respect thereto, written or oral. The terms and
conditions of this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. Nothing in
this Option Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any of its rights
or obligations under this Option Agreement or the Option created hereunder to
any other person, without the express written consent of the other party, except
that F&M may assign in whole or in part the Option and other benefits and
obligations hereunder without limitation to any of its wholly-owned
subsidiaries, and F&M may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation in the event a Purchase
Event shall have occurred and F&M shall have delivered to Security a copy of a
letter from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to Security, to the effect that such
assignment will not violate the requirements of the Securities Act of 1933, as
amended; provided that prior to any such assignment, F&M shall give written
notice of the proposed assignment to Security, and within 24 hours of such
notice of a bona fide proposed assignment, Security may purchase the Option at a
price and on other terms at least as favorable to F&M as that set forth in the
notice of assignment.
(d) Notices. All notices or other communications that are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage
prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
9 Court Square
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282)
Copy to:
George P. Whitley, Esquire
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003)
If to Security:
Danny R. May
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 22210
Tele: (703) 361-1986
Copy to:
Jody M. Wagner, Esq.
Kaufman & Canoles
One Commercial Place
Post Office Box 3037
Norfolk, Virginia 23514
Tele: (757) 624-3000
(e) Counterparts. This Option Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Option Agreement by
either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the conflicts of laws principles thereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Option Agreement as of the day and year first written above.
SECURITY BANK CORPORATION
By: /s/ John O. Gregory
-------------------
John O. Gregory
Chairman of the Board
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
-------------------
Alfred B. Whitt
President
APPENDIX III
OPINION OF SCOTT & STRINGFELLOW, INC.
Board of Directors
Security Bank Corporation
Manassas, Virginia 22210
[Scott & Stringfellow letterhead]
________________, 1999
Board of Directors
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 22010
Gentlemen:
Security Bank Corporation ("SBC"), F&M National Corporation ("F&M"), and
F&M Bank-Northern Virginia have entered into an Agreement and Plan of
Reorganization, dated November 25, 1998, and a related Plan of Merger
(collectively the "Merger Agreement"), pursuant to which SBC will merge with and
into F&M Bank-Northern Virginia. You have requested our opinion as to the
fairness, from a financial point of view, to the holders of outstanding shares
of Common Stock, par value $5.00 per share, of SBC ("SBC Common Stock") of the
exchange of each issued and outstanding share of SBC Common Stock into a number
of shares of Common Stock, par value $2.00 per share, of F&M ("F&M Common
Stock"), which aggregate market value equals $17.25, such market value to be the
average closing price of F&M Common Stock as reported on the New York Stock
Exchange for each of the ten full trading days ending on the fifth business day
prior to the Effective Date of the Merger (the "Exchange Ratio").
Scott & Stringfellow, as a customary part of its investment banking
business, is engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements, and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
SBC in connection with the transaction described above. We are familiar with
SBC, having acted as its financial advisor in the past and have provided certain
investment banking services from time to time.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Merger Agreement; (2) the Proxy Statement (3) SBC's financial
statements for the three years ended December 31, 1997; (4) SBC's unaudited
financial statements for the nine months ended September 30, 1997 and 1998, and
other internal information relating to SBC prepared by SBC's management; (5)
information regarding the trading market for the common stocks of SBC and F&M
and the price ranges within which the respective stocks have traded; (6) the
relationship of prices paid to relevant financial data such as net worth,
earnings, assets and deposits in certain bank and bank holding company mergers
and acquisitions in Virginia in recent years; (7) F&M's annual reports to
shareholders and its financial statements for the three years ended December 31,
1997; and (8) F&M's unaudited financial statements for the nine months ended
September 30, 1997 and 1998, and certain other internal information relating to
F&M prepared by F&M's management. We have discussed with members of management
of SBC and F&M the background to the Merger, the reasons and basis for the
Merger and the business and future prospects of SBC and F&M individually and as
a combined entity. Finally, we have conducted such other studies, analyses and
investigations, particularly of the banking industry, and considered such other
information as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the information furnished to us by
or on behalf of SBC and F&M. We have not attempted independently to verify such
information, nor have we made any independent appraisal of the assets of SBC or
F&M. With respect to the information relating to the prospects of SBC and F&M,
we have assumed that such information reflects the best currently available
judgments and estimates of the managements of SBC and F&M as to the likely
future financial performances of their respective companies and of the combined
entity. We have taken into account our assessment of general economic, financial
market and industry conditions as they exist and can be evaluated at the date
hereof, as well as our experience in business valuation in general. We have also
assumed that, in the course of obtaining regulatory and third party consents for
the Merger and the transactions contemplated by the Merger Agreement, no
restriction will be imposed that will have a material adverse effect on the
future results of operations or financial condition of SBC or F&M. Furthermore,
we are expressing no opinion as to the price which F&M's Common Stock will trade
at in any future time
Our advisory services and opinion expressed herein were prepared for the
use of the Board of Directors of SBC and do not constitute a recommendation to
the SBC shareholders as to how they should vote at the stockholders meeting in
connection with the Merger. We hereby consent, however, to the inclusion of this
opinion as an exhibit to any proxy or registration statement distributed in
connection with the Merger.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions and assumptions noted above, it is our opinion that, as of the date
hereof the Exchange Ratio is fair from a financial point of view to the
shareholders of SBC Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By:
--------------------------------
Gary S. Penrose
Managing Director
Financial Institutions Group
APPENDIX IV
SECURITY BANK CORPORATION
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997
FORM 10-KSB
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
---
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
SECURITY BANK CORPORATION
(Name of small business issuer in its charter)
Virginia 54-1337782
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8780 Centreville Road, Manassas, Virginia 20110
- ----------------------------------------- -----
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (703) 361-1986
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $5.00 share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and if no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
The bank's revenues for the fiscal year ended December 31, 1997, were
approximately $4,181,979.
The aggregate market value of the voting stock held by non-affiliates of the
bank as of March 25, 1998, was approximately $8,022,813.
As of March 25, 1998, there were 958,724 shares of Common Stock, par value $5.00
per share, of Security Bank Corporation issued and outstanding.
Documents Incorporated by Reference
Portions of the following documents are hereby incorporated into this Form
10-KSB by reference: the Proxy Statement for the Annual Meeting of Stockholders
to be held on May 20, 1998 - Part III; and the Annual Report of Security Bank
Corporation for the fiscal year ended December 31, 1997 - Parts I, II and IV.
INDEX
Page
Part I
Item 1 Description of Business 3
Item 2 Description of Property 20
Item 3 Legal Proceedings 20
Item 4 Submission of Matters to a Vote of
Security Holders 20
Part II
Item 5 Market for Common Equity and Related
Stockholder Matters 20
Item 6 Management's Discussion and Analysis 21
Item 7 Financial Statements 27
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Part III
Item 9 Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 28
Item 10 Executive Compensation 28
Item 11 Security Ownership of Certain Beneficial
Owners and Management 28
Item 12 Certain Relationships and Related
Transactions 26
Part IV
Item 13 Exhibits, Lists and Reports on Form 8-K 30
Signatures
Part I
In addition to historical information, the following Report contains forward
looking statements that are subject to risks and uncertainties that could cause
the Bank's actual results to differ materially from those anticipated. Readers
are cautioned not to place undue reliance on these forward looking statements,
which reflect management's analysis only as of the date of the Report.
Item 1 -- DESCRIPTION OF BUSINESS
General
The Bank was organized and chartered under the laws of the Commonwealth of
Virginia on March 26, 1986, and commenced operations on July 28, 1986. The Bank
is a member of the Federal Reserve System. The Bank's deposits are FDIC insured,
and the Bank is subject to the supervision, examination, and regulation of the
Federal Reserve Bank and the Virginia Bureau of Financial Institutions. The Bank
provides a wide range of financial services principally to individuals and to
small and medium-sized businesses, including individual and commercial demand
and time deposit accounts, commercial, real estate, and consumer installment
loans, travelers' checks, safe deposit facilities, sales of United States
Savings Bonds, collection items and official checks. The Bank operates one full
service banking office in the City of Manassas, Prince William County, Virginia
and another full service banking office in Manassas, Prince William County,
Virginia. This second office was opened as a temporary office at 7813 Sudley
Road on January 6, 1997. The new banking facility was built and opened May 19,
1997, in the front of the Kmart parking lot.
The Bank is one of ten banks located in western Prince William County, and the
only bank headquartered in the City of Manassas and Prince William County. There
are two other community banks operating in the City of Manassas. In addition,
seven multi-state banks, and two community banks operate offices in Prince
William County. Based upon a survey of deposit accounts by the FDIC, as of June
30, 1997, the Bank held 10.5% of the bank deposits in the City of Manassas, and
a 3.3% share of the total Prince William County deposits in banks. The Bank's
defined primary market area is Prince William County, but the majority of Bank
customers live and/or work in the area immediately in and around the City of
Manassas. It should be noted that several of the banks with offices in the City
of Manassas and Prince William County are in the process of merging with or
being acquired by out-of-state holding companies.
Credit Policies
The Bank employs extensive written policies and procedures to enhance management
of credit risk. The loan portfolio is managed under a specifically defined
credit process. This process includes formulation of portfolio management
strategy, guidelines for underwriting standards and risk assessment, procedures
for on-going identification and management of credit deterioration, and regular
portfolio reviews to estimate loss exposure and to ascertain compliance with the
Bank's policies. The largest unsecured individual lending authority currently
granted by the Bank is $100,000. All loans in excess of individual lending
authority are considered, reviewed, and approved by the Executive Committee of
the Board of Directors, which is comprised of six of the Bank's eight directors
and meets bi-monthly.
A major element of credit risk management is the diversification of risk. The
Bank's objective is to maintain a diverse loan portfolio to minimize the impact
of any single event or set of circumstances. Concentration parameters are based
upon individual risk factors, policy constraints, economic conditions,
collateral, and products. The Bank, as a matter of policy, generally does not
extend credit to any single borrower or group of related borrowers in excess of
$800,000. The Bank generally does not make loans outside its market area, except
for loan participations, unless the borrower has an established relationship
with the Bank and lives and conducts his principal business operations within
the Bank's market area. Consequently, the Bank and its borrowers are directly
affected by the economic conditions prevailing in its market area.
Lending Activities
The Bank's primary market focus is on making loans to small businesses and
consumers in its local market area. Business and consumer installment loans
secured by real estate represent the largest segment of the Bank's loan
portfolio. At December 31, 1997, approximately 75.8% of the total loan portfolio
was secured by real estate. In addition, the Bank also provides a wide range of
business and consumer installment loans that are not secured by real property.
The Bank's lending activities are principally directed to its defined market
area of Prince William County and adjacent areas. With the exception of several
participation loans made with or through other Virginia-based community banks,
the Bank does not normally lend outside its defined primary market areas.
Commercial Business Lending. The Bank's commercial loans are made primarily to
local service and retail oriented businesses for a variety of purposes,
including revolving lines of credit, working capital loans, equipment financing
loans, letters of credit, construction loans, and "mini-permanent" financing of
commercial real estate. Pricing on commercial loans is generally tied to the
depository relationship and/or the perceived risk involved in the credit.
