As filed with the Securities and Exchange Commission on October 27, 2000
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 Executive Officer
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. David H. Baris, Esq.
Scott H. Richter, Esq. Noel M. Gruber, Esq.
LeClair Ryan, A Professional Corporation Kennedy, Baris & Lundy, L.L.P.
707 East Main Street, 11th Floor 4701 Sangamore Road, Suite P-15
Richmond, Virginia 23219 Bethesda, Maryland 20816
________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the proposed merger described herein have been satisfied or
waived.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
________________________
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each class of securities Amount to be Proposed maximum Proposed maximum Amount of
to be registered registered (1) offering price per share aggregate offering price (2) registration fee
===================================================================================================================================
Common Stock, $2.00 par value 566,175 N/A $7,043,217 $1,859
===================================================================================================================================
(1) Based upon the maximum number of shares of common stock, par value $2.00 per
share, of F&M National Corporation that may be issued pursuant to the
merger.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended (the "Securities
Act"). This fee has been computed pursuant to Rule 457(f)(2) under the
Securities Act and is based on the book value of Community Bankshares of
Maryland, Inc. common stock on September 30, 2000 to be received by the
Registrant in exchange for common stock of the Registrant pursuant to the
merger described in the enclosed Proxy Statement/Prospectus.
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.
================================================================================
[CBM letterhead]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Fellow Shareholders:
You are invited to attend a special meeting of shareholders of
Community Bankshares of Maryland, Inc. to be held at ______________________
located at ______________, Bowie, Maryland on _______, _________ __, 2000 at
_:__ _.m.
The purpose of the meeting will be to consider and vote on the merger
of Community Bankshares with F&M National Corporation, a bank holding company
headquartered in Winchester, Virginia. If shareholders approve the merger
agreement, Community Bankshares will merge into F&M and Community Bankshares'
subsidiary bank, Community Bank of Maryland, will merge into F&M's subsidiary
bank in Maryland, F&M Bank-Maryland.
As a result of the merger, you will receive 0.75 shares of F&M common
stock for each share of Community Bankshares common stock you own. In general,
you will not recognize federal income tax gain or loss for the F&M common stock
you receive.
On ___________ __, 2000, the closing price of F&M stock was $_____. If
this were the F&M stock price at the time of the merger, you would have received
F&M stock that had an equivalent per share value of approximately $_____ for
each Community Bankshares share held. The most recent sale of Community
Bankshares common stock occurred on March 22, 2000 at $19.25 per share, based on
information received by Community Bankshares. These prices will fluctuate
between now and the merger.
The merger cannot be completed unless holders of at least two-thirds of
the shares of Community Bankshares common stock approve the merger agreement. If
approved, we anticipate the merger will occur in January 2001.
This proxy statement/prospectus provides you with detailed information
about 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 Community Bankshares
in documents it has filed with the Federal Reserve.
Your Board of Directors has approved the merger and believes it is
advisable and in the best interests of Community Bankshares 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 or vote in
person, the effect will be a vote against approval of the merger. You can revoke
your proxy by writing to Community Bankshares' Secretary any time before the
meeting or by attending the meeting and voting in person.
We look forward to seeing you at the meeting.
Sincerely yours,
William V. Meyers
Chairman of the Board of Directors
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the F&M common stock to be issued in the
merger or determined if this proxy statement/prospectus is accurate or complete.
Any representation to the contrary is a criminal offense. The shares of F&M
stock to be issued in the merger are not savings or deposit accounts or other
obligations of any bank or savings association and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency.
This proxy statement/prospectus is dated ___________ __, 2000 and is
first being mailed to shareholders on _____________ __, 2000.
ADDITIONAL INFORMATION
Important business and financial information about F&M is incorporated
in this proxy statement/prospectus from other documents that are not included or
delivered with this proxy statement/prospectus. You may obtain copies of these
documents without charge by requesting them in writing or by telephone from F&M
at the following address:
F&M National Corporation
P.O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
If you would like to request any documents, please do so by ________,
2000 in order to receive them before the special meeting.
See "Where You Can Find More Information" that begins on page ____.
COMMUNITY BANKSHARES OF MARYLAND, INC.
Bowie, Maryland
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ____________ __, 2000
-------------------------
A special meeting of shareholders of Community Bankshares of Maryland,
Inc. will be held on _________, _____________ __, 2000 at _:__ _.m. at
__________________________ located at _____ _______________ _________, Bowie,
Maryland for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
August 23, 2000, between F&M National Corporation and Community Bankshares and a
related Plan of Merger, providing for the merger of Community Bankshares with
and into F&M upon the terms and conditions therein, including, among other
things, that each issued and outstanding share of Community Bankshares common
stock will be exchanged for 0.75 shares of F&M common stock, 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 ______________________ __, 2000, as
the record date for the special meeting. Only holders of record of Community
Bankshares 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.
Each Community Bankshares shareholder has the right to dissent from the
merger and seek an appraisal of the fair market value of his or her shares,
provided the proper procedures of Title 3, Subtitle 2 of the Maryland General
Corporation Law are followed. A copy of Title 3, Subtitle 2 is attached as
Appendix IV to this proxy statement/prospectus.
By Order of the Board of Directors
Lucie M. Baldi
Secretary
___________ __, 2000
Please mark, sign, date and return your proxy promptly, whether or not
you plan to attend the special meeting.
The Board of Directors of Community Bankshares unanimously recommends
that shareholders vote for the merger agreement.
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT THE MERGER......................................................................... 1
SUMMARY........................................................................................................
THE SPECIAl MEETING............................................................................................
THE MERGER.....................................................................................................
Terms of the Merger...................................................................................
Background of and Reasons for the Merger; Recommendation of Community Bankshares Board................
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.....................................................................
Stock Option Agreement................................................................................
Affiliate Agreement...................................................................................
Resales of F&M Common Stock...........................................................................
Accounting Treatment..................................................................................
Interests of Certain Persons in the Merger............................................................
Material Federal Income Tax Consequences..............................................................
Dissenters' Rights....................................................................................
Certain Differences in Rights of Shareholders.........................................................
Expenses of the Merger................................................................................
Cautionary Statement Concerning Forward-Looking Statements............................................
MARKET PRICES AND DIVIDENDS....................................................................................
COMMUNITY BANKSHARES OF MARYLAND, INC..........................................................................
Business..............................................................................................
Lending Activities....................................................................................
Employees.............................................................................................
Competition...........................................................................................
Property..............................................................................................
Security Ownership....................................................................................
COMMUNITY BANKSHARES OF MARYLAND, INC. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................
BUSINESS OF F&M NATIONAL CORPORATION...........................................................................
History and Business..................................................................................
F&M's Acquisition Program.............................................................................
COMPARATIVE RIGHTS OF SHAREHOLDERS.............................................................................
DESCRIPTION OF F&M CAPITAL STOCK...............................................................................
LEGAL MATTERS..................................................................................................
EXPERTS........................................................................................................
OTHER MATTERS..................................................................................................
WHERE YOU CAN FIND MORE INFORMATION............................................................................
INDEX TO FINANCIAL STATEMENTS..................................................................................
APPENDICES
I Agreement and Plan of Reorganization and Plan of Merger
II Stock Option Agreement
III Opinion of Scott & Stringfellow, Inc.
IV Title 2, Subtitle 3 of the Maryland General Corporation Law
Relating to Dissenters' Rights
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is Community Bankshares merging with F&M?
A: Both the Community Bankshares board and the F&M board believe the
merger is advisable and 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 Community Bankshares and F&M to be better
positioned to be a stronger competitor in the rapidly changing and
consolidating financial services industry in the Mid-Atlantic region.
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 0.75 shares of F&M common stock in exchange for each
share of Community Bankshares common stock you hold.
On ____________ __, 2000, the closing price of F&M common stock was
$______. If this were the F&M stock price at the time of the merger,
you would have received F&M stock that had an equivalent per share
value of approximately $_____ for each Community Bankshares share held.
The most recent sale of Community Bankshares common stock occurred on
March 22, 2000 at $19.25 per share, based on information received by
Community Bankshares. The value of the shares of F&M common stock you
will receive in the merger will fluctuate with the market price of F&M
common stock.
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: For more than 57 consecutive years, F&M has paid dividends to its
shareholders. F&M currently pays a quarterly dividend of $0.25 per
share. F&M expects that it will continue to pay at least this amount in
quarterly dividends. 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 Community Bankshares,
and for the exchange of each of your shares of Community Bankshares
common stock for 0.75 shares of F&M common stock. After the
transaction, Community Bankshares' subsidiary bank, Community Bank of
Maryland, will merge into F&M's subsidiary bank in Maryland, F&M
Bank-Maryland. Approval of the merger requires the affirmative vote of
at least two-thirds of the shares of Community Bankshares common stock.
The Community Bankshares board approved and adopted the merger
agreement and recommends voting for the approval of the merger
agreement.
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.
1
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 or if you do not vote in
person, it will have the effect of a vote against the merger.
The special meeting will take place at _:__ __.m. on _________
__________ __, 2000. 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 page __ and either change your vote or attend the meeting
and vote in person. If you hold your shares in "street name" you will
need additional documents from your broker in order to vote your shares
in person at the special meeting.
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 Community Bankshares 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 in January 2001.
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 Community Bankshares common stock certificates for
F&M common stock certificates.
Q: May I object to or dissent from the merger and seek the fair value of
my shares in cash?
A: Yes. If you choose to object to the merger, you are entitled to demand
the "fair value" of your shares and an appraisal of your shares under
Maryland law. To exercise your rights as an objecting shareholder you
must comply with the procedures of Title 3, Subtitle 2 of the Maryland
General Corporation Law. If you do not comply with these procedures you
will lose your rights as an objecting shareholder and be bound by the
terms of the merger. We have attached a copy of the relevant portions
of the Maryland General Corporation Law for objecting shareholders as
Appendix IV of this proxy statement/prospectus. See also "Dissenters'
Rights" on page __. If you seek to exercise your rights as an objecting
shareholder, the fair value of your shares may be more or less than the
value of the consideration to be paid by F&M in the merger.
Q: Who can help answer your questions?
A: If you want additional copies of this document, or if you want to ask
any questions about the merger, you should contact:
Thomas G. Moore
President
Community Bankshares of Maryland, Inc.
16410 Heritage Boulevard
Bowie, Maryland 20716
Telephone: (301) 464-6300
2
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger more fully, and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we refer you. See "Where You Can Find
More Information" on page __.
Exchange Ratio is 0.75 Shares of F&M Common Stock for each Community Bankshares
Share (page __)
As a result of the merger, you will receive 0.75 shares of F&M common
stock for each share of Community Bankshares common stock you own. On __________
__, 2000, the closing price of F&M common stock was $_____. If the merger had
occurred on that date, you would have received F&M stock that had an equivalent
per share value of approximately $_____ for each Community Bankshares share
held. The most recent sale of Community Bankshares common stock occurred on
March 22, 2000 at $19.25 per share, based on information received by Community
Bankshares. The value of the F&M shares which you will receive in the merger
will fluctuate with the market value of F&M common stock. F&M common stock is
traded on the New York Stock Exchange under the symbol "FMN".
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 cash
received instead of any fractional share. LeClair Ryan, counsel to F&M, 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 to understand
fully how the merger will affect you.
F&M Dividend Policy Following the Merger
F&M currently pays quarterly dividends of $0.25 per share of common
stock. F&M expects that it will continue to pay at least this amount in
quarterly dividends after the merger, but may change that policy based on
business conditions, F&M's financial condition and earnings or other factors.
F&M's next dividend is payable _______ __, 2000 to shareholders of
record on _______ __, 2000. Because the merger will not be effective by ________
__, 2000, the dividend will not be paid on shares of F&M common stock issued in
the merger to Community Bankshares' shareholders. However, Community Bankshares
will pay a dividend of $0.08 per share on ___________ __, 2000, to its
shareholders of record on ____________ __, 2000.
Community Bankshares Board Recommends Shareholder Approval (page __)
The Community Bankshares board approved the merger and the merger
agreement. The board believes that the merger is fair to you and in your best
interests. The Community Bankshares board recommends that you vote "FOR"
approval of the merger. The Community Bankshares board believes that, as a
result of the merger, Community Bankshares shareholders will have less financial
risk, have greater liquidity in their shares, receive a larger dividend and will
have greater potential for stock value appreciation than they would if Community
Bankshares remained independent.
Exchange Ratio Fair to Shareholders, According to Investment Bank (page __)
Scott & Stringfellow, Inc., a well established regional investment
banking firm with which Community Bankshares had dealings in the past, has given
an opinion to the Community Bankshares board that the exchange ratio is fair
from a financial point of view to Community Bankshares shareholders. 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. We encourage you to read the opinion carefully. If the merger is
completed, Scott & Stringfellow will receive a fee in the amount of $75,000 for
its advice and for providing its fairness opinion.
3
Dissenters' Rights (page __)
If you file a notice of objection to the merger before the vote on the
merger, and do not vote for the merger, you may have the right to obtain a cash
payment for the "fair value" of your shares of Community Bankshares common
stock, excluding any element of value arising from the merger. To exercise these
rights, you must comply with the procedural requirements of Title 3, Subtitle 2
of the Maryland General Corporation Law, which we have attached to this proxy
statement/prospectus as Appendix IV. The "fair value" of Community Bankshares
common stock may be determined in judicial proceedings, and we cannot predict
what the results would be. Failure to take any of the steps required under Title
3, Subtitle 2 of the Maryland General Corporation Law may result in a loss of
the rights to receive the fair value of your shares in cash.
Meeting to be Held _________ __, 2000 (page __)
The special shareholders' meeting will be held on ________,
_____________ __, 2000 at _:__ _.m. at __________________________ located at
____ ______________ ________, Bowie, Maryland.
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 eight banking affiliates in Virginia, one bank affiliate in
West Virginia and one bank affiliate in Maryland which serve the Shenandoah
Valley, Allegheny and Bath counties, Northern, Central and Southside Virginia,
the eastern panhandle of West Virginia and the counties of Montgomery and Prince
George's in Maryland.
Community Bankshares of Maryland, Inc.
16410 Heritage Boulevard
Bowie, Maryland 20716
(301) 464-6300
Community Bankshares is a one-bank holding company headquartered in
Bowie, Maryland that operates four banking offices in Prince George's County and
Anne Arundel County, Maryland through its banking subsidiary, Community Bank of
Maryland.
The Merger (page __)
The merger agreement provides for the merger of Community Bankshares
into F&M. After that transaction, Community Bank will merge into F&M Bank-
Maryland, F&M's subsidiary bank in Maryland. 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, as it is the legal
document that governs the merger.
Two-Thirds Shareholder Vote Required (page __)
Approval of the merger requires the affirmative vote of at least two-
thirds of the votes entitled to be cast at the meeting. Your failure to vote
will have the effect of a vote against approval of the merger. The directors and
executive officers of Community Bankshares, who collectively own about 34.34% of
the shares entitled to vote at the meeting, and Irving L. Kidwell, Chairman
Emeritus of Community Bankshares, who owns about 21.96% of the outstanding
shares entitled to vote at the meeting, have agreed to vote their shares in
favor of the merger.
Brokers who hold shares of Community Bankshares common stock as
nominees will not have authority to vote those shares on the merger unless
shareholders provide voting instructions.
The merger does not require the approval of F&M's shareholders.
4
Record Date Set at ___________ __, 2000; One Vote Per Share of Community
Bankshares Stock (page _)
You are entitled to vote at the special meeting if you owned shares of
Community Bankshares common stock at the close of business on ____________ __,
2000. On __________ __, 2000, there were _________ shares of Community
Bankshares common stock outstanding.
You will have one vote at the meeting for each share you owned on
____________ __, 2000.
Monetary Benefits to Management in the Merger (page __)
When considering the recommendation of the Community Bankshares board,
you should be aware that some Community Bankshares directors and officers have
interests in the merger that differ from, or are in addition to, the interests
of other Community Bankshares shareholders. With respect to Thomas G. Moore,
President of Community Bankshares and Community Bank, his current employment
agreement with Community Bankshares provides for severance payments and other
benefits upon a change in control of Community Bankshares. Pursuant to the terms
of the agreement, and in connection with the merger, Mr. Moore is to receive
$334,548 over the next six years. Mr. Moore also has agreed not to compete with
F&M for a period of two years after the merger.
Also, Mr. Moore and William V. Meyers, Chairman and President of
Community Bankshares, together with up to six other current directors or
advisory directors of Community Bankshares or Community Bank, will become
directors of F&M Bank-Maryland after the merger is completed. Directors of
Community Bankshares and Community Bank who will not be directors of F&M Bank-
Maryland will be offered a position on F&M Bank-Maryland's advisory board.
The Community Bankshares 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 (page __)
The following conditions must be met for us to complete the merger:
. approval of the merger by Community Bankshares shareholders;
. approval from the New York Stock Exchange for the listing of the
F&M common stock to be issued;
. the continuing effectiveness of F&M's registration statement
filed with the Securities and Exchange Commission;
. receipt by F&M of a letter from its accountants stating that the
merger qualifies for pooling of interests accounting treatment;
and
. receipt of a legal opinion concerning the tax consequences of the
merger.
We cannot complete the merger unless we obtain the approval of the
Maryland Division of Financial Regulation and the Board of Governors of the
Federal Reserve System, and receive non-objection to the merger from the
Virginia State Corporation Commission. On _________ __, 2000, applications were
filed with the Maryland Division of Financial Regulation and the Federal
Reserve, and a notice was filed with the Virginia State Corporation Commission.
While we cannot predict whether or when we will obtain the required regulatory
approvals, we see no reason why the approvals will not be obtained in a timely
manner.
Unless prohibited by law, either Community Bankshares 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 __)
F&M and Community Bank can agree to terminate the merger agreement at
any time without completing the merger. Either company may also terminate the
merger agreement in the following circumstances:
5
. the merger is not completed on or before April 30, 2001 or
. if any event occurs which renders impossible, the satisfaction,
in any material respect, by one company of one or more of the
conditions described above, unless the other company waives such
satisfaction.
Option Agreement (page __)
To induce F&M to agree to the merger, and to discourage other companies
from acquiring Community Bankshares, F&M was granted an irrevocable option to
purchase from Community Bankshares up to 144,409 shares of Community Bankshares
common stock at a price of $18.00 per share. F&M may exercise the option only if
another party attempts to acquire control of Community Bankshares. 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.
Affiliate Agreement ( page __)
The directors and executive officers of Community Bankshares, and
Irving L. Kidwell, Chairman Emeritus of Community Bankshares, have entered into
an agreement with F&M pursuant to which they have agreed to vote all of their
shares in favor of the merger agreement. As of September 30, 2000, those
stockholders owned shares representing approximately 56.3% of the voting power
of Community Bankshares common stock entitled to vote at the special meeting.
Merger to Take Place in January 2001 (page __)
The merger will become effective at the date and time stated on the
certificate of merger issued by the Virginia State Corporation Commission and
filed with the Maryland Department of Assessments and Taxation. We anticipate
the merger will take place in January 2001.
Distribution of Stock Certificates (page __)
After the merger, you will need to exchange your Community Bankshares
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.
F&M to Use Pooling of Interest Accounting Treatment (page __)
We expect that the merger will be accounted for as a pooling of
interests. This will enhance future earnings of F&M by avoiding the creation of
goodwill relating to the merger and charges against future earnings resulting
from amortizing goodwill. This accounting method also means that after the
merger F&M will report financial results as if Community Bankshares had always
been combined with F&M.
Listing of F&M Stock
F&M will list the shares of its common stock to be issued in the merger
on the New York Stock Exchange.
Market Price Information
Shares of F&M common stock are traded on the New York Stock Exchange
under the symbol "FMN". Community Bankshares common stock is not registered on
any exchange, quoted on the Nasdaq Stock Market, or traded in the over-the-
counter market. There is no established public market for Community Bankshares
common stock, which has been periodically sold in a limited number of privately
negotiated transactions. On August 22, 2000, the last trading day before the
public announcement of the merger, F&M common stock closed at $24.0625 per
share. The most recent sale of price of Community Bankshares common stock to the
best knowledge of Community Bankshares on or before August 22, 2000 occurred on
March 22, 2000 at a price of $19.25 per share. Based on the exchange ratio,
0.75, the pro forma equivalent per share value of the Community Bankshares
common stock on August 22, 2000 was equal to approximately $18.05 per share. On
________ __, 2000, F&M common stock closed at $_____ per share. The pro forma
equivalent per share value of the Community Bankshares common stock on
__________ __, 2000 was approximately $____ per share.
6
Recent Financial Developments
F&M. For the three months ended September 30, 2000, net income for F&M
was $12.6 million or $.51 per share, assuming dilution, compared to $11.1
million, or $.44 per share, assuming dilution, for the same period in 1999. At
September 30, 2000, F&M had total assets of $3.53 billion, an increase of 14.6%
over the $3.08 billion in total assets at September 30, 1999. Total loans, net
at September 30, 2000 increased to $2.01 billion, up 8.5% from the $1.85 billion
in total loans, net at September 30, 1999. Deposits at September 30, 2000,
increased to $2.98 billion, up from $2.59 billion at September 30, 1999.
Community Bankshares. For the three months ended September 30, 2000,
net income for Community Bankshares was $210.3 thousand or $.29 per share,
assuming dilution, compared to $170.9 thousand, or $.24 per share, assuming
dilution, for the same period in 1999. At September 30, 2000, Community
Bankshares had total assets of $79.1 million, an increase of 8.2% over the $73.2
million in total assets at September 30, 1999. Total loans, net at September 30,
2000 increased to $41.4 million, up 12.6% from the $36.8 million in total loans,
net at September 30, 1999. Deposits at September 30, 2000, increased to $64.1
million, up from $62.2 at September 30, 1999.
Comparative Per Share Information
The following table shows information about our earnings per share,
cash dividends per share and book value per share, and similar information
reflecting the merger which we refer to as "pro forma" information. In
presenting the comparative pro forma information for certain time periods, we
assumed that we had been affiliated throughout those periods.
We also assumed that we will treat our companies as if they had
always been combined for accounting and financial reporting purposes, a method
known as "pooling of interests" accounting. The information listed as "pro forma
equivalent" was obtained by multiplying the pro forma amounts by the 0.75
exchange ratio.
We expect that we will incur reorganization and restructuring expenses
as a result of the merger. We also anticipate that the merger will provide F&M
and Community Bankshares with financial benefits that include reduced operating
expenses and the opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, does not attempt to predict or suggest
future results.
The information in the following table is based on the historical
financial statements of F&M and Community Bankshares and the related notes to
those statements included or incorporated by reference in this proxy
statement/prospectus. The amounts previously reported by F&M in quarterly and
annual reports for the periods presented have been retroactively restated to
reflect the acquisition of The State Bank of the Alleghenies on January 3, 2000
which was accounted for as a pooling of interests. We have incorporated this
material into this proxy statement/prospectus by reference. See "Where You Can
Find More Information" on page __.
7
Six months
ended Year ended
June 30, December 31,
------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Earnings Per Common Share
Basic:
Community Bankshares historical............ $ 0.49 $ 0.92 $ 0.83 $ 0.91
F&M historical............................. 0.92 1.72 1.55 1.44
Pro forma combined......................... 0.92 1.71 1.54 1.43
Community Bankshares pro forma
equivalent.............................. 0.69 1.28 1.16 1.07
Diluted:
Community Bankshares historical............ 0.49 $ 0.92 $ 0.83 $ 0.91
F&M historical............................. 0.92 1.71 1.54 1.42
Pro forma combined......................... 0.91 1.70 1.53 1.42
Community Bankshares pro forma
equivalent.............................. 0.68 1.28 1.15 1.07
Cash Dividends Declared
Per Common Share
Community Bankshares historical............ 0.160 $ 0.30 $ 0.26 $ 0.23
F&M historical............................. 0.485 0.90 0.76 0.73
Pro forma combined......................... 0.485 0.90 0.76 0.73
Community Bankshares pro forma
equivalent.............................. 0.360 0.68 0.57 0.55
June 30, December 31,
2000 1999
---- ----
Book Value Per Common Share
Community Bankshares historical............ $ 12.44 $ 12.13
F&M historical............................. 12.80 12.36
Pro forma combined......................... 12.88 12.44
Community Bankshares pro forma
equivalent.............................. 9.66 9.33
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 1995 through 1999 and unaudited financial
statements for the six months ended June 30, 2000. This information is only
a summary, and you should read it in conjunction with the historical
financial statements of F&M and Community Bankshares and the related notes
to those statements included or incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information" on page __.
The amounts previously reported by F&M in quarterly and annual reports for
the periods presented have been retroactively restated to reflect the
acquisition of The State Bank of the Alleghenies on January 3, 2000 which
was accounted for as a pooling of interests. You should not rely on the six
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)
Six Months Ended
June 30, Year Ended December 31,
------------------------ --------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Net interest income............. $ 67,893 $ 64,501 $ 131,764 $ 125,085 $ 118,098 $ 109,784 $ 103,265
Net income...................... 22,918 22,016 43,002 38,938 35,774 33,764 29,298
Diluted earnings per share...... 0.92 0.87 1.71 1.54 1.42 1.34 1.17
Cash dividends per share........ 0.485 0.43 0.90 0.76 0.73 0.69 0.61
Book value per share............ 12.80 12.73 12.36 12.77 11.79 10.93 10.41
Total assets.................... 3,288,541 3,075,721 3,098,167 3,100,117 2,875,438 2,642,237 2,513,120
Shareholders' equity............ 318,109 308,731 307,682 311,948 287,948 266,844 252,120
COMMUNITY BANKSHARES - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Six Months Ended
June 30, Year Ended December 31,
------------------------ --------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Net interest Income............. $ 1,378 $ 1.286 $ 2,659 $ 2,426 $ 2,184 $ 1,997 $ 1,728
Net income...................... 359 316 663 545 595 428 374
Diluted earnings per share...... .49 .44 .92 .83 .91 .65 .57
Cash dividends per share........ .16 .14 .30 .26 .23 .17 .11
Book value per share............ 12.44 12.05 12.13 11.84 10.86 10.17 9.73
Total assets.................... 78,852 71,426 74,194 67,571 53,100 47,205 42,238
Shareholders' equity............ 9,042 8,680 8,805 8,452 7,104 6,649 6,367
9
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 Community Bankshares for use at a special meeting of shareholders
of Community Bankshares. The special meeting will be held at _________________
located at _______________________, Bowie, Maryland on _________, ______________
__, 2000 at _:__ _.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 August 23, 2000, between F&M
and Community Bankshares, 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.
Record Date
Only shareholders of record at the close of business on ___________ __,
2000, 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 ___________ __,
2000, there were shares of Community Bankshares common stock issued and
outstanding held by approximately _____ shareholders of record.
Vote Required
Each share of Community Bankshares common stock outstanding on
__________ __, 2000, entitles the holder to cast one vote upon each matter
properly submitted at the special meeting. Approval of the merger requires the
affirmative vote of the holders of at least two-thirds of the votes entitled to
be cast at the meeting, in person or by proxy.
Brokers who hold shares of Community Bankshares common stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners of those shares. Any shares
of Community Bankshares common stock for which a broker has submitted an
executed proxy but for which the beneficial owner of the shares 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.
Because approval of the merger requires the affirmative vote of at
least two-thirds of the votes entitled to be cast by the outstanding shares of
Community Bankshares common stock, abstentions and broker non-votes will have
the same effect as a vote against approval of the merger agreement. Accordingly,
the Community Bankshares board urges you to complete, date and sign the
accompanying proxy and return it promptly in the enclosed envelope.
As of September 30, 2000, directors and executive officers of Community
Bankshares and their affiliates beneficially owned an aggregate of 249,598
shares of Community Bankshares common stock, or 34.34% of the shares of
Community Bankshares common stock outstanding on that date. Irving L. Kidwell,
Chairman Emeritus of Community Bankshares, beneficially owns an aggregate of
159,597 shares of Community Bankshares common stock, or 21.96% of the shares of
Community Bankshares common stock outstanding on that date. These persons have
agreed to vote their shares of Community Bankshares common stock in favor of the
merger, and we expect them to do so.
