FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 33-07723
August 12, 1996
Dear Fellow Shareholders:
Enclosed you will find notice of a Special Meeting of Shareholders of
Allegiance Banc Corporation ("Allegiance") to be held at the Main Office of
Allegiance Bank, N.A., at 4719 Hampden Lane, Bethesda, Maryland on Friday,
September 27, 1996 at 10:00 a.m.
The purpose of the meeting is limited to consideration of and voting on
the Agreement and Plan of Reorganization, dated as of April 22, 1996, and a
related Plan of Merger (collectively, the "Merger Agreement") between Allegiance
and F&M National Corporation ("F&M"). Based in Winchester, Virginia, F&M is a
bank holding company with $2.1 billion in total assets at March 31, 1996 and
twelve affiliated banks in Virginia and West Virginia.
Under the Merger Agreement, each share of Allegiance common stock will
be exchanged for shares of F&M common stock whose aggregate market value equals
$15.00, and cash in lieu of any fractional share. In addition, a representative
from our Board, Leonard L. Abel, will be appointed by F&M to its Board of
Directors upon consummation of the merger. F&M common stock is traded on the New
York Stock Exchange under the symbol "FMN." It is anticipated that the merger
will become effective during the latter part of the third quarter or early part
of the fourth quarter of this year.
Your Board of Directors has retained the investment banking firm of
Scott & Stringfellow, Inc. to act as its financial advisor in connection with
this transaction. As discussed in the accompanying Proxy Statement/Prospectus,
Scott & Stringfellow has delivered its written opinion that, as of this date,
the terms of the Merger Agreement are fair from a financial point of view to our
shareholders.
Allegiance shareholders will not recognize gain or loss for federal
income tax purposes to the extent F&M common stock is received in the merger in
exchange for Allegiance common stock, although the receipt of cash in lieu of
fractional shares will be taxable. Details of the proposed transaction with F&M
are set forth in the accompanying Proxy Statement/Prospectus, which you are
urged to read carefully in its entirety. Approval of the transaction with F&M
requires the affirmative vote of at least a majority of the outstanding shares
of Allegiance common stock.
Your Board of Directors has unanimously approved the Merger Agreement
and the transaction with F&M and believes that they are in the best interests of
Allegiance and its shareholders. Accordingly, the Board unanimously recommends
that you VOTE FOR the Merger Agreement.
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR VOTE
IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
Thank you for your consideration of this matter.
Sincerely yours,
LEONARD L. ABEL RONALD D. PAUL
Chairman of the Board President
<PAGE>
ALLEGIANCE BANC CORPORATION
BETHESDA, MARYLAND
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 27, 1996
-------------------------
A Special Meeting of Shareholders of Allegiance Banc Corporation
("Allegiance") will be held on Friday, September 27, 1996 at 10:00 a.m., at the
Main Office of Allegiance Bank, N.A. located at 4719 Hampden Lane, Bethesda,
Maryland for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
April 22, 1996, between Allegiance and F&M National Corporation ("F&M") and a
related Plan of Merger (collectively, the "Merger Agreement"), providing for the
merger of Allegiance with and into F&M upon the terms and conditions therein,
including, among other things, that each issued and outstanding share of
Allegiance common stock will be exchanged for shares of F&M common stock with an
aggregate market value equal to $15.00, with cash being paid in lieu 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
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed July 31, 1996, as the record date for
the Special Meeting, and only holders of record of Allegiance 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 thereof.
Allegiance shareholders will not be entitled to exercise dissenters'
rights of appraisal in connection with the Merger.
By Order of the Board of Directors
Michele Midlo
Corporate Secretary
August 12, 1996
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF ALLEGIANCE UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE MERGER AGREEMENT.
<PAGE>
ALLEGIANCE BANC CORPORATION
PROXY STATEMENT
F&M NATIONAL CORPORATION
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to shareholders of
Allegiance Banc Corporation ("Allegiance") in connection with the solicitation
of proxies by the Board of Directors of Allegiance for use at its Special
Meeting of Shareholders (the "Special Meeting") to be held on September 27,
1996, and any postponements or adjournments thereof.
At the Special Meeting, shareholders will be asked to approve an
Agreement and Plan of Reorganization, dated as of April 22, 1996, between
Allegiance and F&M National Corporation, a bank holding company based in
Winchester, Virginia ("F&M"), and a related Plan of Merger (collectively, the
"Merger Agreement") providing for the merger of Allegiance with and into F&M
(the "Merger") and the exchange of common stock of Allegiance ("Allegiance
Common Stock") for the common stock of F&M ("F&M Common Stock"). Upon
consummation of the Merger, each outstanding share of Allegiance Common Stock
will be converted into and exchanged for shares of F&M Common Stock with an
aggregate market value equal to $15.00. Cash will be paid in lieu of fractional
shares. Allegiance shareholders will not be entitled to exercise dissenters'
rights of appraisal in connection with the Merger. A copy of the Merger
Agreement is included as Appendix I hereto.
Except as described below, the market value of F&M Common Stock will be
its average closing price as reported on the New York Stock Exchange (the
"NYSE") for each of the ten full trading days ending on the second day prior to
the effective date of the Merger (the "Average Closing Price"). The ratio of
shares of F&M Common Stock that will be exchanged for each outstanding share of
Allegiance Common Stock will then be determined by dividing $15.00 by the
Average Closing Price. Accordingly, the exchange ratio will not, except as
described below, be determined until the effective date of the Merger. The
Merger Agreement includes a price adjustment provision designed to address the
situation in which the market value of F&M Common Stock increases as a result of
certain agreements or proposals relating to the acquisition of control, or
announcements of proposals relating to the acquisition of control, of F&M, which
would thereby reduce the number of shares of F&M Common Stock that would
otherwise be issued to Allegiance shareholders. In that event, the exchange
ratio would be fixed using the average closing price of F&M Common Stock for
each of the ten full trading days immediately preceding the public announcement
of the proposed transaction. See "The Merger - Terms of the Merger." F&M is not
aware of any plan or intention of any person or entity to acquire control of
F&M.
Scott & Stringfellow, Inc. ("Scott & Stringfellow") has rendered
its opinion, updated to the date hereof, that the terms of the Merger are
fair to Allegiance's shareholders from a financial point of view. See "The
Merger - Opinion of Financial Advisor."
THE BOARD OF DIRECTORS OF ALLEGIANCE UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT. FAILURE TO VOTE IS EQUIVALENT
TO VOTING AGAINST THE PROPOSAL.
(continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AGENCY NOR HAS
THE COMMISSION OR ANY OTHER FEDERAL OR STATE AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is August 12, 1996.
<PAGE>
This Proxy Statement/Prospectus also constitutes a prospectus of F&M
covering up to approximately 1,816,712 shares of F&M Common Stock to be issued
to shareholders of Allegiance in connection with the Merger. The outstanding
shares of F&M Common Stock are, and the shares offered hereby will be, listed on
the NYSE and traded under the symbol "FMN." The closing price of F&M Common
Stock on the NYSE on August 7, 1996 was $18.25.
This Proxy Statement/Prospectus is first being mailed to shareholders
of Allegiance on or about August 12, 1996.
THE SHARES OF F&M COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
<PAGE>
AVAILABLE INFORMATION
F&M and Allegiance are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center (13th Floor), New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such reports, proxy statements and other information with
respect to F&M may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005, and with respect to
Allegiance may be inspected at the office of the National Association of
Securities Dealers Stock Market, Report Section, 1735 K Street, N.W.,
Washington, D.C. 20006. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4, of which this Proxy
Statement/Prospectus is a part, and exhibits thereto (together with the
amendments thereto, the "Registration Statement"), which have been filed by F&M
with the Commission under the Securities Act of 1933 (the "Securities Act") with
respect to F&M Common Stock and to which reference is hereby made for further
information.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS RELATING TO F&M OR ALLEGIANCE THAT ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS THAT
ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS) ARE AVAILABLE
TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT
CHARGE, UPON WRITTEN OR ORAL REQUEST DIRECTED TO F&M'S SECRETARY, 38 ROUSS
AVENUE, P.O. BOX 2800, WINCHESTER, VIRGINIA 22604; TELEPHONE NUMBER (540)
665-4200 OR UPON WRITTEN OR ORAL REQUEST DIRECTED TO ALLEGIANCE'S SECRETARY,
4719 HAMPDEN LANE, BETHESDA, MARYLAND 20814; TELEPHONE NUMBER (301) 656-5300. IN
ORDER TO ENSURE TIMELY DELIVERY OF ANY REQUESTED DOCUMENTS, THE REQUEST SHOULD
BE MADE BY SEPTEMBER 20, 1996.
The information contained in this Proxy Statement/Prospectus relating
to F&M has been supplied by F&M, and the information relating to Allegiance has
been supplied by Allegiance.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR GIVE ANY
INFORMATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR INCORPORATED BY
REFERENCE HEREIN AND, IF MADE OR GIVEN, SUCH REPRESENTATION OR INFORMATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ALLEGIANCE OR F&M.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE OF ANY
SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ALLEGIANCE OR F&M SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by F&M (File No.
0-05929) under the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus: (i) F&M's Annual Report on Form 10-K for the year ended
December 31, 1995, the consolidated financial statements and certain other
information therein having been superseded by the consolidated financial
statements and certain other information for the year ended December 31, 1995
that are included in F&M's current Report on Form 8-K, dated July 2, 1996, to
reflect F&M's acquisition of FB&T Financial Corporation; (ii) F&M's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; and (iii) F&M's
Current Reports on Form 8-K, dated April 11, April 22, May 9, 1996 and July 2,
1996.
All documents filed by F&M pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Special Meeting shall be deemed to be incorporated by reference herein.
The following documents filed with the Commission by Allegiance (File
No. 0-16706) under the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus: (i) Allegiance's Annual Report on Form 10-K for the year
ended December 31, 1995; (ii) Allegiance's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996; (iii) Allegiance's Current Report on Form 8-K,
dated April 22, 1996; (iv) all other reports filed by Allegiance pursuant to
Section 13(a) or 15(d) of the Exchange Act since the end of the year covered in
its Annual Report referred to in (i) above; and (v) the following portions of
Allegiance's 1995 Annual Report to Shareholders included as Appendix IV hereto:
<TABLE>
<CAPTION>
PAGE NUMBER IN
ANNUAL REPORT
<S> <C>
Selected Financial Data - Five Years Ended December 31, 1995............................ 3
Quarterly Summary of Operations - Two Years Ended December 31, 1995..................... 24
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 6 - 10
Market Price of Common Stock, Dividend Information and Related Shareholder Matters...... 10
</TABLE>
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that also is
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
Also incorporated by reference herein is the Merger Agreement, which is
included as Appendix I to the Proxy Statement/Prospectus.
<PAGE>
TABLE OF CONTENTS
Available Information.................................................
Incorporation of Certain Information by Reference.....................
Summary...............................................................
Comparative Per Share Information.....................................
Selected Financial Data...............................................
Recent Financial Data.................................................
The Special Meeting...................................................
The Merger............................................................
Market Prices and Dividends...........................................
Allegiance Banc Corporation...........................................
Business of F&M ......................................................
Comparative Rights of Shareholders....................................
Description of F&M Capital Stock......................................
Experts...............................................................
Legal Opinions........................................................
Other Matters.........................................................
APPENDICES
I Agreement and Plan of Reorganization and Plan of Merger
II Stock Option Agreement
III Opinion of Scott & Stringfellow, Inc.
IV Allegiance's 1995 Annual Report to Shareholders
V Allegiance's Form 10-Q for the quarter ended March 31, 1996
<PAGE>
SUMMARY
The following summary is not intended to be complete description of all
material facts regarding F&M, Allegiance and the matters to be considered at the
Special Meeting and is qualified in all respects by the more detailed
information and financial statements contained elsewhere in this Proxy
Statement/Prospectus including the Appendices hereto and the documents
incorporated herein by reference.
THE PARTIES
F&M. F&M is a multi-bank holding company headquartered in Winchester,
Virginia. F&M has twelve subsidiary banks (the "Subsidiary Banks") that operate
89 banking offices which offer a full range of banking services principally to
individuals and to small and medium sized businesses in the Shenandoah Valley of
Virginia, central and northern Virginia and the eastern panhandle of West
Virginia. 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 fifteen banks, which have expanded its market
area and increased its market share in Virginia and West Virginia. At March 31,
1996, F&M had total assets of $2.1 billion, total deposits of $1.8 billion and
total shareholders' equity of $211.9 million. F&M's principal executive offices
are located at 38 Rouss Avenue, Winchester, Virginia 22601, and its telephone
number is (540) 665-4200. See "Selected Financial Data," "Recent Financial Data"
and "Business of F&M."
F&M Common Stock is listed for trading on the NYSE under the symbol
"FMN."
ALLEGIANCE. Allegiance is a one bank holding company that serves as the
parent company for Allegiance Bank, N.A. ("Allegiance Bank"). Allegiance Bank, a
locally oriented national banking association based in Bethesda, Maryland,
provides commercial and consumer banking services through seven full-service
banking offices to customers in central and eastern Montgomery County and in
northern Prince George's County, Maryland. At March 31, 1996, Allegiance had
total assets of $138.1 million, total deposits of $112.7 million, and total
shareholders' equity of $12.0 million. The principal executive offices of
Allegiance are located at 4719 Hampden Lane, Bethesda, Maryland 20814 and its
telephone number is (301) 656-5300. See "Selected Financial Data," "Recent
Financial Data" and "Allegiance Banc Corporation." For additional information
concerning Allegiance, the Allegiance's 1995 Annual Report to Shareholders and
Form 10-Q for the quarter ended March 31, 1996 that are included as Appendices
IV and V, respectively, to this Proxy Statement/Prospectus.
Allegiance Common Stock is traded on the Nasdaq National Market under
the symbol "ALLG."
THE SPECIAL MEETING
TIME, PLACE AND PURPOSE. The Special Meeting will be held on September
27, 1996 at 10:00 a.m. at the Main Office of Allegiance located at 4719 Hampden
Lane, Bethesda, Maryland 20814. At the Special Meeting, Allegiance shareholders
will be asked to consider and vote upon a proposal to approve the Merger
Agreement, attached hereto as Appendix I.
<PAGE>
RECORD DATE. Only holders of record of Allegiance Common Stock at the
close of business on July 31, 1996 (the "Record Date"), will be entitled to
notice of and to vote at the Special Meeting. At the record date, there were 672
holders of record of the 1,748,813 shares of Allegiance Common Stock then
outstanding and entitled to vote at the Special Meeting. See "The Special
Meeting."
THE MERGER
Allegiance and F&M have entered into an Agreement and Plan of
Reorganization and related Plan of Merger dated as of April 22, 1996
(collectively, the "Merger Agreement") pursuant to which Allegiance will be
merged with and into F&M (the "Merger"). In connection with the Merger, each
outstanding share of Allegiance Common Stock at the Effective Date will
automatically and without further action be exchanged for the number of shares
of F&M Common Stock having an aggregate market value of $15.00 per share. As a
result of the Merger, F&M will serve as the parent bank holding company for
Allegiance Bank, which will continue to carry on its banking business in
substantially the same manner as before the Merger.
At the Effective Date of the Merger, each outstanding share of
Allegiance Common Stock will be exchanged for shares of F&M Common Stock with an
aggregate market value equal to $15.00, with cash paid in lieu of any fractional
shares. Except as described below, the market value of F&M Common Stock will be
its average closing price as reported on the NYSE for each of the ten full
trading days ending on the second day prior to the Effective Date of the Merger
(the "Average Closing Price"). The number of shares of F&M Common Stock for
which each outstanding share of Allegiance Common Stock will be exchanged will
be established at the Effective Date by dividing $15.00 by the Average Closing
Price (the "Exchange Ratio").
The Merger Agreement includes an adjustment provision for the Exchange
Ratio designed to address the situation in which the market value of F&M Common
Stock increases in the unanticipated event of a proposed acquisition of F&M
which would thereby reduce the number of shares of F&M Common Stock that would
otherwise be issued to Allegiance shareholders. Accordingly, in the event: (a)
F&M shall have entered into an agreement with any person to (i) acquire, merge
or consolidate, or enter into any similar transaction, with F&M, (ii) purchase,
lease or otherwise acquire all or substantially all of the assets of F&M or
(iii) purchase or otherwise acquire securities representing 10% or more of the
voting power of F&M; or (b) any person shall have made a bona fide proposal to
F&M by public announcement or written communication that is or becomes the
subject of public disclosure to acquire F&M by merger, share exchange,
consolidation, purchase of all or substantially all of its assets or any similar
transaction, the Exchange Ratio will thereupon be fixed using the average
closing price of F&M Common Stock for each of the ten trading days immediately
preceding the public announcement of a transaction or event described in either
(a) or (b). F&M is not aware of any plan or intention of any person or entity to
acquire control of F&M.
There is no minimum number of shares of F&M Common Stock which must be
issued in connection with the Merger in exchange for shares of Allegiance Common
Stock. Allegiance has no right to terminate the Merger or to obtain an
adjustment of the consideration to be received solely as a result of a decrease
in the Exchange Ratio below a specified level. Similarly, there is no maximum
number of shares of F&M Common Stock which may be issued in connection with the
Merger, and F&M has no right to terminate the Merger or obtain an adjustment in
the consideration to be paid to Allegiance shareholders solely as a result of an
increase in the Exchange Ratio above a specified level. See "The Merger - Terms
of the Merger."
<PAGE>
The Merger Agreement also provides for the adjustment of the Exchange
Ratio to reflect any stock split, stock dividend, recapitalization or similar
transaction with respect to the F&M Common Stock occurring during the period for
determination of the Exchange Ratio. At the Effective Date, Allegiance's
obligations with respect to outstanding employee options granted under its
Employee Stock Option Plans and outstanding warrants held by directors of
Allegiance and Allegiance Bank will be assumed by F&M, and each stock option and
director warrant outstanding at the Effective Date will become the right to
receive, upon payment by the holder of the adjusted exercise price, that number
of shares of F&M Common Stock which such person would have received pursuant to
the Merger if he or she had exercised such option or warrant immediately prior
thereto, and cash in lieu of any fractional shares. Shares of F&M Common Stock
received by holders of Allegiance stock options and warrants will be subject to
the same holding periods or other restrictions, if any, to which they would be
otherwise subject. See "The Merger - Terms of the Merger" and "Interests of
Certain Persons in the Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ALLEGIANCE
The Board of Directors of Allegiance has unanimously approved the
Merger and the Merger Agreement. The Board of Directors believes that the Merger
is fair to and in the best interests of the shareholders of Allegiance and
recommends that shareholders VOTE FOR the Merger and the Merger Agreement. See
"The Merger Background of and Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
The Board of Directors of Allegiance has retained Scott & Stringfellow,
an investment banking firm experienced in the valuation of financial
institutions and their securities in connection with merger and acquisition
transactions, to act as its financial advisor in connection with the Merger.
Scott & Stringfellow has rendered its opinion that the terms of the Merger are
fair from a financial point of view to the Allegiance shareholders. The full
text of Scott & Stringfellow's opinion, including the assumptions made and other
matters considered and limitations on the review undertaken, updated to the date
hereof, is set forth as Appendix III to this Proxy Statement/Prospectus.
Shareholders are urged to read and consider the opinion in its entirety. See
"The Merger - Opinion of Financial Advisor."
VOTE REQUIRED
Approval of the Merger requires the affirmative vote of the holders of
at least a majority of the shares of Allegiance Common Stock outstanding at the
Record Date. As of the Record Date, directors and executive officers of
Allegiance and their affiliates beneficially owned 341,044 shares of Allegiance
Common Stock, or approximately 19.5% of the shares of Allegiance Common Stock
outstanding on such date (exclusive of shares of Allegiance Common Stock subject
to options and warrants). The directors and executive officers of Allegiance
have indicated their intention to vote their shares of Allegiance Common Stock
in favor of the Merger. See "The Allegiance Special Meeting - Vote Required."
<PAGE>
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, AND BROKER "NON-VOTES" WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST APPROVAL OF THE MERGER AGREEMENT.
EFFECTIVE DATE
The Merger will become effective at the date and time set forth on the
Certificates of Merger issued by the Virginia State Corporation Commission (the
"Effective Date") and filed with the Delaware Secretary of State. The Effective
Date will occur as soon as practicable, and in any event, unless the parties
otherwise agree, within fifteen days following the date that all conditions
specified in the Merger Agreement have been satisfied or waived. The Merger is
expected to be made effective on or about October 1, 1996. F&M and Allegiance
each has the right, acting unilaterally, to terminate the Merger Agreement
should the Merger not be consummated by January 15, 1997. See "The Merger - The
Effective Date."
DISTRIBUTION OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
As soon as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent (the
"Exchange Agent"), to mail to each Allegiance shareholder a letter of
transmittal and instructions for use in order to surrender the certificates
representing shares of Allegiance Common Stock in exchange for certificates
representing shares of F&M Common Stock. Cash (without interest) will be paid to
Allegiance shareholders in lieu of the issuance of any fractional shares, in an
amount equal to the fraction of a share of F&M Common Stock to which such
shareholder would otherwise be entitled multiplied by the Average Closing Price
of F&M Common Stock. See "The Merger - Surrender of Stock Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
LeClair Ryan, counsel for F&M, has delivered an opinion that, among
other things, (i) no gain or loss will be recognized by Allegiance shareholders
to the extent they receive shares of F&M Common Stock solely in exchange for
their Allegiance Common Stock (ii) the aggregate tax basis of F&M Common Stock
received by an Allegiance shareholder will equal the aggregate tax basis of the
Allegiance Common Stock surrendered in exchange therefor (reduced by any amount
allocable to fractional share interests for which cash is received), and (iii)
the holding period of the F&M Common Stock received will generally include the
holding period of the Allegiance Common Stock surrendered if the Allegiance
Common Stock is held as a capital asset at the Effective Date. For a more
complete description of the federal income tax consequences of the Merger, see
"The Merger - Certain Federal Income Tax Consequences."
DUE TO THE INDIVIDUAL NATURE OF THE TAX CONSEQUENCES OF THE MERGER, IT
IS RECOMMENDED THAT EACH ALLEGIANCE SHAREHOLDER CONSULT HIS OR HER OWN TAX
ADVISOR CONCERNING THE TAX CONSEQUENCES OF THE MERGER WITH RESPECT TO HIS OR HER
PARTICULAR TAX SITUATION.
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Allegiance's management, as well as certain members
of the Allegiance Board of Directors, have interests in the Merger in addition
to their interests as shareholders of Allegiance. These include, among other
things, provisions in the Merger Agreement relating to indemnification of
directors and officers of Allegiance, appointment of an Allegiance director to
the Board of Directors of F&M, assumption by F&M of outstanding employee stock
options and director warrants to acquire up to 187,980 shares of Allegiance
Common Stock held by directors, officers and employees of Allegiance and
Allegiance Bank, and eligibility for certain F&M employee benefits. In each
case, the Allegiance Board was aware of these potential interests, and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Directors. F&M has agreed to cause Leonard L. Abel, Chairman of the
Board of Allegiance, or if he is unavailable, Ronald D. Paul, President of
Allegiance, or such other person selected by the Board of Directors of
Allegiance and reasonably acceptable to F&M, to be appointed to the Board of
Directors of F&M at the Effective Date or as soon thereafter as practicable.
Stock Options and Warrants. Certain officers and employees of
Allegiance hold stock options under Allegiance's two employee stock option plans
to acquire aggregate of 68,980 shares of Allegiance Common Stock as of June 30,
1996 at exercise prices ranging from $3.33 to $9.50 per share. In addition, the
directors of Allegiance and Allegiance Bank hold warrants to purchase an
aggregate of 119,000 shares of Allegiance Common Stock at exercise prices
ranging from $5.00 to $6.50 per share. Such options and warrants, to the extent
not exercised prior to the Effective Date, will become, by virtue of the Merger,
the right to receive, upon payment of the adjusted exercise price specified in
the option or warrant, that number of shares of F&M Common Stock the holder
would have received pursuant to the Merger if he or she had exercised such
option or warrant immediately prior thereto, and cash in lieu of any fractional
shares.
See "The Merger - Interests of Certain Persons in the Merger" and "The
Merger - Terms of the Merger."
REGULATORY APPROVALS
The Merger is subject to the prior approval of the Board of Governors
of the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), the Virginia State Corporation
Commission (the "Virginia SCC") and the Maryland State Bank Commissioner (the
"Maryland Commissioner"). Applications were filed this June by F&M with the
Federal Reserve, the Virginia SCC and the Maryland Commissioner. Each
application has been accepted for processing. There can be no assurance that the
approval of the Federal Reserve, the Virginia SCC or the Maryland Commissioner
will be obtained or as to the timing or conditions of such approvals. See "The
Merger - Regulatory Approvals."
<PAGE>
CONDITIONS TO CONSUMMATION OF THE MERGER; TERMINATION
Consummation of the Merger is contingent upon the following unwaivable
conditions: (i) receipt of the approval of the shareholders of Allegiance
solicited hereby; (ii) receipt of an opinion of counsel as to the tax-free
nature of the Merger (except for cash received in lieu of fractional shares);
and (iii) approval of the Federal Reserve, the Virginia SCC, and the Maryland
Commissioner. The receipt by F&M of an opinion from Yount, Hyde & Barbour, P.C.,
that the Merger may be accounted for under the pooling of interests accounting
method is a condition to consummation of the Merger that may be waived by F&M.
The Merger is also subject to satisfaction or waiver of other conditions. See
"The Merger - Representations and Warranties; Conditions to the Merger" and "The
Merger - Regulatory Approvals."
The Merger Agreement may be terminated and the Merger abandoned
notwithstanding shareholder approval (i) by mutual agreement of the Boards of
Directors of F&M and Allegiance, (ii) by either F&M or Allegiance if the
Effective Date has not occurred by January 15, 1997, except that the party whose
failure to perform any obligation under the Merger Agreement resulted in the
delay may not terminate as a result of the delay, or (iii) by either Allegiance
or F&M if the satisfaction in any material respect of one or more conditions to
that party's obligation to consummate the Merger becomes impossible of
satisfaction. See "The Merger - Waivers, Amendment and Termination."
OPTION AGREEMENT
As a condition of F&M's entering into the Merger Agreement and to
increase the probability that the Merger will be consummated, Allegiance and F&M
entered into an Option Agreement, dated as of April 22, 1996 (the "Option
Agreement"). The Option Agreement provides for the acquisition by F&M of up to
343,785 shares of Allegiance Common Stock (approximately 19.9% of the Allegiance
Common Stock outstanding as of the date of the Merger Agreement), subject to
adjustment, at an exercise price of $11.50 per share (the "F&M Option"). The
last trade price of Allegiance Common Stock on the Nasdaq National Market on
April 19, 1996, the trading day immediately prior to the announcement of the
Merger, was $11.25 per share. The Option Agreement is attached to this Proxy
Statement/Prospectus as Appendix II.
Exercise of the F&M Option is permitted only upon the occurrence
of the events and subject to the limitations specified in the Option
Agreement. See "The Merger - The Option Agreement."
EFFECT OF THE MERGER ON THE RIGHTS OF ALLEGIANCE SHAREHOLDERS
Upon consummation of the Merger, Allegiance shareholders will become
shareholders of F&M, and their rights as such will be governed by the Virginia
Stock Corporation Act (the "Virginia SCA") and by the Articles of Incorporation
and Bylaws of F&M. The rights of the shareholders of Allegiance are different in
certain material respects from the rights of the shareholders of F&M. See
"Comparative Rights of Shareholders."
<PAGE>
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a pooling of
interests . It is a condition to F&M's obligation to consummate the Merger that
it receive an opinion from its outside auditors that the Merger will be
accounted for as a pooling of interests. See "The Merger - Accounting
Treatment."
ABSENCE OF APPRAISAL RIGHTS
Shareholders of Allegiance WILL NOT be entitled to dissent from the
Merger and obtain the judicially determined fair value of their shares of
Allegiance Common Stock in connection with the Merger. See "The Merger - Absence
of Appraisal Rights."
RESALES OF F&M COMMON STOCK
Shares of F&M Common Stock received in the Merger will be freely
transferable by the holders thereof, except for those shares held by those
holders who may be deemed to be "affiliates" (generally including directors,
certain executive officers and major shareholders) of Allegiance under
applicable federal securities laws. See "The Merger - Resales of F&M Common
Stock."
MARKET PRICES
The following table sets forth the price per share of F&M Common Stock
and Allegiance Common Stock based on the last reported sales prices per share of
F&M Common Stock on the NYSE Composite Transactions List and of Allegiance
Common Stock on the Nasdaq National Market on April 19, 1996, the last business
day prior to public announcement of the execution of the Merger Agreement, and
on August 7, 1996. See "Market Prices and Dividends."