The Bank normally looks to the borrower's cash flow and/or earnings as the
principal source of repayment for commercial business loans, and most of these
loans are both secured and personally guaranteed by the principals of such
businesses. A majority of the Bank's commercial loan portfolio is secured by
real estate. At December 31, 1997, the Bank had $17.148 million in loans that
were secured by non-residential real estate, or 52.87% of the loan portfolio.
These loans generally have a maximum 20 year amortization schedule, with a three
or five year balloon payment. The Bank normally limits loan amounts on credits
secured by non-residential real estate to 70-80% of the property's appraised
value.
Real Estate Construction Lending. At December 31, 1997, real estate construction
loans comprised $3.256 million, or 10.04%, of the Bank's total loan portfolio.
Many of these loans are for commercial or church construction with conversion to
permanent financing upon completion of the building phase. In general, the Bank
does not originate permanent mortgage loans or construction loans on income
producing properties such as apartments, shopping centers, hotels and large
office buildings. However, because of their short-term maturities and higher
yields, construction loans for residential purposes are attractive to the Bank.
To minimize the risk associated with construction lending, the Bank normally
limits loan amounts to 80% of the project's appraised value. The Bank also
obtains a first lien on the secured property as collateral for its construction
loans. The Bank primarily limits its lending activities to borrowers with
demonstrated financial strength. Over the past 11 years, the Bank has
experienced no losses or charge-offs involving its construction loan portfolio.
Mortgage Lending. The Bank's real estate loan portfolio, a significant portion
of which consists of business related loans secured by the owner's residence or
commercial property, was approximately 75.8% of total loans at December 31,
1997. The mortgage portfolio consists primarily of loans for business and/or
individual purposes with 10- to 20- year amortization schedules that mature with
a balloon payment on the third or fifth anniversary of the loan. The Bank does
not sell any of its loans in the secondary market.
Consumer Lending. The Bank currently offers most types of consumer time and
installment loans, including automobile loans and home equity lines of credit.
The Bank also extends other consumer credit through its overdraft protection
program. At December 31, 1997, the Bank's consumer loans were 8.51% of the total
loan portfolio. The performance of the consumer loan portfolio is directly tied
to and dependent upon the general economic conditions in the Bank's market area
Credit Policies and Administration. The Bank has adopted a comprehensive lending
policy which includes stringent underwriting standards for all types of loans
and pricing guidelines. In an effort to manage risk, all credit decisions in
excess of the officer's lending authority must be approved prior to funding by
the Director Executive Committee. Management believes that it employs
experienced lending officers, secures appropriate collateral, and carefully
monitors the financial conditions of its borrowers and the concentration of such
loans in the Bank's portfolio.
In addition, the Bank employs a qualified loan review person to review all loans
over a certain amount on an annual basis and a sampling of all other loans made
each month. This loan review includes a review of the loan's compliance with
policy, the customer's compliance with the commitment terms, collateral, and the
financial information available. The loans are then rated according to the
internal rating system.
The following statistical information is provided pursuant to the requirements
of Guide 3 (Statistical disclosure by Bank Holding Companies) promulgated under
the Securities Act of 1933.
The following table illustrates average balances of total earning assets and
total interest-bearing liabilities for the periods indicated, showing the
distribution of assets, liabilities, stockholders' equity, and the related
income, expense, and corresponding weighted average yields and costs. The
average balances used for the purpose of these tables and other statistical
disclosures were calculated by using the daily average balances. For 1997 tax
exempt real estate and commercial loans are shown on a tax equivalent basis
using a 34% tax rate.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
Year ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities $14,763 $ 930 6.30% $12,718 $ 773 6.08% $12,216 $ 701 5.74%
Loans: (1)
Commercial (2) 4,662 445 9.55% 4,068 369 9.07% 4,515 469 10.39%
Real estate (2) 20,433 1,986 9.72% 18,759 1,822 9.71% 15,684 1,533 9.77%
Credit cards 71 9 12.68% 137 15 10.95% 235 25 10.64%
Consumer 2,633 253 9.61% 2,540 256 10.08% 2,472 244 9.87%
-------------------- ------------------- ---------- ------
Total loans 27,799 2,693 9.69% 25,504 2,462 9.65% 22,906 2,271 9.91%
Federal funds sold 3,296 181 5.49% 2,447 130 5.31% 2,935 171 5.83%
-------------------- ------------------- ---------- ------
Total earning assets 45,858 3,804 8.30% 40,669 3,365 8.27% 38,057 3,143 8.26%
Less: allowance for loan
losses 420 350 378
Total nonearning assets 6,108 5,270 5,561
--------- -------- -------
Total assets $ 51,546 $45,589 $43,240
========= ======== =======
Liabilities and
Stockholder's Equity:
Interest-bearing deposits:
Interest checking $ 4,917 $ 110 2.24% $ 4,531 $ 100 2.21% $ 5,686 $ 137 2.41%
Regular savings 2,964 82 2.77% 3,245 91 2.80% 3,919 117 2.99%
Money market savings 3,814 122 3.20% 3,459 101 2.92% 4,097 124 3.03%
Certificates of deposit:
$100,000 and over 6,771 384 5.67% 5,591 317 5.67% 5,745 311 5.41%
Under $100,000 14,360 743 5.17% 13,155 710 5.40% 12,332 701 5.68%
------------------- ------------------ -----------------
Total interest-bearing
deposits 32,826 1,441 4.39% 29,981 1,319 4.40% 31,779 1,390 4.37%
Short-term borrowings 877 35 3.99% 723 29 4.01% 251 10 3.98%
------------------- ------------------ -----------------
Total interest-bearing
liabilities 33,703 1,476 4.38% 30,704 1,348 4.39% 32,030 1,400 4.37%
Noninterest bearing
liabilities:
Demand deposits 10,009 9,018 7,258
Other liabilities 313 284 283
--------- ------- -------
Total liabilities 44,025 40,006 39,571
Stockholders' equity 7,521 5,583 3,669
--------- ------- -------
Total liabilities and
stockholders' Equity $51,546 $45,589 $43,240
========= ======= =======
Net interest income $ 2,328 $ 2,017 $ 1,743
======= ======= =======
Interest rate spread(3) 3.92% 3.88% 3.89%
Interest expense as a
percent of Average
earning assets 3.22% 3.31% 3.68%
Net interest margin(4) 5.08% 4.96% 4.58%
- ----------------------------------------------------
(1) Nonaccruing loans are included in average loans outstanding
(2) Yield on tax exempt loans is stated on a tax equivalent basis
(3) Interest spread is the average yield earned on earning assets, calculated on
a fully taxable equivalent basis, less the average rate incurred on
interest-bearing liabilities
(4) Net interest margin is net interest income expressed as a percentage of
average earning assets
The following table describes the impact on the interest income of the Bank
resulting from changes in average balances and average rates for the periods
indicated. The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
1997 compared to 1996 1996 compared to 1995
----------------------------------------------------------
Change Due to: Change Due to:
-------------------------- ---------------------------
Increase/ Increase/
Volume Rate Decrease Volume Rate Decrease
-------------------------- ---------------------------
Assets:
Securities $128 $ 29 $157 $ 29 $ 43 $ 72
Loans:
Commercial 56 20 76 (44) (56) (100)
Real estate 162 2 164 298 (9) 289
Credit cards (9) 3 (6) (11) 1 (10)
Consumer 11 (14) (3) 7 5 12
-------------------------- ---------------------------
Total loans 220 11 231 250 (59) 191
Federal funds sold 46 5 51 (27) (14) (41)
-------------------------- ---------------------------
Total earning assets 394 45 439 252 (30) 222
Liabilities and
Stockholders'
Equity:
Interest-bearing
deposits:
Interest checking 9 1 10 (26) (11) (37)
Regular savings (8) (1) (9) (19) (7) (26)
Money market
savings 11 10 21 (19) (4) (23)
Certificates of
deposit:
$100,000 and over 67 - 67 (8) 14 6
Under $100,000 62 (29) 33 34 (25) 9
-------------------------- ---------------------------
Total interest-
bearing deposits 141 (19) 122 (38) (33) (71)
Short-term
borrowings 6 - 6 19 - 19
-------------------------- ---------------------------
Total interest-
bearing liabilities 147 (19) 128 (19) (33) (52)
-------------------------- ---------------------------
Change in net
interest income $247 $ 64 $311 $271 $ 3 $274
========================== ===========================
The following table illustrates the interest sensitivity gap position of the
Bank as of December 31, 1997. This table presents a position that existed at one
particular day, that changes continually, and that is not necessarily indicative
of the Bank's position at any other time.
Interest Sensitivity Analysis
December 31, 1997 (1)
-------------------------------------------------------------
Within 90-365 1 to 5 Over 5
90 days days Years years Total
-------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Loans(2) $10,523 $ 2,485 $10,928 $ 7,703 $31,639
Investment securities, at
amortized cost 200 400 3,175 3,143 6,918
Securities available for sale,
at fair value (3) 501 797 6,135 3,170 10,603
Federal funds sold 1,045 - - - 1,045
--------- ------------ ----------- ------- --------
Total Earning Assets $12,269 $ 3,682 $20,238 $14,016 $50,205
========= ============ =========== ======= ========
Interest-Bearing Liabilities:
Interest checking (4) - - 4,826 - 4,826
Regular savings (4) - - 3,132 - 3,132
Money market savings 3,140 - - - 3,140
Certificates of deposit:
$100,000 and over 2,061 3,372 1,595 - 7,028
Under $100,000 2,073 12,593 2,669 - 17,335
Repurchase Agreements 431 - - - 431
--------- ------------ ----------- ------- --------
Total Interest-Bearing
Liabilities $ 7,705 $15,965 $12,222 $ - $35,892
========= ============ =========== ======= ========
Period Gap $ 4,564 $(12,283) $ 8,016 $14,016 $14,313
Cumulative Gap $ 4,564 $( 7,719) $ 297 $14,313 -
Ratio of cumulative gap to
total earning
assets 9.09% -15.37% .59% 28.51% -
- --------------------------------
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions
(2) Excludes nonaccrual loans.
(3) Excludes equity securities - Federal Reserve Bank stock and stock of the
Community Bankers Bank
(4) The Bank has determined that interest checking and savings accounts are not
sensitive to changes in related market rates and therefore it has placed
them in the 1 to 5 years column.
The following table illustrates the carrying value of investment securities at
the dates indicated.
Investment Securities
December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in thousands)
Amortized Cost:
U. S. Treasury and other U. S. $6,064 $3,313 $3,780
Government agencies & corporations
States of the United States & political 110 - -
Subdivisions
Other securities 744 742 649
----------- ---------- ------------
$6,918 $4,055 $4,429
=========== ========== ============
The following table illustrates the fair market value of securities available
for sale at the dates indicated.
Securities Available for Sale
December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in thousands)
Fair Value:
U. S. Treasury and other U. S. $ 9,854 $8,603 $6,035
Government agencies & corporations
States of the United States & political - - -
Subdivisions
Other securities 1,029 1,322 1,720
----------- ---------- ------------
$10,883 $9,925 $7,755
=========== ========== ============
The Bank does not hold any derivative instruments.