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 Community Bankshares 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 Community
10
Bankshares common stock represented by the proxy will be voted "FOR" the merger
and in the discretion of the individuals named as proxies as to any other matter
that may come before the special meeting or any adjournment or postponement
thereof including, among other things, a motion to adjourn or postpone the
special meeting to another time and/or place, for the purpose of soliciting
additional proxies or otherwise. No proxy which is voted against the merger will
be voted in favor of any such adjournment or postponement.
A proxy may be revoked at any time before it is voted. You may revoke a
proxy by giving written notice of revocation to Community Bankshares, by
executing and delivering a substitute proxy to Community Bankshares 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 ___________ __, 2000, to Secretary, Community Bankshares of Maryland,
Inc., 16410 Heritage Boulevard, Bowie, Maryland 20716.
If you hold your shares in street name, you will need additional
information from your broker in order to vote your shares in person at the
meeting.
Solicitation of Proxies
Community Bankshares 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 Community Bankshares, none of whom will
receive additional compensation for performing such services. F&M and Community
Bankshares will share equally the expenses of printing this proxy
statement/prospectus, and F&M will pay all of the expenses of mailing this proxy
statement/prospectus.
Recommendation
The board of directors of Community Bankshares has approved the merger
agreement and the transactions contemplated by the agreement. The Community
Bankshares board believes that the proposed transaction is fair to and in the
best interests of Community Bankshares and its shareholders. The Community
Bankshares board unanimously recommends that you vote "FOR" approval of the
merger.
THE MERGER
The following is a summary description of the material aspects of the
merger. This description does not purport to be complete and is qualified in its
entirety by reference to the appendices attached to this proxy
statement/prospectus, including the merger agreement and the plan of merger,
which are attached as Appendix I to this proxy statement/prospectus. We urge you
to read the appendices in their entirety.
Terms of the Merger
The merger agreement provides for the exchange of each outstanding
share of Community Bankshares common stock for 0.75 shares of F&M common stock.
This is the "exchange ratio." After the merger of Community Bankshares into F&M,
Community Bank of Maryland, Community Bankshares' subsidiary bank, will merge
into F&M Bank-Maryland, F&M's banking subsidiary in Maryland.
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.
Shareholders of Community Bankshares are entitled to exercise their
dissenters' rights with respect to the merger. See "-- Dissenters' Rights."
Background of and Reasons for the Merger; Recommendation of Community Bankshares
Board
Background of the Merger
Over the last several years, the board of directors and management of
Community Bankshares have periodically reviewed the future prospects for
earnings and asset growth, and the viability of continued independent
11
operations in accordance with its business plan, from the perspective of the
long term best interests of the company and its shareholders.
As a result of developments affecting bank mergers, including the
proposed imminent elimination of pooling of interests accounting in 2001, the
extended deflation in the market prices and price earnings multiples for
financial company stocks, and the increasing consolidation in the financial
services industry, William V. Meyers, Chairman of the Board of Directors of
Community Bankshares, determined that it was appropriate that confidential
inquiries should be made with respect to the possible acquisition of Community
Bankshares. In making this determination Mr. Meyers considered that these
factors, as well as the reduced universe of potential acquirors, created
uncertainty as to the future ability of Community Bankshares to be sold at an
attractive price. Mr. Meyers also considered the illiquid market for Community
Bankshares' common stock and the adverse effect on the value of the common stock
and on Community Bankshares which could result from the estate planning needs of
the holders of a significant portion of the common stock. These factors, as well
as factors relating to the continued ability of Community Bankshares to compete
effectively and efficiently in the rapidly changing financial services
marketplace had previously been considered by the board in the course of its
deliberations.
Accordingly, in December 1999, Mr. Meyers requested that Thomas G.
Moore, President of Community Bankshares and Community Bank of Maryland,
approach Gary Penrose of Scott & Stringfellow, Inc., a financial advisory firm
with extensive experience and expertise in valuing and advising banking
institutions on strategic issues, including sales of banking institutions, and
with which Community Bankshares had a preexisting relationship. Mr. Moore asked
Mr. Penrose to approach a number of companies to determine if they had an
interest in pursuing an acquisition of Community Bankshares. Mr. Penrose
determined the companies to be approached based on (1) the likelihood of the
acquiror to be interested in Community Bankshares and to offer to pay a fair
price, (2) the desirability of the potential acquiror's stock based on current
pricing, earnings and growth prospects, (3) capacity to consummate the
acquisition successfully and without material negative impact on share price or
earnings, and (4) social issues regarding local autonomy, employees, corporate
culture and banking philosophy and reputation.
As a result of Mr. Penrose's confidential discussions, five companies
expressed an interest in receiving packages of information regarding Community
Bankshares, which were delivered in December, 1999. Two indications of interest
in acquiring Community Bankshares were ultimately received, including F&M's.
F&M's indication had a value substantially in excess of the other indication of
interest received. The results of the discussions and the indications of
interest were presented to the board of directors at a special meeting on August
2, 2000. At this meeting, the board of directors received a presentation from
Mr. Meyers of the financial and other aspects of both indications of interest,
and an extensive presentation from Mr. Penrose on Community Bankshares' current
financial and market position, recent acquisitions pricing, an analysis of the
pricing of F&M's common stock and the fairness of the valuation of Community
Bankshares reflected by F&M's offer.
Following an extensive discussion of (a) the merits of the offer by
F&M, (b) the procedure utilized to solicit indications of interest and the
criteria utilized in selecting potential acquirors, (c) Community Bankshares'
future prospects as an independent entity, (d) the ramifications of continued
independence on shareholder value, (e) the current pricing, earnings, earnings
prospects and dividend distributions of F&M common stock, (f) the effect of an
acquisition on the employees, customers and communities served by Community
Bankshares and other factors, the board of directors unanimously approved
continuing discussions with F&M toward the negotiation and execution of a
definitive agreement for the acquisition of Community Bankshares by F&M, subject
to F&M's due diligence and finalization of an acceptable definitive agreement.
On August 10, 2000, Community Bankshares' counsel received drafts of
the proposed merger agreement, stock option agreement and other documents
relating to the transaction, and commenced review, discussion and negotiation of
these documents with management and counsel to F&M. F&M conducted its onsite due
diligence investigation on August 10, 2000.
On August 22, 2000, the board met with Mr. Penrose and counsel to
consider further the proposed merger and the form of definitive agreement and
related documents which had been negotiated by Mr. Meyers, management and
counsel. Following a lengthy discussion of the status of negotiations, the
structure of the transaction, the transaction documents and other items related
to the proposed merger, the board of directors determined that the merger
pursuant to the definitive agreement was in the best interests of Community
Bankshares and its shareholders,
12
and unanimously approved the proposed merger, subject to the satisfactory
finalization of the merger documents, and authorized Mr. Meyers to execute and
deliver the merger documents on behalf of Community Bankshares.
Community Bankshares' Reasons for the Merger.
In reaching the conclusion that the merger agreement and the merger are
advisable and in the best interests of and advisable for Community Bankshares
and its shareholders, and in approving the merger agreement, the stock option
agreement and the transactions contemplated by those agreements, the board of
directors of Community Bankshares considered and reviewed with senior
management, as well as its financial and legal advisors, a number of factors,
including the following:
. Information regarding the business, operations, financial condition,
demographics, technological capabilities, management, earnings and
prospects of each of Community Bankshares and F&M, including the
prospects of an independent Community Bankshares to achieve growth in
investment value equal to or in excess of that which F&M is capable.
. The current financial services industry environment, including:
. the rapid consolidation within the industry,
. the increasing use of technology-based new product delivery
systems, such as the Internet, and the related expense and
potential advantages of scale,
. increased competition,
. decline in net interest spreads and the market's valuation of
banking organizations, and
. the apparent approaching end of pooling-of-interests accounting
in 2001 which may affect market premiums for at least some
period.
. The directors' belief that the terms of the merger, the merger
agreement and the stock option agreement are fair to and in the best
interests of Community Bankshares' shareholders.
. The potential effect on the value of shares of Community Bankshares
common stock and on the company which may result from estate planning
activities, or the death of, holders of a large proportion of the
outstanding shares of common stock.
. The significant market liquidity of F&M common stock, which is traded
on the New York Stock Exchange.
. The substantially increased dividend distributions which shareholders
of Community Bankshares might expect as a result of the merger, based
upon F&M's current practice of paying aggregate annual dividends of
$1.00 per share, or $0.75 cents per Community Bankshares share
equivalent, as compared to Community Bankshares' current dividend of
$0.32 per share.
. The analyses prepared by management and Scott & Stringfellow.
. The opinion of Scott & Stringfellow that the common stock of F&M was
fairly priced and that the exchange ratio, as set out in the merger
agreement, was fair from a financial point of view to Community
Bankshares' shareholders.
. The fact that the merger is intended to be generally tax-free for
federal income tax purposes and a pooling of interests for accounting
purposes.
. F&M's record as an acquiror of other banks and its commitments
relating to Community Bankshares' franchise, employees and the
communities which they serve.
The above discussion of the information and factors considered by Community
Bankshares' board of directors is not meant to be exhaustive, but indicates the
material matters considered by the board. In reaching its determination to
approve the merger agreement, the stock option agreement and the transactions
which they
13
contemplate, the board did not assign any relative or specific weight to the
foregoing factors, and individual directors may have considered various factors
differently.
Recommendation of Community Bankshares' Board of Directors
Your Board of Directors unanimously recommends that you vote "FOR" the
merger agreement.
Opinion of Financial Advisor
Community Bankshares retained Scott & Stringfellow as its financial
advisor in connection with Community Bankshares' consideration of a possible
business combination with F&M. In connection therewith, the board requested
Scott & Stringfellow to render its opinion as to the fairness, from a financial
point of view, of the exchange ratio offered by F&M to the holders of Community
Bankshares common stock. At the August 22, 2000 meeting at which Community
Bankshares' board considered and approved the merger agreement, Scott &
Stringfellow delivered to Community Bankshares' board both its oral and written
opinion that as of such date, the exchange ratio was fair, from a financial
point of view, to the holders of shares of Community Bankshares common stock.
Scott & Stringfellow has reconfirmed its opinion dated as of August 22, 2000, by
delivering a written opinion to the Community Bankshares board, dated the date
of this proxy statement/prospectus, to the effect that, as of the date thereof,
the exchange ratio was fair to the holders of shares of Community Bankshares
common stock from a financial point of view. Scott & Stringfellow is a regional
investment banking firm and was selected by Community Bankshares based on the
firm's reputation and experience in investment banking, its extensive experience
and knowledge of the Maryland banking market, its recognized expertise in the
valuation of commercial banking businesses and because of its familiarity with,
and prior work for Community Bankshares. 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.
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 Community Bankshares shareholders because it was provided to
the Community Bankshares board in connection with its consideration of the
merger.
In developing its opinion, Scott & Stringfellow reviewed and analyzed:
. the merger agreement;
. this proxy statement/prospectus;
. Community Bankshares' audited financial statements for the three
years ended December 31, 1999;
. Community Bankshares' unaudited financial statements for the six
months ended June 30, 2000 and 1999, and other internal information
relating to Community Bankshares prepared by Community Bankshares'
management;
. information regarding the trading market for Community Bankshares
common stock and F&M common stock and the price ranges within which
the respective stocks have traded;
. 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;
. F&M's annual reports to shareholders and its audited financial
statements for the three years ended December 31, 1999;
. F&M's unaudited financial statements for the six months ended June
30, 2000 and 1999 and other
14
internal information relating to F&M prepared by F&M's management;
. other studies, analysis and investigations which were conducted by
Scott & Stringfellow, particularly of the banking industry, and
considered such other information as it deemed appropriate, the
material portion of which is described below;
. 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; and
. Scott & Stringfellow also has discussed with members of Community
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 Community Bankshares and F&M individually and as a
combined entity, as well as other matters relevant to its inquiry.
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
judgments of the managements of Community Bankshares and F&M as to the future
financial performance of Community Bankshares and F&M, respectively. Scott &
Stringfellow did not make an independent evaluation or appraisal of the assets
or liabilities of Community Bankshares and F&M nor was it furnished with any
such appraisal.
In connection with rendering its August 22, 2000 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, contribution analysis, pro
forma merger analysis, and dividend discount analysis, among others. The
following is a summary of the material analyses presented by Scott &
Stringfellow to the Community Bankshares board of directors on August 22, 2000,
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 exchange ratio and the implied aggregate
transaction value. Based on F&M's closing stock price of $24.06 on August 22,
2000, Scott & Stringfellow calculated an implied transaction value per share of
Community Bankshares common stock of $18.05, and an implied total transaction
value of approximately $13.2 million. Scott & Stringfellow calculated the
transaction's price-to-book value multiple, implied core deposit premium
(defined as the transaction value minus the tangible book value divided by core
deposits) and price-to-trailing 12 months' earnings multiple for Community
Bankshares based on such implied total transaction value. This analysis yielded
a price-to-book value multiple of 1.45x, an implied core deposit premium of
7.18% and a price-to-trailing 12 months' earnings multiple of 18.68x.
Comparable Acquisition Analysis. Scott & Stringfellow reviewed 21
transactions announced from January 1, 2000 to August 22, 2000 involving
commercial banking institutions nationwide with assets between $50 and $150
million ("Peer Transactions"). Scott & Stringfellow compared the price-to-book
value, price-to-last 12 months' earnings, price-to-deposits, price-to-assets,
and the tangible book premium-to-core deposits for such Peer Transactions to the
proposed merger at announcement. Scott & Stringfellow noted that Community
Bankshares' equity level (11.47% of total assets) is meaningfully higher than
that of the Peer Transactions' average seller (9.25% of total assets).
15
F&M/ Peer
Community Bankshares Transactions
-------------------- ------------
Deal Price/Book Value 1.45x 2.22x
Deal Price/LTM Earnings 18.68x 19.81x
Deal Price/Deposits 20.00% 23.85%
Deal Price/Assets 16.71% 20.41%
Tangible Book Premium/ Core Deposits 7.18% 15.16%
Contribution Analysis. Scott & Stringfellow reviewed the relative
contributions of, among other things, last 12 months' core net income, estimated
2000 net income, estimated 2001 net income, total loans, total deposits, and
total equity to be made by Community Bankshares to the combined institution
based on data at and for the 12 months ended June 30, 2000. Scott & Stringfellow
compared such contributions to the ownership percentage of the combined
institution held by the stockholders of Community Bankshares, based upon the
exchange ratio.
Community Bankshares' Community Bankshares'
Contribution Ownership
to F&M of F&M
------ ------
Last 12 Months Core Net Income 1.61% 2.15%
Estimated 2000 Net Income 1.62% 2.15%
Estimated 2001 Net Income 1.74% 2.15%
Total Loans 1.99% 2.15%
Total Deposits 2.34% 2.15%
Total Equity 2.76% 2.15%
Pro Forma Merger Analysis. Scott & Stringfellow analyzed certain pro
forma effects of the merger using 2000 and 2001 earnings estimates provided by
Institutional Brokers Estimate System for F&M. In addition, Scott & Stringfellow
utilized cost savings assumptions ranging from $100,000 to $500,000 pre tax.
Such range of cost savings was based upon Scott & Stringfellow's judgment and
experience in analyzing similar bank merger transactions. This analysis
indicated that the transaction would be slightly dilutive to F&M's 2000 and 2001
earnings per share with cost savings of $100,000 and would be slightly accretive
to F&M's 2000 and 2001 earnings per share with cost savings of $500,000. The
merger would be accretive to F&M's book value per share. The actual results
achieved by F&M may vary from projected results.
Cost Savings
------------
$100,000 $500,000
-------- --------
2000 EPS Accretion (Dilution) (0.39%) 0.16%
2001 EPS Accretion (Dilution) (0.28%) 0.23%
Book Value Accretion (Dilution) 0.63% 0.63%
16
Dividend Discount Analysis. Scott & Stringfellow performed a dividend
discount analysis to determine a range of present values per share of Community
Bankshares common stock assuming Community Bankshares continued to operate as a
stand-alone entity. This range was determined by adding the present value of the
estimated future dividend stream that Community Bankshares could generate and
the present value of the "terminal value" of Community Bankshares common stock
at the end of year 2005. To determine a projected dividend stream, Scott &
Stringfellow assumed a dividend payout equal to 33% of Community Bankshares'
projected net income. Scott & Stringfellow used earnings estimates from
management for 2001, and then projected net income for years 2002 to 2005 using
a 12% annual growth rate. The "terminal value" of Community Bankshares common
stock at the end of the period was determined by applying a range of
price-to-earnings multiples (11.0x to 13.0x) to year 2005 projected earnings.
The dividend stream and terminal values were discounted to present value using
discount rates of 12% to 14%, which Scott & Stringfellow viewed as the
appropriate discount rate range for a commercial bank with Community Bankshares'
risk characteristics. Based upon the above assumptions, the stand-alone value of
Community Bankshares common stock ranged from $12.53 to $15.78 per share.
Terminal Price/Earnings Multiple
----------------------------------------------------------------------------------------------
Discount
Rate 11.0x 11.5x 12.0x 12.5x 13.0x
- -----------------------------------------------------------------------------------------------------------------
--------------
12.00% $13.63 $14.17 $14.70 $15.24 $15.78
--------------
12.50% $13.34 $13.87 $14.40 $14.92 $15.45
13.00% $13.07 $13.58 $14.10 $14.61 $15.13
13.50% $12.80 $13.30 $13.80 $14.31 $14.81
---------------
14.00% $12.53 $13.03 $13.52 $14.01 $14.50
---------------
Other Analyses. Scott & Stringfellow also reviewed, among other things,
selective investment research reports on, and earnings estimates for, Community
Bankshares and 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/prospectus, 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 exchange ratio is fair from a financial point of view to Community
Bankshares' shareholders.
Community Bankshares has agreed to pay Scott & Stringfellow a transaction
fee of $75,000, which is payable and contingent upon the consummation of the
merger. In the past, Scott & Stringfellow has provided investment banking
services to Community Bankshares for which services Scott & Stringfellow
received customary fees.
17
Effective Date
If the merger is approved by the shareholders of Community Bankshares,
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 and filed with the Maryland Department of
Assessments and Taxation. See "-- Representations and Warranties; Conditions to
the Merger."
It is anticipated that the merger will occur in January 2001.
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 Community Bankshares common stock in exchange for certificates
representing shares of F&M common stock.
Community Bankshares shareholders should not send in their certificates
until they receive such instructions.
Promptly after surrender of one or more certificates for Community
Bankshares 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 merger, you will be entitled to vote the number of shares of
F&M common stock into which your Community Bankshares common stock has been
converted, regardless of whether you have surrendered your Community Bankshares
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 Community Bankshares 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
Community Bankshares, 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 Community Bankshares to consummate the
merger are subject to the following conditions, among others:
. approval and adoption of the merger agreement by the shareholders
of Community Bankshares;
. 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 Community Bankshares, materially adversely
affects the economic or business benefits of the merger so as to
render inadvisable or unduly burdensome consummation of the
merger;
. the absence of certain actual or threatened proceedings before a
court or other governmental body relating to the merger; and
. the receipt of an opinion of LeClair Ryan, A Professional
Corporation, counsel to F&M, as to certain federal income tax
consequences of the merger.
18
Also, under the terms of the merger agreement, F&M agreed that,
following the merger, it will indemnify those persons associated with Community
Bankshares 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
The Holding Company Merger. The merger of Community Bankshares into
F&M cannot occur without the approval of the Board of Governors of the Federal
Reserve System, the Virginia State Corporation Commission, and the Maryland
Division of Financial Regulation. On _____________ __, 2000, applications were
filed with the Federal Reserve and the Maryland Division of Financial
Regulation, and a notice was filed with the Virginia State Corporation
Commission. The applications and notice were accepted but no approvals of or
non-objections to the merger have been obtained.
The Subsidiary Bank Merger. As required by the terms of the merger
agreement, Community Bankshares' subsidiary, Community Bank of Maryland, will
merge into F&M Bank-Maryland, F&M's bank subsidiary in Maryland, after the
merger of Community Bankshares into F&M. The subsidiary bank merger is subject
to approval of the Federal Reserve Board and the Maryland Division of Financial
Regulation. On _____________ __, 2000, applications were filed with the Federal
Reserve and the Maryland Division of Financial Regulation. 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 Community Bankshares, inadvisable or unduly burdensome.
Business Pending the Merger
Until the merger, Community Bankshares has agreed to conduct its
operations 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.
In addition, and except with the prior consent of F&M, until the
effective date of the merger Community Bankshares may not:
. 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 Community Bankshares to obtain the
necessary approvals, consents or waivers required to effect the
merger or to perform its covenants and agreements on a timely
basis;
. issue any capital stock, except upon exercise of options issued
pursuant to existing employee benefits plans, programs or
arrangements or effect any stock split or otherwise change its
capitalization;
. 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 and employee bonuses made in the ordinary course of
business consistent with past practice;
. 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;
19
. 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;
. change its lending, investment, asset/liability management or
other material banking policies in any material respect, except
as may be required by law;
. amend its articles of incorporation or bylaws;
. declare or pay dividends on its capital stock, except that
Community Bankshares may pay its regular quarterly cash dividends
of $0.08 per share pending the effectiveness of the merger; or
. take any action that would cause any of its representations and
warranties in the merger agreement to become untrue.
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
Community Bankshares 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
Community Bankshares, or any purchase of all or any material portion of the
assets of Community Bankshares.
Notwithstanding the non-solicitation provision described above, the
Community Bankshares 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 a transaction described above if, and only to the
extent that:
. the Community Bankshares 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;
. prior to taking such action, Community Bankshares receives from
such person or entity an executed confidentiality agreement; and
. the Community Bankshares board concludes in good faith that the
proposal regarding the transaction contains an offer of
consideration that is superior to the consideration set forth in
the merger agreement.
Community Bankshares is required to notify F&M of the receipt of any such
proposal or inquiry, and to provide it with the identity of the party making the
proposal or inquiry and the terms and conditions of the 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 will not be changed after approval of the merger
agreement by the Community Bankshares shareholders. Any material change in a
material term of the merger agreement would require a resolicitation of
Community Bankshares' shareholders. Such a material change would include, but
not be limited to, a change in the tax consequences to Community Bankshares'
shareholders.
The merger agreement may be terminated at any time before the merger,
whether before or after the approval of the merger by the shareholders of
Community Bankshares:
20
. by mutual consent of Community Bankshares and F&M;
. unilaterally by Community Bankshares or F&M, if the merger has
not occurred on or before April 30, 2001, 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
. unilaterally by Community Bankshares 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 will become null and void,
except that certain provisions thereof relating to expenses and confidentiality
of information exchanged between the parties will survive any such termination.
Option Agreement
The option agreement was entered into as a condition to F&M's
willingness to enter into the merger agreement and to increase the probability
of the merger. Exercise of the option by F&M may make the acquisition of
Community Bankshares or a significant interest in it more expensive to any
prospective acquiror other than F&M, even if such an acquisition would be
beneficial to you. The existence of the option is intended to make it less
likely that a prospective acquiror, other than F&M, will seek a business
combination with Community Bankshares. 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 144,409 shares of Community Bankshares common stock at a price of
$18.00 per share, subject to adjustment upon the occurrence of certain events
described below. The shares subject to the option represent approximately 19.9%
of the outstanding shares of Community Bankshares common stock as of August 23,
2000.
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" occurs when:
. Community Bankshares enters into an agreement with a person
(other than F&M or its affiliates) to:
. acquire, merge or consolidate with, or enter into any
similar transaction with Community Bankshares,
. purchase, lease or otherwise acquire all or substantially
all of the assets of Community Bankshares, or
. 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
Community Bankshares;
. any person acquires beneficial ownership of more than 20% of the
outstanding shares of Community Bankshares common stock; or
. 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
Community Bankshares, and following such proposal the
shareholders of Community Bankshares vote not to approve the
merger agreement.
Community Bankshares 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 Community Bankshares written notice
specifying (a) the total number of shares it will purchase and (b) 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 the 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
21
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.
F&M's option will expire and terminate, to the extent not previously
exercised, upon the earlier of:
. the effective date of the merger;
. the date on which the merger agreement is terminated, other than a
termination based upon a material breach by Community Bankshares
of any covenant in the merger agreement or the failure of
Community Bankshares 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
. 12 months after the merger agreement is terminated based upon a
material breach by Community Bankshares of certain specified
covenants or the failure of Community Bankshares 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 Community Bankshares' 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.
Affiliate Agreement
In connection with the execution and delivery of the merger agreement,
the directors and executive officers of Community Bankshares, and Irving L.
Kidwell, Chairman Emeritus of Community Bankshares, entered into an affiliate
agreement with F&M under which these individuals agreed to vote all of their
shares in favor of the merger agreement. As of _____________, 2000, the record
date for the special meeting, these individuals owned shares of Community
Bankshares common stock representing approximately 56.3% of the outstanding
common shares of Community Bankshares.
The affiliate agreement prohibits, subject to limited exceptions, the
shareholder from selling, transferring, pledging, encumbering or otherwise
disposing of any shares of Community Bankshares stock. The affiliate agreement
terminates upon the earlier to occur of the completion of the merger and the
termination of the merger agreement in accordance with its terms.
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 Community Bankshares for purposes
of Rule 145 under the Securities Act of 1933. To the best knowledge of Community
Bankshares and F&M, the only persons who may be deemed to be affiliates of
Community Bankshares subject to these limitations are the directors and
executive officers of Community Bankshares, and Irving L. Kidwell, Chairman
Emeritus of Community Bankshares, who owns 21.96% of its common stock.
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 Community Bankshares are
carried forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Community Bankshares 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.
For the merger to qualify as a pooling of interests, it must satisfy a
number of conditions including that substantially all of the Community
Bankshares 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
22
interests accounting treatment, and a condition to the obligation of F&M to
consummate the merger would not be satisfied. Each of F&M and Community
Bankshares 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 Community Bankshares have
agreed that they will not sell any F&M common stock or Community Bankshares
common stock within 30 days before the effective date of the merger, or 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 Community Bankshares
after the merger.
Interests of Certain Persons in the Merger
As discussed below, certain members of Community Bankshares'
management, as well as certain members of the Community Bankshares board of
directors, have interests in the merger in addition to their interests as
shareholders of Community Bankshares. In each case, the Community Bankshares
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, the officers
and directors of Community Bankshares against certain liabilities arising before
the effective date of the merger. F&M also has agreed to provide directors' and
officers' liability insurance for the present officers and directors of
Community Bankshares for a period of three years after the merger.
Directors. Up to eight current directors or advisory directors of
Community Bankshares or Community Bank, including William V. Meyers, Chairman of
Community Bankshares and Community Bank, and Thomas G. Moore, President of
Community Bankshares and Community Bank, will become directors of F&M
Bank-Maryland. Directors of Community Bankshares and Community Bank who will not
be directors of F&M Bank-Maryland will be offered a position on F&M
Bank-Maryland's advisory board.
Stock Options. Certain officers and employees of Community Bankshares
hold stock options under Community Bankshares' stock incentive plan to acquire
aggregate of 28,025 shares of Community Bankshares common stock at exercise
prices ranging from $14.29 to $19.25 per share. Such options, to the extent 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. In connection with the merger, and pursuant to
the provisions of his employment agreement with Community Bankshares, Thomas G.
Moore will receive severance payments totaling $334,548 over a six year period.
Mr. Moore also has agreed to enter into a noncompetition agreement with F&M
pursuant to which he has agreed not to compete with F&M for a period of two
years following the merger.
Employee and Benefit Plans. As soon as administratively practicable
following the merger, employees of Community Bankshares and Community Bank who
continue on as employees of F&M Bank-Maryland 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. These employees will receive credit for
their years of service to Community Bankshares and Community Bank for
participation and vesting purposes only.
Material Federal Income Tax Consequences
The following is a discussion of all material federal income tax
consequences of the merger under the Internal Revenue Code to Community
Bankshares shareholders who receive F&M common stock solely in exchange for
Community Bankshares 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 Community Bankshares shareholders. Certain tax
consequences of the merger may vary depending upon the particular circumstances
of each Community Bankshares shareholder and other factors.