BECAUSE THE MARKET PRICE OF F&M COMMON STOCK, AND THEREFORE THE AVERAGE
CLOSING PRICE, IS SUBJECT TO FLUCTUATION AND WILL LIKELY CHANGE PRIOR TO THE
TIME THE EXCHANGE RATIO IS FIXED, THE NUMBER OF SHARES OF F&M COMMON STOCK THAT
ALLEGIANCE SHAREHOLDERS WILL RECEIVE PURSUANT TO THE MERGER, AND THE PER SHARE
VALUE THEREOF, MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE DATE, BUT THE
AGGREGATE VALUE OF F&M COMMON STOCK RECEIVED BY ALLEGIANCE SHAREHOLDERS WILL
STILL EQUAL $15.00. ALLEGIANCE SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR F&M COMMON STOCK.
F&M ALLEGIANCE
April 19, 1996............. $16.00 $11.25
August 7, 1996............. $18.25 $14.00
If the Merger had been effective on April 19, 1996, the Exchange Ratio
would have been 0.938 shares of F&M Common stock per share of Allegiance Common
Stock, using the closing price for F&M Common Stock on the NYSE on April 19,
1996 ($16.00) as the Average Closing Price. If the Merger had been effective on
August 7, 1996, the Exchange Ratio would have been .822 shares of F&M Common
Stock per share of Allegiance Common Stock, using the closing price of F&M
Common Stock on August 7, 1996 ($18.25) as the Average Closing Price.
<PAGE>
THERE CAN BE NO ASSURANCE AS TO THE AVERAGE CLOSING PRICE OR THE
EXCHANGE RATIO AT THE EFFECTIVE DATE, OR AS TO THE NUMBER OF SHARES OF F&M
COMMON STOCK FOR WHICH EACH SHARE OF ALLEGIANCE COMMON STOCK WILL BE EXCHANGED,
OR AS TO THE MARKET OR TRADING VALUE OF SUCH SHARES OF F&M COMMON STOCK AT ANY
TIME AFTER THE EFFECTIVE DATE.
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 the beginning of 1988,
F&M has acquired approximately $1.1 billion in assets and approximately $917
million in deposits through eleven bank acquisitions. Management believes there
are additional opportunities to acquire financial institutions or to acquire
assets and deposits that will allow F&M to enter new markets or increase market
share in existing markets. Management intends to pursue acquisition
opportunities in strategic markets where its managerial, operational and capital
resources will enhance the performance of acquired institutions and may, after
the date of this Proxy Statement/Prospectus, enter into agreements to acquire
one or more financial institutions. See "Business of F&M's Acquisition Program."
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.
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The table below presents selected comparative unaudited per share
information (i) for F&M on a historical basis and on a pro forma combined basis
assuming the Merger had been effective during the periods presented and
accounted for as a pooling of interests and (ii) for Allegiance on a historical
basis and on a pro forma equivalent basis. The information shown below should be
read in conjunction with the historical financial statements of F&M and
Allegiance and the respective notes thereto that are incorporated herein by
reference. Results for F&M and Allegiance for the three months ended March 31,
1996 are not necessarily indicative of results to be expected for their entire
fiscal years, nor are pro forma amounts necessarily indicative of results that
will be obtained on a combined basis.
As explained more fully in Note 1 below, because the number of shares
of F&M Common Stock issuable pursuant to the Exchange Ratio will not be
established until the Effective Date, it is assumed for purposes of this table
that .822 shares of F&M Common Stock will be issued for each share of
Allegiance Common Stock. BECAUSE THE MARKET PRICE OF F&M COMMON STOCK IS SUBJECT
TO FLUCTUATION AND WILL LIKELY CHANGE PRIOR TO THE FIXING OF THE EXCHANGE RATIO,
THE PRO FORMA COMBINED AND ALLEGIANCE PRO FORMA EQUIVALENT AMOUNTS ARE SUBJECT
TO CHANGE.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31,
--------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
PER COMMON SHARE:
NET INCOME:
Allegiance-historical........................... $ 0.16 $ 0.49 $ 0.71 $ 0.66
F&M-historical.................................. 0.35 1.32 1.21 1.14
Pro forma combined.............................. 0.34 1.27 1.19 1.11
Allegiance pro forma equivalent (1)............. 0.28 1.04 0.98 0.91
CASH DIVIDENDS DECLARED:
Allegiance-historical........................... $ -- $ -- $ -- $ --
F&M-historical.................................. 0.16 0.61 0.54 0.58
Pro forma combined.............................. 0.16 0.61 0.54 0.58
Allegiance pro forma equivalent (1)............. 0.13 0.50 0.44 0.48
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
<S> <C>
BOOK VALUE:
Allegiance-historical........................... $ 6.95 $ 6.86
F&M-historical.................................. 11.10 11.03
Pro forma combined.............................. 10.92 10.85
Allegiance pro forma equivalent (1)............. 8.98 8.92
</TABLE>
(1) Allegiance pro forma equivalent amounts represents F&M's pro forma combined
information multiplied by an assumed Exchange Ratio of .822 shares of F&M
Common Stock for each share of Allegiance Common Stock, using the closing
price of F&M Common stock on the NYSE on August 7, 1996 ($18.25) as the
Average Closing Price.
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial information
for F&M and Allegiance. This information is derived from and should be read in
conjunction with the historical financial consolidated statements of F&M and
Allegiance and the respective notes thereto included in documents incorporated
herein by reference. For each of F&M and Allegiance, income statement
information for each of the years ended December 31, 1995, 1994 and 1993, and
balance sheet information as of December 31, 1995 and 1994, are based on, and
should be read in conjunction with, the consolidated audited financial
statements of F&M and Allegiance incorporated herein by reference. For F&M, the
consolidated audited financial statements are included in F&M's Current Report
on Form 8-K dated July 2, 1996 and are restated to give retroactive effect to
F&M's merger on March 29, 1996 with FB&T Financial Corporation, which was
accounted for under the pooling-of-interests method of accounting. For
Allegiance, the consolidated audited financial statements are included in its
1995 Annual Report to shareholders, delivered herewith and incorporated by
reference herein. See "Incorporation of Certain Information by Reference." All
adjustments necessary to present a fair statement of results of interim periods
of F&M and Allegiance (which adjustments were of a normal recurring nature), in
the opinion of the respective management's of F&M and Allegiance, have been
included. Results for F&M and Allegiance for the three months ended March 31,
1996 and 1995, are not necessarily indicative of the results to be expected for
their entire fiscal years.
<PAGE>
F&M NATIONAL CORPORATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME DATA (1)
Interest income............... $ 38,751 $ 35,593 $ 149,040 $ 132,043 $ 117,032 $ 112,602 $ 120,996
Interest expense.............. 16,694 14,045 63,179 50,603 46,374 49,440 65,303
Net interest income........... 22,057 21,548 85,861 81,440 70,658 63,162 55,693
Provision for loan losses..... 472 362 2,149 2,599 3,205 4,424 7,862
Noninterest income............ 4,915 4,489 18,650 18,299 16,595 13,552 12,856
Noninterest expense........... 16,241 15,968 64,952 62,932 53,541 47,755 44,434
Income taxes.................. 3,529 3,186 12,402 11,143 9,770 7,246 4,486
----------- ---------- ----------- ----------- ----------- ----------- ----------
Net income.................... $ 6,730 $ 6,521 $ 25,008 $ 23,065 $ 20,737 $ 17,289 $ 11,765
=========== ========== =========== =========== =========== =========== ==========
PER SHARE DATA (1)
Net income.................... $ 0.35 $ 0.34 $ 1.32 $ 1.21 $ 1.14 $ 1.02 $ 0.70
Cash dividends................ 0.16 0.14 0.61 0.54 0.58 0.41 0.39
Book value, end of period..... 11.10 10.13 11.03 9.82 9.69 8.92 8.05
Average shares outstanding.... 19,056 19,027 19,014 19,028 18,212 16,910 16,727
PERIOD END BALANCES (1)
Assets........................ $ 2,111,097 $1,937,019 $ 2,076,889 $ 1,914,165 $ 1,835,493 $ 1,551,302 $1,431,413
Loans, net of unearned income 1,239,740 1,151,963 1,202,891 1,143,211 1,068,224 869,393 846,943
Securities.................... 600,829 540,627 611,067 562,379 546,343 462,633 375,664
Deposits...................... 1,814,203 1,676,911 1,774,991 1,661,024 1,598,107 1,349,637 1,266,340
Shareholders' equity.......... 211,927 193,210 210,416 184,857 178,776 155,564 130,040
PERFORMANCE RATIOS (1) (2)
Return on average assets...... 1.30% 1.37% 1.26% 1.21% 1.24% 1.18% 0.87%
Return on average equity...... 12.64 13.59 12.44 12.53 12.47 12.37 9.31
CAPITAL RATIOS (1)
Leverage...................... 9.84% 9.91% 10.08% 9.65% 10.35% 10.56% 9.60%
Risk-based:
Tier 1 capital............. 15.96 15.91 16.04 15.73 15.53 17.40 15.14
Total capital.............. 17.21 17.16 17.29 16.98 16.78 18.65 16.39
</TABLE>
(1) The amounts previously reported in F&M's report on Form 10-K for the
periods presented have been restated to reflect the acquisition on March
29, 1996 of FB&T Financial Corporation accounted for as a pooling of
interest.
(2) Annualized for the three months ended March 31, 1996 and 1995.
<PAGE>
ALLEGIANCE BANC CORPORATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME DATA
Interest income............$ 2,567 $ 2,117 $ 9,488 $ 7,763 $ 7,071 $ 7,283 $ 7,175
Interest expense........... 1,078 840 3,977 2,806 2,768 3,384 4,126
Net interest income........ 1,489 1,277 5,511 4,957 4,303 3,899 3,049
Provision (credit) for
loan losses.............. 0 (100) (100) 70 90 375 2,001
Noninterest income......... 234 144 869 241 1,040 912 755
Noninterest expense........ 1,295 1,393 5,214 4,615 4,138 4,058 3,661
Income taxes provision
(benefit)................ 148 44 438 (693) 0 0 0
--------- --------- --------- ----------- --------- --------- ---------
Net income (loss)..........$ 280 $ 84 $ 828 $ 1,206 $ 1,115 $ 378 $ (1,858)
========= ========= ========= ========= ========= ========= ==========
PER SHARE DATA
Net income (loss)..........$ 0.16 $ 0.05 $ 0.49 $ 0.71 $ 0.66 $ 0.22 $ (1.10)
Cash dividends............. 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Book value, end of period.. 6.95 6.37 6.86 6.24 6.06 5.07 4.85
Average shares outstanding. 1,712 1,696 1,696 1,696 1,692 1,692 1,692
PERIOD END BALANCES
Assets.....................$ 138,090 $ 108,267 $ 131,100 $ 106,326 $ 105,474 $ 103,724 $ 94,034
Loans, net of unearned
income................... 94,914 67,683 93,313 66,300 52,642 49,972 54,956
Securities................. 23,464 28,108 23,680 28,009 44,659 40,172 31,946
Deposits................... 112,718 94,462 107,859 93,108 94,922 94,699 85,192
Shareholders' equity....... 12,011 10,806 11,630 10,578 10,262 8,581 8,203
PERFORMANCE RATIOS (1)
Return on average assets... 0.94% 0.34% 0.71% 1.13% 1.12% 0.39% (2.27)%
Return on average equity... 9.38 3.19 7.46 12.21 12.30 4.49 (20.34)
CAPITAL RATIOS
Leverage................... 8.88% 9.75% 9.60% 9.77% 8.97% 7.52% 7.96%
Risk-based:
Tier 1 capital.......... 11.32 14.22 11.39 14.39 15.54 13.18 13.11
Total capital........... 12.57 15.47 12.64 15.64 16.80 14.44 14.64
</TABLE>
(1) Annualized for the three months ended March 31, 1996 and 1995.
<PAGE>
RECENT FINANCIAL DATA
F&M. For the three months ended June 30, 1996, net income for F&M was
$7.160 million or $0.38 per share, compared to $6.226 million or $0.33 per share
for the same period in 1995. For the six months ended June 30, 1996, net income
for F&M increased to $13.890 million or $0.73 per share, from $12.747 million or
$0.67 per share for the comparable period in 1995. At June 30, 1996, F&M had
total assets of $2.114 billion, an increase of 1.78% over the $2.077 billion in
total assets at December 31, 1995. Total loans at June 30, 1996 increased to
$1.268 billion, up 5.40% from the $1.203 billion total loans at December 31,
1995. Deposits at June 30, 1996, increased to $1.817 billion, up from $1.775
billion at December 31, 1995.
Allegiance. For the three months ended June 30, 1996, net income for
Allegiance was $310 thousand or $0.18 per share, compared to $232 thousand or
$0.14 per share for the same period in 1995. For the six months ended June 30,
1996, net income for Allegiance increased to $590 thousand or $0.34 per share,
from $316 thousand or $0.19 per share for the comparable period in 1995. At June
30, 1996, Allegiance's total assets increased to $133.202 million, up from
$131.100 million at December 31, 1995. Total loans were $98.230 million at June
30, 1996, compared to $92.272 million at December 31, 1995. Deposits at June 30,
1996, increased to $116.795 million, up from $107.859 million at December 31,
1995.
The following tables set forth certain unaudited financial data at or
for the three and six months ended June 30, 1996 and 1995 for F&M and
Allegiance. In the opinion of the respective management's of F&M and Allegiance,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial position and results of operations of such
unaudited periods have been included.
<PAGE>
F&M National Corporation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Data
Interest income............... $ 39,157 $ 36,952 $ 77,908 $ 72,545
Interest expense.............. 16,562 15,714 33,256 29,759
Net interest income........... 22,595 21,238 44,652 42,786
Provision for loan losses..... 556 220 1,028 582
Noninterest income............ 4,505 4,925 9,420 9,414
Noninterest expense........... 15,568 16,561 31,809 32,529
Income taxes.................. 3,816 3,156 7,345 6,342
------- ------- -------- --------
Net income.................... $ 7,160 $ 6,226 $ 13,890 $ 12,747
======= ======= ======== ========
Per Share Data
Net income.................... $ 0.38 $ 0.33 $ 0.73 $ 0.67
Cash dividend................. 0.16 0.13 0.32 0.27
Book value, end of period..... 11.15 10.58
Closing market price.......... 18.25 16.50
Performance Ratios (Annualized)
Return on average assets...... 1.36% 1.27% 1.33% 1.31%
Return on average equity...... 13.50 12.53 13.07 13.04
</TABLE>
June 30, December 31,
1996 1995
----------- -----------
(Unaudited)
(Dollars in thousands)
Period End Balances
Assets........................ $ 2,114,383 $ 2,076,889
Loans, net of unearned income. 1,268,461 1,202,890
Securities.................... 608,902 611,067
Deposits...................... 1,816,746 1,774,991
Shareholders' equity.......... 211,828 210,416
<PAGE>
Allegiance Banc Corporation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
----------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Data
Interest income............... $2,612 $2,345 $5,179 $4,462
Interest expense.............. 1,053 978 2,131 1,818
Net interest income........... 1,559 1,367 3,048 2,644
Provision for loan losses..... -- -- -- (100)
Noninterest income............ 342 233 576 377
Noninterest expense........... 1,463 1,246 2,758 2,639
Income taxes.................. 128 122 276 166
------ ------ ------ ------
Net income.................... $ 310 $ 232 $ 590 $ 316
====== ====== ====== ======
Per Share Data
Net income.................... $ 0.18 $ 0.14 $ 0.34 $ 0.19
Cash dividend................. -- -- -- --
Book value.................... 6.86 6.24 6.86 6.24
Closing market price.......... 13.875 6.50 13.875 6.50
Performance Ratios (Annualized)
Return on average assets...... 1.01% 0.90% 0.97 % 0.63 %
Return on average equity...... 10.37 8.49 9.88 5.89
</TABLE>
June 30, December 31,
1996 1995
----------- -----------
(Unaudited)
(Dollars in thousands)
Period End Balances
Assets........................ $ 133,202 $ 131,100
Loans, net of unearned income. 98,230 92,272
Securities.................... 25,022 23,681
Deposits...................... 116,795 107,859
Shareholders' equity.......... 12,360 11,630
THE SPECIAL MEETING
DATE, PLACE AND TIME
The Special Meeting will be held at the Main Office of Allegiance Bank
located at 4719 Hampden Lane, Bethesda, Maryland 20814 on Friday, September
27, 1996 at 10:00 a.m.
RECORD DATE
Only shareholders of record at the close of business on July 31, 1996,
(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 the Record Date, there
were 1,748,813 shares of Allegiance Common Stock outstanding, held by
approximately 672 shareholders of record.
VOTE REQUIRED
Each share of Allegiance Common Stock outstanding on the Record Date
entitles the holder to cast one vote upon each matter properly submitted at the
Special Meeting. The affirmative vote of the holders of at least a majority of
the shares of Allegiance Common Stock outstanding as of the Record Date, in
person or by proxy, is required to approve the Merger Agreement.
As of the Record Date, directors and executive officers of Allegiance
and their affiliates, beneficially owned an aggregate of 341,044 shares of
Allegiance Common Stock, or 19.5% of the shares of Allegiance Common Stock
outstanding on such date (exclusive of shares of Allegiance Common Stock subject
to outstanding options and warrants that are currently exercisable). Directors
and executive officers of Allegiance have indicated an intention to vote their
shares of Allegiance Common Stock in favor of the Merger.
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, AND BROKER "NON-VOTES" WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST APPROVAL OF THE MERGER AGREEMENT.
VOTING AND REVOCATION OF PROXIES.
Shareholders of Allegiance are requested to complete, date and sign the
accompanying form of proxy and return it promptly to Allegiance in the enclosed
envelope. If a proxy is properly executed and returned in time for voting, it
will be voted as indicated thereon. IF A PROXY IS SIGNED AND RETURNED WITHOUT
INDICATING ANY VOTING INSTRUCTIONS, SHARES OF ALLEGIANCE COMMON STOCK
REPRESENTED BY THE PROXY WILL BE VOTED FOR THE MERGER AGREEMENT.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to Allegiance by executing and delivering a substitute
proxy to Allegiance or by attending the Special Meeting and voting in person. If
a Allegiance shareholder desires to revoke a proxy by written notice, such
notice should be mailed for receipt or delivered, on or prior to the meeting
date, to Michele Midlo, Corporate Secretary, Allegiance Banc Corporation, 4719
Hampden Lane, Bethesda, Maryland 20814.
<PAGE>
SOLICITATION OF PROXIES
Allegiance 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 Allegiance, none of whom will receive
additional compensation for performing such services. F&M shall pay all of the
expenses of printing and mailing the Proxy Statement/Prospectus.
RECOMMENDATION
The Board of Directors of Allegiance has unanimously approved the
Merger Agreement and believes that the proposed transaction is fair to and in
the best interests of Allegiance and its shareholders. The Board of Directors of
Allegiance unanimously recommends that Allegiance shareholders VOTE FOR approval
of the Merger Agreement.
In making its recommendation, the Board of Directors of Allegiance has
considered, among other things, the opinion of Scott & Stringfellow that F&M's
proposal is fair to Allegiance shareholders from a financial point of view. See
"The Merger - Opinion of Financial Advisor."
THE MERGER
The following is a summary description of the material terms of the
Merger, and is qualified in its entirety by reference to the Merger Agreement
which is attached as Appendix I hereto. All holders of Allegiance Common Stock
are urged to read the Merger Agreement in its entirety.
TERMS OF THE MERGER
Allegiance and F&M have entered into an Agreement and Plan of
Reorganization and related Plan of Merger dated as of April 22, 1996
(collectively, the "Merger Agreement") pursuant to which Allegiance will be
merged with and into F&M (the "Merger"). In connection with the Merger, each
outstanding share of Allegiance Common Stock will automatically and without
further action, be exchanged for the number of shares of F&M Common Stock having
an aggregate market value of $15.00 per share. As a result of the Merger, F&M
will serve as the parent bank holding company for Allegiance Bank, which will
continue to carry on its banking business in substantially the same manner as
before the Merger.
At the Effective Date of the Merger, each outstanding share of
Allegiance Common Stock will be exchanged for shares of F&M Common Stock having
an aggregate market value equal to $15.00, and cash in lieu of any fractional
shares. Except as described below, the market value of F&M Common Stock will be
its average closing price as reported on the NYSE for each of the ten full
trading days ending on the second day prior to the Effective Date (the "Average
Closing Price"). The number of shares of F&M Common Stock that will be exchanged
for each outstanding share of Allegiance Common Stock will then be established
at the closing date by dividing $15.00 by the Average Closing Price (the
"Exchange Ratio").
The Merger Agreement includes an adjustment provision for the Exchange
Ratio designed to address the situation in which the market value of F&M Common
Stock increases in the unanticipated event of a proposed acquisition of F&M
which would thereby reduce the number of shares of F&M Common Stock that would
otherwise be issued to Allegiance shareholders. Accordingly, in the event:
<PAGE>
(a) F&M shall have entered into an agreement with any person to (i) acquire,
merge or consolidate, or enter into any similar transaction, with F&M, (ii)
purchase, lease or otherwise acquire all or substantially all of the assets of
F&M or (iii) purchase or otherwise acquire securities representing 10% or more
of the voting power of F&M; or (b) any person shall have made a bona fide
proposal to F&M by public announcement or written communication that is or
becomes the subject of public disclosure to acquire F&M by merger, share
exchange, consolidation, purchase of all or substantially all of its assets or
any similar transaction, the Exchange Ratio will thereupon be fixed using the
average closing price of F&M Common Stock for each of the ten full trading days
immediately preceding the public announcement of a transaction or event
described in either (a) or (b). F&M is not aware of any plan or intention of any
person or entity to acquire control of F&M.
There is no minimum number of shares of F&M Common Stock which must be
issued in connection with the Merger in exchange for shares of Allegiance Common
Stock. Allegiance has no right to terminate the Merger or to obtain an
adjustment of the consideration to be received solely as a result of a decrease
in the Exchange Ratio below a specified level. Similarly, there is no maximum
number of shares of F&M Common Stock which may be issued in connection with the
Merger, and F&M has no right to terminate the Merger or obtain an adjustment in
the consideration to be paid to Allegiance shareholders solely as a result of an
increase in the Exchange Ratio above a specified level. There can be no
assurance as to the Average Closing Price, or the actual Exchange Ratio at which
shares of Allegiance Common Stock are exchanged as of the Effective Date, or as
to the market or trading value of shares of F&M Common Stock following the
Effective Date.
The Merger Agreement also provides for the adjustment of the Exchange
Ratio to reflect any stock split, stock dividend, recapitalization or similar
transaction with respect to the F&M Common Stock occurring during the period for
determination of the Exchange Ratio. At the Effective Date, Allegiance's
obligations with respect to outstanding employee options granted under its 1988
and 1994 Employee Stock Option Plans and outstanding warrants held by the
directors of Allegiance and Allegiance Bank will be assumed by F&M, and each
stock option or director warrant outstanding at the Effective Date will become
the right to receive, upon payment by the holder of the adjusted exercise price,
that number of shares of F&M Common Stock the option holder would have received
pursuant to the Merger if he or she had exercised such option or warrant
immediately prior thereto, and cash in lieu of any fractional shares. Shares of
F&M Common Stock received by holders of Allegiance stock options and warrants
will be subject to the same holding periods or other restrictions, if any, to
which they would be otherwise subject.
EFFECTIVE DATE
If the Merger is approved by the requisite vote of the shareholders of
Allegiance and by the Federal Reserve, the Virginia SCC and the Maryland
Commissioner (see "The Merger Regulatory Approvals") and other conditions to the
Merger are satisfied (or waived to the extent permitted by the Merger Agreement
or applicable law), the Merger will be consummated and effected at the time
indicated in the certificates of merger issued by the Virginia SCC pursuant to
the Virginia SCA and filed with the Delaware Secretary of State. The Effective
Date will occur as soon as practicable, and in any event, unless the parties
otherwise agree, within fifteen days following the date that all conditions
specified in the Merger Agreement have been satisfied or waived. See "The Merger
- - Conditions to the Merger."
It is anticipated that the Effective Date will occur on or about
October 1, 1996.
<PAGE>
REASONS FOR AND BACKGROUND OF THE MERGER
The ten years since the organization of Allegiance in 1986 and the
commencement of operations by Allegiance Bank in 1987 have represented a time of
significant upheaval in the financial services industry, in general, and in the
suburban Washington DC market served by Allegiance and Allegiance Bank in
particular. This period has been marked by rapid consolidation, rapid changes in
technology, increased regulation and intensified competition, both from
traditional sources and from non-bank competitors, such as thrift institutions,
insurance companies, brokerage firms, mutual funds and other lending
institutions.
In this rapidly changing and increasingly competitive environment,
Allegiance's Board of Directors has continuously sought to expand the products
and quality of service provided to customers, while controlling expenses,
maintaining and improving asset quality and enhancing long term shareholder
value. As part of its effort to enhance shareholder value, and as part of its
planning process, the Board of Directors of Allegiance has periodically reviewed
and examined the ability of Allegiance to continue to grow and successfully
compete as an independent institution in a manner that will maximize long term
shareholder value, and the various strategic alternatives available to
Allegiance. Among the strategic alternatives which the Board periodically
considered were the acquisition of smaller institutions, a merger of equals, the
affiliation of Allegiance and Allegiance Bank with a larger institution, and a
policy of internal growth.
During the summer and fall of 1995, Allegiance engaged in informal
preliminary discussions with a small number of institutions with respect to the
acquisition of Allegiance and the acquisition by Allegiance of other
institutions, none of which proceeded to more formal discussions. During
November 1995, the Board of Directors determined, based upon its consideration
of Allegiance's inability to successfully effect an acquisition strategy and the
difficulty of continuing on a course of internally generated growth while
maintaining a highly competitive posture and adequately rewarding shareholders,
the Board of Directors determined that it would be in the best interests of
Allegiance and its shareholders to actively pursue an affiliation of Allegiance
and Allegiance Bank with a larger financial institution. During the course of
its discussions with other institutions and its consideration of various
alternatives, the Board of Directors was advised, on an informal basis, by Scott
& Stringfellow, an investment banking firm experienced in the valuation of
banking institutions. In light of the foregoing, the Board of Directors of
Allegiance, at its meeting on November 29, 1995, authorized the establishment of
contact, on a confidential and no-name basis, with a limited number of regional
bank holding companies operating in the Maryland/Virginia area, to determine
whether or not there was any interest in an affiliation with Allegiance.
In all, a total of seven institutions were contacted during December
1995 and January 1996. Of these institutions, three executed confidentiality
agreements with representatives of Allegiance and received certain financial and
other information regarding Allegiance and Allegiance Bank, and members of the
Board of Directors had one meeting with one additional institution regarding
interest in a possible transaction involving Allegiance. During late December
1995 and early January 1996, representatives of Allegiance had a number of
discussions and one meeting with representatives of F&M regarding F&M's interest
in pursuing a transaction with Allegiance. As a result of these discussions, on
January 11, 1996 F&M submitted its proposal for the merger of Allegiance with
F&M for stock having a value of $13.75 per share of Allegiance Common Stock,
which consideration F&M subsequently orally offered to increase to $14.00 per
share. During late January and early February 1996, representatives of
<PAGE>
Allegiance had further discussions and a meeting with representatives of F&M
to discuss a possible transaction. In early February, F&M requested a temporary
hiatus in the discussions pending consummation of its acquisition of FB&T
Financial Corporation.
In late February 1996, Allegiance's legal counsel wrote F&M on behalf
of Allegiance, setting forth the factors Allegiance believed required a higher
level of consideration than that offered by F&M, including better than projected
earnings, the delay requested by F&M, and the comparable pricing ratios on prior
acquisitions by F&M. On March 21, 1996, F&M submitted its proposal to merge
Allegiance with F&M in exchange for stock having a value of $15.00 per share of
Allegiance Common Stock. At its meeting on March 27, 1996, after discussion of
the merits of F&M and its offer, including its intention to maintain Allegiance
Bank as an independent subsidiary under the direction of its local Board of
Directors, and after consideration of the presentation of its financial advisor,
the Board of Directors of Allegiance voted to accept F&M's proposal as a basis
upon which to negotiate a definitive agreement. During the period between March
27 and April 19, 1996, representatives of Allegiance and its legal and financial
advisors were in contact with F&M with respect to the negotiation of the
definitive agreement.
At its meeting on April 19, 1996, following a review and discussion of
the Merger Agreement and after consideration of the presentation of the report
and opinion of Scott and Stringfellow regarding the fairness of the
consideration offered by F&M in connection with the Merger, the Board of
Directors of Allegiance unanimously approved the Merger and the Merger
Agreement.