The following table sets forth the maturity, distribution and weighted average
yields of the investment portfolio as of December 31, 1997. The weighted average
yields are calculated on the basis of book value of the investment portfolio and
on the interest income of investments adjusted for amortization or premium and
accretion of discount.
Maturities of Investments
December 31, 1997
-------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
-------------------------------------
(Dollars in thousands)
U. S. Treasury and other U. S.
Government agencies & corporations
One year or less $ 1,196 $ 1,197 5.68%
After one year to five years 8,505 8,539 6.30%
After five years to ten years 6,038 6,064 7.02%
After ten years 166 163 6.40%
------------ -----------
Total 15,905 15,963 6.53%
------------ -----------
States of the United States & political
subdivisions (1)
After ten years 110 110 7.58%
------------ -----------
Total 110 110 7.58%
------------ -----------
Other securities
One year or less 700 700 5.73%
After one year to five years 791 791 6.01%
------------ -----------
Total 1,491 1,491 5.88%
------------ -----------
Total Securities (2) (3) $17,506 $17,564 6.48%
============ ===========
- ------------------------------------------
(1) Yields on tax-exempt securities have been computed on a tax equivalent basis
(2) Excludes equity securities without readily determinable fair values, at
historical costs, as follows: Federal Reserve Bank - $225,350; Community
Bankers Bank - $54,750
(3) The equity securities have no stated maturity date.
The following table summarizes the composition of the loan portfolio by balance
and percentage at the dates indicated.
Loan Portfolio
December 31,
1997 1996 1995 1994 1993
--------- --------- --------- -------- ---------
Commercial $ 5,062 $4,274 $4,001 $5,437 $4,689
Real estate construction 3,256 1,524 1,138 - 75
Real estate mortgage:
Residential
(1-4 family) 4,180 3,381 3,582 3,224 3,773
Nonfarm nonresidential 17,148 14,943 13,432 10,518 9,881
--------- --------- --------- -------- ---------
Real estate mortgage
subtotal 21,328 18,324 17,014 13,742 13,654
Consumer loans 2,761 2,667 2,663 2,822 2,046
Other 27 52 4 6 655
--------- --------- --------- -------- ---------
Total loans 32,434 26,841 24,820 22,007 21,119
Deferred loan fees (75) (56) (57) (15) -
Allowance for loan losses (425) (409) (252) (484) (582)
--------- --------- --------- -------- ---------
Net loans $31,934 $26,376 $24,511 $21,508 $20,537
========= ========= ========= ======== =========
The following table presents the maturities or repricing periods of selected
loans outstanding as of December 31, 1997.
Maturity/Repricing Schedule of Loans
(Dollars in thousands)
------------------------------------------------------------------------------
1 year or less 1 - 5 years After 5 years Total(1)
------------------------------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate Rate Rate
December 31, 1997 $5,479 $9,827 $10,540 - $5,793 - $21,812 $9,827
- --------------------
(1) Excludes nonaccrual loans
An analysis of the allowance for loan losses, including charge-off activity, is
presented below for the periods indicated.
Allowance for Loan Losses
Years ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(Dollars in thousands)
Balance beginning of period $409 $252 $484 $582 $775
Loans charged off:
Commercial 35 56 106 107 333
Real Estate 8 56 471 108 67
Consumer 36 1 4 28 30
Credit card - 3 25 3 17
-------- -------- -------- ------- ---------
Total Loans Charged Off 79 116 606 246 447
Recoveries:
Commercial 47 8 21 6 6
Real Estate - 125 7 36 12
Consumer - 1 3 11 -
Credit card - 1 6 5 1
-------- -------- -------- ------- ---------
Total Recoveries 47 135 37 58 19
-------- -------- -------- ------- ---------
Net loans charged-off
(recovered) 32 (19) 569 188 428
Provision for loan losses 48 138 337 90 235
-------- -------- -------- ------- ---------
Balance end of period $425 $409 $252 $484 $582
======== ======== ======== ======= =========
Allowance for loan losses
to period end total loans 1.31% 1.52% 1.02% 2.20% 2.76%
Allowance for loan losses
to Nonaccrual loans 52.73% 59.28% 54.88% 129.66% 46.71%
Net charge-offs(recoveries)
to average loans 0.12% -0.07% 2.48% 0.89% 2.06%
A breakdown of the allowance for loan losses along with the percent of loans in
each category is provided in the following table. However, management of the
Bank does not believe that the allowance for loan losses can be fragmented by
category with any precision that would be useful to investors. The breakdown of
the allowance for loan losses is based primarily upon those factors discussed
above in computing the allowance for loan losses as a whole. Because all of
these factors are subject to change, the breakdown is not necessarily indicative
of the category of future loan losses
Allocation for Allowance for Loan Losses in Dollars
December 31, 1997 December 31, 1996 December 31, 1995
-------------------------------------------------------------------------------------
Percent of
Percent of Loans in Percent of
Loans in Each Each Loans in Each
Category to Category to Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans
---------------------- ---------------------- -----------------------------
(Dollars in thousands)
Commercial $130 15.61% $123 15.92% $76 16.12%
Real estate -
construction - 10.04% - 5.68% - 4.59%
Real estate -
mortgage 235 65.76% 225 68.27% 140 68.55%
Consumer 60 8.51% 61 9.94% 36 10.73%
Other - .08% - 0.19% - 0.01%
---------------------- ---------------------- -----------------------------
$425 100.00% $409 100.00% $252 100.00%
====================== ====================== =============================
The following table details information concerning nonaccrual and past
due loans, as well as foreclosed assets, for the dates indicated.
Nonperforming Assets
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
(Dollars in thousands)
Nonaccrual loans $ 795 $ 690 $ 459 $ 373 $1,247
Other real estate owned 663 947 989 1,553 1,565
------- ------- --------- -------- ---------
Total nonperforming assets $1,458 $1,637 $1,448 $1,926 $2,812
======= ======= ========= ======== =========
Loans past due 90 days
accruing interest $ 33 $ - $ 4 $ - $ 279
Allowance for loan losses
to nonaccrual loans 52.73% 59.28% 54.88% 129.66% 46.71%
Nonperforming assets to
period-end loans and
other real estate owned 4.41% 5.89% 5.63% 8.18% 12.40%
The following table details the average amount of and the average rate paid on
the following primary deposit categories for the periods indicated.
Average Deposits and Average Rates Paid
Years ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------
(Dollars in thousands)
------------- ----------- ----------
Noninterest-bearing accounts $10,009 $9,018 $7,258
------------- ----------- ----------
Interest-bearing accounts:
Checking 4,917 2.24% 4,531 2.21% 5,686 2.41%
Regular savings 2,964 2.77% 3,245 2.80% 3,919 2.99%
Money market savings 3,814 3.20% 3,459 2.92% 4,097 3.03%
Certificates of deposit:
$100,000 and over 6,771 5.67% 5,591 5.67% 5,745 5.41%
Under $100,000 14,360 5.17% 13,155 5.40% 12,332 5.68%
------------- ----------- ----------
Total interest-bearing
accounts $32,826 4.39% $29,981 4.40% $31,779 4.37%
------------- ----------- ----------
Total deposits $42,835 $38,999 $39,037
============= =========== ==========
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1997.
Maturities of CD's of $100,000
and Over
December 31, 1997
Amount Percent
-----------------------------------
(Dollars in thousands)
Three months or less $ 2,061 29.33%
Over three months to one year 3,372 47.98%
Over one year to five years 1,595 22.69%
Over five years - -
--------------- --------------
Total $ 7,028 100.00%
=============== ==============
The following table summarizes the liquid assets of the Bank as of December 31
for each period disclosed. The table represents a position that existed at one
particular day, that changes continually, and that is not necessarily indicative
of the Bank's position at any other time.
Summary of Liquid Assets
December 31,
------------------------------------
1997 1996 1995
------------------------------------
(Dollars in thousands)
Cash and due from banks $1,857 $2,986 $2,370
Federal funds sold 1,045 3,422 2,080
Investment securities(1) 1,898 3,022 2,666
----------
========= =========
Total liquid assets $4,800 $9,430 $7,116
========== ========= =========
Deposits and other liabilities $48,558 $42,520 $40,513
Ratio of liquid assets to deposits
and other liabilities 9.89% 22.18% 17.56%
- --------------------------------------------
(1) Only investment securities with a maturity of one year or less are
considered liquid assets for this table.
The following table summarizes ratios considered to be significant indicators of
the Bank's profitability and financial condition during the periods indicated.
Financial Ratios
December 31,
------------------------------------
1997 1996 1995
------------------------------------
Return on average assets 1.02% 1.41% 0.47%
Return on average equity 7.00% 11.48% 5.51%
Average equity to average asset ratio 14.59% 12.25% 8.49%
The following table sets forth the Bank's various capital ratios at the dates
indicated.
Analysis of Capital
--------------------------------------
1997 1996 1995
--------------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 4,791 $4,791 $2,771
Surplus 2,679 2,679 1,784
Retained earnings(deficit) 320 (206) (847)
----------- ---------- --------
Total Tier 1 Capital 7,790 7,264 3,708
Tier 2 Capital:
Allowance for loan losses (1) 425 409 252
----------- ---------- --------
Total risk-based capital $8,215 $7,673 $3,960
=========== ========== ========
Risk weighted assets $39,679 $33,328 $30,851
=========== ========== ========
Capital Ratios:
Tier 1 risk-based capital ratio 19.63% 21.80% 12.00%
Total risk-based capital ratio 20.70% 23.02% 12.84%
Tier 1 capital to average assets 13.91% 15.07% 8.58%
- ---------------------------------------------
(1) Limited to 1.25% of risk weighted assets
Market Area
The Bank has an office on Centreville Road in the City of Manassas which houses
the executive offices as well as a branch with attached drive-up facilities and
an ATM. A temporary office was opened January 6, 1997, in the Kmart shopping
center on Sudley Road to provide teller and loan services. The Bank opened the
permanent facility in Manassas, Prince William County, Virginia, on May 19,
1997, with attached drive-up facilities and an ATM. The current population of
Manassas City, Manassas Park and Prince William County is approximately 299,600.
The population of Prince William County alone is 257,633. Prince William County
is part of the populous Northern Virginia region near Washington, D. C. and is
located approximately 18 miles from Tyson's Corner in Fairfax, Virginia, 18
miles from Dulles International Airport and is adjacent to Loudoun County. The
local economy of Manassas and Prince William County is heavily dependent upon
the federal and local governments. IBM/Toshiba constructed a new facility in
Prince William County, known as Dominion Semiconductor, which opened in 1997
with a projected employment of 3,000 by the year 2000. George Mason University,
a Virginia state university, opened the Prince William Institute Center for
Bioinformatics in the western portion of the county and anticipates enrollment
of 10,000 students by the year 2000. Currently, the two largest employers in and
around Manassas are Prince William Hospital and Lockheed/Martin. In addition, a
large contribution to the county's economy comes from small businesses and from
local residents who work outside the county, in the federal and local
government, and other businesses in the Washington Metropolitan area.