You are urged to consult with your tax advisor to determine the
particular tax consequences of the merger to you.
This summary is based on current law and the advice of LeClair Ryan, A
Professional Corporation, legal counsel to F&M. The advice in this summary is
based on, among other things, certain customary assumptions and
23
representations relating to certain facts and circumstances of, and the
intentions of the parties to, the merger. Neither F&M nor Community Bankshares
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 Community
Bankshares will receive from LeClair Ryan, 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 Internal Revenue Code, if consummated
in the manner set forth in the merger agreement. Accordingly, among other
things, in the opinion of such counsel:
. the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
. no gain or loss will be recognized by F&M or Community Bankshares
as a result of the merger;
. no gain or loss will be recognized by a Community Bankshares
shareholder to the extent he receives F&M common stock solely in
exchange for his Community Bankshares common stock pursuant to the
merger;
. the tax basis of the F&M common stock received by each Community
Bankshares shareholder will be the same as the tax basis of the
Community Bankshares common stock surrendered in exchange
therefor; and
. the holding period for each share of F&M common stock received by
each Community Bankshares shareholder in exchange for Community
Bankshares common stock will include the period for which such
shareholder held the Community Bankshares common stock exchanged
therefor, provided such Community Bankshares 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.
Dissenters' Rights
Any shareholder of Community Bankshares who does not vote in favor of
the merger and the transactions contemplated by the merger agreement and who has
given prior written notice to Community Bankshares of his or her objection to
the proposed transaction and who otherwise complies with the procedures set
forth in Title 3, Subtitle 2 of the Maryland General Corporation Law (the
"MGCL"), will be entitled to receive payment in cash of the fair value of his or
her shares of Community Bankshares common stock. A copy of Title 3, Subtitle 2
of the MGCL is included as Appendix IV to this proxy statement/prospectus.
If you want to demand payment of the fair value of your shares of
Community Bankshares common stock, you must fully comply with the procedures set
out in the MGCL. The required procedures are summarized below.
. First, you must submit a written notice to the President of
Community Bankshares at or prior to the meeting, stating that you
object to the proposed merger. You should send your notice to:
Community Bankshares of Maryland, Inc.
16410 Heritage Boulevard
Bowie, Maryland 20716
Attention: Thomas G. Moore, President
. You must then not vote your shares in favor of the merger. This
means that you should either (1) not return a proxy card and not
vote in person in favor of the adoption of the merger agreement,
(2) return a proxy card with the "Against" or "Abstain" box
checked; (3) vote in person against the adoption of the
24
merger agreement; or (4) register in person an abstention from the
proposal to adopt the merger agreement. Merely voting against the
merger or abstaining from or not voting in favor of the merger
will not constitute notice of objection or dissent, and will not
entitle you to payment in cash of the fair value of your shares.
. Promptly after the effectiveness of the merger, F&M, as the
successor to Community Bankshares, will write to objecting
shareholders of Community Bankshares, notifying them of the date
on which the articles of merger were accepted for record. This
notice will be sent by certified mail, return receipt requested,
to the address you provide in your notice, or if no address is
indicated, to the address which appears on Community Bankshares'
stockholder records.
Within 20 days of the date on which the articles of merger were
accepted for record, an objecting shareholder must make a written
demand for payment of the fair value of his or her stock, stating
the number and class of shares for which payment is demanded. The
written demand for payment should be sent to:
F&M National Corporation
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Attention: Secretary
F&M's notice of the date on which the articles of merger were accepted
may contain an offer of payment of the amount which F&M believes is the fair
value of the Community Bankshares common stock, and certain financial
disclosures. If you have followed all of the procedural steps required to demand
payment of fair value and have not received payment for your shares, you may, or
F&M may, within 50 days of the acceptance of the articles of merger, petition
the court of equity in Montgomery County, Maryland for appraisal of the fair
value of your shares of Community Bankshares common stock as of the date of the
Community Bankshares shareholder meeting, without including any appreciation or
depreciation resulting directly or indirectly from the merger or its proposal.
Any shareholder who files a notice of objection, but fails to file a
written demand for the payment of fair value in a timely manner will be bound by
the shareholder vote and will not be entitled to receive payment in cash as a
holder of dissenting shares.
If you demand payment for you stock as an objecting shareholder, you
have no right to receive any dividends or other distributions on such shares, or
the shares of F&M common stock into which such shares would be converted, after
close of business on the date of the Community Bankshares shareholder meeting at
which the merger is approved, and have no other rights, including voting rights,
with respect to such shares, except the payment of fair value.
If you demand payment for your shares, your rights as a shareholder
will be restored if the demand for payment is withdrawn, a petition of appraisal
is not filed within the time required, a court determines that you are not
entitled to relief, or the merger is abandoned or rescinded. A demand for
payment may be withdrawn only with the consent of F&M.
If the court finds that a shareholder is entitled to an appraisal of
his or her stock, the court will appoint three disinterested appraisers to
determine the fair value of the stock. Within 60 days after appointment, or such
longer period as the court may direct, the appraisers must file with the court
and mail to each shareholder who is a party to the proceeding their report
stating their conclusion as to the fair value of the stock. Within fifteen 15
days after the filing of the report, any party may object to the report and
request a rehearing. The court, upon motion of any party, will enter an order
either confirming, modifying or rejecting the report and, if confirmed or
modified, enter judgment directing the time within which payment must be made.
If the report is rejected, the court may determine the fair value or remit the
proceeding to the same or other appraisers. Any judgment entered pursuant to a
court proceeding will include interest from the date of the shareholders' vote
at the meeting, unless the court finds that the shareholder's refusal to accept
a written offer to purchase the shares was arbitrary and vexatious or not in
good faith.
The costs of the appraisal proceedings, including compensation and
expenses of the appraisers, will be the responsibility of F&M, except that all
or any part of such expenses may be assessed against any or all of the objecting
25
shareholders to whom an offer to pay for such shareholder's shares has been
made, if the court finds the failure to accept such offer was arbitrary,
vexatious or not in good faith. Costs of the proceedings will not including fees
and expenses of counsel. Costs of the proceedings may include fees and expenses
of experts only if F&M did not make an offer of payment for your stock or if the
value of the stock as determined in the appraisal proceeding materially exceeds
the amount offered by F&M,
The preceding is a summary of the material aspects of Title 3, Subtitle
2 of the MGCL, and is qualified by reference to the text of the statute. The
full text of Title 3, Subtitle 2, which we urge you to read in its entirety, is
included as Appendix IV to this proxy statement/prospectus.
Certain Differences in Rights of Shareholders
As a Virginia corporation, F&M is subject to the provisions of the
Virginia Stock Corporation Act, while Community Bankshares, as a Maryland
corporation, is subject to the Maryland General Corporation Law. Your
shareholder rights are presently governed by the Maryland General Corporation
Law and Community Bankshares' 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 and the Virginia Stock Corporation Act.
There are no material differences between the rights of a Community
Bankshares shareholder under the Maryland General Corporation Law and Community
Bankshares' articles of incorporation and bylaws, on the one hand, and the
rights of an F&M shareholder under the Virginia Stock Corporation Act and 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, Community
Bankshares 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
and Community Bankshares will, however, share equally the expenses of printing
this proxy statement/prospectus.
In addition, 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
Community Bankshares because it is not approved by Community Bankshares
shareholders, Community Bankshares must pay 50% of F&M's costs in this
transaction, up to $50,000.
Cautionary Statement Concerning Forward-Looking Statements
This proxy statement/prospectus, including information included or
incorporated by reference in this proxy statement/prospectus, 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 Community Bankshares. 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:
. competitive pressure in the banking industry increases
significantly;
. changes in the interest rate environment reduce margins;
. general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a
deterioration in credit quality;
. expected cost savings from this merger or other previously
announced or completed mergers may not be fully realized;
26
. The loss of deposits, revenue or customers following this or other
previously announced or completed mergers may be greater than
anticipated;
. the costs of integrating the businesses of F&M and its merger
partners may be greater than expected;
. changes occur in the regulatory environment;
. changes occur in business conditions and inflation; and
. 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." Community Bankshares common stock is not registered on any exchange or
quoted by the Nasdaq Stock Market, and no brokers offer to make a market in
Community Bankshares common stock. Community Bankshares common stock has traded
infrequently, on a sporadic basis, in a privately negotiated transactions.
The following table provides the high and low closing sales prices for
F&M common stock on the NYSE for the periods indicated.
F&M
---
Closing Sales Prices
-----------------------------------------------------------------------------
2000 1999 1998
--------------------- ----------------------- -----------------------
High Low High Low High Low
---- --- ---- --- ---- ---
1st Quarter............................ $ 27.25 $ 22.13 $ 30.00 $ 23.87 $ 36.25 $ 31.75
2nd Quarter............................ 24.82 21.00 33.18 23.93 34.31 32.00
3rd Quarter............................ 25.00 21.75 33.50 26.00 31.56 26.13
4th Quarter (through __)............... 30.12 26.50 31.69 25.06
The closing price of F&M common stock on the NYSE on August 22, 2000,
the last full trading day preceding the public announcement of the proposed
merger, was $24.0625 per share. The closing price of F&M common stock on the
NYSE on ___________ __, 2000, the latest practicable date before the date of
this proxy statement/prospectus was $_____ per share.
Community Bankshares
In the fourth quarter of 1998, Community Bankshares sold 58,035 shares
of its common stock through a secondary public offering at a price per share of
$17.50. Community Bankshares has no knowledge of any other sales of or trades in
its common stock during 1998. Based on information made available to Community
Bankshares, in 1999, the only trade of its common stock occurred in the first
quarter at a price of $19.00 per share, and in 2000, the only trade occurred in
the first quarter at a price of $19.25 per share. The sales prices of the
Community Bankshares common stock sold in 1999 and 2000 do not necessarily
reflect the price that would be paid in an active and liquid market. In
addition, there may have been other transactions at other prices not known to
Community Bankshares.
As of _____________ __, 2000, there were _____ record holders of F&M
common stock. As of _____________ __, 2000, the record date, there were
approximately 178 holders of record of Community Bankshares common stock.
27
Dividends
The tables below reflect the cash dividends declared per share during
each quarter on F&M common stock and Community Bankshares common stock for the
periods indicated. F&M or F&M Bank-Winchester has paid regular cash dividends
for more than 57 consecutive years. Community Bankshares has paid regular cash
dividends for more than five consecutive years.
The amounts shown for F&M have not been restated and adjusted to
reflect the acquisition of The State Bank of the Alleghenies on January 3, 2000
which was accounted for as a pooling of interests.
F&M
---
2000 1999 1998
---- ---- ----
1st Quarter............................................ $ 0.235 $ 0.195 $ 0.185
2nd Quarter............................................ 0.250 0.235 0.185
3rd Quarter............................................ 0.250 0.235 0.195
4th Quarter............................................ --- 0.235 0.195
Community Bankshares
--------------------
2000 1999 1998
---- ---- ----
1st Quarter............................................ $ 0.08 $ 0.07 $ 0.06
2nd Quarter............................................ 0.08 0.07 0.06
3rd Quarter............................................ 0.08 0.08 0.07
4th Quarter............................................ --- 0.08 0.07
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 eight within the F&M system, is prohibited
from paying a dividend that would impair its paid-in capital. In addition, the
Virginia State Corporation Commission 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." 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.
28
COMMUNITY BANKSHARES OF MARYLAND, INC.
Business
Community Bankshares of Maryland, Inc. was incorporated under the laws
of the State of Maryland in 1987 and has one wholly-owned subsidiary, Community
Bank of Maryland, a Maryland chartered commercial bank. The bank commenced
operations in 1989, and currently operates out of its main office and three
branch offices. Community Bank provides a high level of personal service and
offers a full range of financial products and services to a wide array of
depositors and borrowers, focusing particularly on the small business and the
individual retail customer.
Principal Market Area. The primary service area of the bank is Prince
George's County and Anne Arundel County in Maryland and the immediate
surrounding area. Community Bank solicits business from individuals and small-
to medium-sized businesses within these service areas.
Banking Services. Community Bank provides a wide range of banking
services including various deposit products, loan services, automated teller
machines, ATM cards, and telephone banking. No material portion of Community
Bank's deposits has been obtained from a single or small group of customers and
the loss of deposits of any one customer or of a small group of customers would
not have a material adverse effect on the business of Community Bank.
Lending Activities
Community Bank offers a full spectrum of lending services to its
customers, including commercial loans, lines of credit, residential mortgages,
home equity loans, personal loans, auto loans and financing arrangements for
personal equipment and business equipment. Loan terms, including interest rates,
loan to value ratios, and maturities, are tailored as much as possible to meet
the needs of the borrower. A special effort is made to keep loan products as
flexible as possible within the guidelines of prudent banking practices in terms
of interest rate risk and credit risk.
Loan business is generated primarily through referrals and
direct-calling efforts. Referrals of loan business come from Community Bank's
directors, stockholders of Community Bankshares, present clients of Community
Bank and professionals.
At September 30, 2000, Community Bank's statutory lending limit to any
single borrower was $950,000, subject to certain exceptions provided under
applicable law. As of September 30, 2000, Community Bank had credit exposure to
its largest borrower of no greater than that amount. Community Bank only extends
loans to directors of Community Bank and Community Bankshares on the same terms
on which it extends loans to unaffiliated persons, and has a policy of limiting
the aggregate principal amount of loans to all executive officers, directors,
principal stockholders, and employees of Community Bank and Community Bankshares
to 100% of capital. Insiders are not present when their loans are discussed. At
September 30, 2000, the aggregate principal amount of all loans to insiders was
approximately $2.9 million.
Commercial Loans. Commercial loans are written for any business
purpose, including the financing of plant and equipment, the carrying of
accounts receivable, contract administration, and the acquisition and
construction of rental real estate projects. Special attention is paid to the
commercial real estate market which is particularly stable and active in the
Prince George's County and Anne Arundel County area. Community Bank's commercial
loan portfolio reflects a diverse group of borrowers with no concentration in
any borrower, group of borrowers, or industry.
As part of its internal loan review process, Community Bankshares' loan
review committee, comprised of loan officers and staff, reviews all loans 60-day
delinquent, loans on Community Bankshares' watch list, loans rated special
mention, substandard, or doubtful, and other loans of concern at least
quarterly. Loan reviews are reported to Community Bankshares' executive
committee with any adversely rated changes specifically mentioned. All other
loans with their respective risk ratings are reported monthly to Community
Bankshares' board of directors. Community Bankshares' audit and operations
committee performs periodic documentation and internal control reviews to
complement loan reviews.
29
Residential Mortgage and Home Equity Loans. The strong local economy
provides for a large and active real estate market for the construction and sale
of new residential property and sale of existing housing. Community Bankshares
provides financing for the construction and acquisition of residential property
throughout its market area. Community Bankshares has availed itself of the
services of mortgage brokers in an effort to offer as many long-term and low
interest rate mortgage products as possible. In addition, Community Bank has
developed a competitive home equity line of credit product for the use of its
customers. This product offers the customer the ability to use the line of
credit flexibility features to manage their own credit needs on an on-going
basis. Community Bankshares does not currently sell loans which it originates
into the secondary market, and does not document such loans for sale.
Other Loans. Loans are considered for any worthwhile personal or
business purpose on a case-by-case basis, such as the financing of equipment,
receivables, contract administration expenses, land acquisition and development,
and automobile financing.
Employees
On September 30, 2000, Community Bank had 27 full-time and 10 part-time
employees. None of its employees are represented by any collective bargaining
agreements, and relations with employees are considered excellent.
Competition
Community Bank's primary market is generally defined as Prince George's
County and Anne Arundel County. Community Bank is subject to intense competition
from various other financial institutions and other companies that offer
financial services. Among financial institutions, the primary method of
competition is the efficient delivery of diversified quality services at
competitive prices.
Property
Community Bank has leased offices occupied for banking facilities, and
has purchased leasehold improvements, fixtures and equipment with respect
thereto.
Community Bankshares and Community Bank own 43.61% and 56.39%,
respectively, of Community Bankshares of Maryland, Inc./Community Bank of
Maryland Partnership, a Maryland limited partnership which owns the office
building in which the main office of the bank is located and is authorized to
engage in real estate activities related to the operation of the bank. The
building in which the main office of the bank is located is 99% leased and is
occupied by four tenants.
Security Ownership of Management
The following table sets forth information as of September 30, 2000
regarding the number of shares of Community Bank common stock beneficially owned
by (a) the directors of Community Bankshares, (b) the executive officers of
Community Bankshares, and (c) all directors and executive officers of Community
Bankshares 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 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.
30
Common Stock Percent
Name Beneficially Owned of Class(1)
---- ------------------ -----------
Directors and Executive Officers
Lucie M. Baldi...................... 27,552 3.79%
Lance W. Billingsley................ 15,248 2.10
Vaseleos Colevas(2)................. 55,384 7.62
Hugh O. Lowe(3)..................... 53,397 7.35
William V. Meyers(4)................ 14,311 1.97
Thomas G. Moore(5).................. 14,800 2.02
Andrew O. Mothershead(6)............ 53,103 7.31
Glenn A. Turner(7).................. 23,103 3.18
Charles A. Bryer(8)................. 6,550 0.89
All executive officers and directors
as a group (9 persons) .......... 263,448 35.57
Other 5% Shareholders
Irving L. Kidwell (9) 159,597 21.96%
Sandy Spring Bancorp, Inc. (10) 52,500 7.22
Albert W. Turner (7) (11) 52,500 7.22
________________________
(1) The percentage of shares is based on 726,876 shares
outstanding as of September 30, 2000, except with respect to
individuals holding options to acquire common stock
exercisable within 60 days of that date, in which event
represents percentage of shares issued and outstanding as of
September 30, 2000 plus the number of such options held by
such person, and all directors and officers as a group, which
represents percentage of shares outstanding as of September
30, 2000 plus the number of such options held by all such
persons as a group.
(2) The address of Ms. Colevas is P.O. Box 564, Upper Marlboro,
Maryland 20773.
(3) The address of Mr. Lowe is 4937 Hine Drive, Shady Side,
Maryland 20764.
(4) Includes a total of 1,000 shares held in two trusts for Mr.
Meyers' grandchildren and 1,000 shares owned by Meyers Liquors
Limited, a company controlled by Mr. Meyers.
(5) Includes presently exercisable options to purchase 7,300
shares of Community Bankshares common stock.
(6) The address of Mr. Mothershead is 7112 Eversfield Drive,
Hyattsville, Maryland 20782.
(7) Glenn A. Turner is the son of Albert W. Turner.
(8) Consists of presently exercisable options to purchase 6,550
shares of Community Bankshares common stock.
(9) The address of Mr. Kidwell is 2925 Conne Mara Drive,
Davidsonville, Maryland 21035.
(10) The address Sandy Spring Bancorp, Inc. is 17801 Georgia
Avenue, Olney, Maryland 20832.
(11) The address of Mr. Turner is 1103 Thomas Swan Lane,
Davidsonville, Maryland 21035.
31
COMMUNITY BANKSHARES OF MARYLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition of Community
Bankshares. This discussion and analysis should be read in conjunction with
Community Bankshares' consolidated financial statements and the accompanying
notes contained in this proxy statement/prospectus.
General
During 1999 and the first six months of 2000, Community Bankshares
continued to experience sound, stable growth. Net income for the six months
ended June 30, 2000 of $359 thousand ($.49 earnings per share, diluted)
represented an increase of $43 thousand or 13.6% from net income of $316
thousand ($.44 earnings per share, diluted) for the six months ended June 30,
1999. For 1999, Community Bankshares reported net income of $663 thousand ($.92
earnings per share, diluted), an increase of $118 thousand or 21.7% compared to
net income of $545 thousand ($.83 earnings per share, diluted) for 1998.
Financial Condition
Total assets increased $6.6 million or 9.8% from $67.6 million at
December 31, 1998 to $74.2 million at December 31, 1999, and increased an
additional $4.7 million or 6.3% to $78.9 million at June 30, 2000. This increase
at December 31, 1999 was primarily attributable to a $4.2 million or 19.8%
increase in securities and a $4.4 million or 12.8% increase in net loans. These
increases were partially offset by a decrease in cash and cash equivalents, net
of $2.7 million or 35.7%. This increase at June 30, 2000 was primarily
attributable to a $2.6 million or 53.6% increase in cash and cash equivalents,
and a $1.3 million or 3.3% increase in net loans. The growth in cash and cash
equivalents and investment securities was funded by the growth in deposits in
the periods discussed above.
Total liabilities increased $6.3 million or 10.6% from $59.1 million at
December 31, 1998 to $65.4 million at December 31, 1999, and increased an
additional $4.4 million or 6.8% to $69.8 million at June 30, 2000. This increase
at December 31, 1999 was primarily attributable to a $2.6 million or 4.5%
increase in deposits and a $3.6 million or 194.8% increase in short-term
borrowings. This increase at June 30, 2000 was primarily attributable to a $6.4
million or 10.7% increase in deposits which was offset by a $2.0 million or
36.3% decrease in short-term borrowings.
Total stockholders' equity increased $353 thousand or 4.2% from $8.5
million at December 31, 1998 to $8.8 million at December 31, 1999, and increased
an additional $237 thousand or 2.7% to $9.0 million at June 30, 2000. These
increases primarily reflect net income recorded during the periods, which was
partially offset by dividends to stockholders and unrealized losses on
securities available for sale.
The following table provides certain information relating to Community
Bankshares' average consolidated statements of financial condition and reflects
the interest income on interest-earning assets and interest expense on
interest-bearing liabilities for the periods indicated and the average yields
earned and rates paid for the periods indicated. These yields and costs are
derived by dividing income or expense by the average daily balance of the
related assets or liabilities, respectively, for the periods presented.
Non-accrual loans have been included in the average balances of loans.
32
Average Balances, Interest Income and Expenses, and Average Yields and Rates
Six Months Ended June 30, Year Ended December 31,
----------------------------------- -------------------------------------------------------------
2000 1999 1998
----------------------------------- --------------------------- -----------------------------
Interest Interest Interest
Average Income/ Yield Average Income/ Yield Average Income/ Yield
Balance Expense Rate (5) Balance Expense Rate Balance Expense Rate
--------- --------- --------- -------- ------- ------ -------- ------- -----
Assets:
Interest earning assets:
Securities:
Taxable $ 18,391 $ 579 6.30% $16,293 $ 986 6.05% $ 11,630 $ 708 6.09%
Tax exempt (1) 6,901 219 6.35% 6,739 421 6.25% 5,164 322 6.24%
--------- -------- ------- ------ --------- ------
Total securities 25,292 798 6.31% 23,032 $1,407 6.11% 16,794 1,030 6.13%
Federal funds sold 3,594 110 6.12% 3,499 176 5.03% 3,877 211 5.44%
Loans, net (2) 40,016 1,841 9.20% 36,158 3,301 9.13% 33,336 3,177 9.53%
--------- -------- ------- ------ --------- ------
Total earning assets 68,902 2,749 7.98% 62,689 4,884 7.79% 54,007 4,418 8.18%
-------- ------ ------
Less: allowance for
loan losses (402) (362) (333)
Total non-earning
assets 7,933 7,945 6,971
--------- ------- -------
Total assets $ 76,433 $70,272 $60,645
========= ======= =======
Liabilities and
Stockholders' Equity
Interest-bearing
deposits:
Checking $ 3,812 $ 28 1.47% $ 3,737 $ 54 1.45% $ 3,912 $ 73 1.87%
Regular Savings 4,414 63 2.85% 3,977 97 2.44% 3,295 84 2.55%
Money Market
Savings 7,323 126 3.44% 7,581 233 3.07% 6,960 256 3.68%
Other time deposits 24,854 697 5.61% 22,513 1,198 5.32% 18,966 1,064 5.61%
Time deposits
>$100,000 8,647 246 5.69% 7,545 406 5.38% 5,964 339 5.68%
--------- -------- ------- ------ --------- ------
Total interest-
bearing deposits 49,050 1,160 4.73% 45,353 1,988 4.38% 39,097 1,816 4.64%
Short-term
borrowings 5,000 137 5.48% 2,253 94 4.17% 1,541 66 4.28%
--------- -------- ------- ------ --------- ------
Total interest-
bearing liabilities 54,050 1,297 4.80% 47,606 2,082 4.37% 40,638 1,882 4.63%
Non-interest bearing -------- ------ ------
liabilities:
Demand deposits 13,188 14,070 12,265
Other non-interest-
bearing liabilities 347 282 471
--------- ------- -------
Total liabilities 67,585 61,958 53,374
--------- ------- -------
Stockholders' equity 8,848 8,314 7,271
Total liabilities and
stockholders'
equity $76,433 $70,272 $60,645
========= ======= =======
Net interest income $ 1,452 $ 2,802 $ 2,536
========= ======= =======
Interest rate spread (3) 3.18% 3.42% 3.55%
Interest expense as a %
of earning assets 3.76% 3.32% 3.48%
Net interest margin (4) 4.21% 4.47% 4.70%
____________________________
(1) Income and yields as reported on a tax equivalent basis assuming a federal
tax rate of 34%.
(2) For the purposes of these calculations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(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 the net interest income, calculated on a fully
taxable basis assuming a federal tax rate of 34%, expressed as a percentage
of average earning assets.
(5) Yields for six months ended June 30, 2000 are on an annualized basis.
33
Net Interest Income
Net interest income is the excess of interest earned on loans and other
interest-earning assets over the interest paid on deposits and borrowings. The
change in net interest income is a function of the change in volume and rates on
interest-earning assets and interest-bearing liabilities. For 1999, Community
Bankshares' net interest income (on tax equivalent basis) was $2.8 million
compared to $2.5 million for 1998, representing an increase of $266 thousand or
10.5% from 1998 to 1999. Net interest income (on tax equivalent basis) for the
six months ended June 30, 2000 was $1.5 million, an increase of $92 thousand or
7.1% over the $1.3 million in net interest income for the comparable period in
1999. The increase for 1999 was primarily the result of a $1.7 million or 12.8%
increase in the relative amount of interest-earning assets over interest-bearing
liabilities during 1999 versus 1998, which more than offset a 13 basis point net
decrease to 3.42% in the yield on interest-earning assets over the rate paid on
interest-bearing liabilities.
The following table indicates the changes in interest income and
interest expense that are attributable to changes in average volume and average
rates, in comparison with the same period in the preceding year. The change in
interest due to the combined rate-volume variance has been allocated to the
change in rate and the change in volume based upon the respective percentages of
their combined totals.
Volume and Rate Analysis
Six Months Ended Years Ended
June 30, December 31,
----------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in:
---------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
----------- ---------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Increase (decrease) in:
Interest-earning assets:
Taxable securities $ 113 $ 29 $ 142 $ 283 $ (5) $ 278
Tax-exempt
securities 3 3 6 98 1 99
Federal funds sold (1) 23 22 (20) (15) (35)
Loans 198 40 238 246 (122) 124
----------- ---------- ----------- ----------- ---------- -----------
Total interest-
earning assets 313 95 408 607 (141) 466
----------- ---------- ----------- ----------- ---------- -----------
Interest expense:
Checking 2 1 3 (3) (16) (19)
Regular savings 9 12 21 16 (3) 13
Money market 1 14 15 27 (50) (23)
Time deposits
* $100,000 80 37 117 185 (51) 134
Time deposits
** $100,000 42 13 55 84 (17) 67
Short-term
borrowings 82 22 104 30 (2) 28
----------- ---------- ----------- ----------- ---------- -----------
Total interest
expense 216 99 315 339 (139) 200
----------- ---------- ----------- ----------- ---------- -----------
Net interest earnings $ 97 $ (4) $ 93 $ 268 $ (2) $ 266
=========== ========== =========== =========== ========== ===========
* means less than
** means greater than or equals to
34
Interest Rate Sensitivity and Liquidity
Prudent asset and liability management assures liquidity and maintains
balance between rate sensitive assets and liabilities. Liquidity management
involves meeting the cash flow requirements of Community Bankshares' loan
customers and depositors. Interest rate sensitivity management involves
maximizing the net interest margin to ensure net income growth stability and
growth through various interest rate cycles and fluctuations. Community
Bankshares' senior management monitors the liquidity position and formulates a
strategy to maintain an interest sensitive position that maximizes the net
interest margin.