The Allegiance Board of Directors believes that the Merger and the Merger
Agreement are in the best interests of Allegiance and its shareholders. In
considering the terms and conditions of the Merger Agreement, the Board of
Directors considered a number of factors, including the opinion of its
independent financial advisor. The Board of Directors did not assign any
relative or specific weights to the factors considered. The material factors
considered were:
(i) The Financial Terms of the Merger. The Board of Directors was of
the view that, based on historical and anticipated trading ranges for
F&M Common Stock, the value of consideration to be received by
Allegiance shareholders pursuant to the proposed Merger represented a
fair multiple of Allegiance's book value and earnings. The Board of
Directors also considered that, pursuant to the proposed Merger, the
Merger would likely result in an increase in pro forma book value per
share to Allegiance shareholders, and that based on the Board of
Directors' belief that F&M would continue to pay dividends at its
current rate, the Merger would result in a substantial increase in
dividend income to Allegiance shareholders, although there can be no
assurance that current dividends are indicative of future dividends.
See "Comparative Per Share Information" and "The Merger -- Opinion of
Financial Advisor."
(ii) The Terms, Other Than the Financial Terms, and Structure of the
Merger. The Board of Directors considered the benefits to the customers
and employees of Allegiance and Allegiance Bank and the communities
they serve of allowing Allegiance to continue operating as a separate
bank after the Merger, under the direction of its Board of Directors
made up of local representatives. As part of these benefits, the Board
considered its enhanced ability to serve the communities which it
serves in a competitive manner, and to effect continued improvement in
services as a result of the greater resources available to Allegiance
Bank as a subsidiary of F&M and as a result of cooperation with other
F&M subsidiaries. The Board of Directors also considered that the
Merger would qualify as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended. See "--Certain Federal Income Tax
Consequences."
<PAGE>
(iii) Certain Financial and Other Information Concerning F&M and
Opinion of Financial Advisor. The Board of Directors considered, among
other things, the established record of F&M as a strong community based
financial institution in terms of profitability, capital adequacy, and
asset quality. The Board of Directors considered that the historical
dividends per share, net income per share, and book value per share of
F&M Common Stock to be received by Allegiance shareholders, would
likely represent an increase in the historical dividends per share, net
income per share, and book value per share of Allegiance Common Stock,
although there can be no assurance that pro forma amounts are
indicative of future dividends, income per share or book value per
share of F&M, or as to the actual Exchange Ratio at which shares of
Allegiance Common Stock are exchanged. The Board of Directors also
considered the greater liquidity and the trading history of F&M Common
Stock, which is traded on the NYSE and has substantially greater and
more consistent daily trading volume than does Allegiance Common Stock,
and greater institutional interest and coverage. In connection with its
evaluation of the value and prospects of F&M and the adequacy of the
consideration offered by F&M, the Board of Directors also considered
the report of Scott and Stringfellow and its opinion that the terms of
the Merger are fair from a financial point of view to the shareholders
of Allegiance.
THE ALLEGIANCE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF ALLEGIANCE AND ITS SHAREHOLDERS. THE ALLEGIANCE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE MERGER AND THE
MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
The Allegiance Board of Directors retained the investment banking firm
of Scott & Stringfellow to evaluate the terms of the Merger Agreement, and Scott
& Stringfellow has rendered its opinion to the Board of Directors of Allegiance
that the terms of the Merger Agreement are fair from a financial point of view.
In developing its opinion, Scott & Stringfellow reviewed and analyzed: (1) the
Merger Agreement; (2) the Registration Statement; (3) Allegiance's audited
financial statements for the three years ended December 31, 1995; (4)
Allegiance's unaudited financial statements for the three months ended March 31,
1996 and 1995, and other internal information relating to Allegiance prepared by
Allegiance's management; (5) information regarding the trading markets for
Allegiance Common Stock and F&M Common Stock 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, deposits and assets in
certain bank and bank holding company mergers and acquisitions in Virginia and
Maryland in recent years; (7) F&M's annual reports to stockholders and its
financial statements for the three years ended December 31, 1995; and (8) F&M's
unaudited financial statements for the three months ended March 31, 1996 and
1995 and other internal information relating to F&M prepared by F&M's
management. Scott & Stringfellow has discussed with members of Allegiance's and
F&M's management the background of the Merger, the reasons and basis for the
Merger, and the business and future prospects of Allegiance and F&M individually
and as combined entity. No instructions or limitations were given or imposed in
connection with the scope of or the examination or investigations made by Scott
& Stringfellow in arriving at its findings. Finally, Scott & Stringfellow has
conducted such other studies, analysis and investigations, particularly of the
banking industry, and considered such other information as it deemed
appropriate, the material portion of which is described below. A copy of Scott &
Stringfellow's opinion, which sets forth the assumptions made, matters
considered and qualifications made on the review undertaken, is attached as
Appendix III hereto and should be read in its entirety.
<PAGE>
Scott & Stringfellow evaluated the financial terms of the transaction
using standard valuation methods, including discounted cash flow analysis,
market comparable analysis, comparable acquisition analysis, and dilution
analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the fair
market value of Allegiance Common Stock. Among other things, Scott &
Stringfellow considered a range of asset and earnings growth for Allegiance of
between 7% and 10% and required equity capital level of 8.00% assets. A range of
discount rates from 12% to 14% were applied to the cash flows resulting from the
projections during the first five years and the residual values. The residual
values were estimated by capitalizing the projected final year earnings by the
discount rates, less the projected long-term growth rate of Allegiance's
earnings. The discount rates, growth rates and capital levels were chosen based
on what Scott & Stringfellow, in its judgment, considered to be appropriate
taking into account, among other things, Allegiance's past and current financial
performance and condition, the general level of inflation, rates of return for
fixed income and equity securities in the marketplace generally and particularly
in the banking industry. The discounted cash flow analysis indicated a reference
range of $6.85 to $8.81 per share for Allegiance Common Stock. These values
compare to the value of $15.00 per share of consideration for each share of
Allegiance Common Stock. Accordingly, the present value of Allegiance Common
Stock was calculated at less than the value of the consideration to be received
from F&M pursuant to the Merger Agreement.
Comparable Acquisition Analysis. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as tangible net
worth, assets, deposits and earnings in 30 bank and bank holding company mergers
and acquisitions in Virginia and Maryland since January 1, 1993, representing
all such transactions known to Scott & Stringfellow to have occurred during this
period involving bank and bank holding companies in Virginia and Maryland, with
the proposed Merger and found the consideration to be received by Allegiance's
shareholders from F&M to be within the relevant pricing ranges acceptable for
such recent transactions. Specifically, based upon the most recent transactions
either closed or announced in Virginia and Maryland since January 1, 1993, other
than the Merger, the average price to tangible book value in these transactions
was 2.08 times, compared with 2.15 times for the Merger, the average price to
earnings ratio was 21.8 times, compared to 25.2 times for the Merger, the
average deal price to deposits was 19.9%, compared with 22.9% for the Merger,
and the average deal price to assets was 17.6%, compared with 18.7% for the
Merger. For purposes of computing the information with respect to the Merger,
$15.00 per share of consideration for each share of Allegiance Common Stock was
used.
Analysis of F&M and Virginia/Maryland Bank Group. Scott & Stringfellow
analyzed the performance and financial condition of F&M relative to the
Virginia/Maryland Bank Group, which includes the following Virginia and Maryland
based financial institutions: Central Fidelity Banks, Inc., Crestar Financial
Corporation, First Virginia Banks, Inc., George Mason Bankshares, Inc.,
Jefferson Bankshares, Inc., MainStreet BankGroup Inc., Premier Bankshares
Corporation, Signet Banking Corporation, Union Bankshares Corporation, Citizens
Bancorp, FCNB Corp., F&M Bancorp, Inc., Mason-Dixon Bancshares, Inc., Mercantile
Bankshares Corp., Provident Bankshares Corp., and Sandy Spring Bancorp, Inc.
Among the financial information compared was information relating to tangible
equity to assets, loans to deposits, net interest margin, nonperforming assets,
total assets, non-accrual loans, and efficiency ratio, as well as a comparison
of common stock liquidity. Additional information compared for the period ended
March 31, 1996, was (i) price to tangible book value ratio which was 1.66x for
F&M, compared to an average of 1.72x for the Virginia/Maryland Bank Group, (ii)
<PAGE>
price to earnings ratio which was 12.6x for F&M, compared to an average of 13.7x
for the Virginia/Maryland Bank Group, (iii) return on assets which was 1.30% for
F&M, compared to an average of 1.16% for the Virginia/Maryland Bank Group, (iv)
return on equity which was 12.48% for F&M, compared to an average of 12.68% for
the Virginia/Maryland Bank Group, and (v) a dividend yield of 3.61% for F&M,
compared to an average of 3.02% for the Virginia/Maryland Bank Group. Overall,
in the opinion of Scott & Stringfellow, F&M's operating performance and
financial condition were comparable to the Virginia/Maryland Bank Group average
and F&M's market value was reasonable when compared to the Virginia/Maryland
Bank Group. Accordingly, in the opinion of Scott & Stringfellow, Allegiance
stockholders shall receive F&M Common Stock that is reasonably valued when
compared to the Virginia/Maryland Bank Group.
Dilution Analysis. Based upon publicly available financial information
on Allegiance and F&M, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of Allegiance and F&M.
The immediate effect on F&M -- assuming minimal cost savings of 10% of
Allegiance's non-interest expense -- was to decrease earnings by $.02 per share
or 2.0% and to dilute book value by $.21 or 1.9%. The effect on Allegiance under
the same assumptions is to increase earnings $.47 per share or 79.2%, to
increase book value by $2.36 per share or 33.9%, to increase dividends by $.55,
and to increase the April 19, 1996 market value of Allegiance of $11.25 per
share to $15.00. This dilution analysis does not take into account the longer
term benefits for the combined companies resulting from the combination. Scott &
Stringfellow concluded from this analysis that the transaction would have a
significant positive effect on Allegiance and the Allegiance shareholders in
that, historical dividends per share, net income per share and book value per
share of F&M Common Stock to be received by the Allegiance stockholders, after
giving effect to the Exchange Ratio, would represent a substantial increase in
the historical dividends per share, net income per share, and book value per
share of Allegiance Common Stock, although there can be no assurance that pro
forma amounts are indicative of future results. See "Comparative Per Share
Information."
The summary set forth above includes the material factors considered,
but does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Allegiance Board or of the analyses performed by Scott &
Stringfellow. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Accordingly, notwithstanding the separate factors
summarized above, Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the process underlying the preparation of its
opinion. As a whole, these various analyses, contributed to Scott &
Stringfellow's opinion that the terms of the Merger Agreement are fair from a
financial point of view to Allegiance shareholders.
Scott & Stringfellow is a full service investment banking and brokerage
firm headquartered in Richmond, Virginia, that provides a broad array of
services to corporations, financial institutions and state and local
governments. The Financial Institutions Group of Scott & Stringfellow actively
works with financial institutions in Maryland, Virginia, North Carolina, the
District of Columbia, and West Virginia on these and other matters. As part of
its investment banking practice, it is continually engaged in the valuation of
financial institutions and their securities in connection with mergers and
acquisitions, negotiated underwritings, and secondary distribution of listed and
unlisted securities. Scott & Stringfellow was selected by the Allegiance Board
based upon its expertise and reputation in providing valuation and merger and
acquisition and advisory services to financial institutions.
<PAGE>
In addition to the financial advisory services described above, Scott &
Stringfellow has from time to time provided financial advisory and/or brokerage
services to Allegiance, for which Scott & Stringfellow has received customary
compensation. In the ordinary course of business, Scott & Stringfellow makes a
market in Allegiance Common Stock and F&M Common Stock and trades such
securities for its own account and for the accounts of its customers.
In exchange for its services, Scott & Stringfellow will receive from
Allegiance on the Effective Date of the Merger a fee of $50,000.
SURRENDER OF STOCK CERTIFICATES
As soon as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent (the
"Exchange Agent"), to mail to each Allegiance shareholder a letter of
transmittal and instructions for use in order to surrender the certificates
representing shares of Allegiance Common Stock in exchange for certificates
representing shares of F&M Common Stock.
ALLEGIANCE SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for Allegiance
Common Stock, together with a properly completed letter of transmittal, the
holder of such certificates will receive a certificate or certificates
representing the number of shares of F&M Common Stock to which he or she is
entitled and, where applicable, a check for the amount payable in cash in lieu
of issuing a fractional share. Lost, stolen, mutilated or destroyed certificates
will be treated in accordance with the existing procedures of F&M.
Cash (without interest) will be paid to Allegiance shareholders in lieu
of the issuance of any fractional shares in an amount equal to the fraction of a
share of F&M Common Stock to which such shareholder would otherwise be entitled
multiplied by the Average Closing Price of F&M Common Stock.
After the Effective Date, Allegiance shareholders will be entitled to
vote the number of shares of F&M Common Stock into which their Allegiance Common
Stock has been converted, regardless of whether they have surrendered their
Allegiance 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 will be paid to the holder of any
Allegiance certificate until such holder physically surrenders such certificate,
promptly after which time all such dividends or distributions will be paid
(without interest).
CONDITIONS TO THE MERGER
The obligations of F&M and Allegiance to consummate the Merger are
subject to the following conditions, among, others: approval and adoption of the
Merger Agreement by the requisite shareholder vote; 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 Allegiance, 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; receipt of a fairness opinion from Scott &
<PAGE>
Stringfellow; and the receipt of an opinion of counsel as to certain federal
income tax consequences of the Merger. Also, under the terms of the Merger
Agreement, F&M agreed that, following the Effective Date, it will indemnify
those persons associated with Allegiance and its subsidiaries who are entitled
to indemnification as of the Effective Date of the Merger.
In addition, each party's obligation to effect the Merger, unless
waived, is subject to performance by the other party of its obligations under
the Merger Agreement, the accuracy, in all material respects, of the
representations and warranties of the other party contained therein, and the
receipt of certain opinions and certificates from the other party.
REGULATORY APPROVALS
As indicated above, the consummation of the Merger is conditioned on
the prior approval of the Merger by the Federal Reserve, the Virginia SCA and
the Maryland Commissioner, and any other state or federal regulatory agency
having jurisdiction. As of the date hereof, all regulatory applications have
been filed and accepted, but no approvals have been obtained. Although neither
Allegiance nor F&M know of any reason that any approval should not be granted,
there can be no assurance that 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 Allegiance,
inadvisable or unduly burdensome.
BUSINESS PENDING THE MERGER
Until consummation of the Merger (or termination of the Merger
Agreement), Allegiance is obligated to operate its businesses 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. Until
consummation of the Merger (or termination of the Merger Agreement) Allegiance
may not, without the consent of F&M, among other things: (a) declare or pay
additional dividends on its capital stock; (b) solicit or encourage inquires or
proposals with respect to, furnish any information relating to, or participate
in any negotiations regarding any acquisition or purchase of all or a
substantial portion of the assets of, or a substantial equity interest in,
Allegiance or Allegiance Bank or any business combination with Allegiance,
except where the failure to do so would constitute a breach of the fiduciary or
legal obligations of the Allegiance Board of Directors to the shareholders of
Allegiance; (c) amend its charter or bylaws; (d) issue any capital stock, except
upon exercise of rights or options issued pursuant to existing employee benefits
plans, programs or arrangements or effect any stock split or otherwise change
its capitalization; or (e) purchase or redeem any of its capital stock.
Pending consummation of the Merger, F&M has agreed that F&M and its
subsidiary banks will operate their respective businesses in the ordinary course
and use best efforts to preserve their respective properties, business and
customer and employee relationships. F&M has further agreed that its will not
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations regarding, any
acquisition or purchase of all or a substantial portion of the assets of, or a
substantial equity interest in, F&M or any business combination with F&M, which
may, as a condition thereof, result in the termination of the Merger Agreement,
except where the failure to do so would constitute a breach of the fiduciary or
legal obligations of the F&M Board of Directors to the shareholders of F&M.
<PAGE>
WAIVER, AMENDMENT AND TERMINATION
At any time on or prior to the Effective Date, 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 prior to the
Effective Date by agreement of the parties whether before or after the Special
Meeting (except that the Exchange Ratio shall not be changed after approval of
the Merger Agreement by the Allegiance shareholders). Any material change in a
material term of the Merger Agreement would require a resolicitation of
Allegiance's shareholders. Such a material change would include, but not be
limited to, a change in the tax consequences to Allegiance's shareholders.
The Merger Agreement may be terminated by F&M or Allegiance, whether
before or after the approval of the Merger Agreement by the shareholders of
Allegiance: (a) by mutual consent of Allegiance and F&M; (b) unilaterally by
Allegiance or F&M, in the event that the Effective Date has not occurred on or
before January 15, 1997, 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 (c) unilaterally by Allegiance or
F&M if the satisfaction in any material respect of one or more conditions to the
obligation of that party is rendered impossible of satisfaction. In the event of
termination, the Merger Agreement shall become null and void, except that
certain provisions thereof relating to expenses and confidentiality of
information exchanged between the parties shall survive any such termination.
RESALES OF F&M COMMON STOCK
All shares of F&M Common Stock received by Allegiance shareholders 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 Allegiance for
purposes of Rule 145 under the 1933 Act. To the best knowledge of Allegiance and
F&M, the only persons who may be deemed to be affiliates of Allegiance subject
to these limitations are the directors and executive officers of Allegiance.
ACCOUNTING TREATMENT
It is anticipated 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 Allegiance are carried
forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Allegiance 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 Allegiance Common
Stock be exchanged for F&M Common Stock. In the event that any of the conditions
to pooling of interests accounting is not satisfied, then the Merger would not
qualify for pooling of interests accounting treatment, and a condition to the
obligation of F&M to consummate the Merger would not be satisfied. Each of F&M
and Allegiance 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, affiliates of F&M and Allegiance have agreed that they
will not sell any F&M Common Stock or Allegiance Common Stock within 30 days
<PAGE>
prior to the Effective Date, nor sell any F&M Common Stock until such time as
F&M has published financial results covering at least 30 days of the combined
operations of F&M and Allegiance after the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management of Allegiance and the Allegiance Board
may be deemed to have interests in the Merger in addition to their interests as
shareholders of Allegiance generally. These interests include, among others,
provisions in the Merger Agreement relating to indemnification of Allegiance
directors and officers, directors' and officers' liability insurance, the
election or appointment of a member of the Allegiance Board to the F&M Board,
and certain employee benefits, as described below. In each case, the Allegiance
Board was aware of their potential interests, and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby.
Directors. F&M has agreed to cause Leonard L. Abel, Chairman of the
Board of Allegiance, or if he is unavailable, Ronald D. Paul, President of
Allegiance, or such other person selected by the Board of Directors of
Allegiance and reasonably acceptable to F&M, to be appointed to the Board of
Directors of F&M at the Effective Date or as soon thereafter as practicable. F&M
currently pays each director $500 for attendance at each Board meeting and, in
addition, pays each nonemployee director an annual retainer of $6,500.
Indemnification of Directors and Officers. Following the Effective
Date, F&M has agreed to indemnify the directors and officers of Allegiance who
are currently entitled to indemnification from Allegiance to the same extent and
on the same conditions as they are entitled to indemnification pursuant to
Virginia law and Allegiance's Articles of Incorporation or Bylaws with respect
to matters occurring on or prior to the Effective Date. In addition, F&M has
agreed to use its reasonable best efforts to maintain Allegiance's existing
directors' and officers' liability policy, or some other policy providing at
least comparable coverage, for a period of three years after the Effective Date.
Stock Options and Warrants. Certain officers and employees of
Allegiance hold stock options under Allegiance's employee stock option plans to
acquire an aggregate of 68,980 shares of Allegiance Common Stock as of June 30,
1996 at exercise prices ranging from $3.33 to $9.50 per share. In addition, the
directors of Allegiance hold warrants to purchase up to an aggregate of 119,000
shares of Allegiance Common Stock at exercise prices ranging from $5.00 to $6.50
per share. Such options and warrants, to the extent not exercised prior to the
Effective Date, will become, by virtue of the Merger, the right to receive, upon
payment of the adjusted exercise price specified in the option or warrant, that
number of shares of F&M Common Stock the holder would have received pursuant to
the Merger if he or she had exercised such option or warrant immediately prior
thereto, and cash in lieu of any fractional shares.
Employees and Benefit Plans. The Merger Agreement provides that the
officers and employees of Allegiance Bank will not change as a result of the
Merger. As soon as administratively practicable following the Merger, employees
of Allegiance will be entitled to participate in the F&M pension, benefit and
similar plans on the same terms and conditions as employees of F&M. Employees of
Allegiance will receive credit for their years of service to Allegiance for
participation and vesting purposes only.
<PAGE>
THE OPTION AGREEMENT
The Option Agreement was entered into as a condition to F&M's entering
into the Merger Agreement and is intended to increase the probability that the
Merger will be consummated. Exercise of the F&M Option may tend to make the
acquisition of a controlling interest in Allegiance more expensive to any
prospective acquiror other than F&M, even if such an acquisition would be
beneficial to Allegiance's shareholders. The existence of the F&M Option is
intended to make it less likely that a prospective acquiror, other than F&M,
will seek a business combination with Allegiance. The following is a brief
summary of the F&M Option 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 the Allegiance
Option to acquire up to 343,785 shares of Allegiance Common Stock at a price of
$11.50 per share, an amount in excess of the per share market price of
Allegiance Common Stock on the last trading day prior to the public announcement
of the Merger Agreement), subject to adjustment upon the occurrence of certain
events described below. The shares subject to the Allegiance Option represent
approximately 19.9% of the outstanding shares of Allegiance Common Stock as of
the date of the Merger Agreement.
F&M may exercise the F&M Option, in whole or in part, at any time or
from time to time, upon or after the occurrence of a "Purchase Event." As used
in the Option Agreement, a "Purchase Event" means:
(a) Allegiance or Allegiance Bank shall have entered into an
agreement with a person (other than F&M or its affiliates) to: (i)
acquire, merge or consolidate with, or enter into any similar
transaction with Allegiance or Allegiance Bank, (ii) purchase, lease or
otherwise acquire all or substantially all of the assets of Allegiance
or Allegiance Bank, or (iii) purchase or otherwise acquire (including
by way of merger, consolidation, share exchange or any similar
transaction) securities representing more than 10% of the voting power
of Allegiance or Allegiance Bank;
(b) any person shall have acquired beneficial ownership of
more than 20% of the outstanding shares of Allegiance Common Stock; or
(c) 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 Allegiance
or Allegiance Bank, and following such proposal the shareholders of
Allegiance vote not to approve the Merger Agreement.
Allegiance 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 Allegiance Option, it must send Allegiance written notice
specifying (i) the total number of shares it will purchase and (ii) the place
and date not earlier than three business days nor later than 60 business days
after the date on which such notice is given for the closing of such purchase.
If prior notification to, or approval of, any federal or state regulatory agency
is required, F&M will promptly file the required notice or application for
approval and the period of time that otherwise would run pursuant to such notice
period will run instead from the date on which the last required notification
period has expired or has been terminated or such approvals have been obtained
and any requisite waiting period has passed.
<PAGE>
The Allegiance Option will expire and terminate, to the extent not
previously exercised, upon the earlier of (i) the Effective Date; (ii) the date
on which the Merger Agreement is terminated, other than a termination based upon
(a) a material breach by Allegiance of any covenant in the Merger Agreement or
(b) the failure of Allegiance 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 (iii) twelve months
after the Merger Agreement is terminated based upon a material breach by
Allegiance of certain specified covenants or the failure of Allegiance 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.
In the event that Allegiance's capitalization changes by reason of
stock dividend, split-up merger, recapitalization, combination, exchange of
shares or the like, the number of shares subject to the Allegiance Option and
the purchase price per share thereof will be adjusted so that the economic value
of the Allegiance Option remains unaltered.
CERTAIN FEDERAL INCOME TAX MATTERS
F&M and Allegiance have received an opinion from LeClair Ryan, counsel
for F&M, to the effect that for federal income tax purposes:
1. The Merger will constitute a reorganization within the meaning of
Section 368 of the Code;
2. No gain or loss will be recognized by F&M or Allegiance as a result
of the Merger;
3. No gain or loss will be recognized by a Allegiance shareholder
to the extent he or she receives F&M Common Stock solely in exchange for his
Allegiance Common Stock pursuant to the Merger;
4. The tax basis of the F&M Common Stock received by each
Allegiance shareholder will be the same as the tax basis of the Allegiance
Common Stock surrendered in exchange therefor; and
5. The holding period for each share of F&M Common Stock received by
each Allegiance shareholder in exchange for Allegiance Common Stock will include
the period for which such shareholder held the Allegiance Common Stock exchanged
therefor, provided such Allegiance Common Stock is a capital asset in the hands
of such holder at the Effective Date.
The opinion from LeClair Ryan has been filed as an exhibit to the
Registration Statement, and receipt of the tax opinion is a non-waivable
condition to consummation of the Merger. The opinion from LeClair Ryan is based
on certain customary assumptions and representations regarding, among other
things, the lack of previous dealings between F&M and Allegiance, the existing
and future ownership of Allegiance and F&M Common Stock and the future business
plans of F&M.
Any cash received by shareholders in lieu of the issuance of fractional
shares could result in taxable income to the shareholders. The receipt of such
cash generally will 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.
<PAGE>
The preceding discussion summarizes the material federal income tax
consequences of the Merger to Allegiance shareholders. It does not discuss all
potentially relevant federal income tax matters or consequences to any foreign
or other shareholders subject to special tax treatment, nor does it discuss, and
no opinion has been requested regarding, any state or local tax consequences of
the Merger. The tax consequences to any particular shareholder may depend on the
shareholder's circumstances. Allegiance shareholders are urged to consult their
own tax advisors concerning federal, state and local tax consequences of the
Merger with respect to their particular tax situation.
ABSENCE OF APPRAISAL RIGHTS
Under Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL"), shareholders of Allegiance WILL NOT be entitled to
dissent from the Merger and obtain the judicially determined fair value of their
shares of Allegiance Common Stock because Allegiance Common Stock is traded on
the Nasdaq National Market. See "Market Prices and Dividends."
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
As a Virginia corporation, F&M is subject to the provisions of the
Virginia SCA, while Allegiance, as a Delaware corporation, is subject to the
DGCL. Shareholders of Allegiance, whose rights are governed by the DGCL and
Allegiance's Certificate of Incorporation and Bylaws, will, upon consummation of
the Merger, become shareholders of F&M. The rights of the former Allegiance
shareholders will then be governed by the Articles of Incorporation and Bylaws
of F&M and the Virginia SCA.
A discussion of certain material differences between the rights of an
Allegiance shareholder under the DGCL and Allegiance's Certificate of
Incorporation and Bylaws, on the one hand, and the rights of an F&M shareholder
under the Virginia SCA and the Articles of Incorporation and Bylaws of F&M, on
the other hand, is set forth below in the section "Comparative Rights of
Shareholders."
EXPENSES OF THE MERGER
In general, whether or not the Merger is consummated, Allegiance 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, except that F&M
will pay the expenses of printing and mailing this Proxy Statement/Prospectus,
and under circumstances involving willful and material breaches of certain
provisions of the Merger Agreement.
If either party willfully and materially breaches the Merger Agreement,
that party must pay the costs associated with this transaction incurred by the
non-breaching party. If the Merger Agreement is terminated by Allegiance because
it is not approved by the Allegiance shareholders, Allegiance must pay 50% of
F&M's costs in this transaction, up to $50,000.
<PAGE>
MARKET PRICES AND DIVIDENDS
MARKET PRICES
F&M Common Stock has been listed for trading on the NYSE under the
symbol "FMN" since December 28, 1994. Prior thereto, F&M Common Stock was traded
on the Nasdaq National Market under the symbol "FMNT". Allegiance Common Stock
is traded on the Nasdaq National Market under the symbol "ALLG."
The following tables set forth: (i) in the case of F&M, the high and
low closing sales prices for F&M Common Stock as quoted on the Nasdaq National
Market for the periods indicated through December 27, 1994, and subsequent
thereto the high and low closing sales prices as reported on the NYSE Composite
Transactions List; and (ii) in the case of Allegiance, the high and low closing
sales prices for Allegiance Common Stock as quoted on the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
F&M
CLOSING SALES PRICES
--------------------
1996 1995 1994
----------------- ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter............................ $19.75 $17.25 $17.125 $15.75 $16.50 $15.75
2nd Quarter............................ $18.50 $16.00 17.375 15.50 16.25 15.50
3rd Quarter (through August 7, 1996)... 18.25 17.125 18.125 15.625 17.375 16.00
4th Quarter............................ 20.00 17.25 17.25 14.75
</TABLE>
The closing price of F&M Common Stock on the NYSE Composite
Transactions List on April 19, 1996, the last full trading day preceding the
public announcement of the execution of the Merger Agreement, was $16.00 per
share. The closing price of F&M Common Stock on the NYSE Composite Transactions
List on August 7, 1996, the latest practicable date prior to the date of the
Proxy Statement/Prospectus was $18.25 per share.