Competition
The Bank is one of ten banks located in Manassas. As of June 30, 1997, the Bank
held 10.5% of the bank deposits in the City of Manassas, and 3.3% of the total
bank deposits in Prince William County, Virginia. In addition to the Bank, two
other community banks have offices in Manassas. Seven multi-state banking
organizations also have offices in Manassas. Accordingly, the Bank operates in a
highly competitive banking environment, competing for deposits and loans with
other financial institutions, some or all of whom may possess greater financial
resources than those available to the Bank. These institutions all have higher
lending limits than the Bank, and many provide various services, such as trust
services or a full range of mortgage products, which the Bank does not offer
directly to its customers. In addition, there can be no assurance that other
financial institutions, with substantially greater resources than the Bank, will
not establish operations in the Bank's service area. There are numerous
commercial banks and savings and loan associations, and large credit unions
located in the Washington Metropolitan area.
Employees
At December 31, 1997, the Bank had the equivalent of 28 full-time employees.
None of its employees is represented by any collective bargaining unit. The
Bank considers relations with its employees to be good.
Supervision and Regulation
The Bank is regulated extensively under both federal and state law. The Bank is
organized as a Virginia chartered banking corporation and is regulated and
supervised by the Bureau of Financial Institutions of the Virginia State
Corporation Commission ("SCC"). As a member of the Federal Reserve System, the
Bank is regulated and supervised by the Federal Reserve Bank of Richmond, which
is the Federal Reserve Bank (the "Federal Reserve") for the district in which
the Bank is located. The SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of the Bank, reviewing such matters as the adequacy of loan
loss reserves, quality of loans and investments, management practices,
compliance with laws, and other aspects of the Bank's operations. In addition to
these regular examinations, the Bank must furnish the SCC and the Federal
Reserve with periodic reports containing a full and accurate statement of its
affairs. Supervision, regulation and examination of banks by these agencies are
intended primarily for the protection of depositors rather than stockholders.
The Bank's deposits are insured up to $100,000 per insured depositor (as defined
by law and regulation) through the Bank Insurance Fund ("BIF"). The BIF is
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by BIF-insured institutions.
The actual assessment to be paid by each BIF member is based on the
institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. The Bank is currently classified as a "well-capitalized"
institution and therefore pays the minimum rate.
The federal supervisory agencies share authority to implement regulations under
the Community Reinvestment Act of 1979, as amended ("CRA"). The general purpose
of the CRA is to encourage lenders, while operating safely and soundly, to meet
the credit needs of their communities. The CRA specifically directs regulators,
when examining a lender, to assess the lender's record of helping to meet the
credit needs of its entire community, including low and moderate-income
neighborhoods. For example, the regulators will evaluate and take into account a
lender's record of meeting its community credit needs when evaluating a lender's
application for creation of a new branch. The Bank has always had a
"Satisfactory" rating with respect to its compliance with the CRA. As a result
of a Presidential initiative, each of the federal banking agencies, including
the FDIC, issued a notice of proposed rule making in October 1994 to replace the
current CRA assessment system with a new evaluation system that would rate
institutions based on their actual performance (rather than efforts) in meeting
community credit needs. The final rule retains, to a significant extent, the
principles and structures underlying the 1994 proposal and was phased in over
1996 and 1997.
Economic and Monetary Policies. The operations of the Bank are affected not only
by general economic conditions, but also by the economic and monetary policies
of various regulatory authorities. In particular, the Federal Reserve regulates
money, credit and interest rates in order to influence general economic
conditions. These policies have a significant influence on overall growth and
distribution of loans, investments and deposits and affect interest rates
charged on loans or paid for time and savings deposits. Federal Reserve monetary
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. The amount of dividends that may be paid
by the Bank depends upon the Bank's earnings and capital position and is limited
by federal and state law, regulations and policies. Federal regulations limit
the amount of dividends which the Bank can pay without obtaining prior approval
from regulatory authorities.
As a member bank subject to the regulations of the Federal Reserve, the Bank
must obtain prior written approval for any dividend if the total of all
dividends declared in any calendar year would exceed the total of its net
profits, as defined by applicable regulations, for that year, combined with its
retained net profits for the preceding two years. In addition, the Bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of loans which are in arrears
with respect to interest by six months or more unless such loans are fully
secured and in the process of collection. Moreover, for purposes of this
limitation, the Bank is not permitted to add the balance in its allowance for
loan losses account to its undivided profits then on hand; however, it may net
the sum of its bad debts as so defined against the balance in its allowance for
loan losses account and deduct from undivided profits only bad debts as so
defined in excess of that account.
In addition, the Federal Reserve is authorized to determine under certain
circumstances relating to the financial condition of a bank that the payment of
dividends would be an unsafe and unsound practice and to prohibit payment
thereof. The payment of dividends that deplete a bank's capital base could be
deemed to constitute such an unsafe or unsound practice. The Federal Reserve has
indicated that banking organizations should generally pay dividends only out of
current operating earnings.
In addition, under Virginia law no dividend may be declared or paid out of a
Virginia chartered bank's paid-in-capital. The SCC has general authority to
prohibit payments of dividends by a Virginia chartered bank if it determines
that the limitation is in the public interest and is necessary to ensure the
bank's financial soundness, and may also permit the payment of dividends not
otherwise allowed by Virginia law.
Capital Requirements. The various federal bank regulatory agencies, including
the Federal Reserve, have adopted risk-based capital requirements for assessing
bank capital adequacy. These standards define capital and establish capital
requirements in relation to assets and off-balance sheet exposure as adjusted
for credit risk. The risk-based capital standards currently in effect are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among bank holding companies and banks, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items.
The minimum standard for the ratio of capital to risk-weighted assets (including
certain off balance sheet obligations, such as standby letters of credit) is
8.0%. At least half of the risk-based capital must consist of common equity,
retained earnings, and qualifying perpetual preferred stock, less deductions for
goodwill and various other intangibles ("Tier 1 capital"). The remainder ("Tier
2 capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, preferred stock, and a limited
amount of the general valuation allowance for loan losses. The sum of Tier 1
capital and Tier 2 capital is "total risk-based capital."
The Federal Reserve also has adopted regulations which supplement the risk-based
guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly
average assets ("Leverage ratio") of 4%. The Federal Reserve has emphasized that
the foregoing standards are supervisory minimums and that a banking organization
will be permitted to maintain such minimum levels of capital only if it receives
the highest rating under the regulatory rating system and the banking
organization is not experiencing or anticipating significant growth. These rules
further provide that banking organizations experiencing internal growth or
making acquisitions will be expected to maintain capital positions substantially
above the minimum supervisory levels and comparable to peer group averages,
without significant reliance on intangible assets. The Federal Reserve continues
to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of
a banking organization's Tier 1 capital, less deductions for intangibles
otherwise includable in Tier 1 capital, to total tangible average assets.
Item 2 - DESCRIPTION OF PROPERTY
The executive offices and a branch are located at 8780 Centreville Road,
Manassas, Virginia. The Bank has owned the building for approximately ten years.
This office houses a full service banking office, with drive-up and ATM
facilities. This property is owned by the Bank and is free of liens. In
addition, the Bank has a branch location at 7801 Sudley Road, Manassas,
Virginia, in Prince William County, Virginia. The permanent facility was
completed and opened for operation on May 19, 1997. The Bank owns the building
but leases the land on which the building is sited.
Item 3 -- LEGAL PROCEEDINGS
In the course of its operations, the Bank is party to various legal proceedings.
The Bank does not believe that the outcome of these lawsuits, individually or in
the aggregate, will have a material adverse effect on the Bank's business,
financial position, or results of operations.
Item 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Bank during the
fourth quarter of 1997.
Part II
Item 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Bank's Common Stock is listed on the NASDAQ SmallCap Market under the symbol
"SBCM." The high and low closing bid prices of the Bank's Common Stock on the
NASDAQ SmallCap Market from June 24, 1996 (the date the stock was listed on
NASDAQ SmallCap Market) to December 31, 1997, are set forth in the following
table. From January 1, 1996, through June 23, 1996, the Bank's Common Stock was
quoted on the NNOTC Bulletin Board, a NASD sponsored and operated inter-dealer
quotation system for equity securities not listed on the NASDAQ Stock Market,
under the symbol "SEMA." The high and low closing bid prices during this period
are also set forth in the following table.
Closing Bid Price
NASDAQ SmallCap Low High
1997 --- ----
Fourth Quarter $9.75 $13.875
Third Quarter 9.375 10.00
Second Quarter 9.125 10.25
First Quarter 9.00 10.25
Closing Bid Price
NASDAQ SmallCap Low High
1996 --- ----
Fourth Quarter $8.25 $9.50
Third Quarter 8.375 9.00
Second Quarter (beginning June 24, 1996) 8.375 9.25
Closing Bid Price
NASDAQ Bulletin Board Low High
1996 --- ----
Second Quarter (through June 23, 1996) $7.75 $7.75
First Quarter 6.00 8.00
At December 31, 1997, there were 958,267 shares of common stock outstanding held
by approximately 530 stockholders of record.
The Bank has not declared any cash dividends. Payment of dividends is at the
discretion of the Board of Directors, is subject to various federal and state
regulatory limitations and is dependent upon the overall performance and capital
requirements of the Bank.
American Stock Transfer & Trust Company became the Bank's stock transfer agent
and registrar effective February 3, 1997.
Item 6 -- MANAGEMENT'S DISCUSSION ANALYSIS
The following discussion provides information about the major components of the
results of operations and financial condition, liquidity, and capital resources
of Security Bank Corporation. This discussion and analysis should be read in
conjunction with the Financial Statements and Notes to the Financial Statements.
Overview
Net income totaled $526,201 in 1997, a decrease of 17.92% from 1996. In 1996,
net income totaled $641,093, a 217.2% increase over 1995 which totaled $202,091.
Basic earnings per share were $.55, $.84, and $.36 in 1997, 1996, and 1995
respectively. Diluted earnings per share were $.54, $.83, and $.36 in 1997,
1996, and 1995 respectively. Net income decreased in 1997 due to the opening of
our first branch on Sudley Road in Manassas, VA, in a temporary location on
January 6, 1997, and in the permanent location on May 19, 1997. Net income for
1996 increased due to improved net interest margin and the reduction of loan
charge-offs which allowed for a reduction in the provision for loan losses.
Profitability as measured by the Bank's return on average assets (ROA) was 1.02%
in 1997, down from 1.41% in 1996, and .47% in 1995. The Bank's return on average
assets decreased in 1997 due to the opening of the new branch location. Another
key indicator of performance, the return on average equity (ROE) for 1997 was
7.00%, compared to 11.48% and 5.51% for 1996 and 1995 respectively. The decrease
in the return on average equity is due to a higher amount of equity for the
entire year of 1997. In 1996 the stock offering added $2.9 million to equity as
of June 24, 1996. The ratio of net income to average total assets (ROA) and on
average shareholder's equity (ROE) and certain other ratios for the periods
indicated are presented in the table of Selected Financial Data.
At the end of 1997, the Bank had total assets of $56.358 million, up $6.587
million, or 13.2% over the previous year-end. In 1996, there was an increase of
12.4% over year-end 1995, $2.9 million of which was attributable to the stock
offering in June of 1996. The growth in 1997 was funded primarily by
interest-bearing deposits while the growth in 1996 was funded both by the stock
offering and interest-bearing deposits.