Interest Rate Sensitivity
-------------------------
Interest rate sensitivity analysis reflects the earlier of the maturity
or repricing date for various assets and liabilities. The mismatch of assets and
liabilities repricing within a specific period of time is used to measure
interest rate sensitivity. Community Bankshares' goal is to manage interest rate
exposure in order to hedge against interest rate fluctuations. A tool Community
Bankshares uses to determine its interest-rate risk is gap analysis. Gap
analysis attempts to examine the volume of interest-rate-sensitive assets minus
interest-rate-sensitive liabilities. The difference between the two is the
interest-sensitive gap, and it indicates how future changes in interest rates
may affect net interest income. Regardless of whether interest rates are
expected to increase or fall, the objective is to maintain a gap position that
will minimize any changes in net interest income. A negative gap exists when
Community Bankshares has more interest-sensitive liabilities maturing within a
certain time period than interest-sensitive assets. Under this scenario, if
interest rates were to increase it would tend to reduce net interest income. A
weakness of this sensitivity analysis is that it provides only a general
indication of interest sensitivity at a specific point in time. Senior
management and the board of directors regularly monitor the sensitivity trend.
Strategies to manage the interest rate risk include maintaining a strong balance
sheet and adequate liquidity, generating core deposit growth, and practicing
conservative and sound banking policies.
At June 30, 2000, Community Bankshares was liability sensitive in the
short term (one year) by approximately 31.6% of earning assets. Technically,
Community Bankshares may reprice interest checking, savings and insured money
markets at any time and, accordingly, they have been classified in the 1-30 day
sensitivity category in the accompanying table. While these accounts have in the
last several years been somewhat more subject to repricing than in prior years,
the degree and frequency of movement is limited, and they are much less
sensitive than contractually possible.
The following tables present Community Bankshares' interest sensitivity
position at June 30, 2000 and at December 31, 1999. This is a one-day position
which continually is changing and is not necessarily indicative of Community
Bankshares' position at any other time.
35
Interest Sensitivity Analysis
June 30, 2000
----------------------------------------------------------------------------------
Within 3-12 1 to 5 Over
3 Months Months Years 5 Years Total
------------- ----------- ------------- ------------- -------------
(Dollars in thousands)
Interest-earning assets:
Loans (net) $ 10,415 $ 1,549 $ 18,709 $ 9,462 $ 40,135
Securities 538 1,876 18,774 4,946 26,134
Federal funds sold 4,407 - - - - - - 4,407
------------- ----------- ------------- ------------- -------------
Total interest-
earning assets $ 15,360 $ 3,425 $ 37,483 $ 14,408 $ 70,676
============= =========== ============= ============= =============
Interest-bearing liabilities:
Deposits:
NOW and savings $ 7,966 $ - - $ - - $ - - $ 7,966
Money Market 5,876 - - - - - - 5,876
Time deposits $100,000
and over 2,392 4,233 3,412 - - 10,037
Other time deposits 5,177 11,442 9,914 - - 26,533
Short-term
borrowings 3,497 - - - - - - 3,497
------------- ----------- ------------- ------------- -------------
Total interest-
bearing liabilities $ 24,908 $ 15,675 $ 13,326 $ - - $ 53,909
============= =========== ============= ============= =============
Period Gap $ (9,548) $ (12,250) $ 24,157 $ 14,408 $ 16,767
Cumulative Gap $ (9,548) $ (21,798) $ 2,359 $ 16,767
Ratio cumulative gap
to total earning assets (13.9)% (31.6)% 3.4% 24.3%
Ratio of interest-earning
assets to interest-bearing
liabilities 61.7% 21.9% 281.3% - -
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 61.7% 46.3% 104.4% 131.1%
36
Interest Sensitivity Analysis
December 31, 1999
---------------------------------------------------------------------------------
Within 3-12 1 to 5 Over
3 Months Months Years 5 Years Total
------------- ----------- ------------- ------------- -------------
(Dollars in thousands)
Interest-earning assets:
Loans (net) $ 11,068 $ 1,939 $ 17,720 $ 8,121 $ 38,848
Securities 801 1,588 14,435 8,575 25,399
Federal funds sold 2,013 - - - - - - 2,013
------------- ----------- ------------- ------------- -------------
Total interest-
earning assets $ 13,882 $ 3,527 $ 32,155 $ 16,696 $ 66,260
============= =========== ============= ============= =============
Interest-bearing liabilities:
Deposits:
NOW and savings $ 10,528 $ - - $ - - $ - - $ 10,528
Money Market 6,365 - - - - - - 6,365
Time deposits $100,000
and over 1,774 2,888 3,224 - - 7,886
Other time deposits 5,968 9,572 8,749 - - 24,289
Short-term
borrowings 5,488 - - - - - - 5,488
------------- ----------- ------------- ------------- -------------
Total interest-
bearing liabilities $ 30,123 $ 12,460 $ 11,973 $ - - $ 54,556
============= =========== ============= ============= =============
Period Gap $ (16,241) $ (8,933) $ 20,182 $ 16,696 $ 11,704
Cumulative Gap $ (16,241) $ (25,174) $ (4,992) $ 11,704
Ratio of cumulative gap
to total earning assets (25.9)% 13.2% 8.0% 18.7%
Ratio of interest-earning
assets to interest-bearing
liabilities 46.1% 28.3% 268.6% - -
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 46.1% 40.9% 90.8% 121.5%
Liquidity
---------
Liquidity refers to the Community Bankshares' ability to meet present
and future financial obligations on a timely basis and at reasonable cost.
Community Bankshares manages its liquidity of both assets and liabilities.
Liquidity needs are met with cash on hand, deposits in banks, federal
funds sold and the fair value of securities available for sale. At June 30,
2000, these liquid assets represented 29.0% of total deposits and other
interest-bearing liabilities. Pay-downs and maturities within the investment
portfolio provide a stable source of funds. Community Bankshares minimizes
liquidity needs by maintaining substantial core deposits. As of June 30, 2000
and December 31, 1999, core deposits comprised 84.8% and 86.7% of total
deposits, respectively. Core deposits are all deposit accounts with balances of
less than $100,000. Additional sources of liquidity are asset maturities and
repayments and available lines to purchase overnight funds from correspondent
banks.
For liquidity purposes, Community Bankshares also utilizes short term
borrowing, principally securities sold under agreements to repurchase, and has
lines to purchase overnight funds from correspondent banks.
At June 30, 2000, Community Bankshares had $8.8 million in approved
loan and letter of credit commitments. Many of these commitments are in the form
of lines of credit and letters of credit that are available for use by the
borrower, but generally not drawn upon. Certificates of deposit scheduled to
mature in one year or less
37
totaled $23.2 million at June 30, 2000. Community Bankshares expects to have
sufficient funds available to meet the short-term liquidity needs of its
customers for deposit repayments and loan funding.
Community Bankshares has had no outstanding long-term debt as of December
31, 1999, December 31, 1998 and June 30, 2000.
Noninterest Income
Noninterest income includes service charges and other income from services
rendered by Community Bankshares. In addition, other operating income includes
gains and losses realized from the sales and calls of securities and other
income items.
Other income for the year ended December 31, 1999 decreased to $877
thousand from $883 thousand for the year ended December 31, 1998 a decrease of
$6 thousand or 0.7%. Other income for the six months ended June 30, 2000 was
$493 thousand, an increase of $64 thousand or 14.9% from the comparable period
in 1999. This increase was primarily due to an increase in service charges on
deposit accounts.
Noninterest Income
Six Months Ended Years Ended
June 30, December 31,
-------------------------- ---------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
Service charges on deposit accounts $ 256 $ 176 $ 419 $ 339
Noninterest income 237 253 458 500
Securities gains, net -- -- -- 44
----------- ----------- ----------- -----------
Total noninterest income $ 493 $ 429 $ 877 $ 883
=========== =========== =========== ===========
Noninterest Expenses
Other expenses for the year ended December 31, 1999 was $2.5 million
compared to $2.4 million for the year ended December 31, 1998, or an increase of
$93 thousand or 3.9%. Other expense for the six-months ended June 30, 2000 was
$1.3 million, compared to $1.2 million for the comparable period in 1999, or an
increase of $100 thousand or 8.0%. Increases in other expense primarily
reflected increased costs associated with the growth of the loan portfolio and
deposit base. Salaries and benefits accounted for 46.0% and 41.5% of total other
expenses for the year ended December 31, 1999 and 1998 respectively, and 46.1%
and 40.8% for the six-months ended June 30, 2000 and 1999, respectively.
Occupancy expense increased 1.8% from $278 thousand in 1998 to $283 thousand in
1999. Occupancy expense for the six months ended June 30, 2000 increased $33
thousand or 24.3% over the comparable period in 1999.
Noninterest Expenses
Six Months Ended Years Ended
June 30, December 31,
-------------------------- ---------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
Salaries and employee benefits $ 620 $ 508 $ 1,155 $ 1,002
Occupancy expenses 173 140 283 278
Furniture and equipment expense 127 86 204 165
Rental expense 85 97 170 205
Data processing expenses 78 143 253 266
Merchant card expenses 52 43 95 85
Director and committee fees 30 31 58 49
Other expenses *1% of total income 180 197 292 367
----------- ----------- ----------- -----------
Total noninterest expenses $ 1,345 $ 1,245 $ 2,510 $ 2,417
=========== =========== =========== ===========
* Less than
38
Provision for Income Taxes
Community Bankshares' income tax provisions are adjusted for non-deductible
expenses and non-taxable interest after applying the U.S. federal income tax
rate. Provision for income taxes totaled $143 thousand, $227 thousand and $235
thousand for the six-months ended June 30, 2000, and years ended December 31,
1999, and 1998, respectively.
Loan Portfolio
Community Bankshares' loan portfolio is comprised of commercial loans, real
estate loans, home equity loans, consumer loans, and other miscellaneous types
of credit. The primary markets in which Community Bankshares makes loans are
generally areas contiguous to its branch locations. The philosophy is consistent
with Community Bankshares' focus on providing community-based financial
services.
At June 30, 2000, Community Bankshares' loan portfolio was $40.1 million,
up $1.3 million or 3.3% from December 31, 1999. The majority of Community
Bankshares' lending activity centers around loans to small and medium-sized
businesses and loans for real estate acquisition and development. Loans to small
businesses are generally made to finance their operating activities or for the
purchase of real estate; in either case, they are generally secured by real
estate.
Loans increased by $4.4 million or 12.8% from December 31, 1998 to December
31, 1999. This increase was due to an increase in various loans secured by real
estate and a significant increase 31.3% in commercial loans. Super-regional
banks and private finance companies continue to dominate the consumer market in
Community Bankshares' trade area; therefore, the majority of the portfolio
continues to be in business and business-related loans. The trends observed in
2000 are consistent with those experienced in 1999.
Loan Portfolio
June 30, December 31,
------------------------ -------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ---------------------------
% to % to % to
Total Total Total
Gross Gross Gross
Amount Loans Amount Loans Amount Loans
----------- -------- ----------- --------- ----------- ----------
(Dollars in thousands)
Real estate mortgage $ 26,405 65.0% $ 25,538 64.9% $ 21,819 62.6%
Real estate - construction 1,865 4.6 1,339 3.4 3,073 8.8
Commercial, industrial and
agricultural loans 10,572 26.0 10,778 27.4 8,207 23.5
Loans to individuals for
household, family and
other consumer
expenditures 1,788 4.4 1,671 4.3 1,762 5.1
----------- ------ ----------- ------- ----------- -------
Total gross loans $ 40,630 100.0% $ 39,326 100.0% $ 34,861 100.0%
====== ======= =======
Less unearned income (87) (86) (70)
Less allowance for loan
losses (408) (392) (348)
----------- ----------- -----------
Total net loans $ 40,135 $ 38,848 $ 34,443
=========== =========== ===========
Consistent with its focus on providing community-based financial services,
Community Bankshares generally does not make loans outside its principal market
areas. Community Bankshares maintains a policy not to originate or purchase
loans classified by regulators as highly leveraged transactions or loans to
foreign entities or individuals.
39
At June 30, 2000, Community Bankshares' unfunded loan commitments,
including revolving lines, were approximately $8.8 million. Community
Bankshares' unfunded loan commitments were approximately $6.2 million at
December 31, 1999, compared to $4.8 million at December 31, 1998.
The following table provides a maturity schedule of selected loans within
the portfolio. Actual maturities may differ from those shown in the table as
loans often are refinanced or repaid prior to maturity. A significant portion of
Community Bankshares' loans have a variable rate feature which allows Community
Bankshares to change rates as "prime rates" change, thus reducing Community
Bankshares' interest rate risk.
Loan Maturity Schedule
June 30, 2000
---------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
----------- -------------- ----------- -----------
(Dollars in thousands)
Total loans $ 12,610 $ 20,699 $ 6,826 $ 40,135
=========== =========== =========== ===========
Loans maturing after one year within:
Fixed interest rates $ 19,357 $ 6,539 $ 25,896
Variable interest rates 1,342 287 1,629
----------- ----------- -----------
Total loans $ 20,699 $ 6,826 $ 27,525
=========== =========== ===========
Allowance for Loan Losses
Community Bankshares makes provisions for loan losses in amounts deemed
necessary to maintain the allowance for loan losses at an appropriate level. The
provision for loan losses is determined based upon management's estimate of the
amount required to maintain an adequate allowance for loan losses reflective of
the risks in Community Bankshares' loan portfolio. Community Bankshares
generates a monthly analysis of the allowance for loan losses, with the
objective of quantifying portfolio risk into a dollar figure of potential
losses, thereby translating the subjective risk value into an objective number.
Emphasis is placed on monthly internal reviews by Community Bankshares' audit
and operations committee and by Community Bank's management. The determination
of the allowance for loan losses is based on various qualitative factors,
applying appropriate weight to separate types of categories of loans. These
factors include: levels and trends in delinquencies and non-accruals, trends in
volumes and terms of loans, effects of any changes in lending policies, the
experience, ability and depth of management, national and local economic trends
and conditions, concentrations of credit, quality of Community Bankshares' loan
review system, and the effect of external factors (i.e. competition and
regulatory requirements).
The allowance for loan losses in 1999 was $392 thousand, compared to an
allowance of $348 thousand in 1998. The allowance for the first six months of
2000 was $408 thousand, compared to an allowance of $365 thousand for the
comparable period in 1999. The increases in the absolute amount of the allowance
for loan losses are primarily a result of the increased size of the loan
portfolio. The allowance for loan losses as a percentage of loans, net of
unearned income was 1.00% at December 31, 1999 and 1.00% at December 31, 1998
and 1.01% at June 30, 2000. During 1999, net charge-offs totaled $92 thousand,
compared to $95 thousand in 1998. Net charge-offs for the first six months of
2000 were $8 thousand. The ratio of charge-offs (recoveries) to average loans
increased to .25% at December 31, 1999 from .28% at December 31, 1998, and was
.02% at June 30, 2000.
The following tables provide certain information regarding Community
Bankshares' allowance for loan losses.
40
Allowance for Loan Losses
June 30, December 31,
--------------------------
2000 1999 1998
--------- --------- ---------
(Dollars in thousands)
Balance, beginning of period $ 392 $ 348 $ 330
Loans charged off:
Real estate -- 10 8
Commercial 8 69 73
Installment -- 14 15
--------- --------- ---------
Total loans charged off 8 93 96
--------- --------- ---------
Recoveries of loans previously charged off:
Real estate -- -- --
Commercial -- 1 --
Installment -- -- 1
--------- --------- ---------
Total recoveries -- 1 1
--------- --------- ---------
Net loans charged off 8 92 95
Provision for loan losses 24 136 113
--------- --------- ---------
Balance, end of period $ 408 $ 392 $ 348
========= ========= =========
Average total loans $ 40,016 $ 36,158 $ 33,336
Total loans (net of unearned income) $ 40,543 $ 39,240 $ 34,791
Selected loan loss ratios:
Net charge-offs (recoveries) to
average loans .02% .25% .28%
Allowance for loan losses to
period-end loans 1.01% 1.00% 1.00%
Community Bankshares' methodology for allowance for loan losses is composed
of three parts. First, the allowance is compared to the historical loan loss
experience. Second, the allowance is measured for coverage of non-performing
loans. Third, the allowance is allocated for loans internally classified by
management.
Management believes that the allowance for loan losses was adequate at June
30, 2000 to cover potential losses in the loan portfolio. Non-performing assets
as a percentage of loans increased from .56% at December 31, 1998 to 1.17% at
December 31, 1999 and declined to .74% at June 30, 2000. Notwithstanding the
foregoing, there can be no assurance that the allowance for loan losses will be
sufficient to cover all losses inherent in the loan portfolio now or in the
future or that additional provisions will not be required in respect to loans
currently in the loan portfolio or which may in the future be originated or
acquired by Community Bankshares.
Presented in the following table are details of the allocation of the
allowance for loan losses. The allocation for loan losses has remained
relatively constant over the past five years.
41
Allocation for Allowance for Loan Losses in Dollars
June 30, December 31,
-------------------------- -------------------------------------------------------
2000 1999 1998
-------------------------- --------------------------- -------------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
---------- --------- -------- ------------ --------- ----------
Real estate mortgage $ 237 65.0% $ 239 64.9% $ 212 62.6%
Real estate-construction 16 4.6 16 3.4 21 8.8
Commercial 143 26.0 125 27.4 105 23.5
Installment 12 4.4 12 4.3 10 5.1
--------- --------- -------- --------- --------- ------
Total allowance
for loan losses $ 408 100.0% $ 392 100.0% $ 348 100.0%
========= ========= ======== ========= ========= ======
Nonperforming Assets
Community Bankshares seeks to minimize its risk and enhance its
profitability by focusing on providing community-based financing and maintaining
policies and procedures ensuring safe and sound banking practices.
Non-performing loans consist of loans 90 days or more delinquent. The total
non-performing loans increased 85.2% from $196 thousand at December 31, 1998 to
$363 thousand at December 31, 1999, and then declined by 79.1% to $764 thousand
at June 30, 2000.
The following table provides certain information regarding Community
Bankshares' non-performing assets at the dates indicated.
Nonperforming Assets
June 30, December 31,
-------------------------- ---------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
Nonaccrual loans $ 76 $ 121 $ 363 $ 196
Troubled debt restructuring -- -- -- --
----------- ----------- ----------- -----------
Total nonperforming loans $ 76 $ 121 $ 363 $ 196
Foreclosed properties 225 206 96 - -
----------- ----------- ----------- -----------
Total nonperforming assets $ 301 $ 327 $ 459 $ 196
=========== =========== =========== ===========
Loans past due 90 days accruing interest 11 229 384 217
Nonperforming assets to period-end total
loans and other real estate .74% .88% 1.17% .56%
Foregone interest income on nonaccrual
loans 13 9 18 17
Loans are placed in non-accrual status when in the opinion of management
the collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on non-
accrual status until the loan is current as to both principal and interest or
the borrower demonstrates the ability to pay and remain current, or both. Loans
on non-accrual status totaled $76 thousand, $363 thousand, and $196 thousand at
June 30, 2000, December 31, 1999 and December 31, 1998, respectively. The gross
interest income that would have been recorded during such periods had
42
the loans been current in accordance with their original terms was $13 thousand,
$18 thousand and $17 thousand, respectively.
At June 30, 2000, Community Bankshares had no concentrations of loans in
any one industry exceeding 10% of its total loan portfolio. An industry for this
purpose is defined as a group of counterparties that are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions.
Foreclosed properties include properties that have been substantively
repossessed or acquired in complete or partial satisfaction of debt. Such
properties, which are held for resale, are carried at the lower of fair value,
including a reduction for the estimated selling expenses, or principal balance
of the related loan. As of June 30, 2000, December 31, 1999, and December 31,
1998, Community Bankshares held foreclosed properties totaling $225 thousand,
$96 thousand and $0, respectively.
The ratio of non-perform assets to loans is expected to remain near its
current level. This expectation is based on the potential and identified problem
loans at June 30, 2000. At June 30, 2000, Community Bankshares had two loans
totaling $86 thousand, identified as potential problem loans. These are loans as
to which known information about the borrowers' possible credit problems cause
management to have doubts as to their ability to comply with the present loan
repayment terms. Notwithstanding the foregoing, there can be no assurance that
the level of non-performing assets will not increase, due to a decline in asset
quality, deterioration of economic conditions, or otherwise, or that Community
Bankshares will not incur losses as a result of existing or future non-
performing assets.
Investment Securities
The securities portfolio is maintained to manage excess funds in order to
provide diversification and liquidity in the overall asset management policy.
The maturity of securities purchased are based on the needs of Community
Bankshares and current yields and other market conditions.
Securities available for sale are recorded at fair value, based on quoted
market prices. The net unrealized holding gain or loss on securities available
for sale, net of deferred income taxes, is included as a separate component of
stockholders' equity. A decline in the fair value of any securities available
for sale below cost that is deemed other than temporary would be charged to
earnings resulting in a new cost basis for the security. Cost of securities sold
would be determined on the basis of specific identification.
The amortized cost of held to maturity securities at June 30, 2000 was
$13.5 million, compared to $13.2 million at December 31, 1999 and $12.1 million
at December 31, 1998.
Securities available for sale are used as part of Community Bankshares'
interest rate risk management strategy and may be sold in response to changes in
interest rates, changes in prepayment risk, liquidity needs, the need to
increase regulatory capital and other factors. The fair value of securities
available for sale totaled $12.6 million at June 30, 2000 compared to $12.2
million at December 31, 1999 and $9.1 million at December 31, 1998.
Securities Portfolio
June 30, 2000 December 31, 1999 December 31, 1998
------------------------ ----------------------- -------------------------
Available for Sale Available for Sale Available for Sale
------------------------ ----------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ---------- ------------ -----------
(Dollars in thousands)
U.S. Government
Agency obligations $ 9,246 $ 8,870 $ 9,248 $ 8,898 $ 5,414 $ 5,359
State and Political
Subdivisions 3,593 3,515 3,091 3,022 3,526 3,556
Other 253 253 253 253 193 193
----------- ----------- ----------- ---------- ------------ -----------
Total $ 13,092 $ 12,638 $ 12,592 $ 12,173 $ 9,133 $ 9,108
=========== =========== =========== ========== ============ ===========
43
The table below provides an analysis of maturities of securities available
for sale at June 30, 2000 and December 31, 1999 and 1998.
Maturities of Investments
June 30, December 31,
------------------------------- ----------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- -------------------------------
Available for Sale Available for Sale Available for Sale
------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
Amortized Fair Average Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield Cost Value Yield
--------- --------- --------- --------- --------- --------- ----------- --------- --------
(Dollars in thousands)
One year or less $ 1,548 $ 1,495 $ 1,145 $ 1,107 $ -- $ --
After one year to
five years 10,015 9,648 8,441 8,140 7,093 7,052
After five years
to ten years 776 759 2,253 2,182 1,847 1,863
After ten years 500 483 500 491 -- --
--------- --------- --------- --------- --------- ---------
Total $ 12,839 $ 12,385 5.97% $ 12,339 $ 11,920 5.91% $ 8,940 $ 8,915 6.12%
========= ========= ========= ========= ========= =========
Deposits
The principal sources of funds for Community Bankshares are core deposits
(demand deposits, interest-bearing transaction accounts, money market accounts,
savings deposits and certificates of deposit of less than $100,000) from
Community Bankshares' market area. Community Bankshares' deposit base includes
transaction accounts, time and savings accounts and accounts which customers use
for cash management and which provide Community Bankshares with a source of fee
income and cross-marketing opportunities as well as a low-cost source of funds.
Time and savings accounts, including money market deposit accounts, also provide
a relatively stable and low-cost source of funding. The largest source of funds
for Community Bankshares remains certificates of deposit.
Deposit Analysis
For the Six Months For the Years Ended
Ended June 30, December 31,
------------------------ -------------------------------------------------
2000 1999 1998
------------------------ ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- --------- ----------- ---------- ----------- ----------
(Dollars in thousands)
Noninterest-bearing accounts $ 13,188 -- $ 14,070 -- $ 12,265 --
----------- --------- -----------
Interest-bearing liabilities:
Checking $ 3,812 1.47% $ 3,737 1.45% $ 3,912 1.87%
Regular savings 4,414 2.85 3,977 2.44 3,295 2.55
Money market 7,323 3.44 7,581 3.07 6,960 3.68
Time deposits $100,000
and over 8,647 5.69 7,545 5.38 5,964 5.68
Other time deposits 24,854 5.61 22,513 5.32 18,966 5.61
----------- --------- -----------
Total interest-bearing accounts 49,050 4.73% 45,353 4.38% 39,097 4.64%
----------- --------- -----------
Total $ 62,238 $ 59,423 $ 51,362
=========== ========= ===========
44
Maturity of CDs $100,000 and Over
Under Three to Percent
Three Twelve Over One of Total
Months Months Year Total Deposits
----------- ----------- ----------- ---------- -----------
(Dollars in thousands)
June 30, 2000 $ 2,392 $ 4,233 $ 3,412 $ 10,037 14.6%
December 31, 1999 $ 1,774 $ 2,888 $ 3,224 $ 7,886 13.3%
Deposits at June 30, 2000 increased by $6.4 million, or 10.7%, from
December 31, 1999. The primary areas of increase were in demand deposits and
certificates of deposit. The increase in demand deposits is consistent with the
composition of the customer base.
Deposits at December 31, 1999 were $59.5 million, up $2.6 million from
December 31, 1998, or 4.5%. The growth in deposits was led by certificates of
deposit which increased to $32.2 million at December 31, 1999, up $3.4 million
from year end 1998, or 11.7%.
Short-Term Borrowings
For liquidity purposes, Community Bankshares also utilizes short term
borrowing, principally securities sold under agreements to repurchase, and has a
line of credit arrangement with the Federal Home Loan Bank of Atlanta.
The growth in assets was 9.8% in 1999 over 1998. Community Bankshares is
subject to various regulatory capital requirements imposed by the federal
banking regulators. To be categorized as well capitalized, Community Bank must
maintain a Tier 1 capital-to-average assets (leverage) ratio of not less than
5.0%. At June 30, 2000, Community Bankshares' leverage ratio was 12.2% compared
to 12.9% at December 31, 1999 and 14.0% at December 31, 1998. The decline in the
leverage ratio is directly related to the increase in total average assets to
$68.9 million at June 30, 2000, from $62.7 million at December 31, 1999 and
$54.0 million at December 31, 1998.
Federal regulators have adopted additional capital requirements based on
capital-to-assets after certain risk factors are taken into consideration. At
June 30, 2000, a minimum ratio of qualifying total capital-to-risk weighted
assets of 10% and a minimum ratio of Tier 1 capital to risk-weighted assets of
6% was required for Community Bank to be categorized as well capitalized. At
June 30, 2000, Community Bankshares' ratio of qualifying total capital,
including the allowable portion of the allowance for loan and lease losses to
total risk weighted assets was 19.2%, compared to 19.4% and 20.5% at December
31, 1999 and 1998, respectively, all well in excess of the minimum requirements.
The following table contains a two year summary, beginning with 1998, of
the breakdown between Tier 1 capital, Tier 2 capital, risk-weighted assets, as
well as the ratios discussed above.