<TABLE>
<CAPTION>
ALLEGIANCE
CLOSING SALES PRICES
--------------------
1996 1995 1994
------------------- ------------------ -----------------
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter............................. $11.50 $ 9.00 $ 8.00 $6.50 $8.50 $6.50
2nd Quarter............................. 14.625 10.25 7.50 6.50 9.00 6.125
3rd Quarter (through August 7, 1996).... 14.00 13.875 7.875 6.50 8.50 6.50
4th Quarter............................. 11.00 6.875 9.00 7.00
</TABLE>
As of March 31, 1996, there were 7,730 record holders of F&M Common
Stock. As of the Record Date, there were 672 record holders of Allegiance
Common Stock.
<PAGE>
DIVIDENDS
The following tables reflect the cash dividends per share paid during
each quarter on F&M Common Stock for the periods indicated. Allegiance has not
paid any cash dividends to date. The policy of the Board of Directors of
Allegiance has been to retain earnings in order to provide funds for the
growth and development of Allegiance's business.
The information in the table below concerning F&M may vary for
certain periods from the dividends declared during the quarter in cases where
the dividend was paid in the quarter following its declaration. In addition,
the amounts shown for F&M have not been restated and adjusted to reflect (i) the
acquisitions on March 29, 1996 of FB&T Financial Corporation, on April 6,
1995 of Bank of the Potomac and on July 1, 1994 of both PNB Financial
Corporation and Hallmark Bank and Trust Company, and (ii) a 2.5% stock dividend
effective September 1, 1994. See "Selected Financial Data" for such restated
dividend information for F&M.
F&M
1996 1995 1994
---- ---- ----
1st Quarter.................. $0.16 $0.15 $0.145
2nd Quarter.................. 0.16 0.15 0.145
3rd Quarter.................. 0.16 0.15 0.145
4th Quarter.................. 0.16 0.150
- ------------------
F&M or F&M Bank-Winchester has paid regular cash dividends for more
than 50 consecutive years.
F&M is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from its
subsidiary banks. F&M's subsidiary banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to F&M. For
example, a Virginia chartered bank, of which there are nine within the F&M
system, is prohibited from paying a dividend that would impair its paid-in
capital. In addition, the Virginia SCC may limit the payment by any Virginia
chartered bank if it determines that the limitation is in the public interest
and is necessary to ensure the bank's financial soundness.
Under current federal law, insured depository institutions, such as the
Subsidiary Banks, are prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the institution
would become "undercapitalized" (as such term is defined in federal law). Based
on the 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
<PAGE>
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.
ALLEGIANCE BANC CORPORATION
GENERAL
Financial and other information relating to Allegiance is set forth in
the Allegiance's Annual Report to Shareholders for the year ended December 31,
1995, and its Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, copies of which are included herewith as Appendices IV and V. Additional
financial and other information relating to Allegiance, including information
relating to Allegiance's officers and directors, is included in Allegiance's
Annual Report on Form 10-K and Allegiance's Proxy Statement relating to its
Annual Meeting of Shareholders held on May 22, 1996. See "Available
Information" and "Incorporation of Certain Information by Reference."
HISTORY AND BUSINESS
Allegiance was organized in 1986, under the name "Montgomery
Bancorp, Inc." to serve as the holding company for Allegiance Bank, which
commenced operations in 1987. In 1990, Allegiance formed a second national
bank subsidiary to service the Prince George's County market, which was
subsequently merged into Allegiance Bank in 1992. As of March 31, 1996,
Allegiance had total consolidated assets of $138.1 million, total deposits of
$112.7 million, and total consolidated shareholder's equity of $12.0 million.
Allegiance Bank is a locally oriented community bank which seeks to
serve the needs of small and medium size businesses, professionals and consumers
in the southern Montgomery County and northern Prince George's County portions
of the Washington, DC suburban area, which areas constitutes Allegiance Bank's
primary service area. Allegiance Bank, Allegiance's sole subsidiary, currently
operates seven banking offices in Montgomery and Prince George's counties.
Allegiance Bank offers a full line of commercial banking services to businesses
and professionals in its service area, as well as comprehensive deposit and
lending services for consumers. Allegiance Bank is a member of the Federal
Reserve System, and its deposits are insured to the fullest extent provided by
law by the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
Allegiance Bank offers a complete line of commercial banking
services to its business and professional clients, as well as comprehensive
banking services to individuals residing or employed in the its service
area. While it attracts some lending and deposit business from outside its
primary service area, Allegiance Bank has concentrated on servicing its
primary markets. Business lending constitutes the bulk of Allegiance
Bank's lending business, with most loans having variable rates and/or
maturities of three to five years. In making business loans, the cash flow
of the borrower is the principal consideration in terms of the repayment
sources, with collateral constituting a secondary consideration. Commercial
and business loans are made for a variety of purposes, including working
capital, equipment financing, real estate acquisition, lines of credit,
and government contract financing. Asset based lending, and accounts and
inventory financing are available on a selective basis. Real estate
collateralized loans for both commercial and residential purposes are generally
structured with variable rates and three to five year maturities. Residential
first mortgages with a fifteen year maturity are available, but are not typical
of Allegiance Bank's lending activity. Allegiance Bank also offers consumer
installment loans, personal lines of credit and equity lines of credit.
<PAGE>
COMPETITION
In attracting deposits and making loans, Allegiance Bank encounters
competition from other institutions, including larger commercial banking
organizations, savings banks, credit unions, other financial institutions and
non-bank financial service companies serving the Bank's service area.
Competitors include major financial companies whose substantially greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous banking locations and mount extensive promotional and advertising
campaigns. In light of the deregulation of the financial service industry and
the absence of interest rate controls on deposits, Allegiance Bank anticipates
that it will face continuing competition from all of these institutions in the
future. Additionally, as a result of recently enacted state and federal
legislation regarding reduced restrictions on interstate banking, Allegiance
Bank may face additional competition from institutions outside Maryland which
may take advantage of such legislation to acquire or establish banks or branches
in Maryland. The interstate banking legislation will allow commercial banks to
branch at a national level through acquisition of existing commercial banks or
bank branches, and/or the opening of new branches. Additional changes in the
financial services industry, including rapid technology changes and proposed
statutory changes regarding the Glass-Steagall Act, which generally prohibits
certain affiliations between banking and securities businesses, may act as a
catalyst for further basic structural change within the financial services
industry and may result in additional competition.
BUSINESS OF F&M
HISTORY AND BUSINESS
F&M was formed in 1969 to serve as the parent holding company of its
then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired fifteen banks, which expanded its market area
and increased market share in Virginia and West Virginia. F&M has twelve
subsidiary banks (the "Subsidiary Banks") that operate 89 banking offices
offering a full range of banking services, principally to individuals and
small and middle-market businesses in the Shenandoah Valley, central and
northern Virginia, Southside Virginia, and the eastern panhandle of West
Virginia.
The 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. In addition, F&M
Bank-Winchester, F&M Bank-Blakeley and F&M Bank-Keyser operate trust
departments offering a range of fiduciary services. F&M also operates Big
Apple Mortgage which engages in residential mortgage origination and
servicing in the Shenandoah Valley and the eastern panhandle of West Virginia.
F&M has maintained its community orientation by allowing the 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
<PAGE>
more senior holding company officers serve on the board of directors of each
Subsidiary Bank to monitor operations and to serve as a liaison to F&M.
F&M currently operates in six market regions: the Shenandoah Valley and
Loudoun County; the eastern panhandle of West Virginia;
Charlottesville/Albemarle County and surrounding areas; Greenville County in
southside Virginia; suburban Richmond, primarily Henrico and Chesterfield
Counties; the northern Virginia area that includes the eastern portions of
Fairfax and Prince William Counties, Loudoun County and the Warrenton and
surrounding Fauquier County area. F&M operates thirty-nine banking offices in
the Shenandoah Valley from Winchester to Harrisonburg and in Loudoun County with
deposits of $857.5 million at March 31, 1996, nine banking offices in the
eastern panhandle of West Virginia with deposits of $245.7 million at March 31,
1996, seven banking offices in the Charlottesville/Albemarle County and
surrounding area with deposits of $64.8 million at March 31, 1996, three banking
offices in Emporia, Virginia and surrounding Greenville County with deposits of
$57.8 million at March 31, 1996, nine banking offices in suburban Richmond with
deposits of $143.6 million at March 31, 1996, eighteen banking offices in the
Fairfax and Prince William County area of northern Virginia area with deposits
of $360.1 million at March 31, 1996 and four offices in the Warrenton and
surrounding Fauquier County area with deposits of $87.4 million at March 31,
1996. F&M's principal banking market is Winchester and the surrounding five
Virginia counties where its lead bank, F&M Bank-Winchester, is the dominant
financial institution in terms of deposit market share.
At March 31, 1996, F&M had total consolidated assets of
approximately $2.1 billion, total consolidated deposits through its banking
subsidiaries of approximately $1.8 billion and consolidated shareholders'
equity of approximately $211.9 million. F&M's total consolidated net income
for the three months ended March 31, 1996, was approximately $6.7 million, or
$0.35 per share.
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 the
beginning of 1988, F&M has acquired approximately $1.1 billion in assets and
approximately $917 million in deposits through eleven bank acquisitions. Most
recently, F&M completed on March 29, 1996 the acquisition of FB&T
Financial Corporation, the parent bank holding company of Fairfax Bank & Trust
Company which operates eleven banking offices in the Fairfax and Prince
William County area of Northern Virginia.
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 "Available
Information" and "Incorporation of Certain Information by Reference."
<PAGE>
COMPARATIVE RIGHTS OF SHAREHOLDERS
GENERAL
As a Virginia corporation, F&M is subject to the provisions of
the Virginia Stock Corporation Act (the "Virginia SCA"). Allegiance is a
Delaware corporation and is therefore subject to the General Corporation
Law of Delaware (the "DGCL"). Shareholders of Allegiance, whose rights are
governed by Allegiance's Certificate of Incorporation and Bylaws and by the
DGCL will become shareholders of F&M upon consummation of the Merger. The
rights of such shareholders as shareholders of F&M will then be governed by
the Articles of Incorporation and Bylaws of F&M and by the Virginia SCA.
The following is a summary of certain material differences in the
rights of shareholders of Allegiance and F&M. THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ARTICLES OR CERTIFICATE OF INCORPORATION AND
BYLAWS OF EACH CORPORATION AND TO THE VIRGINIA SCA AND THE DGCL.
AUTHORIZED CAPITAL
F&M. F&M is authorized to issue (i) 30,000,000 shares of Common Stock,
par value $2.00 per share, of which 19,095,349 shares were issued and
outstanding as of March 31, 1996, and (ii) 5,000,000 shares of serial
Preferred Stock, without par value, of which no shares were issued and
outstanding as of March 31, 1996. F&M's Articles of Incorporation authorize
the F&M Board, without shareholder approval, to fix the preferences,
limitations and relative rights of the preferred stock and to establish
series of such preferred stock and determine the variations between each
series. If any shares of preferred stock are issued, the rights of holders of
F&M Common Stock would be subject to the rights and preferences conferred
to holders of such preferred stock. See "Description of F&M Capital
Stock" for additional information.
Allegiance. Allegiance is authorized to issue 10,000,000 shares of
Allegiance Common Stock, par value $1.00 per share, of which 1,748,813 shares
were issued and outstanding as of June 30, 1996. Allegiance 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 funds legally available therefor. One of the principal sources of income
to F&M is dividends from its subsidiary banks. For a description of certain
restrictions on the payment of dividends by banks, see "Market Prices and
Dividends." 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.
Allegiance. The holders of Allegiance Common Stock also are
entitled to share ratably in dividends when and as declared by the Allegiance
Board of Directors out of funds legally available therefor. The principal
source of income to Allegiance is dividends from Allegiance Bank. As a result
of regulatory restrictions, Allegiance Bank, and therefore Allegiance, have
not paid any cash dividends to date.
<PAGE>
VOTING RIGHTS
The holders of both F&M and Allegiance Common Stock have one vote for
each share held on any matter presented for consideration by the shareholders.
Neither the holders of F&M nor Allegiance Common Stock are entitled to
cumulative voting in the election of directors.
DIRECTORS AND CLASSES OF DIRECTORS
F&M. All of F&M's directors are elected each year. F&M's Articles
of Incorporation do not include a provision relating to the removal of
directors. Accordingly, the removal of F&M directors is governed by the
Virginia SCA which provides that shareholders may remove directors with or
without cause if, in the case of F&M, the number of votes cast to remove him
constitutes a majority of the outstanding shares of F&M Common Stock.
Allegiance. Similar to F&M, all of Allegiance's directors are elected
each year. Allegiance's Certificate of Incorporation does not contain any
provision regarding the removal of directors, which is therefore governed
by the DGCL. The DGCL provides that any director, or the entire board of
directors, may be removed at any time, with or without cause, by a majority of
the shares entitled to vote in the election of directors.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Virginia SCA and the DGCL, and of the
Articles of Incorporation and Bylaws of F&M, may discourage an attempt to
acquire control of F&M or Allegiance, 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 Board or Allegiance
Board, respectively, did not approve.
Authorized Preferred Stock. The Articles of Incorporation of F&M
authorize the issuance of preferred stock. The F&M Board may, subject to
applicable law and the rules of the NYSE, authorize the issuance of preferred
stock at such times, for such purposes and for such consideration as it may
deem advisable without further shareholder approval. The issuance of
preferred stock under certain circumstances may have the effect of
discouraging an attempt by a third party to acquire control of F&M by, for
example, authorizing the issuance of a series of preferred stock with rights
and preferences designed to impede the proposed transaction.
Supermajority Voting Provisions. The Virginia SCA provides that,
unless a corporation's articles of incorporation provide for a higher or lower
vote, certain significant corporate actions must be approved by the
affirmative vote of the holders of more than two-thirds of the votes entitled
to be cast on the matter. Corporate actions requiring a two-thirds vote
include amendments to a corporation's articles of incorporation, adoption of
plans of merger or exchange, sales of all or substantially all of a
corporation's assets other than in the ordinary course of business and
adoption of plans of dissolution ("Fundamental Actions"). The Virginia SCA
provides that a corporation's articles may either increase the vote required
to approve Fundamental Actions or may decrease the required vote to not less
than a majority of the votes entitled to be cast.
The Articles of Incorporation of F&M provide that a Fundamental Action
shall be approved by a vote of a majority of all votes entitled to be cast on
such transactions by each voting group entitled to vote on the transaction,
provided that the transaction has been approved and recommended by at least
<PAGE>
two-thirds of the directors in office at the time of such approval and
recommendation. If the transaction is not so approved and recommended, then the
transaction shall be approved by the vote of 80% or more of all votes entitled
to be cast on such transactions by each voting group entitled to vote on the
transaction.
The Certificate of Incorporation of Allegiance and, except with
respect to the approval of certain business combinations with "interested
stockholders," the DGCL, do not contain any provisions requiring a supermajority
vote to approve Fundamental Actions. Approval of Fundamental Actions generally
requires the vote of only a majority of the shares entitled to vote.
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.
Shareholder Meetings. Shareholders of F&M may not request that a
special meeting of shareholders be called, while shareholders owning 10% or
more of the issued and outstanding shares of Allegiance may call a special
meeting of shareholders.
State Anti-Takeover Statutes. Virginia has two anti-takeover
statutes in force, the Affiliated Transaction Statute and the Control Share
Acquisitions Statute. Delaware has one statute in effect, Section 203 of the
DGCL, which relates to certain business combinations with interested
stockholders (i.e., a person that acquires 15% or more of a corporation's
voting stock), which may have an anti-takeover effect.
Virginia Anti-Takeover Statutes:
Affiliated Transactions. The Virginia SCA contains provisions governing
"affiliated transactions" (including, among other various transactions, mergers,
share exchanges, sales, leases, or other dispositions of material assets,
issuances of securities, dissolutions, and similar transactions) with an
"interested shareholder" (generally the beneficial owner of more than 10% of any
class of the corporation's outstanding voting shares). During the three years
following the date a shareholder becomes an interested shareholder, any
affiliated transaction with the interested shareholder must be approved by both
a majority of the "disinterested directors" (those directors who were directors
before the interested shareholder became an interested shareholder or who were
recommended for election by a majority of disinterested directors) and by the
affirmative vote of the holders of two-thirds of the corporation's voting shares
other than shares beneficially owned by the interested shareholder. The
foregoing requirements do not apply to affiliated transactions if, among other
things, a majority of the disinterested directors approve the interested
shareholder's acquisition of voting shares making such a person an interested
shareholder prior to such acquisition. Beginning three years after the
shareholder becomes an interested shareholder, the corporation may engage in an
affiliated transaction with the interested shareholder if (i) the transaction is
approved by the holders of two-thirds of the corporation's voting shares, other
than shares beneficially owned by the interested shareholder, (ii) the
affiliated transaction has been approved by a majority of the disinterested
directors, or (iii) subject to certain additional requirements, in the
affiliated transaction the holders of each class or series of voting shares will
receive consideration meeting specified fair price and other requirements
designed to ensure that all shareholders receive fair and equivalent
consideration, regardless of when they tendered their shares.
<PAGE>
Control Share Acquisitions. Under the Virginia SCA's control share
acquisitions law, voting rights of shares of stock of a Virginia corporation
acquired by an acquiring person at ownership levels of 20%, 33 1/3%, and 50% of
the outstanding shares may, under certain circumstances, be denied unless
conferred by a special shareholder vote of a majority of the outstanding shares
entitled to vote for directors, other than shares held by the acquiring person
and officers and directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's articles of incorporation or by-laws permit
the acquisition of such shares prior to the acquiring person's acquisition
thereof. If authorized in the corporation's articles of incorporation or
by-laws, the statute also permits the corporation to redeem the acquired
shares at the average per share price paid for them if the voting rights are
not approved or if the acquiring person does not file a "control share
acquisition statement" with the corporation within sixty days of the last
acquisition of such shares. If voting rights are approved for control shares
comprising more than fifty percent of the corporation's outstanding stock,
objecting shareholders may have the right to have their shares repurchased by
the corporation for "fair value".
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.
Delaware Anti-takeover Statutes:
Section 203 of the DGCL generally restricts certain transactions
between a Delaware corporation and a person, who owns, together with such
person's affiliates and associates, 15% or more of a corporation's outstanding
voting stock (an "interested stockholder"). For a period of three years
following the date on which a person becomes an interested stockholder, Section
203 prohibits the following types of transactions between the corporation and
the interested stockholder unless certain conditions described below are met:
(i) mergers or consolidations; (ii) sales, leases, exchanges or other transfers
of 10% or more of the aggregate assets of the corporation; (iii) issuances or
transfers by the corporation of any stock of the corporation which would have
the effect of increasing the interested stockholder's proportionate share of any
class or series of stock; (iv) receipt by the interested stockholder of the
benefit of loans, advances, pledges, or other financial benefits from the
corporation, other than proportionately as a stockholder; and (v) any other
transaction which has the effect of increasing the proportionate share of any
class or series of stock of the corporation owned by the interested stockholder.
The three year prohibition does not apply under certain circumstances, including
where the proposed transaction with the interested stockholder or the
transaction by which the interested stockholder became an interested stockholder
is approved by the board of directors prior to the date such stockholder became
an interested stockholder. The Board of Directors of Allegiance has approved the
Merger, and therefore the prohibition of Section 203 is not applicable to the
Merger.
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 (i) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
<PAGE>
as a limitation on or elimination of the liability of the officer or director,
or (ii) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
The DGCL permits the certificate of incorporation of a Delaware
corporation to include a provision limiting or eliminating the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of a director's fiduciary duty, except that such provision
may not limit or eliminate a director's liability for monetary damages: (i) for
any breach of a director's duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for unlawful
distributions; or (iv) for any transaction from which the director obtained an
improper personal benefit.
F&M. The Articles of Incorporation of F&M provide that to the full
extent that the Virginia SCA permits the limitation or elimination of the
liability of directors or officers, a director or officer of F&M shall not be
liable to F&M or its shareholders for monetary damages in excess of one dollar
($1.00).
Allegiance. The Certificate of Incorporation of Allegiance provides
that a director shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty to the fullest extent permitted
by the DGCL.
INDEMNIFICATION
F&M. The Articles of Incorporation of F&M provide that to the
full extent permitted by the Virginia SCA and any other applicable law,
F&M is required to indemnify a director or officer of F&M who is or was a party
to any proceeding by reason of the fact that he is or was such a director or
officer or is or was serving at the request of the corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. The board
of directors is empowered, by majority vote of a quorum of disinterested
directors, to contract in advance to indemnify any director or officer.
Allegiance. The Certificate of Incorporation of Allegiance provides
that Allegiance shall have the power to the full extent permitted by the DGCL
to indemnify any person that it may indemnify thereunder. The Bylaws of
Allegiance provide that Allegiance shall indemnify, to the fullest extent
provided by law, any person who is or was a party or threatened to be made a
party to any action suit or proceeding by reason of the fact that such person
was a director, advisory director, officer, employee, agent or fiduciary
of Allegiance or was serving as such for another entity at the request of
Allegiance.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue (i) 30,000,000 shares of Common Stock, par
value $2.00 per share, and (ii) 5,000,000 shares of serial Preferred Stock,
without par value, which may be issued in series with such powers,
designations, and rights as may be established from time to time by the Board
of Directors. On March 31, 1996, F&M had issued and outstanding 19,095,349
shares of F&M Common Stock held by 7,730 shareholders of record. All
<PAGE>
outstanding shares of F&M Common Stock are fully paid and nonassessable. On
March 31, 1996, F&M had 143,350 shares of F&M Common Stock reserved for
issuance pursuant to outstanding stock options granted to its employees. 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 of F&M 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.
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. Since December 28, 1994, F&M Common Stock has been listed for
trading on the NYSE. Prior to its listing on the NYSE, F&M Common Stock was
traded on the Nasdaq National Market.
F&M maintains an Employee Stock Purchase Plan (the "ESP Plan")
providing that all F&M employees who have served F&M full time for over twelve
months may purchase shares of F&M Common Stock through payroll
deduction. An eligible employee who wishes to participate elects to
contribute from 2% to 15% of his or her actual adjusted base pay (actual
base pay plus overtime and shift premiums) by payroll deduction. In
November, a participant may elect to bring his or her total actual
contribution up to 15% of his or her annual base pay. Shares are sold by F&M
to the ESP Plan fund on behalf of those participating employees at 85% of the
lesser of market value on January 1 or December 31 of the year. The maximum
number of shares is limited for any calendar year to 50,000 plus shares
available to be offered but not purchased in prior years. A total of 67,570
shares of F&M Common Stock have been issued under the ESP Plan since its
inception in 1993, and a maximum of 138,293 shares are available for issuance
in 1996. The administrator may decide to offer fewer than the maximum
available number.
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
<PAGE>
shareholder approval. The Board of Directors 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 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 Board of Directors, might warrant the issuance of Preferred Stock.
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, 1995 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. Such financial statements have been restated in
F&M's Current Report on Form 8-K dated July 2, 1996.
The consolidated financial statements of F&M that are incorporated
herein by reference from F&M's Current Report on Form 8-K dated July 2, 1996,
which restates the consolidated financial statements that are incorporated by
reference from F&M's Annual Report on Form 10-K for the year ended December 31,
1995, to reflect the acquisition of FB&T Financial Corporation by F&M on March
29, 1996, have been incorporated by reference herein 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 accounting and auditing.
The consolidated financial statements of Allegiance contained in the
Allegiance Annual Report included in this Proxy Statement/Prospectus as Appendix
IV and incorporated by reference herein have been so included and incorporated
in reliance upon the report of Stegman & Company, independent certified public
accountants, and upon authority of such firm as experts in auditing and
accounting.
LEGAL OPINIONS
The validity of the shares of F&M Common Stock offered hereby is
being passed upon for F&M by LeClair Ryan, A Professional Corporation,
Richmond, Virginia. LeClair Ryan will deliver an opinion to F&M and
Allegiance concerning certain federal income tax consequences of the Merger.
See "The Merger - Certain Federal Income Tax Consequences."
Certain matters relating to the Merger will be passed upon for
Allegiance by Kennedy & Baris, L.L.P., Bethesda, Maryland.
<PAGE>
OTHER MATTERS
The Board of Directors 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 Allegiance Board
of Directors.
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
AND
PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of April 22, 1996, by and between F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), and ALLEGIANCE BANC CORPORATION, a Delaware
corporation ("ABC").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and ABC have
approved the affiliation of their companies through the merger of ABC 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 undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby;
NOW, THEREFORE, in consideration of the mutual warranties, covenants
and agreements set forth herein, the parties agree as follows.
ARTICLE 1
THE MERGER AND RELATED MATTERS
1.1 THE MERGER
Subject to the terms and conditions of this Agreement, at the Effective
Date as defined in Section 1.4 hereof, ABC 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 ABC shall thereupon
cease, and F&M will be the surviving corporation in the Merger.
1.2 CONVERSION OF ABC STOCK
At the Effective Date, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $1.00
per share, of ABC ("ABC Common Stock") issued and outstanding immediately prior
to the Effective Date shall cease to be outstanding and shall be converted into
and exchanged for shares of common stock, par value $2.00 per share, of F&M
("F&M Common Stock") whose aggregate market value equals $15.00, plus cash for
fractional shares, pursuant to the terms and conditions set forth in the Plan of
Merger. Each share of F&M Common Stock issued and outstanding immediately prior
to the Effective Date shall continue unchanged as an outstanding share common
stock of F&M, as the successor corporation.
<PAGE>
1.3 BOARD OF DIRECTORS OF F&M AND ALLEGIANCE BANK; OFFICERS AND
EMPLOYEES
(a) F&M shall take all such action as shall be necessary to elect or
appoint Leonard L. Abel (or in the event that he is unavailable to serve, Ronald
D. Paul, or in the event of his unavailablity such other person selected by the
Board of Directors of ABC and acceptable to F&M) to the Board of Directors of
F&M at, or as promptly as practicable after, the Effective Date.
(b) The officers and employees of Allegiance Bank, N.A., the national
banking subsidiary of ABC ("Allegiance Bank"), will not change as a result of
the Merger.
(c) The Board of Directors of Allegiance Bank in office at the
Effective Date, together with a person designated by F&M, shall serve as the
Board of Directors of Allegiance Bank following the Effective Date until the
1997 Annual Meeting of Allegiance Bank and until their successors shall be duly
elected and qualified.
1.4 THE EFFECTIVE DATE
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 Date") to occur on such date as the parties may
agree within five days (or as soon as reasonably practicable thereafter) after
the receipt of the approval of shareholders of ABC and 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 ABC shareholder meeting is held.
1.5 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" when used with respect to a party shall mean
the current and conscious knowledge, after conducting a reasonabe investigation,
of any "Executive Officer" of such party, as such term is defined in Regulation
O of the Federal Reserve Board. Any reference herein to the Knowledge of ABC
shall also be deemed to include the Knowledge of any Executive Officer of
Allegiance Bank;
(b) the term "Material Adverse Effect", when applied to a party, shall
mean any condition, event, change or occurrence (including, without limitation,
(i) the making of any provisions for possible loan and lease losses, write-downs
of other real estate and taxes and (ii) any breach of a representation or
warranty by such party) that individually, or in the aggregate with any other
condition, event, change or occurrence, has or is reasonably likely to have a
material negative effect upon (i) the financial condition, results of operations
<PAGE>
or business of the party and its subsidiaries, taken as a whole, or (ii) the
ability of a party to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement.
(c) the term "Previously Disclosed" shall mean information set forth in
a letter from one party to the other party delivered and dated not later than
5:00 p.m. on April 19, 1996, specifically designated as information "Previously
Disclosed" pursuant to this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF ABC
ABC represents and warrants to F&M as follows:
2.1 ORGANIZATION, STANDING AND POWER
ABC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware with full corporate power and
authority to carry on its business as now conducted. ABC is duly registered as a
bank holding company under the Bank Holding Company Act of 1956.
2.2 ORGANIZATION, STANDING AND POWER OF ALLEGIANCE BANK
Allegiance Bank is the only subsidiary of ABC (collectively with ABC,
the "ABC Companies"), is a duly organized and validly existing national banking
association in good standing under the national banking laws with full corporate
power and authority to carry on its business as now conducted and is qualified
to do business in each state or other jurisdiction of the United States where
its ownership or leasing of property or the conduct of its business requires
qualification to do business and where the failure to so qualify would have a
Material Adverse Effect on ABC on a consolidated basis. Except as Previously
Disclosed, ABC 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 Allegiance
Bank. The outstanding shares of capital stock of Allegiance Bank are validly
issued and outstanding and fully paid and all such shares are directly owned by
ABC free and clear of all liens, claims and encumbrances or preemptive rights of
any person.