Net Interest Income
Net interest income is the major component of the Bank's earnings and is equal
to the amount by which interest income exceeds interest expense. The net
interest margin is net interest income expressed as a percentage of interest
earning assets. Changes in the volume and mix of earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income and the net interest
margin.
During 1997, net interest income increased 13.7% to $2.293 million from $2.017
million in 1996. The Bank's net interest margin increased to 5.08% from 4.96% in
1996 and 4.58% in 1995. This is primarily due to the increased earning assets
and the change in the mix of earning assets. In addition, the 1997 yields are
adjusted for tax-equivalent yield while the 1996 and 1995 numbers were not
adjusted because of the NOL carryforward. The yield on average earning assets
increased to 8.30% in 1997 from 8.27% in 1996 and 8.26% in 1995. The yield on
average interest-bearing liabilities decreased to 4.38% in 1997, compared to
4.39% and 4.37% in 1996 and 1995 respectively. Average earning assets increased
$5.189 million or 12.8% in 1997. Average interest-bearing liabilities increased
9.8% to $33.703 million during the same period.
Interest Sensitivity
An important element of earnings performance and the maintenance of sufficient
liquidity is proper management of the interest sensitivity position ("GAP"). The
interest sensitivity GAP is the difference between interest sensitive assets and
interest sensitive liabilities in a specific time interval. This GAP can be
managed by repricing assets and/or liabilities, by selling investments
available-for-sale, by replacing an asset or liability at maturity or by
adjusting the interest rate during the life of the asset or liability. Matching
the amounts of assets and liabilities maturing in the same interval helps to
hedge interest risk and to minimize the impact on net interest income in periods
of rising or falling interest rates.
The Bank evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
On December 31, 1997, the Bank held $4.564 million more in interest-sensitive
assets than liabilities that repriced within three months or less, and was
therefore in an asset-sensitive position. The Bank's cumulative gap continues to
decrease through the end of one year, thereby causing the Bank to be
liability-sensitive at ($7.719) million. An asset-sensitive institution's net
interest margin and net interest income generally will be impacted favorably by
rising interest rates, while that of a liability-sensitive institution generally
will be impacted favorably by declining interest rates.
Noninterest Income
The Bank's principal sources of noninterest income are service charges and fees
on deposit accounts, particularly transaction accounts. In 1997 noninterest
income increased 5.0% or $18,953. 1996 noninterest income increased $42,866, or
13.0% over 1995 after taking into account one-time gains on the sale of other
real estate owned. Service charges on deposit accounts increased 12.6% in 1997
over 1996 and 30.7% in 1996 over 1995. The majority of this increase is
attributed to overdraft charges paid by several customers.
Noninterest Expense
Noninterest expense increased 28.6% or $462,933 in 1997. $191,073 of this change
is an increase in salary and benefits due to the opening of the branch office
and $137,198 is an increase in building and equipment costs associated with the
new facility. Other operating costs such as data processing, supplies and
advertising also increased because of the new facility. In addition, the Bank
installed a local area network in both offices with a wide area network to tie
the two locations together. This necessitated upgrading most of the computers in
the Bank. Noninterest expense increased 5.5% or $83,908 in 1996 after taking
into account a writedown on other real estate owned in 1995 in the amount of
$78,606. The increase in 1995 was 2.1% after the above adjustment. Increases in
noninterest expense in 1996 can be attributed to two new officers hired in
November to staff the new branch and the costs associated with opening the new
branch on January 6, 1997.
Income Taxes
Income tax expense at December 31, 1997, was $35,731, up from zero in 1996 and
1995. This amount was determined after the utilization of the net operating loss
carryforward of $384,525. Note 7 to the Financial Statements for year end
provide a reconciliation between the amount of income tax expense computed using
the federal statutory income tax rate and the Bank's actual income tax expense.
Also included in Note 7 to the Financial Statements is information regarding the
principal items giving rise to deferred taxes for 1997 and 1996.
Asset Quality - Allowance for Loan Losses
The allowance is to provide for potential losses inherent in the loan portfolio.
Among other factors, management considers the Bank's historical loss experience,
the size and composition of the loan portfolio, the value and adequacy of
collateral and guarantors, non-performing credits, and current and anticipated
economic conditions. There are additional risks of future loan losses which
cannot be precisely quantified or attributed to particular loans or classes of
loans. Since those risks include general economic trends as well as conditions
affecting individual borrowers, the allowance for loan losses is an estimate.
The allowance is also subject to regulatory examinations and determination as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
banks identified by regulatory agencies.
In 1997, the Bank had a provision expense of $48,000 compared to $137,500 in
1996 and $337,421 in 1995. Loans charged off during 1997 amounted to $78,676
compared to $116,195 in 1996 and $606,031 in 1995. Recoveries amounted to
$46,808, $135,322 $37,138, in 1997, 1996, and 1995 respectively. The ratio of
net charge-offs to average outstanding loans was .12% in 1997, (.07%) in 1996,
and 2.48% in 1995.
Nonperforming Assets
Total nonperforming assets, which consist of the Bank's nonaccrual loans and
other real estate owned, were $1.469 million at December 31, 1997, a decrease of
$168,000 from December 31, 1996. The improvement in nonperforming assets was due
to the sale of two of the four pieces of other real estate owned offset by an
increase in nonaccrual loans.
The Bank places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of both principal and
interest is doubtful. Policy is to place loans on nonaccrual status if principal
or interest is past due for 90 days or more unless the debt is both well secured
and in the process of collection.
Of the total nonperforming assets as of December 31, 1997, $662,594 represents
two pieces of property. This is a decrease from 1996 of $284,243. These
properties are not cuurently listed with a real estate agent for sale.
Securities
The securities portfolio plays a primary role in the management of interest rate
sensitivity and generates substantial interest income. In addition the portfolio
serves as a source of liquidity and is used as needed to meet collateral
requirements.
At year-end 1997, total securities were $17.801 million, up 27.3% from $13.980
million at year-end 1996. Securities of U. S. Treasury and other U. S.
Government Agencies and Corporations represent 89.4% of the total securities
portfolio. The remainder consists of investment grade corporate securities and
one municipal security of $110,147. The growth of the securities portfolio is
primarily due to the growth in assets and lending activities that did not keep
pace. The greater majority of the U. S. Government Agencies are callable bonds
with varying call dates. Although there is a risk that these bonds will be
called in a decreasing rate environment, the bonds were purchased with the call
provision in mind as a means of funding an increase in the loan portfolio.
Effective December 31, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As a result, the securities portfolio
consists of two components, investment securities held to maturity and
securities available for sale. Securities are classified as investment
securities based on management's intent and ability, at the time of purchase, to
hold such securities to maturity. These securities are carried at amortized
cost. Securities which may be sold in response to changes in the market interest
rates, changes in the securities' prepayment risk, increases in loan demand,
general liquidity needs, and other similar factors are classified as available
for sale and are carried at estimated fair market value.
Loan Portfolio
At December 31, 1997, loans, net of unearned income and the reserve for loan
losses, totaled $31.934 million, an increase of 21.1% over the 1996 total of
$26.376 million. Net loans increased 7.6% and 14% in 1996 and 1995 respectively.
The Bank is making a concerted effort to increase the gross loan/deposit ratio
from the year-end total of 68%.
The Bank's lending activities are its principal source of income. The Bank's
loan portfolio is comprised of commercial loans, construction loans, real estate
loans, and consumer loans. The primary market in which the Bank makes loans is
Prince William County (including the Cities of Manassas and Manassas Park) and
the adjacent counties of Fauquier and Fairfax. The major portion of the loan
portfolio is in real estate lending.
Deposits
The Bank's predominate source of funds is depository accounts. The Bank's
deposit base is comprised of demand deposits, savings and money market accounts,
and time deposits. The Bank's deposits are provided by individuals and
businesses located within Prince William County and the Cities of Manassas and
Manassas Park.
Total deposits increased $6.075 million, or 14.6%, in 1997 over 1996. In 1997,
this growth was mainly in interest-bearing deposits due to the opening of the
branch and a special certificate of deposit program offered during September and
October 1997 on 1 year CDs. In 1996, total deposits increased $1.693 million, or
4.2% over 1995.
Liquidity
Liquidity represents the Bank's ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold, and
investments and loans maturing within one year. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
which is sufficient to satisfy its depositors' requirements and to meet
customers' credit needs.
At December 31, 1997, cash, securities maturing within one year, and federal
funds sold were 9.9% of deposits plus other liabilities, compared to 22.2% at
December 31, 1996. Most of the loan growth was in the last half of 1997 and was
funded with federal funds sold and maturing or called investments.
Additional resources of liquidity available to the Bank include the Bank's
capacity to borrow additional funds through an established line of credit with a
correspondent bank in an amount not to exceed 50% of capital.
Capital Resources
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, and changing competitive conditions
and economic forces. The adequacy of the Bank's capital is reviewed by
management on an ongoing basis. Management seeks to maintain a capital structure
that will assure an adequate level of capital to support anticipated asset
growth and to absorb potential losses.
The Bank's capital position continues to exceed regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier 1 capital, total risk-based capital, and leverage ratios.
Tier 1 capital consists of common stock, surplus, and retained earnings. Total
capital includes Tier 1 and a portion of the Allowance for Loan and Lease
Losses. Risk-based capital ratios are calculated with reference to risk-weighted
assets. The Bank's Tier 1 capital ratio was 19.6% at December 31, 1997, compared
to 21.8% at December 31, 1996. The total risk-based capital ratio was 20.7% at
December 31, 1997, compared to 23.0% at December 31, 1996. These ratios are in
excess of the mandated minimum requirement of 4% and 8% respectively.
Shareholders' equity reached $7.800 million at year-end 1997 compared to $7.251
million at year-end 1996. The leverage ratio consists of Tier 1 capital divided
by average assets. At December 31, 1997, the Bank's leverage ratio was 15.2%
compared to 15.1% at December 31, 1996. Each of these exceeds the required
minimum leverage ratio of 4%.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services, since such prices are
affected by inflation. Another impact of inflation is on noninterest expenses,
which tend to rise during periods of general inflation. The values of real
estate collateralizing the Bank's loans and foreclosed property could be
affected by inflation or changing prices due to market conditions.
Other Matters
Year 2000: The Bank has formed a Year 2000 committee consisting of officers
representing the operating departments of the Bank. A list has been compiled of
all the hardware, software, and equipment vendors that the Bank uses.
Assignments have been made so that each vendor will be contacted to determine
their compliance with Year 2000 needs.
The main vendor that could affect the Bank is an outside service bureau which
processes deposit and loan accounts, and general ledger transactions. This
outside servicer reported as of the end of December 1997 that they are 86%
complete on their Year 2000 project and testing of the system changes is
expected to be complete by May 1998.
The Bank expects its hardware, software, and equipment to be compliant by the
end of 1998. An on-going part of the project is interaction with loan customers
regarding what each of them has done to bring their own businesses into
compliance with the needs of the Year 2000.