45
Analysis of Capital
June 30, December 31,
---------------- -----------------------------------
2000 1999 1998
---------------- --------------- ---------------
(Dollars in thousands)
Consolidated:
Total Tier 1 capital 9,342 9,082 8,468
---------------- --------------- ---------------
Total risk-based capital $ 9,750 $ 9,474 $ 8,816
================ =============== ===============
Capital Ratios:
Tier 1 risk-based capital ratio 18.4% 18.6% 19.7%
Total risk-based capital ratio 19.2% 19.4% 20.5%
Tier 1 capital to average adjusted total assets 12.2% 12.9% 14.0%
Community Bank of Maryland:
Total Tier 1 capital 6,693 6,452 6,009
---------------- --------------- ---------------
Total risk-based capital $ 7,101 $ 6,844 $ 6,357
================ =============== ===============
Capital Ratios:
Tier 1 risk-based capital ratio 13.5% 13.5% 14.3%
Total risk-based capital ratio 14.3% 14.4% 15.2%
Tier 1 capital to average adjusted total assets 8.7% 9.3% 9.4%
Impact of Inflation and Changing Prices
The consolidated and interim financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which typically 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 Community Bankshares
are monetary in nature. As a result, interest rates have a more significant
impact on Community Bankshares' performance than the general level of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
BUSINESS OF F&M NATIONAL CORPORATION
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 twenty banks, which expanded its market area and
increased its market share in Virginia, Maryland and West Virginia. F&M has
eight banking affiliates in Virginia, one bank affiliate in West Virginia and
one bank affiliate in Maryland. F&M offers a full range of banking services
principally to individuals and small and middle-market businesses in the
Shenandoah Valley, Allegheny and Bath counties, northern, central and southern
Virginia, the eastern panhandle of West Virginia and the counties of Montgomery
and Prince George's in Maryland.
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
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of the trust departments of its subsidiary banks in Virginia in F&M Trust
Company. F&M offers insurance services through its subsidiaries, F&M-Shomo &
Lineweaver and F&M-J.V. Arthur, and offers annuities and brokerage services
through F&M Financial Services, Inc. F&M also operates F&M Mortgage Services,
Inc., which engages in residential mortgage origination and servicing.
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.
At September 30, 2000, F&M had total consolidated assets of approximately
$3.5 billion, total consolidated deposits through its banking subsidiaries of
approximately $3.0 billion and consolidated shareholders' equity of
approximately $327.2 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 $1.6 billion in assets through 16 bank acquisitions.
On July 5, 2000, F&M entered into an agreement for the acquisition of
Atlantic Financial Corp, a bank holding company headquartered Newport News,
Virginia. The acquisition of Atlantic Financial is subject to the approval of
shareholders of Atlantic Financial Corp and the appropriate regulatory agencies
and is expected to close in January 2001. The acquisition of Atlantic Financial
is expected to be accounted for as a pooling of interests for financial
reporting purposes and provides for a tax-free exchange of 0.753 shares of F&M
common stock for each common share of Atlantic Financial. As of September 30,
2000, Atlantic Financial had total consolidated assets of approximately $390.4
million, total consolidated deposits thorough its banking subsidiaries of
approximately $340.5 million, and consolidated shareholder's equity of $45.2
million. F&M has filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission 3,229,486 shares of its common stock to be
issued to Atlantic Financial shareholders in connection with that transaction.
You may obtain a copy of the proxy statement/prospectus delivered to
shareholders of Atlantic Financial from either F&M or the SEC. See "Where You
Can Find More Information" on page ___.
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
As a Virginia corporation, F&M is subject to the provisions of the Virginia
Stock Corporation Act (the "Virginia SCA"). Community Bankshares is a Maryland
corporation and is subject to the provisions of the MGCL. Your rights as a
shareholder of Community Bankshares are governed by Community Bankshares'
articles of incorporation and bylaws and by the MGCL. 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.
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The following is a summary of the material differences in the rights of
shareholders of Community Bankshares and F&M. This summary is qualified in its
entirety by reference to the articles of incorporation and bylaws of F&M and
Community Bankshares and to the provisions of the MGCL and the Virginia SCA.
Authorized Capital Stock
F&M. F&M is authorized to issue 30,900,000 shares of common stock, par
value $2.00 per share, of which 24,759,882 shares were issued and outstanding as
of September 30, 2000, and 5,000,000 shares of serial preferred stock, without
par value, of which no shares were issued and outstanding as of September 30,
2000. 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
were 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.
Community Bankshares. Community Bankshares is authorized to issue
10,000,000 shares of common stock, par value $10.00 per share, of which 726,876
shares were issued and outstanding as of September 30, 2000 Community Bankshares
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. 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.
Community Bankshares. The holders of Community Bankshares common stock also
are entitled to share ratably in dividends when and as declared by the Community
Bankshares board of directors out of legally available funds.
The MGCL prohibits a Maryland corporation from making any distributions to
shareholders, including the payment of cash dividends, if either (a) the
corporation would not be able to pay its indebtedness as it becomes due in the
usual course of business or (b) the corporation's total assets would be less
than the sum of the corporation's total liabilities plus, unless the articles
permits otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights on dissolution are
superior to those receiving the distribution.
The ability of the board of directors of Community Bankshares to declare a
dividend to pay distributions to the holders of Community Bankshares common
stock depends, however, upon the amount of dividends its bank and other
subsidiaries pay to it. Community Bank, like F&M's bank subsidiaries, is subject
to regulatory restrictions on the payment of dividends.
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 Community Bankshares 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 Community Bankshares 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. Currently, the F&M board
consists of 10 directors. There is no provision relating to the removal of
directors in F&M's articles of incorporation. Accordingly, the removal of
directors is governed by the Virginia SCA which provides that shareholders may
remove directors with
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or without cause if the number of votes cast to remove him constitutes a
majority of the outstanding shares of common stock.
Community Bankshares. Currently, the Community Bankshares board consists of
seven directors, all of whom are elected each year. Community Bankshares'
articles of incorporation do not contain any provisions regarding removal of
directors, which is therefore governed by the MGCL. The MGCL provides that
directors may be removed, with or without cause, upon the affirmative vote of
the holders of a majority of the votes entitled to be cast in the election of
directors.
Anti-Takeover Provisions
Certain provisions of the Virginia SCA and the MGCL, and of the articles of
incorporation and bylaws of F&M, may discourage an attempt to acquire control of
F&M or Community Bankshares, respectively, that a majority of either
corporation'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 or Community Bankshares
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.
Community Bankshares does not have an authorized class of preferred stock.
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.
The Virginia SCA provides that a corporation's articles may either increase the
vote required to approve those 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 the actions set out above
must 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 must 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.
Under the MGCL, the affirmative vote of at least two-thirds of the votes
entitled to be cast is required to approve:
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. amendments to a corporation's articles of incorporation,
. adoption of plans of merger, consolidation or share 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 liquidation or dissolution.
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 Community Bankshares may request that a special
meeting of shareholders be called, upon payment of the reasonably estimated cost
of preparing and mailing the notice of meeting.
State Anti-Takeover Statutes. Virginia has two anti-takeover statutes in
force, the Affiliated Transaction Statute and the Control Share Acquisitions
Statute. Maryland has two statutory anti-takeover provisions generally
applicable to corporations, Section 3-602 of the MGCL, which relates to certain
business combinations with interested shareholders (i.e., a person that acquires
10% or more of a corporation's voting stock), and its Control Share Acquisitions
Statute.
Virginia Anti-Takeover Statutes.
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
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. These 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:
. 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,
. the affiliated transaction has been approved by a majority of the
disinterested directors, or
. 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 Acquisition Statute. 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:
. 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
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. 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.
Maryland Anti-Takeover Statutes.
Restrictions on Business Combinations with Interested Shareholders. Section
3-602 of the MGCL imposes conditions and restrictions on certain "business
combinations" (including, among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance of equity securities) between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's stock (an "interested
shareholder"). Unless approved in advance by the board of directors, or
otherwise exempted by the statute, such a business combination is prohibited for
a period of five years after the most recent date on which the interested
shareholder became an interested shareholder. After such five-year period, a
business combination with an interested shareholder must be: (a) recommended by
the corporation's board of directors, and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the interested shareholder with whom the business combination is to be effected,
unless, among other things, the corporation's common shareholders receive a
"fair price" (as defined by the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the interested
shareholder for his or her shares. Section 3-602 is currently applicable to a
business combination involving Community Bankshares because it has more than 100
shareholders of record. As the merger of Community Bankshares into F&M is
pursuant the merger agreement, which has been approved by the Community
Bankshares board of directors, Section 3-602 does not limit the ability of
Community Bankshares and F&M to complete the merger.
Control Share Acquisitions. Under the MGCL's control share acquisition law,
voting rights of shares of stock of a Maryland corporation acquired by an
acquiring person at ownership levels of 20%, 33-1/3% and 50% of the outstanding
shares are denied unless conferred by a special shareholder vote of two-thirds
of the outstanding shares held by persons other than the acquiring person and
officers and directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's charter or bylaws permit the acquisition of
such shares prior to the acquiring person's acquisition thereof. Unless a
corporation's charter or bylaws provide otherwise, the statute permits such
corporation to redeem the acquired shares at "fair value" if the voting rights
are not approved or if the acquiring person does not deliver a "control share
acquisition statement" to the corporation on or before the tenth day after the
control share acquisition. The acquiring person may call a shareholder's meeting
to consider authorizing voting rights for control shares subject to certain
disclosure obligations and payment of certain costs. If voting rights are
approved for more than 50% of the outstanding stock, objecting shareholders may
have their shares appraised and repurchased by the corporation for cash. As the
merger of Community Bankshares into F&M is pursuant to the merger agreement, the
control share acquisition law is not applicable to the merger.
Rights of Dissent and Appraisal
Under the Virginia SCA, with respect to corporations such as F&M that have
a class or series of shares either listed on a national securities exchange or
the Nasdaq National Market or held by more than 2,000 record shareholders,
dissenters' rights are not available to the holders of such shares by reason of
a merger, share exchange or sale or exchange of property unless:
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. unlike the F&M articles, the articles of incorporation of the
corporation issuing such shares provided otherwise;
. in the case of a merger or share exchange, unlike the merger, the
holders of such shares are required to accept anything other than (a)
cash, (b) shares in another corporation that are either listed on a
national securities exchange or held by more than 2,000 record
shareholders or (c) a combination of cash and such shares; or
. the transaction is with a shareholder who owns more than 10 percent of
a class of shares and has not been approved by a majority of the
directors unaffiliated with such shareholder.
Under the MGCL, a shareholder of a Maryland corporation has the right to
demand and receive payment of the fair value of the shareholder's stock from the
successor if:
. The corporation consolidates or merges with another corporation;
. The shareholder's stock is to be acquired in a share exchange;
. The corporation transfers its assets other than in the ordinary course
of business;
. The corporation amends its articles of incorporation in a way which
alters the contract rights, as expressly set forth in the articles, of
any outstanding stock and substantially adversely affects the
shareholder's rights, unless the right to do so is reserved by the
articles of the corporation; or
. The transaction is governed by or exempted from Section 3-602 of the
MGCL.
Unless the business combination is one to which Section 3-602 applies (or
is exempted from that statute) the right to obtain fair value does not apply if:
. the stock held by the shareholder is listed on a national securities
exchange, the Nasdaq National Market or designated for trading on the
Nasdaq SmallCap market;
. the stock held by the objecting shareholder is that of the successor
unless the merger alters the contract rights of the stock as expressly
set forth in the articles , and the articles do not reserve the right
to do so; or the stock is to be changed or converted in whole or in
part in the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising out of
provisions for the treatment of fractional shares of stock in the
successor;
. the stock is not entitled to be voted on the transaction or the
shareholder did not own the shares of stock on the record date for
determining shareholders entitled to vote on the transaction;
. the charter provides that the holders of the stock are not entitled to
exercise the rights of an objecting shareholder; or
. he stock is that of an open-end investment company registered with the
Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net
asset value.
A shareholder who has the right to object to a transaction and receive
payment of the "fair value" of his or her shares must follow specific procedural
requirements as set forth in the MGCL in order to maintain such right and obtain
such payment. See "The Merger -- Dissenters' Rights" at page __.
Holders of Community Bankshares common stock have the right to receive the
fair vale of their shares as objecting shareholders in connection with the
merger.
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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 a single
transaction, occurrence or course of conduct may not exceed the lesser of (a)
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
(b) the greater of (1) $100,000 or (2) 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 is not be liable to F&M or
its shareholders for monetary damages in excess of one dollar.
The MGCL requires that a director of a Maryland corporation discharge
duties as a director in good faith, in a manner reasonably believed to be in the
best interest of the corporation and with the care that an ordinarily prudent
person in a like position would use under similar circumstances. The MGCL
provides that a person who performs his duties in accordance with the standard
provided shall not have any liability for having been a director. Community
Bankshares' articles do not contain a provision expanding or limiting the
liability of directors and officers.
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. There is a similar provision in the
articles of incorporation of Community Bankshares.
Each of the F&M and Community Bankshares boards of directors is empowered,
by majority vote of a quorum of disinterested directors, to contract in advance
to indemnify any director or officer.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue 30,900,000 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 its board of directors. On September
30, 2000, F&M had issued and outstanding 24,759,882 shares of F&M common stock
held by [9,229] 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 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.
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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.
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.
LEGAL MATTERS
The validity of the shares of F&M common stock to be issued in connection
with the merger passed upon for F&M by LeClair Ryan, A Professional Corporation,
Richmond, Virginia. LeClair Ryan also will deliver an opinion to F&M and
Community Bankshares concerning certain federal income tax consequences of the
merger. See "The Merger -- Material Federal Income Tax Consequences" on page __.
Certain matters relating to the merger will be passed upon for Community
Bankshares by Kennedy, Baris & Lundy, L.L.P., Bethesda, Maryland.
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, 1999 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 audited financial statements of Community Bankshares for year ended
December 31, 1999 which are included in this proxy statement/prospectus, have
been included in reliance upon the report of Stegman & Company, independent
certified public accountants, included in this proxy statement/prospectus, and
upon the authority of said firm as experts in accounting and auditing. In early
September 1999, Stoy, Malone & Company, P.C., the independent certified public
accountants which audited Community Bankshares' financial statements for the
year ended December 31, 1998, was dismissed by the board of directors upon the
recommendation of the audit committee. Stoy Malone's report on Community
Bankshares' financial statements for the year ended December 31, 1998 did not
contain an adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles.
During the year ended December 31, 1998 and through the date on which they
were dismissed, there were no disagreements with Stoy Malone on any matter of
accounting principles or practices, financial statement disclosure, audit scope
or procedure which, if not resolved to its satisfaction, would have caused it to
make reference to such disagreement in connection with its report. Stegman &
Company was retained by Community Bankshares on September 15, 1999 to audit its
financial statements for fiscal year 1999 as its certifying accountant. The
appointment of Stegman & Company, was recommended by the audit committee of the
board of directors and approved by the board of directors. There were no
consultations between Community Bankshares and Stegman & Company regarding the
application of accounting principles to any matter, or as to any type of opinion
that might be issued on Community Bankshares' financial statements.
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OTHER MATTERS
The Community Bankshares 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
Community Bankshares board of directors.
WHERE YOU CAN FIND MORE INFORMATION
F&M files reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information that F&M files at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Information on F&M is also available to the public through the SEC's website at
"http://www.sec.gov." Reports, proxy statements and other information about F&M
is also available to the public from commercial document retrieval services and
also should be available for inspection at the offices of the New York Stock
Exchange.
F&M has filed a registration statement on Form S-4 to register with the SEC
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 Community Bankshares for the special meeting. As allowed by
SEC 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 SEC allows F&M to "incorporate by reference" information into this
proxy statement/prospectus, which means that it can disclose important
information to you by referring you to another document filed separately with
the SEC. 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 has previously filed with the SEC. These documents contain
important business information about F&M.
F&M's SEC Filings (File No. 0-05929) Period
Annual Report on Form 10-K......................................... Year ended December 31, 1999
Quarterly Reports on Form 10-Q..................................... Quarters ended March 31 and June 30, 2000
Current Reports on Form 8-K........................................ Dated January 3, January 13, July 12, and
August 23, 2000
F&M also incorporates by reference additional documents that it may file
with the SEC 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 Community Bankshares has supplied all such
information relating to Community Bankshares.
Documents incorporated by reference by F&M are available through the SEC or
the SEC's website or from F&M without charge, excluding all exhibits unless
specifically incorporated by reference as an exhibit to this document.
Shareholders of Community Bankshares may obtain documents incorporated by
reference in this document by F&M by requesting them in writing or by telephone
from F&M at the following address:
55
F&M NATIONAL CORPORATION
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
If you would like to request documents from F&M, please do so by
____________ __, 2000 in order to receive timely delivery of the documents
before the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote your shares at the special
meeting. F&M and Community Bankshares have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated __________ __,
2000. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to shareholders nor the
issuance of F&M common stock in the merger creates any implication to the
contrary.
56
Index to Financial Statements
Community Bankshares of Maryland, Inc.
--------------------------------------
Page
----
Audited Consolidated Financial Statements:
Independent Auditors' Reports................................................................................... F-2
Consolidated Statements of Condition as of December 31, 1999 and 1998........................................... F-4
Consolidated Statements of Income for the Years Ended
December 31, 1999 and 1998............................................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the
for the Years Ended December 31, 1999 and 1998......................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998............................................................................. F-7
Notes to Consolidated Financial Statements...................................................................... F-8
Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Condition as of June 30, 2000....................................................... F-24
Consolidated Statements of Income for the Six Months Ended
June 30, 2000 and 1999................................................................................ F-25
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 2000 and 1999............................................................... F-26
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999............................................................... F-27
Notes to Interim Consolidated Financial Statements............................................................. F-28
[Stegman & Company Letterhead]
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
Community Bankshares of Maryland, Inc.
Bowie, Maryland
We have audited the accompanying consolidated statement of condition of
Community Bankshares of Maryland, Inc. and Subsidiaries as of December 31, 1999,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The financial statements of the Company as of
December 31, 1998 were audited by other auditors whose report dated January 29,
1999 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Bankshares of Maryland, Inc. and Subsidiaries as of December 31, 1999, and the
results of their operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
[Signature of Stegman & Company]
Baltimore, Maryland
January 31, 2000
F-2
[Stoy Malone & Company, P.C. letterhead]
INDEPENDENT AUDITORS REPORT
- ---------------------------
To the Board of Directors and Stockholders of
Community Bankshares of Maryland, Inc.
We have audited the accompanying consolidated statement of condition of
Community Bankshares of Maryland, Inc., formerly Financial Institutions Holding
Corporation, and Subsidiaries as of December 31, 1998, and the related
consolidated statement of income, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial positions of Community
Bankshares of Maryland, Inc. and Subsidiaries as of December 31, 1998, and the
results of their operations and their cash flows for the year than ended in
conformity with generally accepted accounting principles.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
January 29, 1999
F-3
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
---------------- ----------------
Cash and due from banks $ 2,852,044 $ 3,106,313
Federal funds sold 2,012,664 4,462,957
---------------- ----------------
Cash and cash equivalents 4,864,708 7,569,270
Investment securities available for sale 12,172,806 9,108,392
Investment securities held to maturity 13,226,671 12,094,563
Loans, net 38,847,931 34,443,206
Premises and equipment, net 3,889,336 3,466,628
Accrued interest receivable 571,426 447,741
621,137 441,330
---------------- ----------------
TOTAL ASSETS $ 74,194,015 $ 67,571,129
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: $ 13,239,919 $ 15,142,590
Demand 3,543,261 3,183,190
NOW accounts 10,527,942 9,815,846
Savings 7,885,866 7,892,114
Time, $100,000 and over 24,289,396 20,901,287
----------------
Other time 59,486,384 56,935,027
Total deposits 5,487,847 1,861,360
Short-term borrowings 414,762 322,724
---------------- ----------------
Accrued expenses and other liabilites
Total liabilities $ 65,388,993 $ 59,119,111
================ ================
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 10,000,000 shares authorized;
shares issued, 1999 - 725,676 and 1998 - 714,026 7,256,760 7,140,260
Additional paid-in capital 439,010 389,180
Retained earnings 1,385,663 938,853
Accumulated other comprehensive income (276,411) (16,275)
---------------- ----------------
Total stockholders' equity 8,805,022 8,452,018
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,194,015 $ 67,571,129
================ ================
See accompanying notes.
F-4
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---------- -----------
Interest income:
Interest and fees on loans $3,300,607 $3,177,172
Interest on investment securities:
Taxable 986,240 707,877
Exempt from federal taxes 278,547 212,737
Interest on federal funds sold 175,872 210,606
---------- -----------
Total interest income 4,741,266 4,308,392
---------- -----------
Interest expense:
Interest on deposits 2,007,436 1,816,285
Interest on short-term borrowings 75,056 65,865
---------- -----------
Total interest expense 2,082,492 1,882,150
---------- -----------
Net interest income 2,658,774 2,426,242
Provision for loan losses 136,131 113,446
---------- -----------
Net interest income after provision for loan losses 2,522,643 2,312,796
---------- -----------
Noninterest income:
Service charges on deposit accounts 419,364 338,809
Rental income 350,065 339,864
Gain on sales of investment securities - 44,493
Other 107,583 160,126
---------- -----------
Total noninterest income 877,012 883,292
---------- -----------
Noninterest expenses:
Salaries and employee benefits 1,155,064 1,002,472
Occupancy expense 283,254 277,913
Furniture and equipment expenses 204,071 165,054
Rental expenses 169,728 204,897
Other operating expenses 697,798 766,496
---------- -----------
Total noninterest expenses 2,509,915 2,416,832
---------- -----------
Income before income taxes 889,740 779,256
Income taxes 226,775 234,573
---------- -----------
NET INCOME $ 662,965 $ 544,683
========== ===========
Earnings per share:
Basic $ .92 $ .83
========== ===========
Diluted $ .92 $ .83
========== ===========
See accompanying notes.
F-5
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
--------------- --------------- --------------- --------------- ----------------
Balances, January 1, 1998 $ 6,540,410 $ - $ 564,584 $ (802) $ 7,104,192
Comprehensive income:
Net income - - 544,683 - 544,683
Other comprehensive income
(loss), net of tax:
Unrealized loss on securities
available for sale, net of
reclassification adjustment
of $(28,920) - - - (15,473) (15,473)
----------------
Total comprehensive income 529,210
Issuance of 750 shares of
common stock 7,500 5,625 - - 13,125
Stock options exercised for
1,200 shares 12,000 5,148 - - 17,148
Subscribed for but not issued,
58,035 shares of common
stock in public offering, net 580,350 378,407 - - 958,757
Cash dividends, $.26 per share - - (170,414) - (170,414)
---------------- --------------- --------------- --------------- ----------------
Balances, December 31, 1998 7,140,260 389,180 938,853 (16,275) 8,452,018
Comprehensive income:
Net income - - 662,965 - 662,965
Other comprehensive income
(loss), net of tax:
Unrealized loss on securities
availabe for sale - - - (260,136) (260,136)
----------------
Total comprehensive income 402,829
----------------
Stock options exercised 116,500 49,830 166,330
Cash dividends, $.30 per share - - (216,155) - (216,155)
---------------- --------------- --------------- --------------- ----------------
---------------- --------------- --------------- --------------- ----------------
Balances, June 30, 2000 $ 7,256,760 $ 439,010 $ 1,385,663 $ (276,411) $ 8,805,022
================ =============== =============== =============== ================
See accompanying notes.
F-6
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 662,965 $ 544,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sales of investment securities available-for-sale - (44,493)
Gain on sales of premises and equipment (22,417) -
Premium amortization, net of discount accretion 41,867 28,339
Provision for loan losses 136,131 113,446
Depreciation and amortization on premises and equipment 289,254 262,649
Amortization of deferred leasing commissions 21,827 21,847
Deferred income taxes 24,850 (5,461)
Increase in accrued interest receivable (123,685) (60,242)
Increase in other assets (92,585) (73,385)
Increase (decrease) in accrued expenses and other liabilities 91,768 (22,798)
----------- ------------
Net cash provided by operating activities 1,029,975 764,585
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity (3,479,055) (5,692,681)
Proceeds from maturities of investment securities held-to-maturity 2,619,802 3,450,000
Principal collected on investment securities held-to-maturity 67,886 102,658
Purchases of investment securities available-for-sale (3,840,788) (11,155,498)
Proceeds from maturities of investment securities available-for-sale - 1,800,000
Proceeds from sales of investment securities available-for-sale - 3,320,559
Proceeds from sales of premises and equipment 54,856 -
Net increase in loans (4,540,856) (2,889,194)
Purchases of premises and equipment (744,401) (310,764)
----------- ------------
Net cash used in investing activities (9,862,556) (11,374,920)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,551,357 12,489,186
Net increase in short-term borrowings 3,626,487 656,855
Issuance of common stock 166,330 30,273
Common stock subscribed for, net - 929,007
Cash dividends paid (216,155) (170,414)
----------- ------------
Net cash provided by financing activities 6,128,019 13,934,907
----------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,704,562) 3,324,572
CASH AND CASH EQUIVALENTS:
Beginning of year 7,569,270 4,244,698
----------- ------------
End of year $ 4,864,708 $ 7,569,270
=========== ============
Supplementary cash flow information:
Cash paid during the year for:
Taxes $ 228,361 $ 344,494
=========== ============
Interest $ 2,057,810 $ 1,824,132
=========== ============
See accompanying notes.
F-7
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies of Community Bankshares of
Maryland, Inc. and Subsidiaries (the "Company") is as follows:
Basis of Accounting
-------------------
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles and conform to general
practices within the banking industry.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Community Bankshares of Maryland, Inc. (the "Parent"), its wholly-owned
subsidiary, Community Bank of Maryland (the "Bank"), Community Bank of Maryland
Investment Services, Inc. (the "Investment Company") and Community Bankshares of
Maryland, Inc.-Community Bank of Maryland Partnership (the "Partnership"). On
May 12, 1998, the stockholders approved a change in the Parent's name to
Community Bankshares of Maryland, Inc. from Financial Institutions Holding
Corporation. In connection with this name change, the name of the Partnership
was changed to Community Bankshares of Maryland, Inc.-Community Bank of Maryland
Partnership, from FIHC-Bank of Bowie Partnership. On October 14, 1997, the Board
of Directors amended the articles of incorporation to change the name of the
Bank to Community Bank of Maryland from Bank of Bowie. All significant
intercompany transactions and balances have been eliminated.
Nature of Operations
--------------------
The Parent was organized under the laws of the State of Maryland to
serve as a bank holding company. The Bank operates as a commercial bank in
Maryland and its primary deposit base and principal real estate lending markets
include Prince George's and Anne Arundel Counties.
The Partnership is engaged in real estate activities, which has
included the ownership of the headquarters building for the Bank. The
Partnership's primary tenant, other than the Bank, is an insurance company.
The Investment Company is engaged in the business of providing
investment products and services to the public.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for loan losses. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in local economic
conditions. Service industries and federal, state and local governments employ a
significant portion of the Maryland labor force. Adverse changes in economic
conditions could have a direct impact on the collectibility of the Company's
loan portfolio. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably possible
that the allowance for loan losses may change materially in the near term.
Cash and Cash Equivalents
-------------------------
For financial reporting purposes, cash and cash equivalents includes
cash on hand, amounts due from banks (including cash items in process of
clearing), and federal funds sold.
Investment Securities
---------------------
Held-to-maturity securities are those securities which the Company has
the ability and intent to hold until maturity and are stated at amortized cost.
Available-for-sale securities represent those securities not classified as held-
to-maturity or trading and are stated at estimated fair value. Unrealized
holding gains and losses, net of the related deferred tax effect, are reported
as a net amount in accumulated other comprehensive income, a separate component
of stockholder's equity.
Premiums and discounts on investments in debt securities are amortized
over their contractual lives. The method of amortization results in a constant
effective yield on those securities which approximates the interest method.
Realized gains and losses are included in income and are determined by the
specific identification method.
Loans
-----
Loans are stated at the amount of unpaid principal reduced by unearned
fees and the allowance for loan losses. Interest is accrued daily on the
outstanding balances. Accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and other factors,
that the borrower's financial condition is such that collection of interest is
doubtful. Interest income on impaired loans is recognized on the cash basis.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb loan losses inherent in the
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance for loan losses is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Loan origination fees and certain direct origination costs are deferred
and amortized as a yield adjustment over the lives of the related loans using a
method that approximates the interest method.
F-9
Premises and Equipment
----------------------
Premises and equipment is stated at cost less accumulated depreciation
and amortization. Building and improvements and furniture and equipment are
depreciated on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful lives of the improvements or the terms of
the related leases.
Deferred Leasing Commissions
----------------------------
Deferred leasing commissions are being amortized on the straight-line
method over the terms of the related leases.