2.3 AUTHORIZED AND EFFECTIVE AGREEMENT; AFFILIATED TRANSACTION
APPROVAL
(a) ABC has all requisite corporate power and authority to enter into
and (subject to the receipt of all necessary governmental approvals and the
approval of the shareholders of ABC of this Agreement and the Plan of Merger) to
perform all of its obligations under this Agreement, the Plan of Merger and the
Stock Option Agreement of even date herewith between ABC and F&M (the "Option
Agreement"). The execution, adoption and delivery of this Agreement, the Plan of
Merger and the Option Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
<PAGE>
necessary corporate action on the part of ABC, except, in the case of this
Agreement and the Plan of Merger, the approval of shareholders. This Agreement,
the Plan of Merger and the Option Agreement represent the legal, valid, and
binding obligations of ABC, enforceable against ABC in accordance with their
respective terms, in each case subject as to enforceability to (i) bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, conservatorship,
receivership and similar laws affecting the enforcement of rights of creditors
of FDIC-insured institutions or the enforcement of creditors' rights generally,
(ii) laws relating to the safety and soundness of depository institutions and
their holding companies, (iii) general principles of equity, and (iv) in the
case of the Option Agreement, the statutory and common law of Delaware
applicable to corporations organized under Delaware law.
(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 ABC 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 ABC or Allegiance Bank; (ii)
except as Previously Disclosed, constitute or result in the breach of any term,
condition or provision of, or constitute a default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result in
the creation of any lien, charge or encumbrance upon, any property or asset of
ABC or Allegiance Bank pursuant to any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation, or (iii) subject to the receipt of
all required regulatory approvals, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to ABC or Allegiance Bank, except insofar
as the statutory and common law of Delaware applicable to corporations organized
under Delaware law may affect the validity or enforceability of the Option
Agreement.
(c) In accordance with Title 8, Chapter 1, Subchapter VI, Section 203
et. seq. of the Delaware Corporation Law Annotated (the "Affiliated Transactions
Statute"), the Board of Directors of ABC has, by resolution adopted by its Board
of Directors, approved this Agreement and the Option Agreement, and has given
prior approval of F&M's becoming an "interested stockholder" (as defined in
Section 203(c)(5) of the Affiliated Transactions Statute), all in accordance
with Section 203(a)(1) of the Affiliated Transactions Statute.
2.4 CAPITAL STRUCTURE
The authorized capital stock of ABC consists of (i) 10,000,000 shares
of common stock, par value $1.00 per share. As of the date hereof, there are
1,727,563 shares of ABC Common Stock issued and outstanding. All outstanding
shares of ABC 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 (a) warrants
held by directors of ABC that represent rights to purchase 102,000 shares of ABC
Common Stock at a price of $5.00 per share and 35,000 shares of ABC Common Stock
at a price of $6.50 per share, and (b) options held by officers and employees of
ABC that represent rights to purchase a total of 73,480 shares of ABC Common
Stock. Copies of the warrant and stock option agreements have been Previously
Disclosed. No shares of ABC Common Stock have been reserved for any purpose,
<PAGE>
except for the 210,480 shares of ABC Common Stock reserved in connection with
the options and warrants described herein and the 343,785 shares of ABC Common
Stock reserved in connection with the Option Agreement.
2.5 FINANCIAL STATEMENTS; BOOKS AND RECORDS; MINUTE BOOKS
The ABC Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of ABC
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods then ended
(subject, in the case of unaudited interim statements, to normal year-end 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 ABC and Allegiance
Bank fairly reflect 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 ABC and
Allegiance Bank contain accurate records of all corporate actions of their
respective shareholders and Boards of Directors (including committees of its
Board of Directors). The ABC Financial Statements shall mean (i) the
consolidated balance sheets of ABC as of December 31, 1995 and 1994 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years ended December 31, 1995, 1994 and 1993 (including
related notes and schedules, if any) and (ii) the consolidated balance sheets of
ABC and related consolidated statements of income, shareholders' equity and cash
flows (including related notes and schedules, if any) with respect to periods
ended subsequent to December 31, 1995.
2.6 MATERIAL ADVERSE CHANGE
Since December 31, 1995 and except as Previously Disclosed, there has
not been any change in the financial condition or results of operations of ABC
or Allegiance Bank which, individually or in the aggregate, has had or is
reasonably likely to have a Material Adverse Effect (other than as a result of
changes in banking laws or regulations of general applicability or
interpretations thereof).
2.7 ABSENCE OF UNDISCLOSED LIABILITIES
Neither ABC nor Allegiance Bank has any liability (contingent or
otherwise) that is material to ABC on a consolidated basis or that, when
combined with all similar liabilities, would be material to ABC on a
consolidated basis, except as Previously Disclosed or as disclosed in the ABC
Financial Statements and except for liabilities incurred in the ordinary course
of business consistent with past practice since the date of the most recent ABC
Financial Statements.
<PAGE>
2.8 LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS
Except as Previously Disclosed, there are no actions, suits or
proceedings instituted or pending or, to the Knowledge of ABC, threatened
against ABC or Allegiance Bank or against any property, asset, interest or right
of ABC or Allegiance Bank, or against any officer, director or employee of ABC
or Allegiance Bank that would, if determined adversely to ABC or Allegiance
Bank, have a Material Adverse Effect on ABC on a consolidated basis. To the
Knowledge of ABC, ABC and Allegiance Bank 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).
2.9 TAX MATTERS
ABC has filed all federal, state and local tax returns and reports
required to be filed, and all taxes shown by such returns to be due and payable
have been paid or are reflected as a liability in the ABC Financial Statements
or are being contested in good faith and have been Previously Disclosed. Except
to the extent that tax liabilities are specifically reflected in the ABC
Financial Statements or are being contested in good faith, there are no federal,
state or local tax liabilities of ABC other than liabilities that have arisen
since December 31, 1995, all of which have been properly accrued or otherwise
provided for on the books and records of ABC. Except as Previously Disclosed, no
tax return or report of ABC or Allegiance Bank 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 either ABC or Allegiance
Bank by any taxing authority.
2.10 PROPERTY
Except As Previously Disclosed or reserved against in the ABC Financial
Statements, ABC and Allegiance Bank 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 ABC Financial Statements as of December 31,
1995 or acquired after such date. To the Knowledge of ABC, 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
ABC, the buildings, structures, and appurtenances owned, leased, or occupied by
ABC and Allegiance Bank are in good operating condition and in a state of good
maintenance and repair and comply in all material respects with applicable
zoning and other municipal laws and regulations.
2.11 EMPLOYEE BENEFIT PLANS
(a) ABC has Previously Disclosed true and complete copies of all
material retirement, profit-sharing, stock option, bonus, vacation or other
material incentive plans or agreements, all material medical, dental or other
health plans, all life insurance plans and all other material employee benefit
<PAGE>
plans or fringe benefit plans, including, without limitation, all "employee
benefit plans" as that term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), currently adopted,
maintained by, sponsored in whole or in part by, or contributed to by ABC or
Allegiance Bank for the benefit of employees, retirees or other beneficiaries
eligible to participate (collectively, the "ABC Benefit Plans"). Any of the ABC
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as an "ABC ERISA Plan."
No ABC Benefit Plan is or has been a multi-employer plan within the meaning of
Section 3(37) of the ERISA.
(b) Except as Previously Disclosed, all ABC Benefit Plans are in
compliance with the applicable terms of the Internal Revenue Code of 1986, as
amended (the "Code"), and any other applicable laws, rules and regulations, the
breach or violation of which could result in a material liability to ABC on a
consolidated basis.
(c) No ABC ERISA Plan 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.
2.12 INSURANCE
Each of ABC and Allegiance Bank currently maintains insurance in
amounts reasonably necessary for its operations and, to the Knowledge of ABC,
similar in scope and coverage to that maintained by other entities similarly
situated. Except as Previously Disclosed, neither ABC nor Allegiance Bank 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 years,
neither ABC nor Allegiance Bank has been refused any insurance coverage sought
or applied for, and ABC 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 ABC or Allegiance Bank.
2.13 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the balance sheets included
in the ABC 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.
2.14 ENVIRONMENTAL MATTERS
(a) Except as Previously Disclosed and to the Knowledge of ABC, the ABC
Companies are in substantial compliance with all Environmental Laws (as defined
<PAGE>
below). Neither ABC nor Allegiance Bank has received any communication alleging
that ABC or Allegiance Bank is not in such compliance and, to the Knowledge of
ABC, there are no present circumstances that would prevent or interfere with the
continuation of such compliance.
(b) ABC and Allegiance Bank have not received notice of pending, and
are 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) ABC or Allegiance Bank, (ii) any
person or entity whose liability for any Environmental Claim (as defined below)
ABC or Allegiance Bank has or may have retained either contractually or by
operation of law, (iii) any real or personal property owned or leased by ABC or
Allegiance Bank, or any real or personal property which ABC or Allegiance Bank
has been, or is, judged to have managed or to have supervised or to have
participated in the management of, or (iv) any real or personal property in
which Allegiance Bank holds a security interest securing a loan recorded on the
books of Allegiance Bank. Neither ABC nor Allegiance 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
ABC or Allegiance Bank, or all real and personal property which ABC or
Allegiance Bank has been, or is, judged to have managed or to have supervised or
to have participated in the management of, ABC 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 been
Previously Disclosed). To the Knowlege of ABC, the ABC Companies are in
compliance in all material respects with all recommendations contained in any
such environmental audits, analyses and surveys.
(d) To the Knowledge of ABC, 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 ABC or Allegiance Bank or against
any person or entity whose liability for any Environmental Claim ABC or
Allegiance 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.
<PAGE>
(2) "Environmental Laws" means all applicable federal, state
and local laws and regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, that relate to pollution or protection of human health or the
environment.
(3) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum
products and any other materials regulated under Environmental Laws.
2.15 BROKERS AND FINDERS
Neither ABC nor any of its officers, directors or employees has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with transactions contemplated by this
Agreement, except for Scott & Stringfellow, Inc.
2.16 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 ABC shareholders' meeting to vote upon the Merger, such
Registration Statement and all amendments or supplements thereto, with respect
to all information set forth therein furnished by ABC relating to ABC and
Allegiance Bank, (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 not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF F&M
F&M represents and warrants to ABC 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, with full corporate
power and authority to carry on its business as now conducted. F&M is duly
registered as a bank holding company under the Bank Holding Company Act of 1956.
<PAGE>
3.2 ORGANIZATION, STANDING AND POWER OF F&M SUBSIDIARIES
Each subsidiary of F&M (the "F&M Subsidiaries" and, collectively with
F&M, the "F&M Companies") is a duly organized corporation, validly existing and
in good standing in their respective states of incorporation. Each F&M
Subsidiary (i) has full corporate power and authority to carry on its business
as now conducted and (ii) is duly qualified to do business in the states where
its ownership or leasing of property or the conduct of its business requires
such qualification and where the failure to so qualify would have a material
adverse effect on F&M on a consolidated basis. The outstanding shares of capital
stock of each of the F&M Subsidiaries are validly issued and outstanding, fully
paid and nonassessable and all such shares are directly or indirectly owned by
F&M free and clear of all liens, claims and encumbrances or preemptive rights of
any person.
3.3 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) F&M has all requisite corporate power and authority to enter into
and to perform all of its obligations under this Agreement and the Plan of
Merger. The execution, adoption and delivery of this Agreement and the Plan of
Merger and the consummation of the Merger have been duly and validly authorized
by all necessary corporate action on the part of F&M. This Agreement and the
Plan of Merger represent the legal, valid, and binding obligations of F&M,
enforceable against F&M in accordance with their respective terms, in each case
subject as to enforceability to (i) bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, conservatorship, receivership or other similar laws
affecting the enforcement of rights of creditors of FDIC-insured institutions or
the enforcement of creditors' rights generally, (ii) laws relating to the safety
and soundness of depository institutions and their holding companies, and (iii)
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 the business, operations or financial condition of F&M on a
consolidated basis, or (iii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to F&M or any F&M Subsidiary.
3.4 CAPITAL STRUCTURE
The authorized capital stock of F&M consists of: (i) 5,000,000 shares
of preferred stock, no par value per share, of which none are issued and
outstanding; and (ii) 30,000,000 shares of common stock, par value $2.00 per
share, of which 19,095,859 shares were issued and outstanding on March 31, 1996.
All outstanding shares of F&M Common Stock have been duly issued and are validly
<PAGE>
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 ABC Common Stock upon consummation of the
Merger will have been duly authorized and, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable,
will not be issued in violation of the preemptive rights of any person, and will
be duly registered under the applicable federal and state securities laws.
3.5 FINANCIAL STATEMENTS; BOOKS AND RECORDS; MINUTE BOOKS
The F&M Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of F&M
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods then ended
(subject, in the case of unaudited interim statements, to normal year-end 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 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, 1995 and 1994 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years ended December 31, 1995, 1994 and 1993 (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 periods ended
subsequent to December 31, 1995.
3.6 MATERIAL ADVERSE CHANGE
Since December 31, 1995, 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 (other than as a result of changes in banking laws or
regulations of general applicability or interpretations thereof).
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.
<PAGE>
3.8 LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS
There are no actions, suits or proceedings instituted or pending or, to
the Knowledge of F&M, threatened against any of the F&M Companies or against any
property, asset, interest or right of any of the F&M Companies or against any
officer, director or employee of any of the F&M Companies that would, if
determined adversely to F&M or any F&M Subsidiary, have a Material Adverse
Effect on F&M on a consolidated basis. To the Knowledge of F&M, the F&M
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or orders).
3.9 TAX MATTERS
F&M has filed all federal, state and local tax returns and reports
required to be filed, and all taxes shown by such returns to be due and payable
have been paid or are reflected as a liability in the F&M Financial Statements
or are being contested in good faith and have been Previously Disclosed. Except
to the extent that tax liabilities are specifically reflected in the F&M
Financial Statements or are being contested in good faith, there are no federal,
state or local tax liabilities of F&M other than liabilities that have arisen
since December 31, 1995, all of which have been properly accrued or otherwise
provided for on the books and records of F&M. Except as Previously Disclosed, no
tax return or report of F&M or any F&M Subsidiary is under examination by any
taxing authority or the subject of any administrative or judicial proceeding,
and no unpaid tax deficiency has been asserted against any of the 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. 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 years, none of the F&M Companies has been refused any
<PAGE>
insurance coverage sought or applied for, and F&M has no reason to believe that
existing insurance coverage cannot be renewed as and when the same shall expire
upon terms and conditions as favorable as those presently in effect, other than
possible increases in premiums or unavailability of coverage that do not result
from any extraordinary loss experience on the part of the F&M Companies.
3.12 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the balance sheets included
in the F&M Financial Statements, as of their respective dates, is adequate in
all material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
3.13 ENVIRONMENTAL MATTERS
To the Knowledge of F&M, the F&M Companies are in substantial
compliance with all Environmental Laws (as defined in Section 2.14). 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 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
ABC shareholders' meeting to vote upon the Merger, such Registration Statement
and all amendments or supplements thereto, with respect to all information set
forth therein furnished by F&M relating to F&M (i) shall comply in all material
respects with the applicable provisions of the federal and state securities
laws, and (ii) shall not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
ARTICLE 4
COVENANTS AND AGREEMENTS
4.1 INVESTIGATION AND CONFIDENTIALITY
ABC will keep F&M advised of all material developments relevant to its
business and to consummation of the Merger, and F&M will advise ABC of any
material adverse change in its financial condition or operations and all
material developments that may adversely affect consummation of the Merger. F&M
and ABC each may make or cause to be made such further investigation of the
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 ABC agree to furnish the other and the other's advisors with such financial
<PAGE>
data and other information with respect to its business and properties as such
other party shall from time to time reasonably request. Each party hereto shall,
and shall cause each of its directors, officers, attorneys and advisors, to
maintain the confidentiality of all information obtained in such investigation
which is not otherwise publicly disclosed by the other party, such undertaking
with respect to confidentiality to survive any termination of this Agreement. In
the event of the termination of this Agreement, each party shall return to the
furnishing party or, at the request of the furnishing party, destroy and certify
the destruction of all confidential information previously furnished in
connection with the transactions contemplated by this Agreement.
4.2 REGISTRATION STATEMENT; SHAREHOLDER APPROVAL
(a) Subject to the timely effectiveness of the Registration Statement
to be prepared by F&M, ABC shall submit this Agreement and the Plan of Merger to
its shareholders for approval at an annual or special meeting to be held on or
before September 30, 1996 or as soon thereafter as practicable (the "ABC
Meeting"). Subject to the fiduciary duties of the Board of Directors of ABC, the
ABC Board of Directors shall unanimously recommend approval of the Merger and
shall use its best efforts to solicit and obtain votes of the holders of ABC
Common Stock in favor of the Merger. Each member of the ABC Board of Directors
agrees to vote all shares of ABC Common Stock under his control (and not held in
a fiduciary capacity) in favor of the Merger.
(b) F&M and ABC will prepare jointly the proxy statement/prospectus to
be used in connection with the ABC Meeting (the "Proxy Statement/Prospectus").
F&M will prepare and file with the SEC a Registration Statement, of which such
Proxy Statement/Prospectus shall be a part, and will use its best efforts to
have the Registration Statement declared effective as promptly as possible. When
the Registration Statement or any post-effective amendment or supplement thereto
shall become effective and at all times subsequent to such effectiveness, up to
and including the date of the ABC Meeting, such Registration Statement and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by ABC relating to ABC or Allegiance Bank
and by F&M relating to the F&M Companies, will conform in all material respects
with the provisions of the Securities Act of 1933, as amended, and any other
applicable statutory or regulatory requirements.
4.3 OPERATION OF THE BUSINESS OF ABC
Between the date of this Agreement and the Effective Date, ABC agrees
that each of ABC and Allegiance Bank will operate its business substantially as
presently operated and only in the ordinary course and will use its best efforts
to preserve its properties, business and relationships with customers, employees
and other persons having business dealings with it. Without limiting the
generality of the foregoing, ABC agrees that it will not, without the prior
written consent of F&M:
(a) Make any change in its authorized capital stock, or issue, grant or
sell any additional shares of, securities convertible into or exchangeable for,
<PAGE>
or options, warrants or rights to purchase, its capital stock, nor shall it
purchase, redeem or otherwise acquire any of its outstanding shares of capital
stock, except that ABC shall not be restricted from acquiring any shares of ABC
Common Stock that secure an extension of credit made by ABC or Allegiance Bank
that is in default and selling, in the ordinary course, any such re-acquired
shares or from issuing shares of ABC Common Stock pursuant to the exercise of
options and warrants in accordance with the terms thereof and which are
outstanding on the date hereof;
(b) Increase the rate of compensation of any of its directors, officers
or employees, or pay or agree to pay any bonus to, or provide any other employee
benefit or incentive to, any of its directors, officers or employees, except in
a manner and amount consistent with past practice, any of which changes shall be
reported promptly to F&M;
(c) Enter into any bonus, incentive compensation, stock option,
deferred compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment or consulting agreement;
(d) 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;
(e) Solicit or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or a substantial equity interest in, ABC or Allegiance
Bank or any business combination with ABC other than as contemplated by this
Agreement; (except where the Board of Directors of ABC determines, based on the
advice of counsel, that failure to furnish such information or participate in
such negotiations or discussions would constitute a breach of the fiduciary or
legal obligations of ABC's Board of Directors to its shareholders); or authorize
or permit any officer, director, agent or affiliate of ABC or Allegiance Bank to
do any of the above; or fail to notify F&M immediately if any such inquiries or
proposals are received by ABC;
(f) Change its lending, investment, asset/liability management
or other material banking policies in any material respect, except as may be
required by applicable law;
(g) Alter, amend or repeal its Bylaws or Articles of
Incorporation; or
(h) Declare or pay any cash or stock dividend or make any other
distribution in respect of the ABC Common Stock; or
(i) Propose or take any other action which would make any
representation or warranty in Article 2 hereof untrue.
<PAGE>
4.4 OPERATION OF THE BUSINESS OF F&M
Between the date of this Agreement and the Effective Date, F&M agrees
that each of the F&M Companies will operate its business substantially as
presently operated and only in the ordinary course and will use its best efforts
to preserve its properties, business and relationships with customers, employees
and other persons having business dealings with it. In addition, F&M agrees that
it will not solicit or encourage inquiries or proposals with respect to, furnish
any information relating to, or participate in any negotiations or discussions
concerning, any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, F&M or any business combination
with F&M which may, as a condition thereof, result in the termination of this
Agreement and the Plan of Merger (except where the failure to furnish such
information or participate in such negotiations or discussions would, on the
advice of counsel, constitute a breach of the fiduciary or legal obligations of
F&M's Board of Directors to its shareholders); or authorize or permit any
officer, director, agent or affiliate of F&M to do any of the above.
4.5 REGULATORY FILINGS
F&M and ABC shall use their 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.
4.6 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.
4.7 ACCOUNTING TREATMENT
F&M and ABC shall each use their best efforts to ensure that the Merger
qualifies for pooling-of-interests accounting treatment.
4.8 AFFILIATES
ABC shall identify those persons who may deemed to be "affiliates" of
ABC with the meaning of Rule 145 promulgated under the Securities Act. ABC shall
cause each person so identified to deliver to F&M at least 30 days prior to the
Effective Date a written agreement providing that such person will not dispose
of F&M Common Stock received in the Merger, except in a manner that (i) complies
with the Securities Act of 1933 and the rules and regulations promulgated
thereunder, and (ii) is consistent with the qualification of the transactions
contemplated hereby for pooling of interests accounting treatment.
<PAGE>
4.9 BENEFIT PLANS
Upon consummation of the Merger, as soon as administratively
practicable, employees of ABC 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
with ABC as if such service were with F&M.
4.10 NYSE LISTING
F&M shall list on the New York Stock Exchange the shares of F&M Common
Stock to be issued in the Merger.
4.11 INDEMNIFICATION
F&M agrees that following the Effective Date, it shall indemnify,
defend and hold harmless any person who has rights to indemnification from ABC,
to the same extent and on the same conditions as such person is entitled to
indemnification pursuant to Virginia law and ABC's Articles of Incorporation or
Bylaws, as in effect on the date of this Agreement, to the extent legally
permitted to do so with respect to matters occurring on or prior to the
Effective Date. Without limiting the foregoing, in any case in which corporate
approval may be required to effectuate any indemnification, F&M shall direct, at
the election of the party to be indemnified, that the determination of
permissibility of indemnification shall be made by independent counsel mutually
agreed upon between F&M and the indemnified party. F&M shall use its reasonable
best efforts to maintain ABC'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 ABC for a period of three years after the Effective Date on terms
no less favorable than those in effect on the date hereof.
4.12 ABC STOCK OPTIONS
From and after the Effective Date, all employee and officer stock
options and director stock warrants to purchase shares of ABC Common Stock
(each, an "ABC Stock Option" or an "ABC Stock Warrant"), 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 ABC Stock
Option and ABC Stock Warrant in accordance with the terms of the plan and
agreement by which it is evidenced; provided, however, that from and after the
Effective Date (i) each such ABC Stock Option and ABC Stock Warrant 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 ABC Stock
Option or ABC Stock Warrant shall be equal to the number of shares of ABC Common
Stock that were purchasable under such ABC Stock Option or ABC Stock Warrant
immediately prior to the Effective Date multiplied by the Exchange Ratio and
rounding down to the nearest whole share, with cash being paid for any
fractional share interest that otherwise would be purchasable, and (iii) the per
share exercise price under each such ABC Stock Option or ABC Stock Warrant shall
be adjusted by dividing the per share exercise price of each such ABC Stock
<PAGE>
Option or ABC Stock Warrant by the Exchange Ratio, and rounding to the nearest
cent. The terms of each ABC Stock Option or ABC Stock Warrant shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction with respect to F&M Common Stock on or subsequent to the Effective
Date.
4.13 STOCK OPTION AGREEMENT
ABC shall grant to F&M an option to acquire such number of shares of
ABC Common Stock that would equate to 19.9% of the issued and outstanding common
stock of ABC as of the date hereof, all in accordance with the Option Agreement.
4.14 RESTRICTIONS ON TRADING IN F&M COMMON STOCK
Neither F&M, ABC, any subsidiary of F&M or ABC, nor any director or
executive officer of F&M or ABC or their respective subsidiaries shall directly
or indirectly purchase or sell on the NYSE, or submit a bid to purchase or offer
to sell on the NYSE, any shares of F&M Common Stock, or any options, rights,
warrants or other securities convertible into or exercisable for shares of F&M
Common Stock during the Exchange Ratio Determination Period (as such term is
defined in Section 2.1(a) of the Plan of Merger).
ARTICLE 5
CONDITIONS TO THE MERGER
5.1 GENERAL CONDITIONS
The respective obligations of each of F&M and ABC to effect the Merger
shall be subject to the fulfillment, or waiver in the case of Section 5.1(e)
below, at or prior to the Effective Date of the following conditions:
(a) Corporate Action. All corporate action necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby shall have been duly and validly taken,
including without limitation the approval of the shareholders of ABC.
(b) Registration Statement. The Registration Statement shall
have been declared effective and shall not be subject to a stop order or any
threatened stop order of the SEC or any state securities commissioner.
(c) Regulatory Approvals. F&M and ABC 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 ABC, would so materially adversely impact the economic or
<PAGE>
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 ABC shall have received an opinion of F&M's
counsel in form and substance satisfactory to F&M and ABC to the effect that the
Merger will constitute a reorganization within the meaning of Section 368 of the
Code and that no gain or loss will be recognized by the shareholders of ABC to
the extent they receive F&M Common Stock solely in exchange for their ABC Common
Stock in the Merger.
(e) Opinions of Counsel. ABC shall have delivered to F&M and F&M shall
have delivered to ABC opinions of counsel, dated as of the Effective Date, as to
such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) Legal Proceedings. Neither F&M nor ABC shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Merger.
5.2 CONDITIONS TO OBLIGATIONS OF F&M
The obligations of F&M to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties
of ABC set forth in Article 2 shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Date as though made on
the Effective Date (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date), except as otherwise
expressly contemplated by this Agreement or consented to in writing by F&M.
(b) Performance of Obligations. ABC shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date.
(c) Officers' Certificate. ABC shall have delivered to F&M a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.2(a) and
5.2(b) have been satisfied.
(d) Affiliate Letters. F&M shall have received the written agreements
from the affiliates as specified in Section 4.8 hereof.
(e) Accountants' Letters. F&M shall have received a letter, dated as of
the Effective Date, from Yount, Hyde & Barbour, P.C., satisfactory in form and
substance to F&M, that the Merger will qualify for pooling-of-interests
accounting treatment.
<PAGE>
5.3 CONDITIONS TO OBLIGATIONS OF ABC
The obligations of ABC to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties
of F&M set forth in Article 3 shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Date as though made on
the Effective Date (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date), except as otherwise
expressly contemplated by this Agreement or consented to in writing by ABC.
(b) Performance of Obligations. F&M shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date.
(c) Officers' Certificate. F&M shall have delivered to ABC a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.1(b), 5.1(c),
5.3(a) and 5.3(b) have been satisfied.
(d) Investment Banking Letter. ABC shall have received an updated
fairness opinion from Scott & Stringfellow, Inc., financial advisor to ABC,
addressed to ABC and dated on or about the date the Proxy Statement/Prospectus
is mailed to shareholders of ABC, to the effect that the terms of the Merger are
fair to the shareholders of ABC from a financial point of view.
ARTICLE 6
TERMINATION
6.1 TERMINATION
This Agreement and the Plan of Merger may be terminated at any time
before the Effective Date, whether before or after approval thereof by the
shareholders of ABC, as provided below:
(a) Mutual Consent. By mutual consent of the parties, evidenced by
their written agreement.
(b) Closing Delay. At the election of either party, evidenced by
written notice, if the Closing shall not have occurred on or before January 15,
1997, 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 Closing
to occur on or before such date.
<PAGE>
(c) Conditions to F&M Performance Not Met. By F&M upon delivery of
written notice of termination to ABC 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 ABC Performance Not Met. By ABC 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 ABC to effect the Merger set forth in Sections
5.1 and 5.3, and such noncompliance is not waived by ABC.
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 4.1, 4.7 and 6.4, respectively,
shall survive any such termination and (ii) a termination pursuant to 6.1(c) or
6.1(d) hereof shall not relieve the breaching party from liability for an
uncured intentional breach of any provision of this Agreement giving rise to
such termination.
6.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement and the
Plan of Merger shall not survive the Effective Date and shall be terminated and
extinguished at the Effective Date. From and after the Effective Date, the
parties hereto shall have no liability to the other on account of any breach of
any of those representations, warranties and covenants; provided, however, that
the foregoing clause shall not (i) apply to agreements of the parties which by
their terms are intended to be performed after the Effective Date, and (ii)
shall not relieve any person for liability for fraud, deception or intentional
misrepresentation.