Accounting Rule Changes
FASB Statement No. 130, "Reporting Comprehensive Income", was issued in June
1997 and establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 15, 1997.
The effects of these Statements on the Bank's financial statements are not
expected to be material.
Item 7 -- FINANCIAL STATEMENTS
The information required under Item 7 is hereby incorporated herein by reference
from the material under the caption "Financial Statements" on pages 10 through
24 of the Bank's Annual Report for the fiscal year ended December 31, 1997.
Item 8 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change of or disagreement with the Bank's independent
accountants during the twenty-four month period prior of the date of the Bank's
most recent financial statements.
Part III
Item 9 -- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required under Item 9 is hereby incorporated by reference from
the material under the caption "Election of Directors" contained on page 5 of
the Bank's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 20, 1998.
Danny R. May has served as President and Chief Executive Officer of the Bank
since December 1995. Mr. May joined the Bank in 1993 as Executive Vice
President and Senior Credit Officer. From 1991 until 1993, Mr. May was the head
of the Small Business Banking Division of First American Bank.
L. Thomas Campbell was appointed Executive Vice President and Senior Loan
Officer of the Bank in January 1996. From June 1995 to January 1996, Mr.
Campbell was Vice President and Senior Office Manager of Wesbanco, Wellsburg in
Wellsburg, West Virginia. From 1985 until 1995, Mr. Campbell was with Fauquier
Bank in Warrenton, Virginia, serving as Vice President and Senior Loan Officer
at the time of his departure in 1995.
Carol S. Brandon was appointed to her present position with the Bank in 1991.
Prior to 1991, she was Vice President and Controller at Madison National Bank of
Virginia.
Item 10 -- EXECUTIVE COMPENSATION
The information required under Item 10 is hereby incorporated by reference from
the material under the caption "Executive Officer's Compensation and Certain
Transactions," contained on pages 6 through 8 of the Proxy Statement for the
Annual Meeting of Stockholders to be held on May 20, 1998.
Item 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 11 is hereby incorporated by reference from
the material under the caption "Security Ownership of Management," contained on
pages 9 through 11 of the Proxy Statement for the Annual Meeting of Stockholders
to be held on May 20, 1998.
Item 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 12 is hereby incorporated by reference from
the material under the caption "Indebtedness and Other Transactions," contained
on page 5 of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 20, 1998.
Item 13 -- EXHIBITS, LISTS AND REPORTS ON FORM 8-K
Exhibit 2 Not Applicable
Exhibit 3 (1) Articles of Incorporation incorporated by
reference to Exhibit 3 to the Bank's Annual
Report on Form 10-KSB for the year ended
December 31, 1996
(II) Bylaws incorporated by reference to Exhibit 3 to
the Bank's Annual Report on Form 10-KSB for the
year ended December 31, 1996
Exhibit 4 Not Applicable
Exhibit 9 Not Applicable
Exhibit 10 a. Lease Agreement dated July 11, 1996, between
Security Bank Corporation and Twelve Knotts
Limited Partnership incorporated by reference to
Exhibit 10 to the Bank's Form 10-QSB for the
quarter ended September 30, 1996
b. Employment Agreement between Security Bank
Corporation and Danny R. May incorporated by
reference to Exhibit 10 to the Bank's Annual
Report on Form 10-KSB for the year ended
December 31, 1996
Exhibit 11 Not Applicable
Exhibit 13 Annual Report to Security Holders, filed
herewith
Exhibit 16 Not Applicable
Exhibit 18 Not Applicable
Exhibit 21 Not Applicable
Exhibit 22 Proxy Statement for Annual Meeting on May 20,
1998, filed herewith
Exhibit 23 Not Applicable
Exhibit 24 Not Applicable
Exhibit 27 Not Applicable
Exhibit 28 Not Applicable
Reports on Form 8-K. No reports were filed by the registrant during the fourth
quarter of 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY BANK CORPORATION
By: /s/ Danny R. May
-----------------------------
Danny R. May, President and
Chief Executive Officer
Dated: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Danny R. May Director and President March 18, 1998
- ---------------- (Principal Executive Officer)
Danny R. May
/s/ Carol S. Brandon Vice President and Cashier March 25, 1998
- --------------------
Carol S. Brandon
Chairman of the Board of
/s/ John O. Gregory Directors March 25, 1998
- -------------------
John O. Gregory
Vice Chairman of the Board of
/s/ Danny G. Snow Directors March 25, 1998
- -----------------
Danny G. Snow
/s/ Harry J. Parrish II Director March 25, 1998
- -----------------------
Harry J. Parrish II
/s/ John T. DeBell Director March 25, 1998
- ------------------
John T. DeBell
/s/ Michael C. Martin Director March 25, 1998
- ---------------------
Michael C. Martin
/s/ Richard J. Ratcliffe Director March 25, 1998
- ------------------------
Richard J. Ratcliffe
/s/ Kenneth B. Swenson Director March 25, 1998
- ----------------------
Kenneth B. Swenson
APPENDIX V
SECURITY BANK CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
- --------------------------------------------------------------------------------
Form 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
- --------------------------------------------------------------------------------
SECURITY BANK CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1337782
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8780 Centreville Road, Manassas, Virginia 20110
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (703) 361-1986
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Common Stock Number of shares 961,378 Outstanding at November 10, 1998
SECURITY BANK CORPORATION
Index
Part I. Financial information
Item 1. Financial Statements (unaudited) 3
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Income - Nine months ended September 30, 1998 and
1997 4
Statements of Shareholders' Equity - Nine months ended September
30, 1998 and 1997 5
Statements of Cash Flows - Nine months ended September 30, 1998 and
1997 6
Notes to Financial Statements - September 30, 1998 7
Item 2. Management's Discussion and Analysis of Financial Results of
Operations 11
Part II. Other information
Item 6 Exhibits and reports on Form 8-K 14
Signatures 16
SECURITY BANK CORPORATION
BALANCE SHEETS
as of
September 30, 1998 and December 31, 1997
Unaudited
9/30/98 12/31/97
--------------- -------------
ASSETS
Cash and due from banks $ 2,130,552 $ 1,856,746
Federal funds sold 4,417,000 1,045,000
Securities (fair value: 1998, $16,856,305 16,799,467 17,801,393
and 1997, $17,844,791)
Loans, net 33,243,419 31,933,777
Other real estate owned 712,594 662,594
Bank premises & equipment, net 2,232,884 2,344,878
Accrued interest receivable 442,324 453,909
Other assets 457,742 259,582
--------------- -------------
TOTAL ASSETS $ 60,435,982 $ 56,357,879
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 14,478,780 $ 12,212,673
Interest bearing 36,895,873 35,461,009
--------------- -------------
Total Deposits 51,374,653 47,673,682
--------------- -------------
Securities sold under agreement to repurchase 374,262 430,786
Accrued interest payable 174,475 128,029
Other liabilities and accrued expenses 396,499 325,672
--------------- -------------
Total Liabilities 52,319,889 48,558,169
--------------- -------------
SHAREHOLDERS' EQUITY
Capital stock, $5.00 par value
authorized 3,000,000 shares,
issued 961,198 in 1998 and 958,267 shares in 1997 4,805,990 4,791,335
Surplus 2,687,068 2,678,730
Retained earnings 576,612 320,221
Accumulated other comprehensive income 46,423 9,424
--------------- -------------
Total Shareholders' Equity 8,116,093 7,799,710
--------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,435,982 $ 56,357,879
=============== =============
SECURITY BANK CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Quarter Ended
9/30/98 9/30/97 9/30/98 9/30/97
------------------------------ -----------------------------
INTEREST INCOME
Interest and fees on loans $ 2,305,513 $ 1,946,461 $ 776,843 $ 674,804
Interest on federal funds sold 136,870 121,488 70,957 47,740
Interest and dividends on investment
securities:
Taxable interest income 281,078 226,007 77,937 78,504
Tax exempt interest income 7,741 - 4,159 -
Interest and dividends on securities
available for sale:
Taxable interest income 400,880 432,500 128,618 141,454
Dividends 10,141 9,915 3,381 3,367
------------- ------------- ------------ ------------
Total interest income 3,142,223 2,736,371 1,061,895 945,869
------------- ------------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 1,221,305 1,025,925 413,435 355,122
Interest on short-term borrowings 19,870 27,480 5,993 10,091
------------- ------------- ------------ ------------
Net interest income 1,901,048 1,682,966 642,467 580,656
------------- ------------- ------------ ------------
Provision for loan losses 205,000 27,000 45,000 21,000
------------- ------------- ------------ ------------
Net Interest Income after provision
for loan losses 1,696,048 1,655,966 597,467 559,656
------------- ------------- ------------ ------------
OTHER INCOME
Fees on deposit accounts 254,644 266,502 81,196 85,673
Other service charges and fees 33,414 19,600 14,647 7,860
Securities gains, net 10,663 - - -
Other operating income 11,766 6,286 8,561 4,508
------------- ------------- ------------ ------------
310,487 292,388 104,404 98,041
------------- ------------- ------------ ------------
OTHER EXPENSE
Salaries and employee benefits 789,270 820,430 250,590 271,932
Occupancy expense 163,224 136,853 56,632 53,075
Furniture and equipment expense 134,350 111,638 48,459 49,207
Other operating expenses 556,618 501,871 185,982 153,366
------------- ------------- ------------ ------------
1,643,462 1,570,792 541,663 527,580
------------- ------------- ------------ ------------
Income before income taxes 363,073 377,562 160,208 130,117
Provision for income taxes 106,682 - 48,512 -
------------- ------------- ------------ ------------
NET INCOME $ 256,391 $ 377,562 $ 111,696 $ 130,117
============= ============= ============ ============
PER COMMON SHARE
Basic $ 0.27 $ 0.39 $ 0.12 $ 0.14
============= ============= ============ ============
Assuming dilution $ 0.26 $ 0.39 $ 0.11 $ 0.13
============= ============= ============ ============
SECURITY BANK CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Accumulated
Retained Other
Comprehensive Earnings Comprehensive Common
Total Income(Loss) (Deficit) Income(Loss) Stock Surplus
--------------- ---------------- -------------- ----------------- ----------- ----------
Balance, January 1, 1997 $ 7,250,771 $ -- $ (205,980) $ (13,314) $ 4,791,335 $2,678,730
Comprehensive Income(loss):
Net income $ 377,562 377,562 377,562
Other comprehensive income(loss)
Unrealized gains(losses) on securities
available for sale 28,920 28,920 28,920
--------------- -------------
Total comprehensive income(loss) $ 406,482
============= -------------- ------------------------------------------
Balance, September 30, 1997 $ 7,657,253 $ 171,582 $ 15,606 $ 4,791,335 $ 2,678,730
============ ========== ========= ============ ===========
Accumulated
Retained Other
Comprehensive Earnings Comprehensive Common
Total Income(Loss) (Deficit) Income(Loss) Stock Surplus
------------- ----------- ---------- --------------- --------- ------------
Balance, January 1, 1998 $ 7,799,710 $ -- $ 320,221 $ 9,424 $ 4,791,335 $ 2,678,730
Comprehensive Income(loss):
Net income 256,391 256,391 256,391
-------------
Other comprehensive income, net of tax
Unrealized gains(losses) on securities
available for sale 47,662
Less: reclassification adjustment (10,663)
Other comprehensive income, net of tax 36,999 36,999 36,999
------------
Total comprehensive income $ 293,390
=============
Issuance of common stock -
exercise of options (1,750) shares 15,907 8,750 7,157
Issuance of common stock-
exercise of warrants (1,181 shares) 7,086 5,905 1,181
------
---------------------- ------------------------------
Balance, September 30, 1998 $ 8,116,093 $ 576,612 $ 46,423 $ 4,805,990 $ 2,687,068
============ ========== ========= ============ ===========
SECURITY BANK CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months ended September 30, 1998 and 1997
1998 1997
----------------- ------------------
Cash Flows from Operating Activities
Net income $ 256,391 $ 377,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 205,000 27,000
Deferred income taxes(credits) (52,371) -
Depreciation 145,448 119,565
Net premium amortization(discount accretion) on securites 10,744 4,827
(Gain) on sale of securities (10,663) -
(Gain)loss on disposition of fixed assets - 3,188
Changes in assets and liabilities:
(Increase)decrease in accrued interest receivable 11,585 (8,244)
(Increase)decrease in other assets (131,357) (67,536)
Increase(decrease) in accrued interest payable 46,446 22,484
Increase(decrease) in other liabilities 123,060 7,512
----------------- ------------------
Net cash provided by (used in) operating activities 604,283 486,358
----------------- ------------------
Cash Flows from Investing Activities
Investments
Proceeds from maturities & principal payments of securities
held to maturity 2,882,037 2,164,972
Proceeds from maturities of securities available for sale 7,958,900 4,549,363
Proceeds from sale of securities available for sale 860,078 -
Purchases of securities held to maturity (313,379) (2,085,027)
Purchases of securities available for sale (10,329,732) (6,601,725)
Net (increase) decrease in loans (1,659,735) (1,569,275)
Purchase of other real estate owned (50,000) -
Sale of other real estate owned 60,000 -
Purchase of premises and equipment (34,086) (928,503)
----------------- ------------------
Net cash provided by(used in) investing activities (625,917) (4,470,195)
----------------- ------------------
Cash Flows from Financing Activities
Net increase(decrease) in DDA, NOW, and savings accounts 3,019,109 1,250,176
Net increase in certificates of deposit 681,862 2,908,245
Increase(decrease) in repurchase agreements (56,524) 532,577
Proceeds from sale of common stock 22,993 -
----------------- ------------------
Net cash provided by (used in) financing activities 3,667,440 4,690,998
----------------- ------------------
Increase (decrease) in cash and cash equivalents 3,645,806 707,161
Cash and Cash Equivalents
Beginning 2,901,746 6,407,955
----------------- ------------------
Ending $ 6,547,552 $ 7,115,116
================= ==================
Supplemental Disclosures of Cash Flow Information,
Cash payments for interest $ 1,194,729 $ 1,030,921
================= ==================
Supplemental Disclosure of Noncash Investing and Financing Activities:
Unrealized gain(loss) on securities available for sale $ 56,059 $ 28,920
================= ==================
Investments originated through deferred compensation agreements $ 101,647 $ 29,141
================= ==================
Other real estate acquired in settlement of loans $ 60,000 $ -
================= ==================
SECURITY BANK CORPORATION
Notes to Financial Statements
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-QSB and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles.
2. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 30, 1998
and December 31, 1997, and the result of operations and cash flows for the
nine months ended September 30, 1998 and 1997. The statements should be read
in conjunction with the Notes to Financial Statements included in the bank's
Annual Report for the year ended December 31, 1997.
3. The results of operations for the nine month period ended September 30, 1998
and 1997, are not necessarily indicative of the results to be expected for
the full year.
4. Securities held to maturity and available for sale as of September 30, 1998,
and December 31, 1997, are:
December 31,
September 30, 1998 1997
Held to Maturity Amortized Cost Amortized Cost
------------------- -----------------
U. S. treasury securities $ 0 $ 200,104
U. S. governmental corporations and
agencies 3,227,084 5,673,724
Mortgage-backed securities 158,642 190,391
Obligation of states and political
subdivisions 422,793 110,147
Corporate securities 545,221 743,670
------------ ------------
$4,353,740 $6,918,036
============ ============
Fair Value Fair Value
------------ ------------
U. S. treasury securities $ 0 $ 200,375
U. S. governmental corporations and
agencies 3,275,520 5,716,625
Mortgage-backed securities 161,731 192,402
Obligation of states and political
subdivisions 422,133 110,147
Corporate securities 551,194 741,885
------------ ------------
$4,410,578 $6,961,434
============ ============
September 30, 1998 December 31, 1997
Available for Sale Amortized Cost Amortized Cost
-------------------- -------------
U. S. treasury securities $ 902,353 $ 906,029
U. S. governmental corporations and
agencies 9,467,322 8,768,488
Mortgage-backed securities 1,290,952 165,921
Corporate securities 249,462 748,540
Other securities 465,300 280,100
-------------------- -------------
$12,375,389 $10,869,078
==================== =============
Fair Value Fair Value
-------------------- -------------
U. S. treasury securities $ 904,221 $ 907,781
U. S. governmental corporations and
agencies 9,527,765 8,783,303
Mortgage-backed securities 1,298,569 162,653
Corporate securities 249,872 749,520
Other securities 465,300 280,100
-------------------- -------------
$12,445,727 $10,883,357
==================== =============
5. Net loans at September 30, 1998, and December 31, 1997, are summarized as
follows:
September 30, 1998 December 31, 1997
--------------------- ------------------
Loans secured by real estate:
Construction & land development $ 5,433,900 $ 3,256,285
Secured by 1-4 family residential
properties 3,898,942 4,179,316
Secured by nonfarm nonresidential
properties 15,774,440 17,148,178
Commercial & industrial loans 5,712,706 5,062,361
Consumer loans 2,803,568 2,760,625
Other 13,374 26,568
--------------------- ------------
Gross loans 33,636,930 32,433,333
Deduct:
Unearned discount 57,691 74,736
Allowance for loan losses 335,820 424,820
--------------------- ------------
393,511 499,556
--------------------- ------------
Net loans $33,243,419 $31,933,777
===================== ============
6. Reserve for Loan Losses
September 30, 1998 December 31, 1997
-------------------- ---------------------
Balance, beginning $424,820 $408,688
Provision charged to operating
expense 205,000 48,000
Loan recoveries 21,846 46,808
Loan charge-offs (315,846) (78,676)
-------------------- ---------------------
Balance, ending $335,820 $424,820
==================== =====================
7. Earnings per Share
Third Quarter 1998 Third Quarter 1997
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
Basic EPS
Income available to
common stockholders $111,696 960,500 $ .12 $130,117 958,267 $ .14
=============== ============ ============= =================
Effect of Dilutive
Securities:
Warrants 9,576 7,606
Employee options 7,297 2,481
Director options 16,052 7,748
--------------- ------------
Diluted EPS
Income available to
common stockholders
+
assumed conversions $111,696 993,425 $.11 $130,117 976,102 $.13
========================================== ==========================================
Third Quarter 1998 Year to Date Third Quarter 1997 Year to Date
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
Basic EPS
Income available to
common stockholders $256,391 959,346 $ .27 $377,562 958,267 $ .39
=============== ============ ============= =================
Effect of Dilutive
Securities:
Warrants 9,895 7,448
Employee options 8,489 1,008
Director options 16,658 3,486
--------------- ------------
Diluted EPS
Income available to
common stockholders
+
assumed conversions $256,391 994,388 $ .26 $377,562 970,209 $ .39
========================================== ==========================================
8. New Accounting Pronouncements
Effective January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. Financial statements for prior periods
have been restated as required.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets and liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This statement is effective for
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
The Bank will adopt this accounting standard as required by January 1, 2000.
This statement is not expected to have a material impact on the Bank's
financial statements.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. This SOP requires that entities capitalize certain
internal-use software costs once certain criteria are met. This statement is
not expected to have a material impact on the Bank's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities and organization
costs to be expensed as incurred. This statement is effective for the fiscal
year 1999 financial statements. This statement is not expected to have a
material impact on the Bank's financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, the following discussion contains
forward-looking statements regarding management's earnings expectations and
the anticipated effect of the Bank's branching efforts. The actual results of
Security Bank Corporation may differ from those anticipated by management as
a result of several factors including, but not limited to, imposition of
federal taxes due to exhaustion of the tax loss carryforward, expenses
associated with the branch, changes in interest rates, increased competition,
deterioration in the quality of loans, and other factors that may effect a
bank's performance.
FINANCIAL SUMMARY
Net income for the nine months ended September 30, 1998, decreased 32.1% to
$256,391 or $.27 per share (basic) and $.26 (assuming dilution) compared to
$377,562 or $.39 (basic and assuming dilution) for the first nine months of
1997. Annualized returns on average assets and average equity for the period
ended September 30, 1998, were .59% and 4.3%, respectively, compared to 1.0%
and 6.8% for the same period in 1997. The greatest impact on the net income
for 1998 was the $205,000 addition to the loan loss reserve while in 1997
there was a provision of $27,000. In addition, 1998 saw the provision of
$106,682 for federal income taxes while 1997 was covered by a net operating
loss carryforward. The annualized return on equity in 1998 and 1997 was
affected by the large amount of capital in the Bank. The decreased return on
average assets was caused by decreased earnings and an increase in average
assets in 1998 to $57,638,500 from $50,029,712 in the first nine months of
1997.
The total assets of the Bank increased to $60,435,982 at September 30, 1998,
compared to $56,357,879 at December 31, 1997, representing an increase of
$4,078,103 or 7.2%. Gross loans outstanding improved 3.7% to $33,636,930 at
September 30, 1998, from $32,433,333 at December 31, 1997. Total deposits
increased $3,700,971, or 7.8%, to $51,374,653 at September 30, 1998, compared
to $47,673,682 at December 31, 1997.
Shareholders' equity at September 30, 1998, totaled $8,116,093 compared to
$7,799,710 at December 31, 1997. Book value per share of common stock on
September 30, 1998, was $8.44 per share compared to $8.14 at December 31,
1997. The book value increased due to earnings and the increase in
accumulated other comprehensive income.
Net Interest Income
Net interest income is the Bank's primary source of earnings and represents
the difference between interest and fees earned on earning assets and the
interest expense paid on deposits and other interest bearing liabilities. Net
interest income totaled $3,142,223 for the first nine months of 1998 compared
to $2,736,371 for the same period in 1997. The improvement in net interest
income was attributable to a higher volume of earning assets.
Noninterest Income
Service charges on deposit accounts for the nine months of 1998 totaled
$254,644 compared to $266,502 for the same period in 1997, a decrease of
4.4%. The Bank is closing accounts of customers who frequently overdraw more
quickly to reduce the risk of loss to the Bank. The Bank currently derives
most of its other noninterest income from service charges and return check
charges on checking, money market and NOW accounts.