Advertising
-----------
Advertising expenses are expensed as incurred. These expenses amounted
to $42,773 and $43,232 for the years ended December 31, 1999 and 1998,
respectively, and are included in other operating expenses in the consolidated
statements of income.
Income Taxes
------------
The Company files a consolidated federal income tax return. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
Earnings Per Share
------------------
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Diluted
earnings per share is computed as net income divided by the weighted average
number of outstanding common shares used to derive basic earnings per share,
plus the dilutive effect of common stock equivalents relating to outstanding
stock options, as determined under the treasury stock method.
Off-Balance-Sheet Financial Instruments
---------------------------------------
In the ordinary course of business, the Company has entered into off-
balance-sheet financial instruments consisting of commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
New Accounting Pronouncement
----------------------------
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, requires derivative instruments
be carried at fair value on the balance sheet. The statement continues to allow
derivative instruments to be used to hedge various risks and sets forth specific
criteria to be used to determine when hedge accounting can be used. The
statement also provides for offsetting changes in fair value or cash flows of
both the derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be
F-10
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
The Company plans to adopt the provisions of this statement, as
amended, for its annual reporting beginning January 1, 2001, the statement's
effective date. The impact of adopting the provisions of this statement on the
Company's financial position, results of operations and cash flows subsequent to
the effective date is not currently estimable and will depend on the financial
position of the Company and the nature and purpose of any derivative instruments
in use at that time.
F-11
2. INVESTMENT SECURITIES
A summary of investment securities is as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ---------- ---------- ----------- -----------
December 31, 1999
- -----------------
Available-for-sale:
Debt securities:
U.S. Government agencies
and corporations $ 9,248,387 $ - $350,512 $ 8,897,875 $ 8,897,875
State and political subdivisions 3,090,723 68,292 3,022,431 3,022,431
----------- -------- -------- ----------- -----------
12,339,110 - 418,804 11,920,306 11,920,306
Federal Home Loan Bank of
Atlanta stock and other
equity securities 252,500 - - 252,500 252,500
----------- -------- -------- ----------- -----------
12,591,610 - 418,804 12,172,806 12,172,806
----------- -------- -------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 2,285,422 3,566 20,906 2,268,082 2,285,422
U.S. Government agencies
and corporations 6,496,095 - 148,267 6,347,828 6,496,095
Mortgage-backed securities 136,599 - 3,710 132,889 136,599
State and political subdivisions 4,308,555 190 77,019 4,231,726 4,308,555
----------- -------- -------- ----------- -----------
13,226,671 3,756 249,902 12,980,525 13,226,671
----------- -------- -------- ----------- -----------
$25,818,281 $ 3,756 $668,706 $25,153,331 $25,399,477
Total =========== ======== ======== =========== ===========
December 31, 1998
- -----------------
Available-for-sale:
Debt securities:
U.S. Government agencies
and corporations $ 5,414,193 $ 1,729 $ 56,681 $ 5,359,241 $ 5,359,241
State and political subdivisions 3,525,738 31,953 2,040 3,555,651 3,555,651
----------- -------- -------- ----------- -----------
8,939,931 33,682 58,721 8,914,892 8,914,892
Federal Home Loan Bank of
Atlanta stock and other
equity securities 193,500 - - 193,500 193,500
----------- -------- -------- ----------- -----------
9,133,431 33,682 58,721 9,108,392 9,108,392
----------- -------- -------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 2,901,157 79,265 - 2,980,422 2,901,157
U.S. Government agencies
and corporations 4,815,696 47,131 5,201 4,857,626 4,815,696
Mortgage-backed securities 216,969 80 - 217,049 216,969
State and political subdivisions 4,160,740 44,813 - 4,205,553 4,160,740
----------- -------- -------- ----------- -----------
12,094,562 171,289 5,201 12,260,650 12,094,562
----------- -------- -------- ----------- -----------
Total $21,227,993 $204,971 $ 63,922 $21,369,042 $21,202,954
=========== ======== ======== =========== ===========
F-12
The amortized cost and aggregate fair value of debt securities at December
31, 1999 by contractual maturity, are shown below. Maturities may differ from
contractual maturities because the underlying securities may be called or repaid
without any penalties.
Available-for-Sale Held-to-Maturity
------------------------ ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $ 1,144,615 $ 1,107,432 $ 2,188,017 $ 2,186,122
Due from one to five years 8,441,162 8,140,048 5,631,596 5,550,552
Due from five to ten years 2,253,333 2,182,148 5,270,459 5,110,962
Due over ten years 500,000 490,678 - -
Mortgage-backed securities - - 136,599 132,889
----------- ----------- ----------- -----------
Total $12,339,110 $11,920,306 $13,226,671 $12,980,525
=========== =========== =========== ===========
There were no sales of investment securities for the year ended December
31, 1999. Gross realized gains on available-for-sale investment securities were
$44,493 for the year ended December 31, 1998.
The change in unrealized holding loss during the years ended December 31,
1999 and 1998 consisted of the following:
1999 1998
---------- ---------
Balance, beginning of year $ (16,275) $ (802)
Unrealized loss on available-for-sale securities (393,765) (23,806)
Related deferred taxes 133,629 8,333
--------- ---------
Balance, end of year $(276,411) $(16,275)
========= =========
Investment securities with a carrying value of approximately $10,224,775
and $5,633,000 were pledged to secure securities sold under repurchase
agreements, short-term borrowings and public deposits as required or permitted
by law at December 31, 1999 and 1998, respectively.
F-13
3. LOANS
The composition of net loans is as follows at December 31:
1999 1998
----------- -----------
Commercial $13,042,605 $10,357,148
Real estate 23,654,599 21,320,018
Installment 2,521,585 3,139,051
Other consumer 106,794 44,981
----------- -----------
39,325,583 34,861,198
Less:
Unearned fees, net 85,652 69,992
Allowance for loan losses 392,000 348,000
----------- -----------
Loans, net $38,847,931 $34,443,206
=========== ===========
Loans with fixed interest rates totaled approximately $29,669,000 and
$23,311,000 at December 31, 1999 and 1998, respectively, while variable rate
loans amounted to approximately $9,657,000 and $11,550,000 at December 31, 1999
and 1998, respectively.
The Company had nonaccrual loans of approximately $363,500 and $196,100 at
December 31, 1999 and 1998, respectively. Nonaccrual loans had the effect of
reducing interest income by approximately $18,500 and $17,000 for the years
ended December 31, 1999 and 1998, respectively. There was no interest received
on these loans for the years ended December 31, 1999 and 1998.
F-14
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the years
ended December 31:
1999 1998
--------- ---------
Balance, beginning of year $348,000 $330,000
Provision charged to expense 136,131 113,446
-------- --------
484,131 443,446
Losses charged to allowance (93,528) (96,512)
Recoveries of loans previously charged off 1,397 1,066
-------- --------
Balance, end of year $392,000 $348,000
======== ========
Information with respect to impaired loans at December 31 is as follows:
1999 1998
-------- --------
Impaired loans with a valuation allowance $ 40,700 $ 11,400
Impaired loans without a valuation allowance 322,800 184,700
-------- --------
Total impaired loans $363,500 $196,100
======== ========
Allowance for loan losses related to impaired loans $ 2,000 $ 11,400
Allowance for loan losses related to
other than impaired loans 390,000 336,600
-------- --------
Total allowance for loan losses $392,000 $348,000
======== ========
Average impaired loans for the year $224,178 $100,050
======== ========
Interest income on impaired loans
recognized on the cash basis $ - $ -
======== ========
The Company recognizes interest income on impaired loans on a cash basis if
the borrower demonstrates the ability to meet the contractual obligation and
collateral is sufficient. If there is doubt regarding the borrower's ability to
make payments or the collateral is not sufficient, payments received are
accounted for as a reduction in principal.
F-15
5. PREMISES AND EQUIPMENT
The major classes of premises and equipment and the total accumulated
depreciation and amortization are as follows at December 31:
1999 1998
---------- -----------
Land $ 648,640 $ 648,640
Building and improvements 2,002,245 2,002,245
Furniture and equipment 1,647,094 1,107,059
Leasehold improvements 925,841 768,139
---------- -----------
5,223,820 4,526,083
Less accumulated depreciation and
amortization 1,334,484 1,059,455
---------- -----------
Premises and equipment, net $3,889,336 $ 3,466,628
========== ===========
6. DEPOSITS
The scheduled maturities of time deposits are as follows at December
31, 1999:
Year ending December 31:
2000 $20,201,926
2001 9,769,204
2002 1,158,248
2003 1,045,884
2004 -
-----------
Total $32,175,262
===========
7. SHORT-TERM BORROWINGS
Information relating to short-term borrowings is as follows for the
years ended December 31:
1999 1998
---------------------- ----------------------
Amount Rate Amount Rate
------ ---- ------- ----
At year-end:
Federal home Loan Bank advances $2,800,000 6.05% - - %
Repurchase agreements 2,687,847 3.71 1,861,360 3.86
---------- ---------
Total $5,487,847 4.16 1,861,360 3.86
========== =========
Average for the year:
Federal Home Loan Bank advances $ 306,849 6.08 - -
Repurchase agreements 1,946,472 3.86 1,691,043 4.27
Maximum month-end balance:
Federal Home Loan Bank advances 2,800,000 -
Repurchase agreements 3,174,769 2,187,749
The Company pledges certain investments, based upon their market values, as
collateral for the principal and accrued interest of its repurchase agreements.
F-16
The Company has a line of credit arrangement with the Federal Home Loan
Bank of Atlanta under which it may borrow up to $7.3 million at interest rates
based upon current market conditions. The Company pledges certain U.S.
Government agencies as collateral under this borrowing agreement.
8. RENTAL INCOME
The Company leases space in its building under various operating leases
which expire in 2001. In addition to minimum rentals, the leases provide for
annual increases as well as additional payments to cover lessee's proportionate
share of increases in real estate taxes and operating expenses over a base year
amount. The leases also contain renewal options.
Future minimum rentals to be received under these leases are as follows as
of December 31, 1999:
Year ending December 31:
2000 $360,764
2001 277,672
--------
$638,436
========
Rental income under these leases was $350,065 and $339,864 for the years
ended December 31, 1999 and 1998, respectively.
9. OPERATING LEASES
The Company has operating leases for branch space. These leases are
noncancelable and expire during 2000 - 2005. In addition to minimum rentals,
these leases require annual rental increases as well as additional payments to
cover the Company's proportionate share of real estate taxes and operating
expenses. The leases also contain renewal options.
Future minimum rental payments under these leases are as follows as of
December 31, 1999:
Year ending December 31:
2000 $148,219
2001 140,131
2002 140,131
2003 97,117
2004 68,856
--------
$594,454
========
F-17
The following schedule indicates the composition of total rent expense for
the years ended December 31:
1999 1998
--------- ----------
Minimum rentals $ 87,008 $ 94,562
Contingent rentals 7,175 10,303
-------- --------
94,183
104,865
Less sublease rentals - 12,000
-------- -------
Total $ 94,183 $ 92,865
======== ========
10. INCOME TAXES
The components of income tax expense for the years ended December 31, 1999
and 1998 were as follows:
1999 1998
-------- --------
Current $201,925 $240,034
Deferred 24,850 (5,461)
-------- --------
Total $226,775 $234,573
======== ========
Components of the Company's net deferred tax assets are as follows at
December 31:
1999 1998
-------- --------
Deferred tax assets:
Unearned fees $ - $ 2,083
Allowance for loan losses 133,280 134,398
Accumulated depreciation and amortization - 16,477
Unrealized loss on securities available for sale 142,393 8,764
-------- --------
Total deferred tax assets 275,673 161,722
Deferred tax liabilities:
Accumulated depreciation and amortization 5,172 -
-------- --------
Net deferred tax assets $270,501 $161,722
======== ========
The net deferred tax assets are included in other assets in the
consolidated statements of condition.
F-18
Income tax expense differs from that computed at the statutory Federal
income tax rate as follows for the years ended December 31, 1999 and 1998:
1999 1998
------------------- -----------------
Amount Percent Amount Percent
--------- -------- ------- -------
Income tax expense at statutory rate $302,512 34.0% $264,947 34.0%
Tax exempt interest (81,318) (9.1) (60,812) (7.8)
State taxes, net of federal
income tax benefit 5,768 .6 19,750 2.5
Other (187) - 10,688 1.4
-------- ----- -------- -----
$226,775 25.5% $234,573 30.1%
======== ===== ======== =====
11. RETIREMENT PLAN
The Company has a defined contribution 401(k) retirement plan which
covers employees that meet certain age and length of service requirements. Under
this plan, the Company will annually contribute a discretionary amount as
approved by the Board of Directors. For the years ended December 31, 1999 and
1998, the Company's contribution amounted to $17,511 and $24,200, respectively.
12. EMPLOYEE INCENTIVE PLAN
The Company has an incentive plan for all eligible employees which
provides for a bonus based on a specified percentage of pretax income if certain
operating guidelines are met. For the year ended December 31, 1999, this bonus
totaled $61,885. No bonus was accrued for the year ended December 31, 1998.
13. STOCK OPTION PLAN
Effective February 1, 1997, the Company adopted the 1996 Non-Incentive
Stock Plan (the "Plan"). Options may be granted to purchase up to an aggregate
of 43,050 shares of the Company's common stock. Options may be granted to
officers and key employees, and may not be granted at less than the fair market
value of the Company's common stock. The term of each option granted pursuant to
the Plan shall be five years from the effective date and vest immediately.
F-19
The following is a summary of changes in shares under option for the
years ended December 31:
1999 1998
------------------------------ ------------------------------
Number Weighted Number Weighted
of Average of Average
Shares Exercise Price Shares Exercise Price
-------- -------------- ------- --------------
Balance, beginning of year 41,850 $15.50 27,300 $14.29
Granted - - 15,750 17.50
Cancelled (1,450) 15.40 - -
Exercised (11,650) 14.29 (1,200) 14.29
------- ------
Balance, end of year 28,750 $15.99 41,850 $15.50
======= ======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998. No options
were granted during 1999.
Dividend yield 2.0%
Expected volatility -
Risk-free interest rate 5.0%
Expected lives (in years) 5
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), but applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan. No compensation
expense related to the plan was recorded during the year ended December 31,
1998. If the Company had elected to recognize compensation cost based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed by SFAS No. 123, net income and earnings per share would have
been changed to the pro forma amounts as follows for the year ended December 31,
1998:
Net income:
As reported $544,683
Pro forma 515,108
Basic net income per share:
As reported $ .83
Pro forma .79
Diluted net income per share:
As reported $ .83
Pro forma .78
The pro forma amounts are not representative of the effects on reported
net income for future years.
F-20
14. EARNINGS PER SHARE
The calculation of earnings per common share for the years ended December
31 was as follows:
1999 1998
-------- --------
Basic:
Net income available to common stockholders $662,965 $544,683
-------- --------
Average common shares outstanding 720,094 655,093
Basic net income per share $ .92 $ .83
===== =====
Diluted:
Net income available to common stockholders $662,965 $544,683
-------- --------
Average common shares outstanding 720,094 655,093
Stock option adjustment 3,523 4,787
-------- --------
Average common shares outstanding - diluted 723,617 659,880
Diluted net income per share $ .92 $ .83
===== =====
15. COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
In the normal course of business, the Company has outstanding commitments
and contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying consolidated
financial statements. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual
or notional amount of those instruments. The Company uses the same credit
policies in making such commitments as it does for instruments that are included
in the consolidated statement of condition.
A summary of the Company's financial instruments whose contract amount
represents credit risk as of December 31, 1999 and 1998 is as follows:
1999 1998
---------- ----------
Commitments to extend credit $6,179,038 $2,005,690
Standby letters of credit 305,995 235,745
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments frequently expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customers creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include deposit
accounts, accounts receivable, marketable securities, inventory, property and
equipment, residential real estate and income-producing commercial properties.
F-21
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and generally expire within one year from issuance. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies as specified
above and is required in instances which the Company deems necessary.
Concentration of Credit Risk
----------------------------
The Company has funds on deposit with other banks in excess of
$100,000 which are not insured by the Federal Deposit Insurance Corporation.
16. RELATED PARTY TRANSACTIONS
The Company has had, and may be expected to have in the future,
transactions in the ordinary course of business with stockholders, directors,
officers and affiliated entities in which they are principal owners, all of
which have been, in the opinion of management, on the same terms as those
prevailing at the time for comparable transactions with others.
Loans to related parties totaled approximately $3,308,000 and
$3,198,000 at December 31, 1999 and 1998, respectively. Advances and repayments
amounted to approximately $4,784,000 and $4,674,000, respectively, for the year
ended December 31, 1999, and approximately $4,270,000 and $4,005,000,
respectively, for the year ended December 31, 1998.
Legal fees were paid to two law firms in which stockholders of the
Company are partners. These fees totaled $48,580 and $48,961 for the years ended
December 31, 1999 and 1998, respectively.
17. STOCKHOLDERS' EQUITY
Common Stock Offering
---------------------
In the fourth quarter of 1998, the Company sold an additional
58,035 shares of its common stock through a public offering for $958,757, net of
issuance costs. As of December 31, 1998, the Company had collected all of the
subscriptions receivable except for $29,750. During January 1999, the
subscriptions receivable were paid in full and 58,035 shares of common stock
were issued.
Dividend Restrictions
---------------------
Banking regulations limit the amount of dividends that may be
paid by the Bank without prior regulatory approval. Under these regulations, the
Bank may declare dividends from retained earnings or, with prior regulatory
approval, out of surplus in excess of 100% of the aggregate of the par value of
its common stock. The Bank had retained earnings in the amount of $1,451,856 and
$1,009,077 at December 31, 1999 and 1998, respectively, that were available for
the payment of dividends to its parent without prior regulatory approval. Future
dividend payments are dependent upon the receipt of cash dividends from the
Bank.
18. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material
F-22
effect on the Bank and the consolidated financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines involving
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier I capital to risk-weighted assets
(as defined in the regulations), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
The most recent notification from the Board of Governors of the Federal
Reserve System categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the
table.
To Be Well
For Capital Capitalized Under
Prompt Corrective
Actual Adequacy Purposes Action
Provisions ------------------ ------------------ ------
----------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ------- ------ --------- -----
As of December 31, 1999:
Total risk-based capital
(to risk-weighted assets) $6,844,000 14.35% $3,816,160 8.00% $4,770,000 10.00%
Tier I capital (to risk-
weighted assets) 6,452,000 13.53% 1,908,080 4.00% 2,862,120 6.00%
Tier I capital (to
average assets) 6,452,000 9.33% 2,766,892 4.00% 3,458,615 5.00%
As of December 31, 1998:
Total risk-based capital
(to risk-weighted assets) $6,357,000 15.15% $3,356,000 8.00% $4,196,000 10.00%
Tier I capital (to risk-
weighted assets) 6,009,000 14.32% 1,678,000 4.00% 2,517,000 6.00%
Tier I capital (to
average assets) 6,009,000 9.35% 2,570,000 4.00% 3,212,000 5.00%
F-23
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Condition
June 30,
2000
-----------
(unaudited)
Assets
- ------------------
Cash and due from banks $ 3,066,024
Federal funds sold 4,406,865
-----------
Cash and cash equivalents $ 7,472,889
Investment securities 26,133,794
Loans, net 40,135,217
Premises and equipment, net 3,788,831
Accrued interest receivable 556,525
Other assets 764,883
-----------
Total assets $78,852,139
===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Demand $15,458,763
Savings and NOW accounts 13,842,377
Time deposits 36,569,635
-----------
Total deposits $65,870,775
Securities sold under repurchase agreements 3,497,063
Short-term borrowings
Accrued interest and other liabilities 442,574
-----------
Total liabilities $69,810,412
-----------
Stockholders' Equity:
Common stock, $10 par value, 10,000,000
shares authorized, 726,876 shares issued $ 7,268,760
Surplus 444,158
Retained earnings 1,628,599
Accumulated other comprehensive income,
net unrealized holding loss, net of tax (299,790)
-----------
Total stockholders' equity $ 9,041,727
-----------
Total liabilities and stockholders' equity $78,852,139
===========
See Note to Financial Statements.
F-24
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended Six Months Ended
June 30, June 30,
2000 1999
---------------------- ----------------------
(unaudited)
Interest and fees on loans $ 1,841,369 $ 1,602,797
Interest on investment securities 723,715 577,861
Interest on federal funds sold 110,492 87,598
---------------------- ----------------------
Total interest income $ 2,675,576 $ 2,268,256
---------------------- ----------------------
Interest on deposits $ 1,228,065 $ 948,539
Interest on securities sold under repurchase agreements 69,414 33,221
---------------------- ----------------------
Total interest expense $ 1,297,479 $ 981,760
---------------------- ----------------------
Net interest income $ 1,378,097 $ 1,286,496
Provision for loan losses 23,500 33,805
---------------------- ----------------------
Net interest income after provision for loan losses $ 1,354,597 $ 1,252,691
---------------------- ----------------------
Service charges on deposit accounts $ 255,430 $ 175,809
Rental income 178,958 173,747
Other 58,304 79,922
---------------------- ----------------------
Total other income $ 492,692 $ 429,478
---------------------- ----------------------
Salaries and employee benefits $ 619,599 $ 508,223
Occupancy expense 173,376 139,627
Furniture and equipment expenses 127,104 85,623
Rental expenses 84,672 97,157
Other operating expenses 339,925 414,697
---------------------- ----------------------
Total other expenses $ 1,344,676 $ 1,245,327
---------------------- ----------------------
Income before income taxes $ 502,613 $ 446,842
Income taxes 143,377 130,405
---------------------- ----------------------
Net income $ 359,236 $ 316,437
====================== ======================
See Note to Financial Statements.
F-25
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For The Six Month Period Ended June 30, 2000 and 1999
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
--------------- --------------- --------------- --------------- -------------
Other comprehensive income
(loss), net of tax:
Unrealized loss on securities
available for sale -- -- -- (80,045) (80,045)
-------------
Total comprehensive
income $ 236,392
Stock options exercised for
6,490 shares 64,900 27,842 -- -- 92,742
Cash dividends, $.14 per share -- -- (100,872) -- (100,872)
--------------- --------------- --------------- --------------- -------------
Balances, June 30, 1999 $ 7,205,160 $ 417,022 $ 1,154,418 $ (96,320) $ 8,680,280
=============== =============== =============== =============== =============
Balances.
December 31, 1999 $ 7,256,760 $ 439,010 $ 1,385,663 $ (276,411) $ 8,805,022
Comprehensive income:
Net income -- -- 359,236 -- 359,236
Other comprehensive
Income (loss), net of
tax:
Unrealized loss on
Securites available-for-sale -- -- -- (23,379) (23,379)
-------------
Total comprehensive income $ 335,857
Stock options exercised for 1,200 shares 12,000 5,148 -- -- 17,148
Cash dividends, $.16 per share -- -- (116,300) -- (116,300)
--------------- --------------- --------------- ---------------- -------------
Balances, June 30, 2000 $ 7,268,760 $ 444,158 $ 1,628,599 $ (299,790) $ 9,041,727
=============== =============== =============== =============== =============
F-26
Consolidated Statements of Cash Flows
For The Six-Months Ended June 30, 2000 and 1999
2000 1999
------------------ -----------------
(unaudited)
Cash Flows From Operating Activities:
Net income $ 359,236 $ 316,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 12,268 21,903
Provision for loan losses 23,500 33,805
Depreciation and amortization on premises and
equipment 119,635 85,160
(Increase) decrease in accrued interest receivable 14,901 (73,110)
Increase in other assets (131,702) (161,911)
Increase in accrued expenses and other
liabilities 27,812 12,867
------------------ -----------------
Net cash provided by operating activities $ 425,650 $ 235,151
----------------- -----------------
Cash Flows From Investing Activities:
Purchases of securities held-to-maturity $ (1,889,416) $ (1,300,000)
Proceeds from maturities and calls of securities
held-to-maturity 1,607,707 1,922,659
Purchases of securities available-for-sale (500,299) (1,753,729)
Net increase in loans (1,310,786) (2,367,525)
Purchases of premises and equipment (19,130) (415,609)
----------------- -----------------
Net cash (used in) investing activities $ (2,111,924) $ (3,914,204)
----------------- -----------------
Cash Flows From Financing Activities:
- ------------------------------------
Net increase in deposits $ 6,384,391 $ 4,031,849
Net (decrease) in short-term borrowings (1,990,784) (417,637)
Issuance of common stock 17,148 92,742
Cash dividends paid (116,300) (100,872)
----------------- -----------------
Net cash provided by financing activities $ 4,294,455 $ 3,606,082
----------------- -----------------
(Decrease) increase in cash and cash equivalents $ 2,608,181 $ (72,971)
Cash and Cash Equivalents:
Beginning of year 4,864,708 7,569,270
----------------- -----------------
End of year $ 7,472,889 $ 7,496,299
================= =================
See Notes to Financial Statements.
F-27
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
For The Six Months Ended June 30, 2000 and 1999
Note 1. Significant Accounting Policies
A summary of significant accounting policies of Community Bankshares of
Maryland, Inc. and Subsidiaries (the "Company") is as follows:
Basis of Accounting
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles and conform to general practices
within the banking industry. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2000 and the results of operations and changes in cash
flow for the six months ended June 30, 2000 and 1999. The statements should be
read in conjunction with the Consolidated Notes to Financial Statements included
in Community Bankshares Annual Report for the year ended December 31, 1999.
The results of operations for the six-month periods ended June 30, 2000 and 1999
are not necessarily indicative of the results expected for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Community Bankshares of Maryland, Inc. (the "Parent"), its wholly-owned
subsidiary, Community Bank of Maryland (the "Bank"), Community Bank of Maryland
Investment Services, Inc. (the "Investment Company") and Community Bankshares of
Maryland, Inc. - Community Bank of Maryland Partnership (the "Partnership"). On
May 12, 1998, the stockholders approved a change in the Parent's name to
Community Bankshares of Maryland, Inc. from Financial Institutions Holding
Corporation. In connection with this name change, the name of the Partnership
was changed to Community Bankshares of Maryland, Inc. - Community Bank of
Maryland Partnership, from FIHC-Bank of Bowie Partnership. On October 14, 1997,
the Board of Directors amended the articles of incorporation to change the name
to the Bank of Community Bank of Maryland from Bank of Bowie. All significant
intercompany transactions and balances have been eliminated.
Nature of Operations
The Parent was organized under the laws of the State of Maryland to serve as a
bank holding company. The Bank operates as a commercial bank in Maryland and its
primary deposit base and principal real estate lending markets include Prince
George's and Anne Arundel Counties.
The Partnership is engaged in real estate activities, which has included the
ownership of the headquarters building for the Bank. The Partnership's primary
tenant, other than the Bank, is an insurance company.
The Investment Company is engaged in the business of providing investment
products and services to the public.
F-28
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in local economic conditions.
Service industries and federal, state and local governments employ a significant
portion of the Maryland labor force. Adverse changes in economic conditions
could have a direct impact on the collectibility of the Company's loan
portfolio. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably possible
that the allowance for loan losses may change materially in the near term.
Cash and Cash Equivalents
For financial reporting purposes, cash and cash equivalents include cash on
hand, amounts due from banks (including cash items in process of clearing), and
federal funds sold.
Investment Securities
Held-to-maturity securities are those securities which the Company has the
ability and intent to hold until maturity and are stated at amortized cost.
Available-for-sale securities represent those securities not classified as held-
to-maturity or trading and are stated at estimated fair value. Unrealized
holding gains and losses, net of the related deferred tax effect, are reported
as a net amount in accumulated other comprehensive income, a separate component
of stockholders' equity.
Premiums and discounts on investments in debt securities are amortized over
their contractual lives. The method of amortization results in a constant
effective yield on those securities which approximates the interest method.
Realized gains and losses are included in income and are determined by the
specific identification method.