6.4 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 F&M agrees to bear and pay the
cost of printing and mailing the Proxy Statement/Prospectus.
(b) Notwithstanding the provisions of Section 6.4(a) hereof, if for any
reason the Merger is not approved by ABC's shareholders at the ABC Meeting or
any adjournment thereof, ABC shall reimburse F&M for one-half of all reasonable
out-of-pocket expenses incurred by F&M in connection with the transactions
contemplated by this Agreement, provided that the maximum amount that ABC shall
be responsible to F&M for under this Section 6.4(b) shall be limited to $50,000.
(c) If this Agreement is terminated by F&M or ABC because of a willful
and material breach by the other of any representation, warranty, covenant,
<PAGE>
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 of all
reasonable out-of-pocket expenses incurred by it in connection with the
transactions contemplated by this Agreement.
(d) Final settlement with respect to the reimbursement of such fees and
expenses by the parties shall be made within thirty days after the termination
of this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 ENTIRE AGREEMENT
This Agreement contains the entire agreement among F&M and ABC 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 ABC and their respective successors
and assigns. Other than Section 4.11, 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 ABC 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:
<PAGE>
If to F&M:
Alfred B. Whitt
F&M National Corporation
38 Rouss Avenue
P. O. Box 2800
Winchester, Virginia 22604
Copy to:
George P. Whitley, Esq.
LeClair Ryan
707 East Main Street; 11th Floor
Richmond, Virginia 23219
If to ABC:
Ronald D. Paul
Allegiance Banc Corporation
4719 Hampden Lane
Bethesda, Maryland 20814
Copy to:
David H. Baris, Esq.
Kennedy & Baris, L.L.P.
4719 Hampden Lane, Suite 300
Bethesda, Maryland 20814
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
Winchester, Virginia
By: /s/ JACK R. HUYETT
__________________________
Jack R. Huyett
President and Chief
Administrative Officer
ATTEST:
By: /s/ ALFRED B. WHITT
__________________________
Alfred B. Whitt
Secretary
ALLEGIANCE BANC CORPORATION
Bethesda, Maryland
By: /s/ LEONARD L. ABEL
__________________________
Leonard L. Abel
Chairman of the Board
ATTEST:
By: /s/ MICHELE MIDLO
__________________________
Michele Midlo
______________________________
Corporate Secretary
<PAGE>
ALLEGIANCE BANC CORPORATION
BOARD OF DIRECTORS
Each of the undersigned members of the Board of
Directors of Allegiance Banc Corporation agrees to be bound by his personal
obligations as provided in Section 4.2(a) and 4.3(e) of the Agreement and Plan
of Reorganization.
/s/ LEONARD L. ABEL /s/ DUDLEY C. DWORKEN
_________________________________ _____________________________
Leonard L. Abel Dudley C. Dworken
/s/ WILLIAM A. KOIER /s/ RONALD D. PAUL
_________________________________ _____________________________
William A. Koier Ronald D. Paul
/s/ THOMAS L. PHILLIPS
_________________________________
Thomas L. Phillips
<PAGE>
EXHIBIT A
TO THE AGREEMENT AND
PLAN OF REORGANIZATION
PLAN OF MERGER
BETWEEN
ALLEGIANCE BANC CORPORATION
AND
F&M NATIONAL CORPORATION
Pursuant to this Plan of Merger ("Plan of Merger"), Allegiance Banc
Corporation, a Delaware corporation ("ABC"), 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 April 22, 1996 (the "Agreement"), between F&M and
ABC, at the Effective Date ABC shall be merged with and into F&M in accordance
with the provisions of Virginia and Delaware law and with the effect specified
in Section 13.1-721 of the Virginia Stock Corporation Act (the "Merger"). F&M
shall be the surviving corporation of the Merger. The Merger shall become
effective on such date as may be determined in accordance with Section 1.4 of
the Agreement (the "Effective Date").
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 Date until otherwise amended or repealed.
ARTICLE II
MANNER OF CONVERTING SHARES
2.1 CONVERSION OF SHARES
Upon and by reason of the Merger becoming effective and except as set
forth in Section 2.3 below, no cash shall be allocated to the shareholders of
ABC and stock shall be issued and allocated as follows:
<PAGE>
(a) Each share of common stock, par value $1.00 per share, of ABC ("ABC
Common Stock") issued and outstanding immediately prior to the Effective Date
shall, by operation of law, be automatically exchanged for the number of shares
of F&M Common Stock whose aggregate market value equals $15.00. The market value
of F&M Common Stock will be its average closing price as reported on the New
York Stock Exchange (the "NYSE") for each of the ten full trading days ending on
the second day prior to the Effective Date (the "Average Closing Price") (the
ten full trading day period during which the Exchange Ratio will be determined
is referred to as the "Exchange Ratio Determination Period"). The ratio of
shares of F&M Common Stock that will be exchanged for each outstanding share of
ABC Common Stock shall be referred to herein as the "Exchange Ratio," which
shall be rounded to the nearest third decimal point. Notwithstanding the
foregoing, in the event: (A) F&M shall have entered into an agreement with any
person to (i) acquire, merge or consolidate, or enter into any similar
transaction, with F&M, (ii) purchase, lease or otherwise acquire all or
substantially all of the assets of F&M or (iii) purchase or otherwise acquire
securities representing 10% or more of the voting power of F&M; or (B) any
person shall have made a bona fide proposal to F&M by public announcement or
written communication that is or becomes the subject of public disclosure to
acquire F&M by merger, share exchange, consolidation, purchase of all or
substantially all of its assets or any similar transaction, the Average Closing
Price will be based on the average closing price of F&M Common Stock for each of
the ten trading days immediately preceding the public announcement of a
transaction or event described in either (A) or (B).
(b) Each holder of a certificate representing shares of ABC Common
Stock upon the surrender of his ABC stock certificates to F&M, duly endorsed for
transfer in accordance with Section 2.2 below, will be entitled to receive in
exchange therefor a certificate or certificates representing the number of
shares of F&M Common Stock that his shares shall be converted into pursuant to
the Exchange Ratio. Each such holder of ABC Common Stock shall have the right to
receive the consideration described in this Section 2.1 and Section 2.3 upon the
surrender of such certificate in accordance with Section 2.2. In the event F&M
changes the number of shares of F&M Common Stock issued and outstanding prior to
the Effective Date as a result of any stock split, stock dividend,
recapitalization or similar transaction with respect to the outstanding shares
of F&M Common Stock and the record date therefor shall be on or after the first
full trading day of the Exchange Ratio Determination Period but before the
Effective Date, the Exchange Ratio shall be proportionately and equitably
adjusted.
(c) Shares of F&M Common Stock issued and outstanding immediately prior
to the Effective Date shall continue unchanged as an outstanding share of Common
Stock of F&M, as the successor corporation.
(d) From and after the Effective Date, all employee and officer stock
options and director stock warrants to purchase shares of ABC Common Stock
(each, an "ABC Stock Option" or an "ABC Stock Warrant"), 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 ABC Stock
Option or ABC Stock Warrant in accordance with the terms of the plan and
<PAGE>
agreement by which it is evidenced; provided, however, that from and after the
Effective Date (i) each such ABC Stock Option or ABC Stock Warrant 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 ABC Stock
Option or ABC Stock Warrant shall be equal to the number of shares of ABC Common
Stock that were purchasable under such ABC Stock Option or ABC Stock Warrant
immediately prior to the Effective Date multiplied by the Exchange Ratio and
rounding down to the nearest whole share, with cash being paid for any
fractional share interest that otherwise would be purchasable, and (iii) the per
share exercise price under each such ABC Stock Option or ABC Stock Warrant shall
be adjusted by dividing the per share exercise price of each such ABC Stock
Option or ABC Stock Warrant by the Exchange Ratio, and rounding to the nearest
cent. The terms of each ABC Stock Option or ABC Stock Warrant shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction with respect to F&M Common Stock on or subsequent to the Effective
Date. It is intended that the foregoing assumption shall be effected in a manner
that is consistent with the requirements of Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code") as to any ABC Stock Option or ABC Stock
Warrant that is an "incentive stock option" (as defined in Section 422 of the
Code).
2.2 MANNER OF EXCHANGE OF ABC STOCK CERTIFICATES
As promptly as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent ("Exchange
Agent"), to send to each former shareholder of record of ABC immediately prior
to the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of ABC Common Stock for the consideration set forth
in Section 2.1 above and Section 2.3 below. Any checks for cash in lieu of
fractional shares which an ABC shareholder shall be entitled to receive in
exchange for such shareholder's shares of ABC Common Stock, and 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 ABC 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 cash in
lieu of fractional shares checks or 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 determined
pursuant to Section 2.1(a) hereof.
<PAGE>
2.4 DIVIDENDS
No dividend or other distribution payable to the holders of record of
F&M Common Stock at or as of any time after the Effective Date shall be paid to
the holder of any certificate representing shares of ABC Common Stock issued and
outstanding at the Effective Date until such holder physically surrenders such
certificate for exchange as provided in Section 2.2 of this Plan of Merger,
promptly after which time all such dividends or distributions shall be paid
(without interest).
ARTICLE III
TERMINATION
This Plan of Merger may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 6 of the Agreement
between the parties.
APPENDIX II
STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of April 22, 1996 (the "Option
Agreement"), by and between ALLEGIANCE BANC CORPORATION, a Delaware corporation
("ABC"), 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 ABC 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, ABC has agreed to grant to F&M
the option set forth herein to acquire authorized but unissued shares of ABC
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, ABC hereby grants
to F&M an option (the "Option") to acquire up to 343,785 shares of ABC Common
Stock at a price of $11.50 per share (the "Exercise Price") in exchange for the
consideration provided in Section 4 hereof; provided, however, that in the event
ABC issues or agrees to issue any shares of ABC Common Stock (other than as
permitted under the Merger Agreements) at a price less than $11.50 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 ABC 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 ABC Common Stock, before giving effect to the exercise of the Option.
The number of shares of ABC Common Stock that may be received upon the exercise
of the Option is subject to adjustment as set forth herein.
<PAGE>
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) ABC 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
ABC 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 Date 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 ABC of a Specified Covenant (as defined below) or (B) the
failure of ABC 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 ABC of a Specified Covenant or
the failure of ABC 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) ABC or Allegiance Bank, N.A. (the "Bank"), without having
received F&M's prior written consent, shall have entered into an
agreement with any person to (i) acquire, merge or consolidate, or
enter into any similar transaction, with ABC or the Bank, (ii)
purchase, lease or otherwise acquire all or substantially all of the
assets of ABC or the Bank or (iii) purchase or otherwise acquire,
directly from ABC or the Bank, securities representing 10% or more of
the voting power of ABC or the Bank;
(2) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of 20% or more of the outstanding
shares of ABC 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
<PAGE>
(3) any person shall have made a bona fide proposal to ABC by
public announcement or written communication that is or becomes the
subject of public disclosure to acquire ABC or the Bank 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 ABC vote not to approve the Merger
Agreements; or
(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, ABC shall deliver to F&M a certificate or
certificates representing the number of shares of ABC Common Stock exchanged for
the Exercise Price and F&M shall deliver to ABC 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 ABC 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 Allegiance Banc
Corporation 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 Allegiance Banc
Corporation. A copy of such agreement will be provided to the
holder thereof without charge upon receipt by Allegiance Banc
Corporation 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
ABC a copy of a letter from the staff of the Securities and Exchange Commission
(the "Commission"), or an opinion of counsel, in form and substance satisfactory
to ABC, to the effect that such legend is not required for purposes of the
Securities Act of 1933 (the "Securities Act").
5. REPRESENTATIONS
ABC hereby represents, warrants and covenants to F&M as follows:
(a) ABC shall at all times maintain sufficient authorized but unissued
shares of ABC Common Stock so that the Option may be exercised without
authorization of additional shares of ABC 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.
<PAGE>
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of any change in ABC 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 ABC 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 ABC Common Stock outstanding as of the date of the
Reorganization Agreement or that may be issued after the date of the
Reorganization Agreement without constituting a breach thereof), the number of
shares of ABC Common Stock subject to the Option shall be adjusted so that,
after such issuance, it equals 19.9% of the number of shares of ABC 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
warrants or options to acquire shares of ABC Common Stock outstanding as of the
date of the Reorganization Agreement or that may be issued after the date of the
Reorganization Agreement without constituting a breach thereof. Nothing
contained in this Section 6 shall be deemed to authorize ABC to breach any
provision of the Merger Agreements.
7. REGISTRATION RIGHTS
ABC 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 ABC
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 ABC for inclusion in any
registration statement to be filed hereunder. ABC 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 ABC's expense except for underwriting commissions and
the fees and disbursements of F&M's counsel attributable to the registration of
such ABC Common Stock. A second registration statement may be requested
hereunder at F&M's expense. In no event shall ABC 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 ABC of ABC Common Stock. If requested
by F&M, in connection with any such registration, ABC 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, ABC agrees to send a copy thereof to F&M and to any assignee of F&M
known to ABC, 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
<PAGE>
agency determines that the Option Agreement will not permit the holder to
acquire the full number of shares of ABC Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of ABC to allow the holder to acquire, or to require ABC to repurchase, 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.
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 ABC a copy of a letter
from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to ABC, 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
ABC, and within 24 hours of such notice of a bona fide proposed assignment, ABC
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 party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
<PAGE>
(g) Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the conflict of law principles thereof (except to the extent that
Delaware law governs the validity of the Option).
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Option Agreement as of the day and year first written above.
ALLEGIANCE BANC CORPORATION
By: /s/ LEONARD L. ABEL
______________________________
Leonard L. Abel
Chairman of the Board
F&M NATIONAL CORPORATION
By: /s/ ALFRED B. WHITT
______________________________
Alfred B. Whitt
Senior Vice President
APPENDIX III
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
August 9, 1996
Board of Directors
Allegiance Banc Corporation
Bethesda, Maryland 20814
Gentlemen:
You have asked us to render our opinion relating to the fairness,
from a financial point of view, to the shareholders of Allegiance Banc
Corporation ("Allegiance") of the terms of an Agreement and Plan of
Reorganization by and between F&M National Corporation ("F&M") and Allegiance
dated April 22, 1996 and a related Plan of Merger (collectively the "Merger
Agreement"). The Merger Agreement provides for the merger of Allegiance with
and into F&M (the "Merger") and further provides that each share of Common
Stock of Allegiance which is issued and outstanding immediately prior to the
Effective Date of the Merger shall be converted into a number of shares of
F&M Common Stock whose aggregate market value equals $15.00, such market value
to be the average closing price of F&M Common Stock as reported on the New
York Stock Exchange for each of the ten full trading days ending on the second
day prior to the Effective Date of the Merger.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Merger Agreement; (2) Allegiance's financial statements for
the three years ended December 31, 1995; (3) Allegiance's unaudited financial
statements for the six months ended June 30, 1995 and 1996, and other internal
information relating to Allegiance prepared by Allegiance's management; (4)
information regarding the trading market for the common stocks of Allegiance
and F&M and the price ranges within which the respective stocks have traded;
(5) the relationship of prices paid to relevant financial data such as net
worth, assets, deposits and earnings in certain bank and bank holding company
mergers and acquisitions in Maryland and Virginia in recent years; (6) F&M's
annual reports to shareholders and its financial statements for the three years
ended December 31, 1995, and (7) F&M's unaudited financial statements for the
six months ended June 30, 1995 and 1996, and other internal information relating
to F&M prepared by F&M's management. We have discussed with members of
management of Allegiance and F&M the background to the Merger, reasons and
basis for the Merger and the business and future prospects of Allegiance and
F&M individually and as a combined entity. Finally, we have conducted such
other studies, analyses and investigations, particularly of the banking
industry, and considered such other information as we deemed appropriate.
<PAGE>
Board of Directors
Allegiance Banc Corporation
Betheda, Maryland
Page 2
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 Allegiance and F&M. We have not attempted independently
to verify such information, nor have we made any independent appraisal of the
assets of Allegiance or F&M. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and
can be evaluated at the date hereof, as well as our experience in business
valuation in general.
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 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 Allegiance Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ GARY S. PENROSE
____________________________
Gary S. Penrose
Managing Director, Financial
Institutions Group
<PAGE>
APPENDIX IV
ALLEGIANCE'S 1995 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
Table of Contents
1. Letter to Shareholders
2. Financial Highlights
4. Serving Your Needs
6. Management's Discussion
11. Report of Independent Auditors
12. Balance Sheets
13. Statements of Income
14. Statements of Changes in Shareholders' Equity
15. Statements of Cash Flows
16. Notes to Consolidated Financial Statements
26. Board of Directors
28. Officers and Advisory Board
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at the Residence Inn,
7335 Wisconsin Avenue, Bethesda, Maryland, on Wednesday, May 22, 1996 at
10:00 a.m.
TRANSFER AGENT
American Stock Transfer & Trust Company,
40 Wall Street, 46th Floor, New York, New York 10005
CERTIFIED PUBLIC ACCOUNTANTS
Stegman & Company,
405 E. Joppa Road,
Suite No. 200,
Towson, Maryland 21286
NASDAQ LISTING
Listed on the Nasdaq National Markets.
Symbol: ALLG
MARKET MAKERS
Koonce Securities, Inc.,
6550 Rock Spring Drive, Suite No. 600,
Bethesda, Maryland 20817
Ferris, Baker Watts, Inc.
1720 Eye Street, N.W.
Washington, DC 20006
Herzog Heine Geduld, Inc.
New Port Tower
525 Washington Boulevard
Jersey City, New Jersey 07310
FORM 10-K
Copies of the Allegiance Banc Corporation Annual Report to the Securities and
Exchange Commission, Form 10-K, may be obtained by shareholders, without
charge, by writing Allegiance Banc Corporation,
4719 Hampden Lane,
Bethesda, Maryland 20814
<PAGE>
<PAGE>
FINANCIAL
HIGHLIGHTS
At and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991.
(dollars in thousands except percentage and per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONDITION YEAR-END
Total assets $ 131,100 $106,326 $105,474 $103,724 $ 94,034
Total deposits 107,859 93,108 94,922 94,699 85,192
Total loans 93,313 66,300 52,642 49,972 54,956
Shareholder equity 11,630 10,578 10,262 8,581 8,203
INCOME
Interest income $ 9,488 $ 7,763 $ 7,071 $ 7,283 $ 7,175
Interest expense 3,977 2,806 2,768 3,384 4,126
Net interest income 5,511 4,957 4,303 3,899 3,049
Gains (losses) on sales of securities 152 (453) 259 163 163
Income (loss) before
extraordinary item 828 1,206 1,115 232 (1,858)
Net Income (loss) 828 1,206 1,115 378 (1,858)
Return on average assets 0.71% 1.13% 1.12% 0.39% (2.27)%
Return on average equity 7.46% 12.21% 12.30% 4.49% (20.34)%
PER SHARE
Income (loss) before
extraordinary item* $ 0.49 $ 0.71 $ 0.66 $ 0.14 $ (1.10)
Net Income (loss)* $ 0.49 $ 0.71 $ 0.66 $ 0.23 $ (1.10)
Book value at year-end $ 6.86 $ 6.24 $ 6.06 $ 5.07 $ 4.85
</TABLE>
*weighted average. Per share data has been retroactively adjusted to reflect the
1994 stock split.
<PAGE>
SERVING YOUR
NEEDS
THE ALLEGIANCE MISSION
Allegiance Bank, N.A. has a mission: to assist consumers, small to
medium sized businesses and professionals located in Montgomery and Prince
George's Counties. As we demonstrated when we opened our branch in Silver
Spring, we are eager to fill the void that has been created as some banks have
consolidated and moved their headquarters out of State. Our new Silver Spring
branch is located in the heart of the city and reflects our commitment to the
revitalization of this key business district in the Maryland suburbs. We are
ready to support the financial needs of businesses as they move into Silver
Spring or upgrade their existing operations.
Headquartered locally in Bethesda, Maryland, Allegiance Bank provides its
customers with easy access to key decision makers and members of senior
management. Each member of our Board of Directors is a local business person and
aware of the unique problems and challenges that businesses face in our area.
Allegiance Bank has a goal to continue to be the most respected community
bank in Montgomery and Prince George's Counties by offering quality service and
competitive pricing of a full range of products for businesses and consumers. We
strive to offer the best customer service possible. Customer surveys have shown
that Allegiance Bank is known for providing excellent service due to the efforts
of our superb staff of business and personal bankers.
RELATIONSHIP BANKING
Allegiance Bank is proud that the majority of our new clients are
referrals from our existing customers, directors and a network of professionals
who are familiar with our Bank. This "word of mouth" advertising is a testimony
to the sophisticated products, competitive prices and, most of all, the
one-on-one relationship banking found at Allegiance - a quality that is often
promised but rarely delivered by other financial institutions.
Developing long-term relationships with our customers is a key factor in
maintaining our strong client base. We would prefer to be the Bank for a
customer's entire relationship rather than providing just one service or
product. We invested heavily during the past year in developing cash management
products such as PC Banking,automated overnight investments and Lockbox, that
place us on a par with larger regional banks. Emphasis is placed on
cross-selling services to existing customers. This includes merchandising retail
products to the principals and employees of our commercial customers.
Allegiance Bank has developed a reputation as a reliable provider of loans
to the small business community. The Bank is a member of the Montgomery County
Bankers Small Business Loan Fund, which pools resources of 21 banks to provide
loans to businesses that could not obtain them through conventional
financing.Our portfolio of SBA loans continues to grow and again reflects our
desire to meet the needs of the community.
During 1996, Allegiance Bank will continue developing and delivering the
products our customers have asked for because when we say "Our job is to make
yours easier, it's not just a statement - it's a promise."
BANKING FOR CONSUMERS
For the consumer, we continue to not only develop our branch network but
also add and refine our product offerings. Our new branches in Silver Spring and
Gaithersburg allow us to reach more new customers and offer more convenient
locations for our existing clients. Our PRIME + 0% Home Equity Line continues to
be the best home equity product in the market. In response to customers
requests, we added the CIRRUS ATM network to meet cash needs when traveling out
of the area. We offered Allegiance Bank by Phone and will be expanding it at
some time in the future to include bill paying.
During the past year and in 1996 we will market our Certificate of Deposit
products extensively while offering some of the most competitive rates in the
area.
Allegiance Bank wants to make your banking experience enjoyable and hassle-
free. "Our job is to make yours easier." We promise no long lines or delayed
decision making no matter what your need may be.
Finally, for the benefit of all of our customers, we offer friendly,
professional employees who are trained to provide top-quality banking services.
<PAGE>
PRODUCTS AND SERVICES
The following is a list of our products and services,both business and
personal. If you are not already doing so, please consider banking with us. Use
the attached card to indicate which services you would like further information
on. We will be glad to explain how each of our services can work for you.
Remember, "Our job is to make yours easier."
BUSINESS PRODUCTS
<TABLE>
<CAPTION>
<S> <C>
BUSINESS PRODUCTS PERSONAL PRODUCTS
. Commercial Checking . Interest Checking
. Commercial Interest Checking . Regular Checking
. Security Repurchase Investment Accounts . Money Market Accounts
. Sweep Accounts . Certificates of Deposit
. Money Market Accounts . IRA's
. Certificates of Deposit . MOST/CIRRUS ATM Cards
. IOLTA Accounts . Allegiance Bank by Phone
. Allegiance Bank by Phone . Home Equity Lines of Credit
. Execubanc-PC Banking . Personal Loans
. Lockbox . Auto Loans
. Merchant Credit Card Depository . Personal Lines of Credit
. ACH . Home Improvement Loans
. Lines of Credit . Second Mortgage Loans
. SBA Loans . Residential Mortgage Loans
. Inventory Loans
. Equipment Loans
. Letters of Credit
. Commercial Mortgage Loans
. Construction Loans
</TABLE>
<PAGE>
MANAGEMENT'S
DISCUSSION
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
The Consolidated Financial Statements Contained Herein Present the Financial
Condition of the Company and its Wholly-Owned Subsidiary, Allegiance Bank, N.A.
(the Bank), at December 31, 1995 and 1994, and the Results of Operations for the
Years 1995, 1994 and 1993.
Financial Condition
At the end of 1995, the Company's assets had increased from the year-end
1994 level by $24.8 million, or 23.3 percent,to $131.1 million. The Company
managed a substantial growth in loans, with a 40.7 percent increase of $27.0
million to $93.3 million. The loan growth was funded by increased deposits of
$14.8 million, by a $4.3 million reduction in the investment portfolio, and by
short-term borrowing of $8.6 million. Included in the net loan increase were
$8.1 million in local, seasoned loans purchased from a regional bank. The
largest increase in the loan portfolio was in real estate loans which grew by
$17.5 million, while commercial loans increased by $4.7 million and consumer
loans grew by $2.9 million. Loans secured by various types of real estate
represented 63.5 percent of the total loan portfolio, compared to 53.5 percent
at year-end 1994. Total loans represented 79.8 percent of earning assets at
year-end, compared to 68.1 percent at year-end 1994.
As of December 31,1995, variable rate loans totaled $52.9 million, which was
56.7 percent of total loans, while fixed rate loans were $40.4 million and 43.3
percent of the portfolio. This compares to $39.1 million of loans with variable
rates, or 59.0 percent of the portfolio at the end of 1994 and $27.2 million, or
41.0 percent in fixed rate loans. No significant amount of the loan portfolio is
at below market rates.
In 1995, the Bank continued to focus on niche lending segments of the
market, small and medium sized businesses and the professional community. Added
features to the business development program included an increased effort at
cross-selling and deposit generation, and achieving a balance in the Bank's
commercial and residential loan portfolios.
The Bank's underwriting standards continue to be conservative, and
management anticipates no significant changes in this policy. However,
flexibility in the underwriting process is reflected in the structuring of
credit facilities.
The Bank's primary geographic market includes Montgomery and northern Prince
George's Counties in the Maryland suburbs of Washington, DC. As much as
possible, the Bank concentrates on those areas which are proximate to the branch
locations. The Bank has opened two new Montgomery County branches; in Silver
Spring during 1995 and Gaithersburg in 1994. As the Bank has expanded, the
geographic factors have widened the market considerably.
Community reinvestment is a continuing and important segment of the Bank's
efforts. During 1995 the majority of the loans originated by the Bank were in
Montgomery and Prince George's Counties. The Bank participates in government-
sponsored lending programs, such as those offered by the Small Business
Administration, and other special lending programs including the Montgomery
County Banker's Small Business Loan Fund and the Prince George's County
Revitalization Loan Fund.
During 1995, the Company's investment portfolio declined by $4.3 million to
$23.7 million, as the proceeds from sales and maturities of investments were
used to fund loan growth, as noted above. As bond prices rose during 1995 in
response to a decline in prevailing interest rates, the Company had the benefit
of a significant increase in the value of the investment portfolio. In addition
to the realization of securities gains of $152 thousand on investments which
were sold, the unrealized losses on the investments held to maturity and the
investments available for sale improved by approximately $1.8 million during
1995. In December 1995, the Bank transferred $5.0 million of investments from
held to maturity to the available for sale portfolio; this transfer was made to
achieve a better balance in the investment portfolio and to increase liquidity
following significant reductions in investments during the past two years. At
year-end 1995, investments available for sale stood at $11.6 million while
investments held to maturity were $12.1 million or 50.9 percent of the
portfolio.
The investment portfolio underwent some dramatic changes in 1994. The
available for sale portfolio declined by $17.9 million, from $27.3 million at
the end of 1993 to $9.4 million at year-end 1994. The held to maturity portfolio
grew by $1.2 million, resulting in a net reduction in the total securities
portfolio of $16.7 million. Securities were sold from the available for sale
portfolio, periodically during 1994, primarily to fund loan growth. The net
unrealized holding gains on securities available for sale changed from an
unrealized gain of $566 thousand at year-end 1993 to a net unrealized loss of
$368 thousand at year-end 1994. The net unrealized holding losses represent a
reduction in the estimated fair value of the securities due to a rising interest
rate environment, and are not a reflection of credit risk. During 1994, the Bank
transferred a security with a par value of $1.0 million and an estimated fair
value of $810 thousand, from the available for sale portfolio to the held to
maturity portfolio. The $190 thousand unrealized holding loss on that security
will be amortized over its remaining life. The Bank established a banking
relationship with the Federal Home Loan Bank of Atlanta during 1994, and
purchased $300 thousand of FHLB stock, which is reflected in the investment
portfolio as equity securities.
