ROANOKE -- A shareholders group's $11 million lawsuit against Colonial American Bankshares Corp. has been settled.

The Roanoke bank said last week it had met the demands of the shareholders and that the shareholders had dropped the lawsuit.

The agreement ends a dispute over Colonial American's rejection of a premium purchase offer from Central Fidelity Bankshares in 1986 and a proxy fight over four board seats in 1987.

In the settlement, the shareholders, who own about 17 percent of the bank's stocks, won three seats on the bank's board, inclusion of one of those directors on a company planning committee and reimbursement of some of the expenses incurred in the lawsuit and contested election.

The shareholders also won an amendment in the employment agreement with William Hawkins, chairman and chief executive officer of Colonial American, but those changes were not specified.

"Mr. Wisman and the new directors look forward to working with the board and management in a spirit of cooperation," said Charles Fox, one of the shareholders. "The new directors will be committed to exploring ways to improve shareholder value, including appropriate steps to improve the company's management and performance and the possibility of affiliation with another institution."

"This settlement is in the best interests of the corporation and its shareholders and will allow the corporation to move forward and address important banking issues," Hawkins said. "The board wishes to work with the three new directors to address together matters affecting the future of the company."

But Colonial American said a significant decline in 1987 earnings was being anticipated, in part because of the settlement. Complete financial information will be issued later this month, the bank said.

The dispute began when the shareholders accused the bank board of making misleading statements about Central Fidelity's purchase offer. The shareholders, who had urged the offer be accepted, later criticized the bank's management and unsuccessfully tried to win seats on the bank's board, gaining about 40 percent of the vote.

The shareholders, in addition to Fox, are Paul Wisman of Lynchburg, J.D. Nicewonder Jr. of Clintwood and Eric Heiner, Charles Rotgin Jr. and David Beach of Charlottesville.