Loans
Loans are stated at the amount of unpaid principal reduced by unearned fees and
the allowance for loan losses. Interest is accrued daily on the outstanding
balances. Accrual of interest is discontinued on a loan when management
believes, after considering collection efforts and other factors, that the
borrower's financial condition is such that the collection of interest is
doubtful. Interest income on impaired loans is recognized on the cash basis.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb loan losses inherent in the portfolio. The
amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance for loan losses is
F-29
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Loan origination fees and certain direct origination costs are deferred and
amortized as a yield adjustment over the lives of the related loans using a
method that approximates the interest method.
Premises and Equipment
Premises and equipment is stated at cost less accumulated depreciation and
amortization. Building and improvements and furniture and equipment are
depreciated on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful lives of the improvements or the terms of
the related leases.
Deferred Leasing Commissions
Deferred leasing commissions are being amortized on the straight-line method
over the terms of the related leases.
Advertising
Advertising expenses are expensed as incurred. These expenses amounted to
$19,284 and $25,019 for the periods ending June 30, 2000 and 1999, respectively,
and are included in other operating expenses in the consolidated statements of
income.
Income Taxes
The Company files a consolidated federal income tax return. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the period. Diluted earnings per
share is computed as net income divided by the weighted average number of
outstanding common shares used to derive basic earnings per share, plus the
dilutive effect of common stock equivalents relating to outstanding stock
options, as determined under the treasury stock method.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.
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Appendix I
=================
Agreement and Plan of Reorganization
and
Plan of Merger
=================
TABLE OF CONTENTS
Page
----
ARTICLE 1. THE MERGER AND RELATED MATTERS..................................... 1
1.1 The Merger......................................................... 1
1.2 Conversion of CBM Stock............................................ 1
1.3 The Bank Merger.................................................... 2
1.4 Board of Directors of F&M-Maryland................................. 2
1.5 CBM Stock Options.................................................. 3
1.6 The Effective Time................................................. 3
1.7 Articles of Incorporation and Bylaws............................... 3
1.8 Dissenting Shares.................................................. 4
1.9 Definitions........................................................ 4
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF CBM.............................. 5
2.1 Organization, Standing and Power of CBM............................ 5
2.2 Organization, Standing and Power of the CBM Subsidiaries........... 5
2.3 Authorized and Effective Agreements................................ 5
2.4 Capital Structure.................................................. 6
2.5 Rights............................................................. 6
2.6 Financial Statements; Books and Records; Minute Books.............. 7
2.7 Absence of Material Changes and Events............................. 7
2.8 Absence of Undisclosed Liabilities................................. 7
2.9 Legal Proceedings; Compliance with Laws............................ 7
2.10 Tax Matters........................................................ 8
2.11 Property........................................................... 8
2.12 Employee Benefit Plans............................................. 9
2.13 Insurance.......................................................... 10
2.14 Loans; Allowance for Loan Losses................................... 10
2.15 Environmental Matters.............................................. 11
2.16 Takeover Laws...................................................... 12
2.17 Brokers............................................................ 12
2.18 Tax Treatment; Accounting Treatment................................ 13
2.19 Statements True and Correct........................................ 13
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF F&M.............................. 13
3.1 Organization, Standing and Power................................... 13
3.2 Organization, Standing and Power of F&M Subsidiaries............... 13
3.3 Authorized and Effective Agreement................................. 14
3.4 Capital Structure.................................................. 14
3.5 Financial Statements; Books and Records; Minute Books.............. 14
3.6 Absence of Material Changes or Events.............................. 15
3.7 Absence of Undisclosed Liabilities................................. 15
-i-
Page
----
3.8 Legal Proceedings; Compliance with Laws............................ 15
3.9 Tax Matters........................................................ 16
3.10 Employee Benefit Plans............................................. 16
3.11 Insurance.......................................................... 16
3.12 Allowance for Loan Losses.......................................... 17
3.13 Environmental Matters.............................................. 17
3.14 Securities Reports................................................. 17
3.15 Tax Treatment; Accounting Treatment................................ 17
3.16 Statements True and Correct........................................ 17
ARTICLE 4. COVENANTS AND AGREEMENTS........................................... 18
4.1 Reasonable Best Efforts............................................ 18
4.2 Access to Information; Notice of Certain Matters, Confidentiality.. 18
4.3 Registration Statement; Shareholder Approval....................... 19
4.4 Operation of the Business of CBM................................... 19
4.5 Operation of the Business of F&M................................... 21
4.6 Dividends.......................................................... 21
4.7 No Solicitation of Other Offers.................................... 21
4.8 Regulatory Filings................................................. 22
4.9 Public Announcements............................................... 22
4.10 Accounting Treatment............................................... 22
4.11 Affiliate Agreements............................................... 22
4.12 Benefit Plans...................................................... 22
4.13 NYSE Listing....................................................... 23
4.14 Indemnification.................................................... 23
4.15 Stock Option Agreement............................................. 23
ARTICLE 5. CONDITIONS TO THE MERGER........................................... 23
5.1 General Conditions................................................. 23
5.2 Conditions to Obligations of F&M................................... 24
5.3 Conditions to Obligations of CBM................................... 25
ARTICLE 6. TERMINATION........................................................ 26
6.1 Termination........................................................ 26
6.2 Effect of Termination.............................................. 26
6.3 Survival of Representations, Warranties and Covenants.............. 27
6.4 Fees and Expenses.................................................. 27
ARTICLE 7. GENERAL PROVISIONS................................................. 28
7.1 Entire Agreement................................................... 28
7.2 Binding Effect; No Third-Party Rights.............................. 28
-ii-
Page
----
7.3 Waiver and Amendment............................................... 28
7.4 Governing Law...................................................... 28
7.5 Notices............................................................ 28
7.6 Counterparts....................................................... 29
7.7 Severability....................................................... 29
-iii-
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of August 23, 2000, between F&M NATIONAL CORPORATION, a Virginia
corporation ("F&M"), and COMMUNITY BANKSHARES OF MARYLAND, INC., a Maryland
corporation ("CBM").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and CBM have approved
the affiliation of their companies through the merger of CBM with and into F&M
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
Time, as defined in Section 1.6 hereof, CBM shall be merged with and into F&M
pursuant to the Plan of Merger attached hereto as Exhibit A and made a part
hereof (the "Merger"). The separate corporate existence of CBM shall thereupon
cease, and F&M will be the surviving corporation in the Merger. At and after the
Effective Time, the Merger shall have the effects set forth in Section 3-114 of
the Corporations and Associations Article, Maryland Code (the "MGCL") and
Section 13.1-721 of the Virginia Stock Corporation Act (the "VSCA").
1.2 Conversion of CBM Stock
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $10.00
per share, of CBM ("CBM Common Stock") issued and outstanding immediately prior
to the Effective Time (other than Dissenting Shares as defined in Section 1.8)
shall cease to be outstanding and shall be converted into and exchanged for 0.75
shares of common stock, par value
I-1
$2.00 per share, of F&M ("F&M Common Stock") pursuant to the terms and
conditions set forth in this Agreement and the Plan of Merger (the "Exchange
Ratio").
(b) F&M will issue cash in lieu of fractional shares to the holders of CBM
Common Stock on the basis of the Average Closing Price of F&M Common Stock. As
used herein, "Average Closing Price" shall mean the average of the closing price
of F&M Common Stock as reported by the New York Stock Exchange (the "NYSE")
Composite Transactions reporting system for each of the 10 consecutive NYSE
trading days ending on the fifth trading day prior to the Effective Time.
(c) 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 Time 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 Time, appropriate and
proportional adjustments will be made to the Exchange Ratio.
1.3 The Bank Merger
As promptly as practicable following the Effective Time of the Merger, F&M
shall cause Community Bank of Maryland, a wholly-owned Maryland chartered
banking subsidiary of CBM ("Community Bank"), to merge with and into F&M Bank-
Allegiance, a wholly-owned Maryland chartered banking subsidiary of F&M ("F&M-
Allegiance"), pursuant to the Bank Plan of Merger attached hereto as Exhibit B
(the "Bank Merger"). The separate corporate existence of Community Bank shall
thereupon cease, and F&M-Allegiance will be the surviving corporation in the
Bank Merger and shall thereafter operate under a new name to be determined by
F&M (referred to herein as "F&M-Maryland" from and after the consummation of the
Bank Merger).
1.4 Board of Directors of F&M-Maryland
F&M shall take all such action as shall be necessary to cause up to eight
current directors and advisory directors of CBM and Community Bank in office as
of the date hereof designated by the Chairman and President of CBM and approved
by F&M, including William V. Meyers, Chairman and Chief Executive Officer of
CBM, and Thomas G. Moore, Chairman, President and Chief Executive Officer of
Community Bank, to be elected or appointed as a director of F&M-Maryland at, or
as promptly as practicable after, the effective time of the Bank Merger. Such
appointment or election shall be subject to the qualification of each such
individual as a director, and subject to the policy that no person may be
appointed or elected (including reelection) to the Board of Directors of F&M-
Maryland after having achieved the age of 70. Each of the directors of F&M-
Allegiance in office immediately prior to the effective time of the Bank Merger
will continue to serve as directors of F&M-Maryland. All current directors of
CBM and Community Bank who are not elected or appointed to the Board of
Directors of F&M-
I-2
Maryland, and all current advisory directors of Community Bank, will be offered
a position on F&M-Maryland's Advisory Board.
1.5 CBM Stock Options
At and after the Effective Time, all employee stock options to purchase
shares of CBM Common Stock (each, a "CBM 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 CBM Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that at and after the Effective Time (i) each such
CBM 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 CBM Stock Option shall be equal to the number of shares of CBM
Common Stock that were purchasable under such CBM Stock Option immediately prior
to the Effective Time multiplied by the Exchange Ratio and rounding down to the
nearest whole share, and (iii) the per share exercise price under each such CBM
Stock Option shall be adjusted by dividing the per share exercise price of each
such CBM Stock Option by the Exchange Ratio, and rounding up to the nearest
cent. The terms of each CBM 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 at or subsequent to the Effective Time. As soon as practicable
after the Effective Time, F&M shall file a registration statement on Form S-8
(or other appropriate form) with respect to the shares of F&M Common Stock
subject to such options and shall maintain the effectiveness of such
registration statement (and the current status of the prospectus contained
therein) for so long as such options remain outstanding.
1.6 The Effective Time
Subject to the conditions to the obligations of the parties to effect the
Merger as set forth in Article 5, the parties shall cause the effective date of
the Merger (the "Effective Time") to occur on January 10, 2001 or on such other
date as the parties may agree in writing and after the satisfaction or waiver of
all conditions to either party's obligation to effect the Merger; it being the
intent of the parties that all regulatory approvals be obtained and all
statutory and regulatory waiting periods have expired prior to the date on which
the CBM shareholder meeting is held to consider and vote upon the approval of
the Merger.
1.7 Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of F&M immediately after the
Merger shall be those of F&M as in effect immediately prior to the Effective
Time.
I-3
1.8 Dissenting Shares
Shareholders of CBM shall have the right to demand and receive payment of
the fair value of their shares of CBM Common Stock pursuant to the provisions of
MGCL Section 3-201 et seq. (the "Dissenting Shares").
-- ---
1.9 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, (b) changes in
generally accepted accounting principles or regulatory requirements applicable
to financial institutions, or (c) actions taken or omissions to act at the
request of, or with the consent of, the other party in contemplation of the
transactions contemplated by this Agreement..
(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 not later than 5:00 p.m. on September 15, 2000,
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 and covenants and agreements. Any matter included, whether aggregated
or not, in the CBM Financial Statements or the F&M Financial Statements, as the
case may be, shall be deemed to be Previously Disclosed.
I-4
ARTICLE 2
Representations and Warranties of CBM
CBM represents and warrants to F&M as follows:
2.1 Organization, Standing and Power of CBM
CBM is a Maryland corporation duly organized, validly existing and in good
standing under the laws of Maryland. CBM has the corporate power and authority
to carry on its business in Maryland as now conducted and to own and operate its
assets, properties and business; and CBM has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and the
Stock Option Agreement of even date herewith by and between CBM and F&M, a copy
of which is attached hereto as Exhibit C (the "Option Agreement"), and to
consummate the transactions contemplated hereby and thereby. CBM is duly
registered as a bank holding company under the Bank Holding Company Act of 1956.
2.2 Organization, Standing and Power of the CBM Subsidiaries
Community Bank is the only bank subsidiary of CBM (collectively with CBM,
the "CBM Companies") and is a duly organized corporation, validly existing and
in good standing under applicable laws. Community Bank has full corporate power
and authority to carry on its business as now conducted and 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 CBM on a consolidated basis.
Except as Previously Disclosed in its Disclosure Schedule, CBM does not own,
--------------------
directly or indirectly, any outstanding capital stock or other voting securities
or ownership interests of any corporation, bank or savings association,
partnership or other organization, except for Community Bank. The outstanding
shares of capital stock of Community Bank are validly issued and outstanding,
fully paid and nonassessable and all such shares are directly owned by CBM free
and clear of all liens, claims and encumbrances or preemptive rights of any
person. All references to Community Bank shall also include (i) Community Bank
of Maryland Investment Services, Inc., a wholly-owned subsidiary of Community
Bank, and (ii) Community Bankshares of Maryland, Inc. - Community Bank of
Maryland Partnership, a majority-owned subsidiary of Community Bank.
2.3 Authorized and Effective Agreements
(a) Subject to receipt of the approval of the shareholders of CBM 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 CBM on or prior to
the date hereof. This
I-5
Agreement, the Plan of Merger and the Option Agreement are valid and legally
binding obligations of CBM, enforceable against CBM 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 CBM 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 CBM or the Articles of
Incorporation or Bylaws of Community Bank; (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
CBM pursuant to any (A) note, bond, mortgage, indenture, or (B) any material
license, agreement or other instrument or obligation, to which CBM is a party or
by which it or any of its properties or assets may be bound, 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 CBM.
2.4 Capital Structure
The authorized capital stock of CBM consists of 10,000,000 shares of common
stock, par value $10.00 per share, of which 726,876 shares are issued and
outstanding as of this date. All outstanding shares of CBM 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
the date hereof, there are options held by employees of CBM that represent
rights to purchase a total of 28,025 shares of CBM Common Stock.
2.5 Rights
As of the date of this Agreement, there are not any shares of capital stock
of CBM 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 CBM 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
CBM may exercise stock options).
I-6
2.6 Financial Statements; Books and Records; Minute Books
The CBM Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of CBM
as of the dates indicated and the consolidated 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
the CBM Companies fairly reflect in all material respects the transactions to
which they are a party or by which their 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 CBM Companies contain accurate records of all corporate
actions of their respective shareholders and Boards of Directors (including
committees of its Board of Directors). The CBM Financial Statements shall mean
(i) the consolidated balance sheets of CBM as of December 31, 1999 and 1998 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years ended December 31, 1999, 1998 and 1997
(including related notes and schedules, if any) and (ii) the consolidated
balance sheets of CBM and related consolidated statements of income and
stockholders' equity (including related notes and schedules, if any) with
respect to quarterly periods ended subsequent to December 31, 1999.
2.7 Absence of Material Changes and Events
Since June 30, 2000 and except as Previously Disclosed in its Disclosure
--------------------
Schedule, there has not been any change in the financial condition or results of
operations of CBM or the CBM Subsidiaries which, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect.
2.8 Absence of Undisclosed Liabilities
CBM has not incurred any liability (contingent or otherwise) that is
material to CBM on a consolidated basis or that, when combined with all similar
liabilities, would be material to CBM on a consolidated basis, except as
Previously Disclosed in its Disclosure Schedule or as disclosed in the CBM
- --------------------
Financial Statements and except for liabilities incurred in the ordinary course
of business consistent with past practice since the date of the most recent CBM
Financial Statements.
2.9 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 CBM,
threatened against any of the CBM Companies or against any property, asset,
interest or right of the CBM
I-7
Companies, or against any officer, director or employee of the CBM Companies
that would, if determined adversely to CBM or any CBM Subsidiary, have a
Material Adverse Effect on CBM on a consolidated basis. To the Knowledge of CBM,
the CBM Companies have complied in all material respects with all laws,
ordinances, requirements, regulations or orders applicable to its business
(including environmental laws, ordinances, requirements, regulations or orders).
2.10 Tax Matters
The CBM Companies have 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 the CBM Companies have been paid, are reflected as a liability in the
CBM 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 CBM 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 CBM
Companies 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 charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority.
2.11 Property
Except as Previously Disclosed in its Disclosure Schedule or reserved
--------------------
against in the CBM Financial Statements, the CBM Companies have 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 CBM Financial
Statements as of June 30, 2000 or acquired after such date. To the Knowledge of
CBM, 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 CBM, the buildings, structures, and appurtenances owned,
leased, or occupied by the CBM Companies 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.
I-8
2.12 Employee Benefit Plans
(a) CBM 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 CBM (collectively, the "CBM Benefit Plans").
(b) None of the CBM 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 CBM
--------------------
Benefit Plans are in compliance in all material respects with applicable laws
and regulations, and CBM has administered the CBM Benefit Plans in accordance
with applicable laws and regulations in all material respects.
(d) Each CBM 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) CBM has made available to F&M copies of all CBM 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 CBM Benefit Plans.
(f) To the Knowledge of CBM, CBM has not engaged in any prohibited
transactions, as defined in Code section 4975 or ERISA section 406, with respect
to any CBM 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 CBM 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 CBM Benefit Plan contains
- --------------------
any provision which
I-9
would give rise to any severance, termination or other payments or liabilities
as a result of the transactions contemplated by this Agreement.
(i) Except as Previously Disclosed in its Disclosure Schedule, CBM 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 CBM after
a termination of employment, except as required by the Consolidated Omnibus
Budget Reconciliation Act of 1985.
2.13 Insurance
Each of the CBM Companies currently maintains insurance in amounts
reasonably necessary for its operations and, to the Knowledge of CBM, similar in
scope and coverage to that maintained by other entities similarly situated.
Since January 1, 2000, none of the CBM 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
CBM Companies has been refused any insurance coverage sought or applied for, and
CBM 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 CBM Companies.
2.14 Loans; Allowance for Loan Losses
(a) Except as Previously Disclosed in its Disclosure Schedule, to the
--------------------
Knowledge of CBM each loan reflected as an asset in the CBM 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 CBM's standard loan policies.
(b) CBM 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 the CBM
Companies 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
CBM shall promptly on a periodic basis inform F&M of any such classification
arrived at any time after the date hereof.
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(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 CBM 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.
2.15 Environmental Matters
(a) Except as Previously Disclosed in its Disclosure Schedule and to the
--------------------
Knowledge of CBM, the CBM Companies are in substantial compliance with all
Environmental Laws (as defined below). Neither CBM nor Community Bank has
received any communication alleging that the CBM or Community Bank is not in
such compliance and to the Knowledge of CBM there are no present circumstances
that would prevent or interfere with the continuation of such compliance.
(b) CBM and Community Bank have 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) CBM or Community Bank, (ii) any person or entity
whose liability for any Environmental Claim CBM or Community Banks has or may
have retained either contractually or by operation of law, (iii) any real or
personal property owned or leased by CBM or Community Bank, or any real or
personal property which CBM or Community Bank has been, or are, 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 CBM or Community Bank hold a
security interest securing a loan recorded on the books of CBM or Community
Bank. Neither CBM nor Community Bank is subject to any agreement, order,
judgment, decree or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any such liability.
(c) With respect to all real and personal property owned or leased by CBM
or Community Bank, or all real and personal property which CBM or Community Bank
has been, or is, judged to have managed or to have supervised or to have
participated in the management of, CBM 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). The CBM Companies are in compliance in all material
respects with all recommendations contained in any such environmental audits,
analyses and surveys.
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(d) To the Knowledge of CBM, 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 CBM or Community Bank or against
any person or entity whose liability for any Environmental Claim CBM or
Community Bank 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.
2.16 Takeover Laws
CBM has taken all action necessary to exempt this Agreement, the Stock
Option Agreement and the transactions contemplated hereby and thereby from the
operation of the Maryland "business combination" statute at Sections 3-601 et
--
seq. of the MGCL and the Maryland "control share" statute at Sections 3-701 et
- --- --
seq. of the MGCL.
- ---
2.17 Brokers
Other than the financial advisory services performed for CBM by Scott &
Stringfellow, Inc. (on terms disclosed to F&M), neither CBM 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.
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2.18 Tax Treatment; Accounting Treatment
As of the date hereof, CBM is aware of no reason why the Merger will fail
to qualify as a tax-free reorganization under Section 368(a) of the Code or may
not be accounted for as "pooling of interests" under generally accepted
accounting principles.
2.19 Statements True and Correct
When the Registration Statement on Form S-4 (the "Registration Statement")
to be filed by F&M with the Securities and Exchange Commission (the "SEC") shall
become effective, and at all times subsequent thereto up to and including the
CBM 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 CBM relating to CBM, (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 CBM 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
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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 it 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) 30,900,000 shares of common stock, par value $2.00 per
share, of which 24,854,026 shares were issued and outstanding on June 30, 2000.
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 CBM 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
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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, 1999 and 1998 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years ended December 31, 1999, 1998 and 1997
(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, 1999.
3.6 Absence of Material Changes or Events
Since June 30, 2000, 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
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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. 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, 2000, 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.
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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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"). F&M's Annual Report on Form 10-K for the year ended December 31, 1999,
and all other reports, definitive proxy statements or documents filed or to be
filed by it subsequent to December 31, 1999 under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, in the form filed, or to be filed, with 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.
3.14 Tax Treatment; Accounting Treatment
As of the date hereof, F&M is aware of no reason why the Merger will fail
to qualify as a tax-free reorganization under Section 368(a) of the Code or may
not be accounted for as "pooling of interests" under generally accepted
accounting principles.
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
CBM 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
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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 CBM 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 CBM 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 CBM 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 CBM 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 CBM 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.
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4.3 Registration Statement; Shareholder Approval
(a) F&M and CBM 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 CBM constituting a part thereof
(the "Proxy Statement") and all related documents). F&M and CBM 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) CBM 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 CBM shall recommend such approval, and CBM
shall take all reasonable lawful action to solicit such approval by its
shareholders; provided, however, that if the Board of Directors of CBM 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 CBM, then the Board of Directors of CBM
shall not be obligated to recommend the approval of this Agreement and Plan of
Merger.
4.4 Operation of the Business of CBM
CBM 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 Time:
(a) CBM 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) CBM 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 CBM 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.
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(c) CBM will not:
(1) Other than pursuant to stock options 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 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.
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Notwithstanding anything to the contrary contained in this Section 4.4,
until the Effective Time, the CBM Companies shall be permitted to pay directors
fees consistent with past practice, and shall be entitled to pay employee
bonuses consistent with past practice.
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 CBM, during the period from the
date hereof to the Effective Time:
(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
CBM 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 Dividends
F&M agrees that prior to the Effective Time CBM may declare and pay its
regular quarterly cash dividends, each in an amount not to exceed $0.08 per
share.
4.7 No Solicitation of Other Offers
Without the prior written consent of F&M, CBM 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
CBM 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 (i) the
Board of Directors of CBM concludes in good faith, after consultation with and
based upon the written advice of outside counsel, that the failure to furnish
such information or enter into such discussions or negotiations would likely
constitute a breach of its fiduciary duties to shareholders under applicable
law, (ii) prior to taking such action,
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CBM receives from such person or entity an executed confidentiality agreement,
and (iii) the Board of Directors of CBM 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. CBM 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 (other than as contemplated by this
Agreement), consolidation, share exchange, joint venture, business combination
or similar transaction involving CBM or any purchase of all or any material
portion of the assets of CBM.
4.8 Regulatory Filings
F&M and CBM 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 CBM shall each use their best efforts to ensure that the Merger
qualifies for pooling-of-interests accounting treatment.
4.11 Affiliate Agreements
CBM has identified to F&M all persons who were, as of the date hereof,
directors, directors emeritus or executive officers of CBM (the "Affiliates").
CBM has delivered a written letter agreement in the form of Exhibit D hereto
from each Affiliate.
4.12 Benefit Plans
Upon consummation of the Merger, as soon as administratively practicable,
employees of CBM 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 CBM as if
such service were with F&M.
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4.13 NYSE Listing
F&M shall use its reasonable best efforts to list, at the Effective Time,
on the NYSE upon official notice of issuance, the shares of F&M Common Stock to
be issued in the Merger.
4.14 Indemnification
Following the Effective Time and for a period of six years thereafter, F&M
shall indemnify, defend and hold harmless any person who has rights to
indemnification from a CBM Company, to the same extent and on the same
conditions as such person is entitled to indemnification pursuant to applicable
law and such CBM Company'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 Time. Without limiting
the foregoing, in any case in which corporate approval may be required to
effectuate any indemnification, F&M shall direct, if the party to be indemnified
elects, 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 CBM'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 CBM for a period of three years after
the Effective Time on terms no less favorable than those in effect on the date
hereof.
4.15 Stock Option Agreement
CBM shall grant to F&M an option to acquire such number of shares of CBM
Common Stock that would equate to 19.9% of the issued and outstanding common
stock of CBM as of the date hereof, all in accordance with the Option Agreement.
ARTICLE 5
Conditions to the Merger
5.1 General Conditions
The respective obligations of each of F&M and CBM to effect the Merger
shall be subject to the fulfillment or waiver at or prior to the Effective Time
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 CBM.
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(b) Registration Statement; NYSE Listing. The Registration Statement shall
have been declared effective under the Securities Act, and F&M shall 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 NYSE.
(c) Regulatory Approvals. F&M and CBM 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 CBM, 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 CBM shall have received the opinion of LeClair
Ryan, A Professional Corporation, counsel to F&M, in form and substance
satisfactory to F&M and CBM and dated as of the Effective Time to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and that no gain or loss will be recognized by the
shareholders of CBM to the extent they receive F&M Common Stock solely in
exchange for their CBM Common Stock in the Merger. In rendering its opinion,
such counsel may rely upon representations contained in certificates of officers
of F&M, CBM and others.
(e) Opinions of Counsel. CBM shall have delivered to F&M and F&M shall
have delivered to CBM opinions of counsel, dated as of the Effective Time, 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 CBM 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 Time of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
CBM set forth in Article 2 shall be true and correct as of the date of this
Agreement and as of the Effective Time as though made on the Effective Time,
except (i) for any such
I-24
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, would not reasonably be expected
to have a Material Adverse Effect on CBM.
(b) Performance of Obligations. CBM shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Time.
(c) Officers' Certificate. CBM shall have delivered to F&M a certificate,
dated as of the Effective Time 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.
5.3 Conditions to Obligations of CBM
The obligations of CBM to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time 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 Time as though made on the Effective Time,
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,
would not reasonably be expected to have a Material Adverse Effect on F&M.
(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 Time.
(c) Officers' Certificate. F&M shall have delivered to CBM a certificate,
dated as of the Effective Time 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. CBM shall have received an updated fairness
opinion from Scott & Stringfellow, Inc., financial advisor to CBM, addressed to
CBM and dated on or about the date the Proxy Statement is mailed to shareholders
of CBM, to the effect that the terms of the Merger are fair to the shareholders
of CBM from a financial point of view.
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ARTICLE 6
Termination
6.1 Termination
This Agreement and the Plan of Merger may be terminated at any time before
the Effective Time, whether before or after approval thereof by the shareholders
of CBM at the CBM Meeting, as provided below:
(a) Mutual Consent. By the mutual consent in writing of F&M and CBM.
(b) Closing Delay. At the election of either party, evidenced by written
notice, if the Effective Time shall not have occurred on or before April 30,
2001, 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 Time 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 CBM 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 CBM Performance Not Met. By CBM 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 CBM to effect the Merger set forth in Sections 5.1 and 5.3, and
such noncompliance is not waived by CBM.
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.
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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 Time and shall be terminated and
extinguished at the Effective Time. From and after the Effective Time, 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 Time, 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 CBM.
(b) Notwithstanding any provision in this Agreement to the contrary, if
for any reason the Merger is not approved by CBM's shareholders at the CBM
Meeting or any adjournment thereof, then CBM 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 CBM 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 CBM 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 30 days after the termination of
this Agreement.
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ARTICLE 7
General Provisions
7.1 Entire Agreement
This Agreement contains the entire agreement among F&M and CBM 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 CBM 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 CBM 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
9 Court Square
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282
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Copy to:
George P. Whitley, Esq.