During the fourth quarter of 1994, the Company recorded previously
unrecognized deferred income tax assets totaling $892 thousand by eliminating
the valuation allowance established during 1993 upon the adoption of Statement
of Financial Accounting Standards No.109 (SFAS No.109) "Accounting for Income
Taxes." "The elimination of the valuation allowance was deemed appropriate in
light of the Company's continuing profitable operations and the projected level
of future years' taxable income.In accordance with SFAS No.109, deferred tax
assets are recognized only if their realization is "more likely than not."
Also in 1994, the Bank offset the effect of the elimination of the deferred
tax asset valuation reserve by selling certain investments in the available for
sale portfolio whose market value had been negatively affected by the rising
interest rate environment experienced during 1994. The Bank sold $7.8 million in
securities resulting in $518 thousand in realized losses. The proceeds from
these sales were reinvested in securities with a weighted average yield of 7.72
percent, in order to improve the overall yield of the portfolio, as well as,
future years' earnings. The securities sold had a weighted average yield of 6.46
percent.
During 1995, the Bank opened a new branch in Silver Spring, Maryland, and
completed the conversion to a new data processing system. During 1994,the Bank
opened a new branch in Gaithersburg, Maryland, relocated an existing branch in
Wheaton, Maryland, expanded the third floor of the Bethesda location, installed
a Wide Area Network and purchased new equipment in conjunction with the data
processing conversion. As a result of these activities, the Bank invested $388
thousand and $743 thousand in premises and equipment in 1995 and 1994,
respectively.
In 1995, total deposits increased by $14.8 million or 15.8 percent to stand
at $107.9 million at year-end. Non-interest bearing deposits increased by $3.0
million to $21.8 million, while interest bearing deposits increased by $11.8
million to $86.0 million. The largest increase in interest bearing deposits came
from certificates of deposit which gained $11.7 million to stand at $40.4
million at the end of 1995. To attract these balances in 1995 and to retain them
in 1996, the Bank offered competitive interest rates and a range of new
investment products and services that were designed to appeal to the local
market. Deposit growth was also helped by additional new branches and data
processing systems during 1994 and 1995.
In 1994, non-interest bearing deposits increased $3.9 million,from $15.0 to
$18.9 million, while interest bearing balances declined by $5.7 million,
resulting in a net decrease in deposits of $1.8 million, from $94.9 to $93.1
million. The banking industry as a whole had been experiencing declines in
deposits as investors moved balances into U.S. Treasury securities and mutual
funds, seeking higher returns on their investments. The increases in the prime
lending rate in late 1994 allowed the Bank to counter that outflow by offering
higher rates on deposits without sacrificing interest rate spreads and margins.
At the end of 1995, short-term borrowings in the form of customer repurchase
agreements were approximately $5.8 million compared to $0.4 million at the end
of the previous year. These repurchase agreements fluctuate during the year,
based on customers' liquidity needs and provided a significant new source of
funds for the Bank in 1995.
Short-term borrowing from the Federal Home Loan Mortgage Corporation and the
Federal Home Loan Bank of Atlanta have been used to cover temporary liquidity
needs. The balances from these sources stood at $4.2 million and $1.0 million at
the end of 1995 and 1994, respectively. The Bank also borrowed $1.0 million,for
a term of four years, from the FHLB during 1994 to match fund a specific loan.
Capital Resources and Adequacy
During 1995, stockholders' equity increased by $1.1 million as a result of
net income of $828 thousand and the positive change in the net unrealized loss
on available for sale securities. In 1994, the increased equity of $316 thousand
was the net result of net income of $1.2 million and the $906 thousand change in
the net unrealized losses on the Company's available for sale investment
securities portfolio. Book value per share stood at $6.86 and $6.24 at the end
of 1995 and 1994, respectively.
Risk-based capital regulations require banks and bank holding companies to
maintain minimum ratios of capital to risk-weighted assets and off-balance sheet
credit arrangements. Total capital is classified into two tiers, referred to as
Tier 1 and Tier 2. The Bank's Tier 1 capital is composed of common stockholders'
equity, while Tier 2 capital is composed of the qualifying portion of the
allowance for credit losses. For bank holding companies with consolidated assets
of less than $150 million, the risk-based capital guidelines generally are
applied on a bank-only basis.
The bank regulatory minimums for the Tier 1 risk-based capital and total
risk-based capital ratios are 4.0 percent and 8.0 percent, respectively. At
December 31, 1995, the Bank's Tier 1 risk-based capital ratio was 11.39 percent
and the total risk-based capital ratio was 12.64 percent. At December 31,
1994, the ratios were 14.39 percent and 15.64 percent, respectively. The decline
in the ratios is due to the change in the mix of the earning assets from the
securities portfolio, which carries a lower risk weighting, to the loan
portfolio which carries a higher risk weighting. The Bank remains well in excess
of regulatory minimums with ample room to continue to increase the loan
portfolio.
The Bank's capital leverage ratio, another regulatory measure, is Tier 1
capital divided by average total assets. The regulatory minimum for certain
institutions is 3.0 percent, with most institutions required to maintain a ratio
of at least 4.0 percent to 5.0 percent, depending upon risk profiles and other
factors. At December 31,1995, the Bank's leverage ratio was 9.60 percent,
compared to 9.77 percent at the end of 1994.
Results of Operations
The Company's net income for 1995 was $828 thousand compared to $1.2 million
in 1994, a decrease of 31.3 percent. Net income for 1994 increased by 8.2
percent over that of 1993, which was $1.1 million. Pre-tax earnings were $1.3
million in 1995 compared to $514 thousand in 1994 and $1.1 million in 1993.
While 1995 earnings felt the full effect of a normal income tax provision, net
income for 1994 enjoyed an income tax benefit of $693 thousand, and no tax
provision was recorded in 1993.
Generally, two key measures of profitability include the return on average
assets and the return on average equity. For the three year period from 1993 to
1995, however, the manner in which income tax accounting principles have been
reflected in the Company's results of operations has had an unusual impact on
these ratios. Although there was a significant increase in pre-tax earnings in
1995, there was a decline in return on average assets ratio and the return on
average equity ratio. For 1995, the return on average assets was 0.71 percent
compared to 1.13 percent for 1994 and 1.12 percent for 1993. The return on
average equity for 1995 was 7.46 percent versus 12.21 percent for 1994 and
12.30 percent for 1993. Net income per share was $0.49 in 1995 compared to $0.71
in 1994 and $0.66 in 1993.
Net Interest Income
Net interest income represents the amount by which interest income on
earning assets exceeds the cost of interest bearing sources of funds. Earning
assets include loans, investments and interest earning balances at other banks,
while certain deposits and borrowings represent the interest-bearing
liabilities. Several factors influence net interest income, including market
rates of interest and the volume, mix and rate sensitivity of earning assets and
interest bearing liabilities.
Net interest income for 1995 was $5.5 million, compared to $5.0 million in
1994 and $4.3 million in 1993. The $554 thousand, or 11.2 percent, increase in
1995 net interest income was generated by an increase in interest income of $1.7
million which was partially offset by a $1.2 million increase in interest
expense. This followed 1994 when there was a $654 thousand, or 15.2 percent,
growth in net interest income resulting from an increase in total interest
income of $693 thousand while interest expense remained flat.
During 1995, there was a shift in the mix of earning assets as the
investment securities were reduced to fund loan growth, and there was a decrease
in the average amount of federal funds sold. While interest and fees on loans
increased by $2.6 million to $7.8 million, interest and dividends on investment
securities decreased by $791 thousand to $1.5 million and interest on federal
funds sold decreased by $105 thousand to $134 thousand. The increased level of
deposits resulted in an increase in interest expense of $931 thousand to $3.7
million, while interest expense for short term borrowing and customer repurchase
agreements increased by $199 thousand to $219 thousand.
In 1994, the change in the mix of earning assets was reflected primarily in
an increase in interest and fees on loans of $931 thousand, which was due to the
increase in loans outstanding,as well as,increases in the prime lending rate.
Interest on federal funds sold increased by $112 thousand, due to an increase in
the volume of federal funds sold. Interest income on the investment portfolio
declined by $350 thousand due to the utilization of the investment portfolio to
fund loan growth.
During 1995, the Bank's net interest spread and margin, continued to
improve. The net interest spread is the difference between the yield on
interest-earning assets and rates paid on interest-bearing liabilities. In 1995,
the net interest spread increased to 4.20 percent from 4.09 percent in 1994 and
3.91 percent in 1993. The net interest margin is a measurement of how
effectively the Bank utilizes its interest earning assets in relation to the
interest cost of funding them. It is computed by dividing net interest income by
average interest-earning assets. The net interest margin increased to 5.09
percent in 1995 from 4.82 percent in 1994, and 4.57 percent in 1993.
Valuation Allowance and Provision for credit Losses
The Bank maintains a valuation allowance for credit losses which represents
the amount considered by management to be adequate to cover losses which could
occur in the loan portfolio. The provision for credit losses is a charge to
earnings to maintain the allowance at an adequate level. On a quarterly basis,
management conducts a comprehensive review of the loan portfolio, evaluating
factors such as economic conditions, loan mix and volume, delinquency trends,
identification of weak credits, historical credit loss experience and the value
of collateral, to ensure that an adequate valuation allowance is maintained.
Between reviews, events may occur which would require an immediate adjustment to
the allowance,and these situations are addressed as required.
During 1995, the $1.0 million valuation allowance was increased by $11
thousand as a result of $111 thousand in net recoveries of amounts previously
charged against the allowance, and offset in part by a $100 thousand negative
provision for credit losses. During 1994, the allowance had been reduced by net
charge-offs of $214 thousand and increased by $70 thousand due to a provision
for credit losses through a charge to earnings. Net charge-offs for 1993 were
$389 thousand, while the charge to earnings for the credit loss provision was
$90 thousand. The $1.0 million balance of the valuation allowance for credit
losses represents management's judgment of the current loan portfolio, with
improved asset quality and substantial net loan growth. The increases in loans
during 1995 and 1994 are represented by gains in the real estate segment of the
portfolio. Historical loss experience for real estate loans, as reviewed through
migration analysis for eight quarters, has been negligible, thereby minimizing
requirements for additions to the allowance. The Bank retained an independent
consulting firm which conducted an annual review of the allowance for credit
losses after evaluating the overall quality of the loan portfolio. Bank
management believes that the allowance was adequate, at the end of 1995, when
the $1.0 million valuation allowance was 1.12 percent of loans and 318 percent
of non-performing loans, while at year-end 1994, the $1.0 million allowance was
1.6 percent of loans outstanding and 99 percent of non-performing loans.
Non-accrual loans at year-end 1995 were at $0.3 million, or 0.4 percent of
total loans, compared to $1.0 million, or 1.6 percent of total loans at the end
of 1994. This represents a continued improvement since 1993 when the level of
non-accrual loans was at $1.4 million, or 2.6 percent of total loans
outstanding. At year-end 1995, $265 thousand of the $327 thousand balance of
non-accrual loans were fully secured real estate mortgages, with the remaining
$62 thousand consisting of commercial loans. Of the 1994 total, $777 thousand
were real estate mortgages secured by commercial and residential properties,
with the remaining $265 thousand representing commercial loans,of which $235
thousand were fully guaranteed by the U.S. Small Business Administration. The
1993 non-accruals were comprised of $800 thousand in real estate mortgages
secured by commercial and residential properties, and $600 thousand in
commercial loans, of which $300 thousand were real estate secured. There were no
loans past due for 90 days or more at the end of 1995, 1994 or 1993.
Non-Interest Income
Non-interest income in 1995 was $869 thousand compared to $242 thousand in
1994. Excluding securities gains of $152 thousand in 1995 and securities losses
of $453 thousand in 1994 (as discussed in the Financial Condition section,
above), non-interest income increased by $22 thousand. There was a decline of
$58 thousand in service charges on deposit accounts as a result of the increase
in the earnings credit for commercial accounts which more than offset the effect
of increased levels of deposit accounts. Other income increased by $87 thousand.
Other income represents fees collected for wire transfers, issuance of official
checks, processing of special collections and safe deposit box rentals.
During 1994, total non-interest income declined to $242 thousand, compared
to 1993, due primarily to net losses on sales of securities of $453 thousand,
and to some extent to a decline in deposit account service fee income and
miscellaneous other income. The decline in fee income occurred due to the
reduction in deposit accounts and to customer management of their account
balances to avoid service charges, mainly overdraft fees. The 1993 non-interest
income figure of $1.0 million included net gains on sales of securities of $259
thousand and non-recurring income of $42 thousand. Management projects that
service fee income will increase during 1996, consistent with anticipated
account growth, as discussed in the Financial Condition section relative to
branch and deposit growth.
Non-Interest Expense
In 1995, total non-interest expense was $5.2 million, an increase of $0.6
million or 13.0 percent over 1994 when such expenses were $4.6 million. Salaries
and benefits increased by $247 thousand to $2.6 million as a result of
additional personnel for the branch system,including the addition of new branch
offices in Gaithersburg and Silver Spring, Maryland, and merit increases, with
some reductions in operations as a result of conversion to a new data processing
system. Increases in occupancy and equipment expenses of $229 thousand or 26
percent in 1995 were the result of the new branches and additional space in the
headquarters building, as well as the data processing systems conversion, during
1994 and 1995. A $100 thousand provision was recorded in 1995 for possible
losses on foreclosed real estate. The Federal Deposit Insurance Corporation
reduced the deposit insurance assessment for banks during 1995 resulting in a
$114 thousand or 51 percent reduction in such expenses compared to 1994. In
1996, the FDIC insurance assessments are expected to be reduced to $2 thousand.
Also during 1995, data processing expenses increased by $51 thousand or 51
percent; again due to the conversion to the new data processing systems which
have modernized and expanded the Company's ability to serve the banking needs of
our customers.
Total non-interest expense was $4.6 million for 1994, which was an 11.5
percent increase over the 1993 total of $4.1 million. Higher salaries and
employee benefits, up $342 thousand or 17.3 percent, represented the largest
increase in non-interest expense and were mainly due to increased staffing in
the lending area and the branch system, to merit increases and to a lesser
extent, performance bonuses. Related expenses, such as medical and payroll tax
expense, increased accordingly. The rise in salaries and benefits was $117
thousand, or 6.3 percent, in 1993 and was due primarily to merit increases and
to a lesser extent, increased costs of medical benefits.
The other non-interest expense categories, with the exception of advertising
expense which increased by $92 thousand due to a planned increase in the
advertising budget, increased minimally during 1994. In 1993, the FDIC insurance
premiums increase was $43 thousand, or 22.1 percent, due to an increase in
deposits as of the assessment dates, as well as, an increase in the insurance
rates. The remainder of the non-interest expense categories increased minimally
in 1993.
Liquidity and Interest Rate Sensitivity
Liquidity is a measure of the Bank's ability to generate and maintain
sufficient cash flows to fund operations and to meet financial obligations to
depositors and borrowers promptly and in a cost-effective manner. The Bank's
liquidity is provided by amortizing and maturing loans, maturities and paydowns
of investment securities, federal funds sold, readily marketable available for
sale investment securities and securities that can serve as collateral for
borrowing. In the event necessary, the Parent Company would sell securities from
its portfolio to fund its own liquidity needs.
The Bank's liquidity sources and needs are measured on a monthly basis. The
analysis includes a review of current lending commitments and projections of
future loan demand and anticipated deposit growth or contraction. At December
31, 1995, the Bank's liquidity sources were 1.8 times anticipated liquidity
needs, well in excess of the established management guidelines of 1.5 times
anticipated liquidity needs. At the end of 1994, liquidity sources were 2.1
times projected liquidity needs.
Because of the significant impact interest rate fluctuations may have on the
Bank's performance, management continually monitors the interest rate
sensitivity of its assets and liabilities. The common measurement term is "gap,"
which refers to the relationship of earning assets to interest-bearing
liabilities within the time period in which they will mature or reprice. A
positive gap, wherein earning assets exceed interest-bearing liabilities,
positions the Bank to respond to rising interest rates. A negative gap, wherein
interest-bearing liabilities exceed earning assets, positions the Bank to
respond to declining interest rates.
Management strives to forecast far enough into the future so they can fine
tune the earning assets to respond to changes in rates. As a guide, management
tries to maintain a gap not greater than 15.0 percent of earning assets, either
positive or negative, for the various periods of measurement. At December 31,
1995, the Bank had a cumulative negative gap out to one year of 6.5 percent of
earning assets. During 1995, the Bank narrowed its liability sensitive position
by increasing variable rate assets and shortening the maturities and repricing
periods of a portion of the investment portfolio.
The following table presents the Bank's gap measurements as of December 31,
1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Assets and Liabilities Maturing or Repricing Within
0-3 Over 3 - 12 1 - 5 Over 5
Months Months Years Years
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (rsa)
Investment securities $ 8,103 $ 3,501 $ 7,453 $ 4,134
Loans 55,445 5,849 22,888 9,043
Federal funds sold 5,590 - - -
Total RSA 69,138 9,350 30,341 13,177
RATE SENSITIVE LIABILITIES (rsl)
Interest bearing
demand deposits 10,787 - - -
Money market accounts 34,906 - - -
Certificates of deposit 13,636 17,632 9,144 121
Other 10,005 - 1,000 -
Total RSL 69,334 17,632 10,144 121
Cumulative gap $( 196) $ (8,478) $11,719 $24,775
Ratio of cumulative gap
to earning assets (0.15)% (6.50)% 8.98% 18.99%
</TABLE>
Taxes
In 1995, the Company recorded income tax expense, based upon
statutory rates, of $438 thousand, an effective tax rate of 34.6 percent, which
served to reduce the deferred tax asset previously recorded in 1994. During
1994, the Company recorded a $693 thousand income tax benefit resulting from
the recognition of a deferred tax asset which previously had been eliminated
through a valuation reserve. The valuation reserve was deemed unnecessary as of
December 31, 1994, because realization of the deferred tax asset was considered
probable. The Company's increased level of projected future year taxable income
and the previous three years earnings trend supported the elimination of the
valuation reserve. The net deferred tax assets at December 31, 1995, are
expected to be realized through future taxable income. In 1993, the Company used
a portion of the net operating loss carryforward to eliminate applicable income
taxes in the amount of $433 thousand. For 1995, and subsequent years, the
Company expects to record income tax expense at the statutory rates which will
significantly impact the comparability of net income with previous periods.
The Company files a consolidated federal tax return, and is
taxed at the prevailing statutory rate on net income. The current federal
statutory rate is 34.0 percent. Franchise tax returns are filed by the Bank with
the State of Maryland. At December 31, 1995, the Company had a federal net
operating loss carryforward of approximately $150 thousand which expires in 2007
and can be used to offset future tax liability.
Market Price of Common Stock and Dividends
The Company's common stock is traded on the NASDAQ Exchange
and is listed under the symbol ALLG. The approximate number of shareholders of
record as of January 31, 1996, was 700. Information for high and low sales
prices, as known by the Company, is shown by calendar quarter for the years
indicated in the following table:
<TABLE>
<CAPTION>
1995 High Low
<S> <C> <C>
First Quarter $ 8.00 $6.50
Second Quarter 7.50 6.50
Third Quarter 7.88 6.50
Fourth Quarter 11.00 6.88
1994
First Quarter $8.50 $6.50
Second Quarter 9.00 6.13
Third Quarter 8.50 6.50
Fourth Quarter 9.00 7.00
</TABLE>
No cash dividends on the Company's common stock have been
declared. In June 1994, the Company issued 282,200 shares of common stock as the
result of a 6 for 5 stock split, effected in the form of a 20 percent common
stock dividend. The policy of the Board of Directors has been to retain earn-
ings in order to provide funds for the growth and development of the Company's
business. Any future payment of cash dividends will depend upon the Company's
earnings, growth, financial condition, capital needs, regulatory requirements
and such other factors as the Board of Directors may deem appropriate.
<PAGE>
REPORT OF
INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Allegiance Banc Corporation
Bethesda, Maryland
We have audited the accompanying consolidated balance sheets of Allegiance
Banc Corporation and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholder equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Allegiance Banc Corporation and Subsidiary as of December 31, 1995 and 1994, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Stegman & Company
Towson, Maryland
January 26, 1996
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,133,309 $ 5,338,702
Federal funds sold 4,905,000 3,000,000
Investment securities:
Available for sale-at fair value 11,626,818 9,444,781
Held to maturity-at amortized cost-fair
value of $11,695,642 (1995) and $16,739,186 (1994) 12,053,560 18,564,708
Loans 93,313,086 66,300,378
Less: allowance for credit losses (1,041,433) (1,030,895)
Loans-net 92,271,653 65,269,483
Premises and equipment-net 1,626,089 1,530,210
Foreclosed real estate 791,596 1,306,556
Deferred income tax benefits 360,386 930,644
Accrued interest receivable and other assets 1,331,213 941,110
TOTAL ASSETS $131,099,624 $ 106,326,194
LIABILITIES
Deposits:
Non-interest bearing $ 21,837,223 $ 18,855,398
Interest bearing 86,021,463 74,252,542
Total deposits 107,858,686 93,107,940
Short-term borrowings 10,005,971 1,393,573
Long-term borrowings 1,000,000 1,000,000
Accrued expenses and other liabilities 604,666 246,416
Total liabilities 119,469,323 95,747,929
SHAREHOLDERS' EQUITY
Common stock - $1 par value; 10,000,000 shares authorized
and 1,695,863 shares issued and outstanding 1,695,863 1,695,863
Surplus 10,640,337 10,640,337
Accumulated deficit (590,139) (1,417,881)
Net unrealized holding losses on securities (115,760) (340,054)
Total shareholders' equity 11,630,301 10,578,265
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $131,099,624 $ 106,326,194
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years-ended December 31,
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,843,457 $5,222,903 $4,292,030
Interest and dividends on investment securities 1,510,842 2,301,519 2,652,012
Interest on federal funds sold 134,072 238,916 126,564
Total interest income 9,488,371 7,763,338 7,070,606
INTEREST EXPENSE
Interest on deposits 3,687,256 2,756,160 2,764,439
Interest on short-term borrowings 219,458 20,548 3,698
Interest on long-term borrowings 70,724 29,679 0
Total interest expense 3,977,438 2,806,387 2,768,137
NET INTEREST INCOME 5,510,933 4,956,951 4,302,469
PROVISION FOR CREDIT LOSSES (100,000) 70,000 90,000
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,610,933 4,886,951 4,212,469
OTHER OPERATING INCOME
Service charges on deposit accounts 543,954 601,548 622,547
Gain (loss) on sales of securities 152,449 (453,193) 259,355
Gain on sale of fixed assets 0 7,090 0
Other income 172,709 86,157 158,400
Total other operating income 869,112 241,602 1,040,302
OTHER OPERATING EXPENSES
Salaries and employee benefits 2,565,444 2,318,790 1,976,933
Net occupancy and equipment expense 1,110,257 881,549 842,972
Other real estate owned expense 156,381 23,523 59,951
Director and committee fees 104,363 114,696 106,469
FDIC insurance 109,303 223,296 236,203
Data processing expense 151,591 100,689 96,407
Advertising 120,650 148,651 56,677
Other insurance 88,331 96,884 91,510
Other expense 807,963 706,742 670,521
Total other operating expenses 5,214,283 4,614,820 4,137,643
INCOME BEFORE INCOME TAXES 1,265,762 513,733 1,115,128
INCOME TAX EXPENSE( BENEFIT)
net of tax benefit of operating loss carryforward
of $199,824 for 1994 and $432,821 for 1993 438,020 (692,613) 0
NET INCOME $ 827,742 $1,206,346 $1,115,128
NET INCOME, PER SHARE $ .49 $ .71 $ .66
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS-ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Net unrealized
holding gains (losses)
Common Accumulated on securities
Stock Surplus Deficit Available for Sale
<S> <C> <C> <C> <C>
Balances at January 1,1993 $1,410,000 $ 10,628,000 $ (3,456,887) $ 0
Net Income 0 0 1,115,128 0
Cumulative effect of the initial
application of Statement of Financial
Accounting Standards No. 115 0 0 0 565,943
Balances at December 31,1993 1,410,000 10,628,000 (2,341,759) 565,943
6 for 5 stock split 282,200 0 (282,200) 0
Fractional shares retired 0 0 (268) 0
Stock options exercised 3,663 12,337 0 0
Net Income 0 0 1,206,346 0
Net change in unrealized holding gains
on available for sale securities,
net of taxes of $ 213,959 0 0 0 (905,997)
Balances at December 31,1994 1,695,863 10,640,337 (1,417,881) (340,054)
Net Income 0 0 827,742 0
Net change in unrealized holding gains
on available for sale securities,
net of taxes of $86,579 0 0 0 224,294
Balances at December 31, 1995 $1,695,863 $ 10,640,337 $ (590,139) $ (115,760)
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years-ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 827,742 $ 1,206,346 $ 1,115,128
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision (reduction) for credit losses (100,000) 70,000 90,000
Depreciation and amortization 283,537 226,896 220,037
Loss on disposal of equipment 8,795 0 3,477
Net gains on sales of securities (152,449) 0 (259,355)
Net loss on sales of investment securities available
for sale 0 453,193 0
Deferred income taxes 570,258 (692,613) 0
Net gain on sale of premises and equipment 0 (7,090) (24,603)
(Increase) decrease in accrued interest receivable
and other assets (390,103) 11,250 66,922
Increase (decrease) in accrued expenses and other
liabilities 358,250 (40,201) (9,363)
Other-net (184,228) (452,182) (389,042)
Net cash provided by operating activities 1,221,802 775,599 813,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale investment securities (3,241,031) (8,845,752) 0
Proceeds from sales of available for sale investment
securities 6,109,946 23,145,307 0
Proceeds from maturities and principal payments of
available for sale investment securities 706,733 2,796,006 0
Purchases of held to maturity investment securities (513,600) (3,018,594) (31,936,986)
Proceeds from sales of held to maturity investment
securities 0 0 23,788,228
Proceeds from maturities and principal payments of
held to maturity investment securities 2,000,000 1,000,000 4,486,162
Net increase in loans (18,940,708) (9,547,423) (2,670,665)
Purchase of loans (8,072,000) (4,732,357) 0
Bank premises and equipment acquired (388,211) (743,349) (83,302)
Proceeds from sale of foreclosed real estate 453,532 0 0
Proceeds from sales of premises and equipment 0 7,090 3,500
Net cash provided (used) by investing activities (21,885,339) 60,928 (6,413,063)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 14,750,746 (1,813,945) 222,973
Net increase (decrease) in short-term borrowings 8,612,398 1,390,270 (144,489)
Proceeds from long-term borrowing 0 1,000,000 0
Proceeds from sale of common stock 0 15,732 0
Net cash provided by financing activities 23,363,144 592,057 78,484
NET INCREASE( DECREASE) IN CASH AND
CASH EQUIVALENTS 2,699,607 1,428,584 (5,521,378)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 8,338,702 6,910,118 12,431,496
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 11,038,309 $ 8,338,702 $ 6,910,118
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,801,722 $ 2,786,814 $ 2,778,041
Income taxes paid $ 0 $ 0 $ 0
Assets acquired in foreclosure $ 0 $ 835,609 $ 220,947
Reclassification of available for sale
securities to (from) held to maturity (at estimated
fair value) $ (5,001,000) $ 810,000 $ 0
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Notes To Consolidated
Financial Statements For The
Years-Ended December 31, 1995,
1994 and 1993
1. Summary Of Significant Accounting Policies
Accounting Policies
The accounting and reporting policies of Allegiance Banc Corporation
(the Company) and its subsidiary, Allegiance Bank, N.A. (the Bank) are in
conformity with generally accepted accounting principles and conform to general
practices within the banking industry. Certain reclassifications have been
made to conform the prior year financial statements to the 1995 presentation.
The following is a summary of the significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of
Allegiance Banc Corporation and its subsidiary bank, Allegiance Bank, N.A., with
all significant intercompany transactions eliminated. The investment in
subsidiary is recorded on the books of the holding company on the basis of its
equity in the net assets of the subsidiary.
Nature of Operations
The Company, through its subsidiary, provides a variety of banking
services to businesses, professionals and individuals through seven branches
located in Montgomery and Prince George's Counties in Maryland. Through its
branch network, the Bank offers a variety of depository services and lending
products such as commercial and commercial real estate loans, home equity loans
and personal loans.
Use of Estimates
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and revenues and expenses
for the period. Material estimates that are particularly susceptible to signifi-
cant change in the near-term relate to the determination of the allowance for
credit losses and the evaluation of real estate acquired in connection with
foreclosures or in satisfaction of loans. Actual results could differ from those
estimates.
Securities Available For Sale
Securities available for sale are stated at fair value, based on
quoted market prices. They represent those securities which management may sell
as part of its asset/liability strategy, or which may be sold in response to
changing interest rates, changes in prepayment risk or other similar
factors.Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. The cost of securities sold is
determined by the specific identification method.
Securities Held To Maturity
Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discount which are recognized in
interest income using the interest method over the period to maturity. The
Company has the positive intent and ability to hold these securities until
maturity.