Noninterest Expenses
In support of the Bank's continued growth, total noninterest expenses
consisting of employee related costs, occupancy and other overhead totaled
$1,643,462 for the first nine months of 1998, compared to $1,570,792 for the
same period in 1997, representing an increase of $72,670 or 4.6%. The
decrease in salary and employee benefits is attributable to a reduction in
staff at the Sudley Road office offset by an accrual of $30,000 for the
severance package of the President and CEO. The increased costs in 1998 in
both occupancy and furniture and equipment expense are associated with the
opening of the Sudley Road office as well as the installation of a local area
network and wide area network in 1997. Costs for the above are included for a
full nine months in 1998 while costs for 1997 began in May. In addition, in
1998, the Bank has experienced increased equipment costs to test the local
area networks for compatibility with the Year 2000.
Allowance for Loan Losses
The allowance for loan losses as of September 30, 1998, was $335,820. This
decrease is primarily the result of charge offs taken on long-term workouts
where all efforts to effect collection have been exhausted. The current ratio
of the allowance for loan losses to gross loans is 1.0%. In the first nine
months of 1998, a provision of $205,000 was taken as compared to a provision
for loan losses of $27,000 taken in 1997. The lower provision in 1997 was due
to a recovery on a previously charged-off loan. Management believes that the
allowance for loan losses is adequate to cover credit losses inherent in the
loan portfolio at September 30, 1998. Although loans classified as loss,
doubtful, substandard or special mention are not expected to have a material
impact beyond what has been reserved, it is management's intention to
increase the reserve by $15,000 per month for the remainder of 1998.
Capital Resources
Shareholders' equity on September 30, 1998, was $8,116,093 compared to
$7,799,710 on December 31, 1997. Factors contributing to the change in
shareholders' equity were the retention of net income, the conversion of
1,181 warrants into common stock, the conversion of 1,750 options into common
stock, and the increase in accumulated other comprehensive income due to the
change in the value of securities available for sale.
At September 30, 1998, the Bank's Tier 1 and total risk-based capital ratios
were 19.72% and 20.54%, respectively, compared to 19.63% and 20.70% at
December 31, 1997. The Bank's leverage ratio was 13.36% at September 30,
1998, compared to a ratio of 13.91% at December 31, 1997. The Bank's capital
structure places it above the Federal Reserve Board's guidelines, as the Bank
maintains a strong capital base to take advantage of business opportunities
while ensuring that it has the resources to protect against the risks
inherent in its business.
Other Matters - Year 2000
The Bank has established a committee to address and evaluate problems that
may be encountered with respect to the Year 2000. By the end of 1997 the Bank
completed a thorough assessment of each of our computer related vendors,
service providers, and equipment vendors. The systems deemed to be critical
to the continued, uninterrupted operation of the bank and the service the
Bank provides to its customers were renovated and thoroughly tested by both
the vendor and the bank by September 30, 1998. The renovated programs have
been incorporated into the daily operations of the data center.
The Bank has an on-going project of contacting commercial loan customers with
a survey form that both informs the customers of some of the issues and tries
to determine the readiness of our loan customers when it comes to the Year
2000. These results will be incorporated into loan policy and decisions as
necessary to reduce the risk to the Bank of future loan problems resulting
from the failure of some of our customers to address the issue.
Year to date in 1998 the Bank has expensed approximately $13,000 for the
testing of computer systems. It has been determined that the Bank will not
need to replace any equipment in order to meet Year 2000 requirements. It is
the opinion of the Bank that the cost of addressing Year 2000 problems will
not represent a material event or uncertainty that would reasonably be
expected to adversely affect future financial results.
The Bank is currently working to complete contingency plans which would be
implemented in the event a problem occurs. This project is expected to be
complete by December 31, 1998.
Other Matters
During the third quarter, the Bank was accepted into membership with the
Federal Home Loan Bank. This action increases the ability of the Bank to
borrow funds as needed.
Part II. Other information
Item 1. Legal proceedings.
None
Item 2. Change in securities.
None
Item 3. Defaults upon senior securities.
None
Item 4. Submission of matters to a vote of security holders.
None
Item 5. Other information.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit 2 Not applicable
Exhibit 3 (I) Articles of Incorporation incorporated by
reference to Exhibit 3 to the Bank's Annual Report
on Form 10-KSB for the year ended December 31,
1996
(II) Bylaws, Security Bank Corporation
incorporated by reference to Exhibit 3 (II) to the
Bank's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1998
Exhibit 4 Not applicable
Exhibit 10 a. Lease Agreement dated July 11, 1996, between
Security Bank Corporation and Twelve Knotts
Limited Partnership, Incorporated by reference
to Exhibit 10 to the Bank's Quarterly Report on
Form 10-QSB for the quarter ended September 30,
1996
b. Employment Agreement between Security Bank
Corporation and Danny R. May dated May 1, 1998
incorporated by reference to Exhibit 10(b) to
the Bank's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1998
Exhibit 11 Not applicable
Exhibit 15 Not applicable
Exhibit 18 Not applicable
Exhibit 19 Not applicable
Exhibit 22 Not applicable
Exhibit 23 Not applicable
Exhibit 24 Not applicable
Exhibit 27 Not applicable
Exhibit 99 Not applicable
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY BANK CORPORATION
DATE: November 10, 1998 Danny R. May
Principal Executive Officer
DATE: November 10, 1998 Carol S. Brandon
Principal Financial Officer
Part II -- Information Not Required in Prospectus
Item 20. Indemnification of Officers and Directors
The laws of the Commonwealth of Virginia pursuant to which the Company is
incorporated permit it to indemnify its officers and directors against certain
liabilities with the approval of its shareholders. The articles of incorporation
of the Company, which have been approved by its shareholders, provide for the
indemnification of each director and officer (including former directors and
officers and each person who may have served at the request of the Company as a
director or officer of any other legal entity and, in all such cases, his or her
heirs, executors and administrators) against liabilities (including expenses)
reasonably incurred by him or her in connection with any actual or threatened
action, suit or proceeding to which he or she may be made party by reason of his
or her being or having been a director or officer of the Company, except in
relation to any action, suit or proceeding in which he or she has been adjudged
liable because of willful misconduct or a knowing violation of the criminal law.
The Company has purchased officers' and directors' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company against certain losses resulting from
claims against them in their capacities as directors and officers to the extent
that such losses are not indemnified by the Company and (2) the Company to the
extent that it indemnifies such directors and officers for losses as permitted
under the laws of Virginia.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibit Index
Exhibit No. Description of Exhibit
1 Not Applicable
2.1 Agreement and Plan of Reorganization, dated November 25, 1998,
among F&M National Corporation ("F&M"), F&M Bank-Northern
Virginia and Security Corporation ("SBC") and a related Plan
of Merger, filed as Appendix I to the Proxy
Statement/Prospectus included in this Registration
Statement.
2.2 Stock Option Agreement, dated November 10, 1998, between F&M
and SBC filed as Appendix II to the Proxy Statement/Prospectus
included in this Registration
Statement.
3.1 Articles of Incorporation of F&M. Incorporated herein by
reference to Exhibit 3.1 to F&M's Registration Statement on
Form S-4 (Registration No. 33-45717).
3.2 Bylaws of F&M. Incorporated herein by reference to F&M's
Registration Statement on Form S-4 (Registration No.
33-45717).
5 Opinion of LeClair Ryan, A Professional Corporation,
regarding the legality of the securities being registered
and consent.
Exhibit No. Description of Exhibit
8.1 Form of tax opinion of LeClair Ryan, A Professional
Corporation, regarding the tax-free nature of the acquisition
of F&M and SBC.
21 Subsidiaries of F&M: F&M Bank-Winchester; F&M Bank-Central
Virginia; F&M Bank-Emporia; F&M Bank-Northern Virginia; F&M
Bank-Massanutten; F&M Bank-Peoples; F&M Bank-Richmond; F&M
Bank-Blakely; F&M Bank-Allegiance; F&M Trust Company; Big
Apple Mortgage Company; Apple Title Company; Winchester Credit
Corporation; Credit Bureau of Winchester, Inc.; F&M-Shomo &
Lineweaver Insurance Agency Incorporated.
23.1 Consent of Yount, Hyde & Barbour, P.C., as accountants for
F&M.
23.2 Consent of Yount, Hyde & Barbour, P.C., as accountants for
SBC.
23.3 Consent of LeClair Ryan, (included as part of Exhibit 5).
23.4 Consent of Scott & Stringfellow, Inc. relating to inclusion
of its opinion given to SBC in the Proxy
Statement/Prospectus included in this Registration
Statement.
99.1 Form of proxy of SBC.
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.
Item 22. Undertakings
(a) Item 512 of Regulation S-K.
Rule 415 offerings. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Filings incorporating subsequent Exchange Act documents by reference. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Registration on Form S-4. (1) The undersigned registrant hereby undertakes
as follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party which is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Request for acceleration of effective date or filing registration
statement on Form S-8. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payments by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) Item 22(b) of Form S-4
The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) Item 22(c) of Form S-4
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Winchester, Commonwealth
of Virginia on December 31, 1998.
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
-------------------
Alfred B. Whitt, Vice Chairman and
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Alfred
B. Whitt and Charles E. Curtis, and each of them singly, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all registration statements or applications to the Securities and
Exchange Commission, the regulatory authorities of any state in the United
States or any other regulatory authorities as may be necessary to permit shares
of Common Stock of the Company to be offered in the United States in connection
with the proposed merger of Security Bank Corporation with and into F&M
Bank-Northern Virginia, including without limitation any and all amendments or
post-effective amendments to this registration statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission or any other such regulatory authority,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite or necessary to be done to
enable F&M National Corporation to comply with the provisions of the Securities
Act of 1933, and all requirements of the Securities and Exchange Commission as
well as all other laws, rules and regulations relating to the offer and sale of
securities.
Signature Capacity Date
/s/ W. M. Feltner Chairman of the Board December 31, 1998
- ----------------- and Chief Executive
W. M. Feltner Officer and Director
(Principal Executive
Officer)
/s/ Alfred B. Whitt Vice Chairman, President December 31, 1998
- ------------------- and Chief Financial
Alfred B. Whitt Officer and Director
(Principal Financial
Officer)
/s/ Charles E. Curtis Vice Chairman, Chief December 31, 1998
- --------------------- Administrative Officer
Charles E. Curtis and Director
/s/ Frank Armstrong, III Director December 31, 1998
- ------------------------
Frank Armstrong, III
- ---------------------- Director December ____, 1998
William H. Clement
/s/ John R. Fernstrom Director December 31, 1998
- ---------------------
John R Fernstrom
- ---------------------- Director December ____, 1998
William R. Harris
- ---------------------- Director December ____, 1998
L. David Horner, III
- ----------------- Director December ____, 1998
Jack R. Huyett
/s/ George L. Romine Director December 31, 1998
- ----------------------
George L. Romine
- -------------------------- Director December ____, 1998
John S. Scully, III
/s/ J. D. Shockey, Jr. Director December 31 1998
- ----------------------
J. D. Shockey, Jr.
/s/ Ronald W. Tydings Director December 31, 1998
- -----------------------
Ronald W. Tydings
/s/ Fred G. Wayland, Jr. Director December 31, 1998
- ------------------------
Fred G. Wayland, Jr.