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003
If to CBM:
William V. Meyers, Esq.
6801 Kenilworth Avenue
Suite 400
Riverdale, Maryland 20737-1385
Tele: (301) 699-5800
Copy to:
David H. Baris, Esq.
Kennedy, Baris & Lundy, L.L.P.
4701 Sangamore Road
Suite P-15
Bethesda, Maryland 20816
Tele: (301) 229-3400
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.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
---------------------------------------
Alfred B. Whitt
President and Chief Executive Officer
COMMUNITY BANKSHARES OF
MARYLAND, INC.
By: /s/ William V. Meyers
---------------------------------------
William V. Meyers
Chairman and Chief Executive Officer
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EXHIBIT A
To the Agreement and
Plan of Reorganization
PLAN OF MERGER
BETWEEN
F&M NATIONAL CORPORATION
AND
COMMUNITY BANKSHARES OF MARYLAND, INC.
Pursuant to this Plan of Merger ("Plan of Merger"), Community Bankshares of
Maryland, Inc., a Maryland corporation ("CBM"), shall merge with and into F&M
National Corporation, a Virginia corporation ("F&M").
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 August 23, 2000, between F&M and CBM (the
"Agreement"), at the Effective Time CBM shall be merged with and into F&M (the
"Merger") in accordance with the provisions of Virginia and Maryland law and
with the effects specified in Section 13.1-721 of the Virginia Stock Corporation
Act and Section 3-114 of the Corporations and Associations Article, Maryland
Code (the "MGCL"). F&M shall be the surviving corporation of the Merger. The
Merger shall become effective on such date and time as may be determined in
accordance with Section 1.6 of the Agreement (the "Effective Time").
1.2 Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of F&M in effect immediately prior
to the consummation of the Merger shall remain in effect following the Effective
Time 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, no cash shall be
allocated to the shareholders of CBM and stock shall be issued and allocated as
follows:
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(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $10.00
per share, of CBM ("CBM Common Stock") issued and outstanding immediately prior
to the Effective Time shall cease to be outstanding and shall be converted into
and exchanged for 0.75 of a share of common stock, par value $2.00 per share, of
F&M ("F&M Common Stock") pursuant to the terms and conditions set forth in the
Agreement and this Plan of Merger (the "Exchange Ratio").
(b) Each holder of a certificate representing shares of CBM Common Stock
upon the surrender of his CBM 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 whole shares of F&M Common Stock that
his shares shall be converted into pursuant to the Exchange Ratio. Each such
holder of CBM 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.
(c) 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 Time 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 Time, appropriate and
proportional adjustments will be made to the Exchange Ratio.
(d) At and after the Effective Time, all employee stock options to
purchase shares of CBM Common Stock (each, a "CBM 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 CBM Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that at and after the Effective Time (i) each such
CBM 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 CBM Stock Option shall be equal to the number of shares of CBM
Common Stock that were purchasable under such CBM Stock Option immediately prior
to the Effective Time multiplied by the Exchange Ratio and rounding down to the
nearest whole share, and (iii) the per share exercise price under each such CBM
Stock Option shall be adjusted by dividing the per shareexercise price of each
such CBM Stock Option by the Exchange Ratio, and rounding up to the nearest
cent. The terms of each CBM 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 at or subsequent to the Effective Time.
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2.2 Manner of Exchange of CBM Common Stock Certificates
As promptly as practicable after the Effective Time, 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 CBM Common Stock immediately
prior to the Effective Time transmittal materials for use in exchanging such
shareholder's certificates of CBM 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 CBM 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. As used
herein, "Average Closing Price" shall mean the average of the closing price of
F&M Common Stock as reported on the New York Stock Exchange for each of the 10
consecutive trading days ending on the fifth trading day prior to the Effective
Time.
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 Time shall be paid to the
holder of any certificate representing shares of CBM Common Stock issued and
outstanding at the Effective Time 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).
2.5 Rights of Dissenting Shareholders
Shareholders of CBM who object to the Merger pursuant to the provisions of
MGCL Section 3-201 et seq. will be entitled to the rights and remedies set forth
-- ---
in MGCL Section 3-201 et seq.
-- ---
ARTICLE III
Conditions Precedent
The obligations of F&M and CBM to effect the Merger as herein provided
shall be subject to satisfaction, unless duly waived, of the conditions set
forth in the Agreement.
I-33
ARTICLE IV
Termination
This Plan of Merger may be terminated at any time prior to the Effective
Time by the parties hereto as provided in Article 6 of the Agreement.
I-34
Appendix II
==================
Stock Option Agreement
==================
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of August 23, 2000 (the "Option
Agreement"), between COMMUNITY BANKSHARES OF MARYLAND, INC., a Maryland
corporation ("CBM"), and F&M NATIONAL CORPORATION, a Virginia corporation
("F&M").
WITNESSETH
WHEREAS, the Boards of Directors of the parties hereto approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") and have
adopted a related Plan of Merger, dated as of the date hereof (together referred
to herein as the "Merger Agreements"), providing for the merger of CBM with and
into F&M (the "Merger"); and
WHEREAS, as a condition to and as consideration for F&M's entry into the
Merger Agreements and to induce such entry, CBM has agreed to grant to F&M the
option set forth herein to acquire authorized but unissued shares of CBM Common
Stock.
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions
Capitalized terms used but not defined herein and defined in the Merger
Agreements shall have the same meanings as in the Merger Agreements.
2. Grant of Option
Subject to the terms and conditions set forth herein, CBM hereby grants to
F&M an option (the "Option") to acquire up to 144,409 shares of CBM Common Stock
at a price of $18.00 per share (the "Exercise Price") in exchange for the
consideration provided in Section 4 hereof; provided, however, that in the event
CBM issues or agrees to issue any shares of CBM Common Stock (other than as
permitted under the Merger Agreements) at a price less than $18.00 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 CBM 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 CBM Common Stock, before giving effect to the exercise of the Option.
The number of shares of CBM Common Stock that may be received upon the exercise
of the Option is subject to adjustment as set forth herein.
II-1
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) CBM 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 CBM
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: (i) the Effective Time of the Merger; (ii) upon
termination of the Merger Agreements in accordance with the provisions thereof,
other than a termination based upon, following or in connection with either (A)
a material breach by CBM of a Specified Covenant (as defined below) or (B) the
failure of CBM to obtain shareholder approval of the Merger Agreements by the
vote required under applicable law, in the case that either (A) or (B) follow
the occurrence of a Purchase Event; or (iii) 12 months after termination of the
Merger Agreements based upon a material breach by CBM of a Specified Covenant or
the failure of CBM 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) CBM, without having received F&M's prior written consent, shall
have entered into an agreement with any person to (i) acquire, merge or
II-2
consolidate, or enter into any similar transaction, with CBM, (ii)
purchase, lease or otherwise acquire all or substantially all of the assets
of CBM, or (iii) purchase or otherwise acquire directly from CBM securities
representing 10% or more of the voting power of CBM;
(2) any person shall have acquired beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the outstanding shares of
CBM Common Stock after the date hereof (the term "beneficial ownership" for
purposes of this Option Agreement having the meaning assigned thereto in
Section 13(d) of the Exchange Act and the regulations promulgated
thereunder); or
(3) any person shall have made a bona fide proposal to CBM by public
announcement or written communication that is or becomes the subject of
public disclosure to acquire CBM 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 CBM
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, CBM shall deliver to F&M a certificate or
certificates representing the number of shares of CBM Common Stock exchanged for
the Exercise Price and F&M shall deliver to CBM 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.
(c) Certificates for CBM Common Stock delivered at a closing hereunder may
be endorsed with a restrictive legend which shall read substantially as follows:
"The transfer of the shares represented by this
Certificate is subject to certain provisions of an agreement
between the registered holder hereof and Community
Bankshares of Maryland, Inc. and to resale restrictions
arising under the Securities Act of 1933, as amended, a copy
of which agreement is on file at the principal office of
Community Bankshares
II-3
of Maryland, Inc. A copy of such agreement will be provided
to the holder thereof without charge upon receipt by
Community Bankshares of Maryland, Inc. of a written
request."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if F&M shall have delivered to
CBM a copy of a letter from the staff of the SEC, or an opinion of counsel, in
form and substance satisfactory to CBM, to the effect that such legend is not
required for purposes of the Securities Act.
5. Representations
CBM hereby represents, warrants and covenants to F&M as follows:
(a) CBM shall at all times maintain sufficient authorized but unissued
shares of CBM Common Stock so that the Option may be exercised without
authorization of additional shares of CBM 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 CBM 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 CBM 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 CBM 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 CBM Common Stock
subject to the Option shall be adjusted so that, after such issuance, it equals
19.9% of the number of shares of CBM 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 CBM
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 CBM to
breach any provision of the Merger Agreements.
II-4
7. Registration Rights
CBM shall, if requested by F&M, as expeditiously as possible file a
registration statement on a form of general use under the Securities Act if
necessary in order to permit the sale or other disposition of the shares of CBM
Common Stock that are acquired upon exercise of the Option in accordance with
the intended method of sale or other disposition requested by F&M. F&M shall
provide all information reasonably requested by CBM for inclusion in any
registration statement to be filed hereunder. CBM will use its best efforts to
cause such registration statement first to become effective and then to remain
effective for such period not in excess of 270 days from the date on which such
registration statement first becomes effective as may be reasonably necessary to
effect such sales or other dispositions. The first registration effected under
this Section 7 shall be at CBM's expense except for underwriting commissions and
the fees and disbursements of F&M's counsel attributable to the registration of
such CBM Common Stock. A second registration statement may be requested
hereunder at F&M's expense. In no event shall CBM be required to effect more
than two registrations hereunder. The filing of any registration statement
hereunder may be delayed for such period of time as may reasonably be required
to facilitate any public distribution by CBM of CBM Common Stock. If requested
by F&M, in connection with any such registration, CBM will become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting
agreements. Upon receiving any request from F&M or an assignee of F&M under this
Section 7, CBM agrees to send a copy thereof to F&M and to any assignee of F&M
known to CBM, in each case by promptly mailing the same, postage prepaid, to the
address of record of the persons entitled to receive such copies.
8. Severability
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option Agreement will not permit the holder to
acquire the full number of shares of CBM Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of CBM to allow the holder to acquire, or to require CBM 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.
II-5
9. Miscellaneous
(a) Expenses. Except as otherwise provided herein, each of the parties
--------
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
----------------
Option Agreement contains the entire agreement between the parties with respect
to the transactions contemplated hereunder and supersedes all prior arrangements
or understandings with respect thereto, written or oral. The terms and
conditions of this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. Nothing in
this Option Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any of its rights
----------
or obligations under this Option Agreement or the Option created hereunder to
any other person, without the express written consent of the other party, except
that 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 CBM a copy of a letter
from the staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to CBM, to the effect that such assignment will not
violate the requirements of the Securities Act; provided that prior to any such
assignment, F&M shall give written notice of the proposed assignment to CBM, and
within 24 hours of such notice of a bona fide proposed assignment, CBM 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 in the
manner and to the address provided for in or pursuant to Section 7.5 of the
Reorganization Agreement.
(e) Counterparts. This Option Agreement may be executed in any number of
------------
counterparts and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would be an
--------------------
inadequate remedy for a breach of the provisions of this Option Agreement by
either
II-6
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 State of Maryland, without regard
to the conflicts of laws principles thereof.
II-7
IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
COMMUNITY BANKSHARES OF
MARYLAND, INC.
By: /s/ William V. Meyers
------------------------------------
William V. Meyers
Chairman and Chief Executive Officer
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
------------------------------------
Alfred B. Whitt
President and Chief Executive Officer
II-8
Appendix III
==================
Opinion of Scott & Stringfellow, Inc.
==================
[Scott & Stringfellow Letterhead]
____________, 2000
Board of Directors
Community Bankshares of Maryland
16410 Heritage Boulevard
Bowie, Maryland 20716
Dear Madams and Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Community Bankshares of
Maryland, Inc. ("Community") of the terms of an Agreement and Plan of Merger
between Community and F&M National Corporation ("F&M") dated August 23, 2000
(the "Merger Agreement") pursuant to which Community will be merged with and
into F&M (the "Merger") and further provides that each share of common stock of
Community issued and outstanding shall be exchanged for 0.75 shares of common
stock of F&M.
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
Community in connection with the transaction described above. We are familiar
with Community, 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) Community's
audited financial statements for the three years ended December 31, 1999; (4)
Community's unaudited financial statements for the six months ended June 30,
2000 and 1999, and other internal information relating to Community prepared by
Community's management; (5) information regarding the trading market for the
common stocks of Community 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 recent years; (7) F&M's
annual reports to shareholders and its financial statements for the three years
ended December 31, 1999; (8) F&M's unaudited financial statements for the six
months ended June 30, 2000 and 1999, and certain other internal information
relating to F&M prepared by F&M's management. We have discussed with members of
management of Community and F&M the background of the Merger, the reasons and
basis for the Merger and the business and future prospects of Community and F&M
individually and as a combined entity. Finally, we have conducted such other
studies, analyses and investigations,
III-1
particularly of the banking industry, and considered such other information, as
we have 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 Community and F&M. We have not attempted independently to verify
such information, nor have we made any independent appraisal of the assets of
Community or F&M. With respect to the information relating to the prospects of
Community and F&M, we have assumed that such information reflects the best
currently available judgments and estimates of the managements of Community 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 as of 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
Community or F&M.
Our advisory services and opinion expressed herein were prepared for the
use of the Board of Directors of Community and do not constitute a
recommendation to the Community shareholders as to how they should vote at the
shareholders' meeting in connection with the Merger. We hereby consent, however,
to the inclusion of this opinion as an exhibit to the proxy 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
terms of the Merger Agreement are fair from a financial point of view to the
shareholders of Community common stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: ________________________
Gary S. Penrose
Managing Director
Financial Institutions Group
III-2
Appendix IV
==================
Title 3 of the Annotated Code of Maryland
Relating to Dissenters' Rights
==================
ANNOTATED CODE OF MARYLAND
CORPORATIONS AND ASSOCIATIONS.
TITLE 3. CORPORATIONS IN GENERAL -- EXTRAORDINARY ACTIONS.
Subtitle 2. Rights of Objecting Stockholders.
(S)3-201 "Successor" defined.
(a) Corporation amending charter. -- In this subtitle, except as
provided in subsection (b) of this section, "successor" includes a
corporation which amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding stock,
unless the right to do so is reserved by the charter of the corporation.
(b) Corporation whose stock is acquired. -- When used with reference
to a share exchange, "successor" means the corporation the stock of which
was acquired in the share exchange.
(S)3-202 Right to fair value of stock.
(a) General rule. -- Except as provided in subsection (c) of this
section, a stockholder of a Maryland corporation has the right to demand
and receive payment of the fair value of the stockholder's stock from the
successor if:
(1) The corporation consolidates or merges with another
corporation;
(2) The stockholder's stock is to be acquired in a share
exchange;
(3) The corporation transfers its assets in a manner requiring
corporate action under (S)3-105 of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, unless the right
to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by (S)3-602 of this title or
exempted by (S)3-603 (b) of this title.
(b) Basis of fair value.-
(1) Fair value is determined as of the close of business:
(i) With respect to a merger under (S)3-106 of this
title of a 90 percent or more owned subsidiary into its parent, on the day
notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, on the day
the stockholders voted on the transaction objected to.
IV-1
(2) Except as provided in paragraph (3) of this subsection,
fair value may not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its proposal.
(3) In any transaction governed by (S)3-602 of this title or
exempted by (S)3-603(b) of this title, fair value shall be value determined in
accordance with the requirements of (S)3-603 (b) of this title.
(c) When right to fair value does not apply. -- Unless the
transaction is governed by (S)3-602 of this title or is exempted by (S)3-603(b)
of this title, a stockholder may not demand the fair value of the stockholder's
stock and is bound by the terms of the transaction if:
(1) The stock is listed on a national securities exchange, is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or is designated
for trading on the Nasdaq small cap market:
(i) With respect to a merger under (S)3-106 of this
title of a 90 percent or more owned subsidiary into its parent, on the
date notice is given or waived under (S)3-106; or
(ii) With respect to any other transaction, on the
record date for determining stockholders entitled to vote on the transaction
objected to.
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock
as expressly set forth in the charter, and the charter does not reserve
the right to do so; or
(ii) The stock is to be changed or converted in whole or
in part in the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising out of
provisions for the treatment of fractional shares of stock in the
successor.
(3) The stock is not entitled to be voted on the transaction or
the stockholder did not own the shares of stock on the record date for
determining stockholders entitled to vote on the transaction;
(4) The charter provides that the holders of the stock are not
entitled to exercise the rights of an objecting stockholder under this subtitle;
or
(5) The stock is that of an open-end investment company
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 and the value placed on the stock in the transaction is its
net asset value.
(S)3-203 Procedure by stockholder.
(a) Specific duties. -- A stockholder of a corporation who desires to
receive payment of the fair value of the stockholder's stock under this
subtitle:
(1) Shall file with the corporation a written objection to the
proposed transaction:
IV-2
(i) With respect to a merger under (S)3-106 of this title
of a 90 percent or more owned subsidiary into its parent, within 30 days after
notice is given or waived under (S)3-106; or
(ii) With respect to any other transaction, at or before
the stockholders' meeting at which the transaction will be considered or, in the
case of an action taken under (S)2-505(b) of this article, within 10 days after
the corporation gives the notice required by (S)2-505(b) of this article.
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for payment for the
stockholder's stock, stating the number and class of shares for which the
stockholder demands payment.
(b) Failure to comply with section. -- A stockholder who fails to
comply with this section is bound by the terms of the consolidation, merger,
share exchange, transfer of assets, or charter amendment.
(S)3-204 Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions
payable to holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under (S)3-202 of
this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to
that stock, except the right to receive payment of its fair value.
(S)3-205 Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the
successor.
(S)3-206 Restoration of dividend and other rights.
(a) When rights restored. -- The rights of a stockholder who demands
payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time
required by this subtitle;
(3) A court determines that the stockholder is not entitled to
relief; or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. -- The restoration of a stockholder's
rights entitles him to receive the dividends, distributions, and other rights he
would have received if he had not
IV-3
demanded payment for his stock. However, the restoration does not prejudice any
corporate proceedings taken before the restoration.
(S)3-207 Notice and offer to stockholders.
(a) Duty of successor. --
(1) The successor promptly shall notify each objecting
stockholder in writing of the date the articles are accepted for record by the
Department.
(2) The successor also may send a written offer to pay the
objecting stockholder what it considers to be the fair value of his stock. Each
offer shall be accompanied by the following information relating to the
corporation which issued the stock:
(i) A balance sheet as of a date not more than six
months before the date of the offer;
(ii) A profit and loss statement for the 12 months
ending on the date of the balance sheet; and
(iii) Any other information the successor considers
pertinent.
(b) Manner of sending notice. -- The successor shall deliver the
notice and offer to each objecting stockholder personally or mail them to him by
certified mail, return receipt requested, bearing a postmark from the United
States Postal Service, at the address he gives the successor in writing, or, if
none, at his address as it appears on the records of the corporation which
issued the stock.
(S)3-208 Petition for appraisal; consolidation of proceedings; joinder of
objectors.
(a) Petition for appraisal. -- Within 50 days after the Department
accepts the articles for record, the successor or an objecting stockholder who
has not received payment for his stock may petition a court of equity in the
county where the principal office of the successor is located or, if it does not
have a principal office in this State, where the resident agent of the successor
is located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. --
(1) If more than one appraisal proceeding is instituted, the
court shall direct the consolidation of all the proceedings on terms and
conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in
an appraisal proceeding.
(S)3-209 Notation on stock certificate.
(a) Submission of certificate. -- At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If
IV-4
a stockholder fails to comply with the order, the court may dismiss the
proceeding as to him or grant other appropriate relief.
(b) Transfer of stock bearing notation. -- If any stock represented
by a certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
(S)3-210 Appraisal of fair value.
(a) Court to appoint appraisers. -- If the court finds that the
objecting stockholder is entitled to an appraisal of his stock, it shall appoint
three disinterested appraisers to determine the fair value of the stock on terms
and conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers -- Filing. -- Within 60 days after their
appointment, unless the court sets a longer time, the appraisers shall determine
the fair value of the stock as of the appropriate date and file a report stating
the conclusion of the majority as to the fair value of the stock.
(c) Same -- Contents. -- The report shall state the reasons for the
conclusion and shall include a transcript of all testimony and exhibits offered.
(d) Same -- Service; objection. --
(1) On the same day that the report is filed, the appraisers
shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may
object to it and request a hearing.
(S)3-211 Action by court on appraisers' report.
(a) Order of court. -- The court shall consider the report and, on
motion of any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the
stockholder.
(b) Procedure after order. --
(1) If the appraisers' report is confirmed or modified by the
order, judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair value of
his stock.
(2) If the appraisers' report is rejected, the court may:
IV-5
(i) Determine the fair value of the stock and enter
judgment for the stockholder; or
(ii) Remit the proceedings to the same or other
appraisers on terms and conditions it considers proper.
(c) Judgment includes interest. --
(1) Except as provided in paragraph (2) of this subsection, a
judgment for the stockholder shall award the value of the stock and interest
from the date as at which fair value is to be determined under (S)3-202 of this
subtitle.
(2) The court may not allow interest if it finds that the
failure of the stockholder to accept an offer for the stock made under (S)3-207
of this subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) The price which the successor offered for the
stock;
(ii) The financial statements and other information
furnished to the stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Costs of proceedings. --
(1) The costs of the proceedings, including reasonable
compensation and expenses of the appraisers, shall be set by the court and
assessed against the successor. However, the court may direct the costs to be
apportioned and assessed against any objecting stockholder if the court finds
that the failure of the stockholder to accept an offer for the stock made under
(S)3-207 of this subtitle was arbitrary and vexatious or not in good faith. In
making this finding, the court shall consider:
(i) The price which the successor offered for the
stock;
(ii) The financial statements and other information
furnished to the stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The
reasonable fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock
under (S)3-207 of this subtitle; or
(ii) The value of the stock determined in the
proceeding materially exceeds the amount offered by the successor.
(e) Effect of judgment. -- The judgment is final and conclusive on
all parties and has the same force and effect as other decrees in equity. The
judgment constitutes a lien on the assets of the successor with priority over
any mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
IV-6
(S)3-212 Surrender of stock.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to
it, indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the
certificates and sufficient indemnity bond are furnished.
(S)3-213 Rights of successor with respect to stock.
(a) General rule. -- A successor which acquires the stock of an
objecting stockholder is entitled to any dividends or distributions payable to
holders of record of that stock on a record date after the close of business on
the day as at which fair value is to be determined under (S)3-202 of this
subtitle.
(b) Successor in transfer of assets. -- After acquiring the stock of
an objecting stockholder, a successor in a transfer of assets may exercise all
the rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. -- Unless
the articles provide otherwise, stock in the successor of a consolidation,
merger, or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
IV-7
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
- ----------- ----------------------
2.0 Agreement and Plan of Reorganization, dated August 23, 2000,
between F&M National Corporation ("F&M") and Community Bankshares
of Maryland, Inc., ("CBM") and a related Plan of Merger, filed as
Appendix I to the Proxy Statement/Prospectus included in this
Registration Statement.
3.1 Articles of Incorporation of F&M, as amended. Incorporated herein
by reference to F&M's Registration Statement on Form S-4
(Registration No. 333-90427)
3.2 Bylaws of F&M. Incorporated herein by reference to F&M's
Registration Statement on Form S-4 (Registration No. 33-45717).
5.0 Opinion of LeClair Ryan, A Professional Corporation ("LeCLair
Ryan"), regarding the legality of the securities being registered
and consent.
8.0 Form of tax opinion of LeClair Ryan regarding the tax-free nature
of the merger of CBM with and into F&M.
II-1
Exhibit No. Description of Exhibit
- ----------- ----------------------
21.0 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-West
Virginia; F&M Bank-Allegiance; F&M Bank-Highlands; F&M Trust
Company; F&M Mortgage Services, Inc.; Apple Title Company;
Winchester Credit Corporation; F&M-Shomo & Lineweaver Insurance
Agency Incorporated; F&M-J.V. Arthur, Inc.; F&M Financial
Services, Inc.
23.1 Consent of Yount, Hyde & Barbour, P.C., as accountants for F&M.
23.2 Consent of Stegman & Company, as accountants for CBM.
23.3 Consent of Stoy, Malone & Company, P.C., as accountants for CBM.
23.4 Consent of LeClair Ryan (included as part of Exhibit 5.0).
23.5 Consent of Scott & Stringfellow, Inc. relating to inclusion of
its opinion given to CBM in the Proxy Statement/Prospectus
included in this Registration Statement.
99.0 Form of proxy of CBM.
(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.
II-2
(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.
II-3
(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.
II-4
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 October 26, 2000.
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
----------------------------------------
Alfred B. Whitt
President and Chief Executive Officer
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 Registrant to be offered in the United States in
connection with the Registrant's proposed acquisition by share exchange of
Community Bankshares of Maryland, Inc., 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 Registrant 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 and October 26, 2000
- ------------------------------------------ Director
W. M. Feltner (Principal Executive Officer)
/s/ Alfred B. Whitt Vice Chairman, President, October 26, 2000
- ------------------------------------------ Chief Executive Officer, Chief
Alfred B. Whitt Financial Officer and
Director
(Principal Financial Officer)
/s/ Charles E. Curtis Vice Chairman, Chief October 26, 2000
- ------------------------------------------ Administrative Officer and
Charles E. Curtis Director
II-5
Signature Capacity Date
--------- -------- ----
/s/ Frank Armstrong, III Director October 26, 2000
- ------------------------------------------
Frank Armstrong, III
/s/ William H. Clement Director October 26, 2000
- ------------------------------------------
William H. Clement
/s/ William R. Harris Director October 26, 2000
- ------------------------------------------
William R. Harris
/s/ L. David Horner, III Director October 26, 2000
- ------------------------------------------
L. David Horner, III
/s/ Jack R. Huyett Director October 26, 2000
- ------------------------------------------
Jack R. Huyett
/s/ J. D. Shockey, Jr. Director October 26, 2000
- ------------------------------------------
J. D. Shockey, Jr.
/s/ Ronald W. Tydings Director October 26, 2000
- ------------------------------------------
Ronald W. Tydings
II-6
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.0 Agreement and Plan of Reorganization, dated August 23, 2000,
between F&M National Corporation ("F&M") and Community Bankshares
of Maryland, Inc., ("CBM") and a related Plan of Merger, filed as
Appendix I to the Proxy Statement/Prospectus included in this
Registration Statement.
3.1 Articles of Incorporation of F&M, as amended. Incorporated herein
by reference to F&M's Registration Statement on Form S-4
(Registration No. 333-90427)
3.2 Bylaws of F&M. Incorporated herein by reference to F&M's
Registration Statement on Form S-4 (Registration No. 33-45717).
5.0 Opinion of LeClair Ryan, A Professional Corporation ("LeCLair
Ryan"), regarding the legality of the securities being registered
and consent.
8.0 Form of tax opinion of LeClair Ryan regarding the tax-free nature
of the merger of CBM with and into F&M.
21.0 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-West
Virginia; F&M Bank-Allegiance; F&M Bank-Highlands; F&M Trust
Company; F&M Mortgage Services, Inc.; Apple Title Company;
Winchester Credit Corporation; F&M-Shomo & Lineweaver Insurance
Agency Incorporated; F&M-J.V. Arthur, Inc.; F&M Financial
Services, Inc.
23.1 Consent of Yount, Hyde & Barbour, P.C., as accountants for F&M.
23.2 Consent of Stegman & Company, as accountants for CBM.
23.3 Consent of Stoy, Malone & Company, P.C., as accountants for CBM.
23.4 Consent of LeClair Ryan (included as part of Exhibit 5.0).
23.5 Consent of Scott & Stringfellow, Inc. relating to inclusion of
its opinion given to CBM in the Proxy Statement/Prospectus
included in this Registration Statement.
99.0 Form of proxy of CBM.