Loans Receivable
Loans receivable that management has the intent and ability
to hold for the foreseeable future,or until maturity or pay-off, are reported
at their outstanding unpaid principal balances reduced by any chargeoffs or
specific valuation accounts and net of any deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans.
Interest on Loans
Interest income on loans is accrued at the contractual rate on
the principal amount outstanding. When scheduled principal or interest payments
are past due 90 days or more on any loan not fully secured by marketable
collateral, which may include real estate, the accrual of interest income is
discontinued and recognized only as collected. When loans are placed on
nonaccrual status, previously accrued interest is charged against interest
income. The loan is restored to an accruing status when all amounts past due
have been paid and the borrower has demonstrated the ability to continue such
payments. Loan origination and commitment fees and certain direct loan
origination costs are being deferred, and the net amount is amortized over the
contractual life of the loan as an adjustment of the loan's yield.
Allowance for Credit Losses
The allowance for credit losses is increased by charges to
income and decreased by reversals of previous year provisions and chargeoffs
(net of recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions.
<PAGE>
Foreclosed Real Estate
Real estate acquired through foreclosure of loans is carried at cost or
fair value minus estimated costs of disposal, whichever is lower. Fair value is
based on independent appraisals and other relevant factors. At the time of
acquisition, any excess of the loan balance over fair value is charged to the
allowance for loan losses. Gains and losses on sales of foreclosed real estate
are included in non-interest income.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization computed predominantly by straight-line methods
over the estimated useful lives of the properties. Expenditures for maintenance
and repairs are charged to operations; expenditures for betterment are charged
to the property accounts.
Income Taxes
Income taxes are based on income and expense amounts in the statement
of income. Under the liability method, deferred taxes are determined based on
the differences between the tax and financial bases of assets and liabilities
and are measured at the tax rates expected to be in effect at the time these
differences reverse. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
likely than not."
Net Income Per Common Share
Primary net income is computed by dividing net income by the weighted
average number of common shares outstanding during the year, giving
retroactive effect to stock splits. Although stock options granted and warrants
outstanding are considered common stock equivalents for the purpose of computing
the net income per share, they have been excluded since they have no dilutive
effect.
Cash Flows
The Company has defined cash and cash equivalents as those amounts
included in the balance sheet captions "Cash and due from banks" and "Federal
funds sold."
2. Adoption Of Recently Issued Accounting Policies
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) Nos. 114 and 118, "Accounting by Creditors for
Impairment of a Loan," and "Accounting by Creditors for Impairment of a Loan-
Income Recognition Disclosures," respectively. These standards apply to loans
that are considered impaired, where it is probable that the creditor will not
collect all principal and interest payments according to the loan's contractual
terms. Under SFAS No.114, impaired loans must be measured utilizing methods that
consider the present value of the expected future cash flows discounted at the
loan's effective interest rate, observable market price of the loan or fair
value of the collateral. If the measure of an impaired loan is less than the
recorded investment, a valuation allowance must be established through a
corresponding charge to provision for loan losses. The adoption of SFAS Nos. 114
and 118 did not have a material impact on the Company.
Effective December 31, 1995, The Company adopted SFAS No.107,
"Disclosures About Fair Value of Financial Instruments," which requires all
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the balance sheets, for which it is
practicable to estimate fair value. The adoption of SFAS No. 107 did not have a
material impact on the Company.
3. Restrictions On Cash and Due From Banks
In accordance with Federal Reserve Board Regulation D, the Bank maintains
reserve balances with the Federal Reserve Bank based on the overall levels of
transaction account balances. The average amount of those reserve balances, net
of vault cash, for the years ended December 31, 1995 and 1994 was $525,000 and
$750,000, respectively.
<PAGE>
4. Investment Securities
The amortized cost and estimated fair values of securities available for
sale are as follows:
<TABLE>
<CAPTION>
1995
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 5,113,967 $ 10,142 $ 4,694 $ 5,119,415
Mortgage-backed securities 5,884,113 16,164 42,474 5,857,803
Total debt securities 10,998,080 26,306 47,168 10,977,218
Equity securities 649,600 0 0 649,600
Total available for sale $ 11,647,680 $ 26,306 $ 47,168 $11,626,818
</TABLE>
<TABLE>
<CAPTION>
1994
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 2,609,439 $ 0 $ 73,953 $ 2,535,486
Mortgage-backed securities 6,658,395 0 294,300 6,364,095
Total debt Securities 9,267,834 0 368,253 8,899,581
Equity securities 545,200 0 0 545,200
Total available for sale $ 9,813,034 $ 0 $ 368,253 $ 9,444,781
</TABLE>
The amortized cost and estimated fair values of investment securities held to
maturity are as follows:
<TABLE>
<CAPTION>
1995
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,718,405 $ 9,420 $ 78,433 $ 6,649,392
Mortgage-backed securities 4,821,590 14,810 302,650 4,533,750
Municipal bond 513,565 0 1,065 512,500
Total held to maturity $ 12,053,560 $ 24,230 $ 382,148 $11,695,642
</TABLE>
<TABLE>
<CAPTION>
1994
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 18,564,708 $ 0 $ 1,825,522 $16,739,186
</TABLE>
The amortized cost and estimated fair value of debt maturities because
borrowers may have the right to call securities at December 31, 1995 by
contractual maturity, are or prepay obligations with or without call or
prepayment shown below. Expected maturities will differ from contractual
penalties.
<TABLE>
<CAPTION>
Available For Sale Portfolio Held to Maturity Portfolio
Amortized Cost Est. Fair Value Amortized Cost Est. Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $ 99,980 $ 100,492 $ 2,000,778 $ 2,000,215
Due after one year through five years 4,017,367 4,017,580 2,000,170 1,988,616
Due after five years 996,620 1,001,343 3,231,022 3,173,061
Total 5,113,967 5,119,415 7,231,970 7,161,892
Mortgage-backed securities 5,884,113 5,857,803 4,821,590 4,533,750
Total debt securities $ 10,998,080 $10,977,218 $ 12,053,560 $11,695,642
</TABLE>
<PAGE>
Proceeds from sales of investments in mortgage-backed securities
were $3,725,177 in 1995, $10,619,963 in 1994 and $2,165,423 in 1993. Gross gains
of $101,345 were realized on the 1995 sales, gross gains of $28,452 and gross
losses of $483,224 were realized on the 1994 sales, and gross gains of $107,709
were realized on the 1993 sales. Proceeds from sales of investments in all other
securities were $2,384,769 in 1995, $12,525,344 in 1994, and $21,622,805 in
1993. Gross gains of $51,104 were realized on the 1995 sales, and gross gains of
$120,593 and gross losses of $119,014 were realized on the 1994 sales. Gross
gains of $204,784 and gross losses of $53,138 were realized on the 1993 sales.
At December 31,1995, available for sale securities with book and
estimated fair values of $8,120,697 and $8,111,799, respectively; and held to
maturity securities with book and estimated fair values of $7,963,045 and
$7,634,370, respectively, were pledged as collateral for certain short term
borrowing as required or permitted by law.
In November 1995, the Financial Accounting Standards Board issued
a Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The Report announced a
one-time window of opportunity for the reassessment and reclassification of
securities categorized as held to maturity. On December 18,1995, the Company
transferred some securities previously classified as held to maturity to the
available for sale classification. The amortized cost of those securities
transferred was $5,015,000 and the estimated fair value was $5,001,000 on that
date, resulting in an increase of $14,000 in the net unrealized holding losses
on available for sale securities. This transfer increased the available for sale
portfolio providing additional flexibility for liquidity and interest rate risk
management.
5. Loans and Allowance For Credit Losses
At December 31, 1995 and 1994, loans were as follows:
1995 1994
Real estate construction $ 1,781,842 $ 819,550
Real estate mortgage 57,506,977 34,624,588
Commercial and financial 26,192,814 21,937,700
Loans to individuals 7,831,453 8,918,540
Total loans $ 93,313,086 $66,300,378
The composition of fixed and variable rate loans as of December 31, 1995 and
1994 was as follows:
1995 1994
Variable rate $52,884,195 $39,123,661
Fixed rate 40,428,891 27,176,717
Total loans $93,313,086 $66,300,378
Changes in the allowance for credit losses for 1995, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $ 1,030,895 $ 1,174,964 $ 1,474,006
Provision charged to operating expenses (100,000) 70,000 90,000
Recoveries 133,760 120,147 97,432
Loans charged off (23,222) (334,216) (486,474)
Balance at December 31 $ 1,041,433 $ 1,030,895 $ 1,174,964
</TABLE>
Nonaccrual loans totaled $326,516, $1,043,260, and $1,386,529 at
December 31, 1995, 1994 and 1993,respectively. If interest on these loans had
been accrued, such income would have approximated $33,000, $76,000, and $158,000
for 1995, 1994 and 1993, respectively.
In accordance with SFAS Nos. 114 and 118, "Accounting By Creditors
for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan
Income Recognition and Disclosures," the Company has identified certain loans as
impaired at year end 1995. The recorded investment of impaired loans totaled
$326,516 at December 31, 1995. The average recorded investment in impaired loans
during the year ended December 31, 1995 was approximately $887,000. For the year
ended December 31, 1995, the Company recognized interest income on impaired
loans of $54,000, representing interest received under the cash basis method of
income recognition. The total allowance for credit losses related to these loans
was $29,000 at period end.
<PAGE>
6. Premises and Equipment
Premises and equipment consisted of the following at December 31, 1995 and 1994:
1995 1994
Leasehold improvements $ 1,717,894 $ 1,149,060
Equipment 1,326,759 1,795,046
3,044,653 2,944,106
Accumulated depreciation and amortization ( 1,418,564) (1,413,896)
Premises and equipment - net $ 1,626,089 $ 1,530,210
The Bank rents certain bank premises under lease agreements, the
initial terms of which range from 5 to 15 years. In addition to minimum rentals,
the leases have escalation clauses based upon price indices and include
provisions for additional payments to cover taxes, insurance and maintenance.
Total rental expense for 1995, 1994 and 1993 was $612,278, $512,595 and
$487,485, respectively.
A portion of the Bank's main facility is occupied by a sub-tenant
under a lease which commenced in November 1994 and expires September 1999.
Annual rent under the lease is $42,120. Additionally, the sub-tenant shares in
the operating expenses of the facility.
At December 31, 1995, the aggregate minimum net rental commitments
under noncancelable operating leases on bank premises are as follows:
Minimum Rentals
1996 $ 594,719
1997 596,303
1998 611,608
1999 602,748
2000 517,954
Thereafter 690,854
Total $ 3,614,186
7. Deposits
Included in interest bearing deposits are certificates of deposit
in denominations of $100,000 or more which totaled $13,905,058 and $12,115,424
at December 31, 1995 and 1994, respectively.
Interest on deposits for the years ended December 31, 1995, 1994
and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Certificates of deposit ($100,000 or more) $ 797,849 $ 573,261 $ 590,185
Other time deposits 1,446,159 758,017 834,064
Other interest bearing accounts 1,445,135 1,424,882 1,340,190
Total interest on deposits $3,689,143 $2,756,160 $ 2,764,439
</TABLE>
8. Short-term Borrowings
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings represent funds acquired for
short-term liquidity needs. Federal funds purchased mature on the business day
after execution. Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings:
1995 1994
Maximum month-end balance $10,005,971 $ 1,736,915
Average daily balance 8,133,969 676,975
Amount outstanding at December 31 10,005,971 1,393,573
Average rate during the year 5.64% 3.04%
Average rate at December 31 5.59% 4.37%
9. Long-term Borrowing
Long-term borrowing consists of an advance from the Federal Home
Loan Bank of Atlanta which matures August 1, 1998. The interest rate on the
long-term borrowing is fixed at 7.12%. Collateral for this borrowing consists
of U.S. government agency securities with book values and estimated fair values
of $2,000,000 and $1,785,000, respectively, as of December 31, 1995.
<PAGE>
10. Income Taxes
Applicable income taxes for the years-ended December 31, 1995, 1994 and 1993
were as follows:
Current 1995 1994 1993
Federal $ 0 $ 0 $ 0
State 0 0 0
Total current 0 0 0
Deferred
Federal 353,380 (567,075) 0
State 84,640 (125,538) 0
Total deferred 438,020 (692,613) 0
Total income tax expense $ 438,020 $ (692,613) $ 0
Components of deferred income taxes for the years-ended December 31, 1995, 1994
and 1993 were as follows:
1995 1994 1993
Provision for credit losses $ 46,217 $ (115,618) $140,202
Loan fees and costs 36,168 (100,704) (36,024)
Depreciation 4,399 (54,220) (8,631)
Loan income 23,583 (29,216) (5,952)
Net operating loss carryforward 335,709 (368,310) (89,595)
Other (8,056) (24,545) 0
Total $ 438,020 $ (692,613) $ 0
The net deferred tax assets at December 31, 1995, are expected to
be realized through expected future taxable income. The Company has a federal
net operating loss carryforward of approximately $150,000 which expires in 2007
and may be used to offset future tax liability.
The valuation allowance for deferred tax assets decreased by $675,209
in 1994 due to the Company's ability to realize more tax benefits as a result of
higher taxable income than previously anticipated for 1994 and future years. The
increased level of projected future taxable income reflects the Company's
improved earnings capacity. A reconciliation between actual tax expense and
taxes computed at the statutory rate for the years-ended December 31, 1995, 1994
and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax computed at statutory rate $ 430,359 34.0% $ 174,669 34.0% $ 379,144 34.0%
State income taxes,
net of federal income tax benefit 54,037 4.3% 23,905 4.7% 53,677 4.4%
Utilization of net operating
loss carryforward 0 0% 0 0% (432,821) (38.4%)
Tax exempt interest (67,362) (5.3)% (3,694) (.7)% 0 0%
Non-deductible expenses 12,610 .9% 4,944 .9% 0 0%
Recognition of deferred tax asset 0 0% (892,437) (173.7)% 0 0%
Other, net 8,376 .7% 0 0% 0 0%
Actual tax expense (benefit) $ 438,020 34.6% $ (692,613) (134.8)% $ 0 0%
</TABLE>
<PAGE>
The tax effects of each type of significant item that gave rise to deferred
income taxes as of December 31 were as follows:
1995 1994
Deferred tax assets:
Provision for credit losses $ 69,401 $115,618
Loan fees and costs 64,536 100,704
Loan income 5,633 29,216
Depreciation 49,821 54,220
Unrealized holding losses on investment
securities available for sale 72,836 213,959
Net operating loss carryforward 56,673 392,382
Other 41,486 24,545
Total deferred tax assets $360,386 $930,644
11. Profit Sharing Plan
The subsidiary bank has a 401(k) profit sharing plan covering all
employees who meet certain service requirements. Contributions made to the plan
for the years-ended December 31, 1995, 1994 and 1993 were $39,382, $26,787 and
$37,045, respectively.
12. Stock Options and Warrants
In 1994, the Company renewed a five-year stock option plan providing
for the periodic granting of options to certain employees to purchase shares of
the Company's stock. Under the terms of the plan, 78,000 unissued shares have
been allocated for this purpose. Options are exercisable at a price at least
equal to the fair market value at the date of the grant and expire not later
than five years from the date of the grant.
At December 31, 1995, the Company had outstanding warrants to
purchase 137,000 shares of the Company's common stock at an average price of
$5.38 per share, adjusted for splits, expiring in 1999 and 2000.
As of December 31, 1995, options granted under the plan are as
follows:
Number of Shares Price Per Share Year Expires
6,900 $ 6.67 1996
4,080 3.33 1997
17,100 5.00 1998
21,480 6.67 1999
23,500 6.50 2000
73,060
13. Related Party Transactions
In the ordinary course of business, loans are made to officers and
directors of the Company and its subsidiary. These loans are made on
substantially the same terms and conditions as those prevailing at the time for
comparable transactions with outsiders and are not considered to involve more
than the normal risk of collectibility.
For the years-ended December 31, 1995, 1994 and 1993 an analysis of such
aggregate loans is as follows:
1995 1994 1993
Balance at January 1 $ 3,329,604 $ 2,990,545 $ 3,209,821
New loans 3,781,542 2,895,727 1,567,758
Repayments (3,535,928) (2,556,668) (1,787,034)
Balance at December 31 $ 3,575,218 $ 3,329,604 $ 2,990,545
<PAGE>
14. Financial Instruments With Off-balance Sheet Risk
In the normal course of business, to meet the financial needs of its
customers, the Bank is a party to financial instruments with off-balance sheet
risk. These financial instruments include commitments to extend credit, standby
letters of credit and purchase commitments. The Bank's exposure to credit loss
in the event of non-performance by the other party to these financial
instruments is represented by the contractual amount of the instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
The Bank generally requires collateral or other security to support
the financial instruments with credit risk. The amount of collateral or other
security is determined based on management's credit evaluation of the
counterparty.
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 many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Contract Amount
1995 1994
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $19,855,858 $13,654,007
Standby letters of credit 1,218,710 568,438
15. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. SFAS No.107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value for its financial instruments as defined by SFAS
No.107.
(bullet) Cash and due from banks: The carrying amount approximates fair value.
(bullet) Federal funds sold: The carrying amount approximates fair value.
(bullet) Investment securities available for sale and held to maturity: Fair
values are based on published market prices or dealer quotes.
(bullet) Loans: For loans with short-term or variable characteristics, such as
home equity or personal lines of credit and variable-rate commercial
and real estate loans, the carrying value approximates fair value. This
amount excludes any value related to account relationship. The fair
value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made
to borrowers with similar characteristics.
(bullet) Interest receivable and interest payable: The carrying amount
approximates fair value.
(bullet) Noninterest-bearing deposits: The fair value of these instruments, by
the SFAS No.107 definition, is the amount payable at the reporting
date.
(bullet) Interest-bearing deposits: The fair value of demand deposits, savings
accounts and money market deposits with no defined maturity, by SFAS
No. 107 definition, is the amount payable on demand at the reporting
date. The fair value of certificates of deposit is estimated by
discounting the future cash flows using the current rates at which
similar deposits would be made.
At December 31, 1995, the Company had outstanding letters of
credit and commitments to extend credit of $19,855,858 and $1,218,710,
respectively. The fair value of these off-balance-sheet financial instruments,
based on fees that would be charged to enter similar arrangements, is
immaterial.
The estimated fair values of the Company's financial instruments
required to be disclosed under SFAS No.107 are as follows:
Carrying
Amount Fair Value
Assets:
Cash and due from banks $ 6,133,309 $ 6,133,309
Federal funds sold 4,905,000 4,905,000
Investment securities
available for sale 11,626,818 11,626,818
Investment securities
held to maturity 12,053,560 11,695,642
Loans (net) 92,271,653 91,308,000
Interest receivable 847,884 847,884
Liabilities:
Noninterest-bearing deposits 21,837,223 21,837,223
Interest-bearing deposits 86,021,463 86,296,000
Interest payable 380,636 380,636
16. Restrictions On Dividends
The Bank is subject to certain requirements imposed by federal
banking statutes and regulations. These requirements, among other things,
establish minimum levels for capital and restrict the amounts of dividends that
can be distributed. Currently no dividends may be paid by the Bank without
approval by the Office of the Comptroller of the Currency.
<PAGE>
17. Consolidated Quarterly Summary of Operations (unaudited)
<TABLE>
<CAPTION>
1995 1994
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $2,546 $2,480 $2,345 $2,117 $2,066 $ 1,946 $ 1,846 $ 1,905
Interest Expense 1,100 1,059 978 840 785 711 649 661
Net Interest Income 1,446 1,421 1,367 1,277 1,281 1,235 1,197 1,244
Provision For Credit Losses 0 0 0 (100) 0 0 10 60
Net Interest Income After
Provision For Credit Losses 1,446 1,421 1,367 1,377 1,281 1,235 1,187 1,184
Other Income (Loss) 258 234 233 144 (368) 196 199 214
Other Expenses 1,355 1,220 1,246 1,393 1,307 1,093 1,136 1,079
Income (Loss) Before Income Taxes 349 435 354 128 (394) 338 250 319
Income Tax Expense (Benefit) 120 152 122 44 (693) 0 0 0
Net Income $ 229 $ 283 $ 232 $ 84 $ 299 $ 338 $ 250 $ 319
Per Share Data
Average Common Shares
Outstanding 1,696 1,696 1,696 1,696 1,693 1,693 1,693 1,410
Net Income $ .13 $ .17 $ .14 $ .05 $ .17 $ .20 $ .15 $ .19
Dividends 0 0 0 0 0 0 0 0
Market Price
High 11.00 7.88 7.50 8.00 9.00 8.50 9.00 8.50
Low 6.88 6.50 6.50 6.50 7.00 6.50 6.13 6.50
</TABLE>
18. Parent Company Financial Information
Condensed financial information for Allegiance Banc Corporation (parent company
only) is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash $ 58,865 $ 100,247
Investment securities available for sale 461,820 453,042
Loans 88,200 95,125
Investment in subsidiary 10,951,178 9,867,774
Deferred income tax benefits 68,553 55,155
Other assets 10,270 12,479
TOTAL ASSETS $11,638,886 $10,583,822
LIABILITIES
Other liabilities $ 8,585 $ 5,557
SHAREHOLDERS' EQUITY
Common stock 1,695,863 1,695,863
Surplus 10,640,337 10,640,337
Accumulated deficit (590,139) (1,417,881)
Net unrealized holding losses on securities available for
sale (115,760) (340,054)
Total shareholder equity 11,630,301 10,578,265
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,638,886 $10,583,822
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years-ended December 31,
Income: 1995 1994 1993
<S> <C> <C> <C>
Taxable interest income $ 39,529 $ 46,217 $ 44,927
Other operating income 0 51 0
Total income 39,529 46,268 44,927
Interest and other expenses 124,698 137,959 86,816
Loss before equity in
income of subsidiary (85,169) (91,691) (41,889)
Equity in income of subsidiary 883,953 1,266,862 1,157,017
Net income before income tax benefit 798,784 1,175,171 1,115,128
Income tax benefit (28,958) (31,175) 0
Net income $ 827,742 $ 1,206,346 $ 1,115,128
</TABLE>
CONDENSED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
Years-ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 827,742 $ 1,206,346 $ 1,115,128
Equity in income of subsidiaries (883,953) (1,266,862) (1,157,017)
Decrease in other assets 4,876 10,053 2,385
Increase (decrease) in other liabilities 3,028 (916) 3,815
Net cash used by operating activities (48,307) (51,379) (35,689)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
payments of available for sale investment securities 0 120,265 205,277
Purchases of available for sale investment securities 0 (99,953) (300,000)
(Increase) decrease in loans 6,925 (95,125) 200,000
Net cash provided (used) by investing activities 6,925 (74,813) 105,277
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 0 15,732 0
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (41,382) (110,460) 69,588
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 100,247 210,707 141,119
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 58,865 $ 100,247 $ 210,707
</TABLE>
<PAGE>
Board of
Directors
LEONARD L. ABEL* - Chairman of the Board of Allegiance Banc Corporation and
Allegiance Bank, N.A. since 1987. Mr. Abel, a CPA and attorney, is a retired
partner in the accounting firm, Kershenbaum, Abel, Kernus and Wychulis.
DUDLEY C. DWORKEN* - Director since 1987. Mr. Dworken is the President of
Curtis Chevrolet. Mr. Dworken currently sits on the Governing Boards of the
American Cancer Society, D.C.Chapter, and The Bullis School and is a sponsor for
the Montgomery County Detention Center, Jaycees Chapter.
STEVEN L. FANAROFF - Director since 1990. Mr.Fanaroff has been with
Magruder, Inc., a local grocery chain, for 16 years, and is currently serving as
Senior Vice President and Chief Financial Officer. He is the Chairman of the
Bank's Advisory Board.
JOHN R. FERNSTROM - Director since 1990. Mr.Fernstrom is an investor in
various real estate holdings and other business ventures; he has been involved
in industrial and commercial real estate projects in the Washington area for
over 20 years.
WILLIAM E. KNIGHT - Director since 1990. Mr.Knight is a Senior Partner in
the law firm, Knight, Brennan, Shay & Ham, P.A. Mr. Knight is a member of the
Prince George's County Bar, Maryland State Bar, Maryland Trial Lawyers, and
American Bar Association.
WILLIAM A. KOIER* - Director since 1987. Mr. Koier is an investor. He is a
retired developer/builder in Montgomery and Prince George's Counties. He is
President of Haven Construction Company and President of Holten Investments,
Inc.
RONALD E. PARR* - Director since 1990. Mr. Parr is a principal in Franey,
Parr & Associates, Inc. He is active in local community business organizations.
RONALD D.PAUL* - President of Allegiance Banc Corporation; Director of
Allegiance Bank, N.A. since 1990. Mr.Paul is President of Ronald D. Paul
Companies. Mr.Paul is also an investor in other business ventures throughout the
Washington Metropolitan area. He is Vice Chairman of the National Kidney
Foundation.
THOMAS L. PHILLIPS* - Vice Chairman of Allegiance Banc Corporation and
Allegiance Bank, N.A. since 1987. Mr. Phillips is President of Phillips
Publishing International, Inc. He is a member of World Presidents' Organization
and a member of the Board of Visitors of the University of Maryland College of
Journalism. Mr. Phillips is Chairman of the Board of Governors for the Business
Leadership Council and serves on the Advisory Board of the National Journalism
Center and on the Board of Visitors of The Institute of Political Journalism. In
June 1994, Mr. Phillips was elected as the first member of the Newsletter
Publishers Hall of Fame.
DONALD R. ROGERS - Director since 1987. Mr.Rogers is a Partner in the law
firm, Shulman, Rogers, Gandal, Pordy and Ecker. Mr. Rogers was an associate
professor at the American University Washington College of Law, and has served
on the American Bar Association Committee.
LINDA GREER SPOONER - Director since 1990. Ms. Spooner has been in private
law practice for 21 years in the Washington metropolitan area. She was former
Deputy Zoning Counsel in Prince George's County and an attorney with HUD.
H.L. WARD - Mr. Ward is President and Chief Executive Officer of Allegiance
Bank, N.A. He has been employed by the Bank since 1992 and has been in banking
in the Washington area for 27 years. Mr. Ward has been active in community
service organizations and youth sports for many years.
RONALD A. WILLONER - Director since 1990. Mr.Willoner has been a Partner in
the law firm of Willoner, Calabrese & Rosen, P.A. since 1980. Mr. Willoner was a
member of the White House Army Signal Agency during the Eisenhower
Administration. Currently, Mr. Willoner is the Chairman of the Character
Committee of the Court of Appeals of Maryland for the Seventh Judicial Circuit.
*DIRECTOR OF ALLEGIANCE BANC CORPORATION
<PAGE>
Officers
and Advisory Board
H. L. Ward
PRESIDENT
CHIEF EXECUTIVE OFFICER
Thomas D. Murphy
EXECUTIVE VICE PRESIDENT
CHIEF RETAIL OFFICER
Robert P. Pugh
SENIOR VICE PRESIDENT
CHIEF CREDIT OFFICER
Elaine B. Durkin
VICE PRESIDENT
Richard B. Anderson
SENIOR VICE PRESIDENT/UNIT HEAD
COMMERCIAL LOANS
Loren C. Geisler
SENIOR VICE PRESIDENT/UNIT HEAD
REAL ESTATE LOANS
Martha Foulon-Tonat
VICE PRESIDENT
Scot R. Browning
VICE PRESIDENT
Scott W. Palmer
COMMERCIAL LOAN OFFICER
Charles V. Joyce, III
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
Mary L. Queen
ASSISTANT VICE PRESIDENT
OPERATIONS MANAGER
David S. Cohen
ASSISTANT CONTROLLER
David W. Irey
VICE PRESIDENT
CONSUMER LOANS/COMPLIANCE OFFICER
Larry J. Bolton
VICE PRESIDENT
R. Frederick Marsden
VICE PRESIDENT
Pamellia G. Wilson
VICE PRESIDENT
Concetta Forte
ASSISTANT VICE PRESIDENT
Robert F. Niggel, Jr.
ASSISTANT VICE PRESIDENT
Ronald E. Tillery
ASSISTANT VICE PRESIDENT
Sherry T. White
ASSISTANT VICE PRESIDENT
Andrea M. Zabriskie
ASSISTANT VICE PRESIDENT
Mary C. McQuillen
CORPORATE SECRETARY
Bernard J. Gillespie
SECURITY OFFICER
Steven L. Fanaroff
ADVISORY BOARD CHAIRMAN
MAGRUDER, INC.
Stuart L. Bindeman
COMMERCIAL INVESTORS,INC.
Herbert O. Brown
MONTGOMERY INSURANCE AND BONDING
William S. Burak, CPA
SOBEL & CO., P.A., CPAs
Toni E. Clark
REICHELT, NUSSBAUM, LAPLACA & MILLER
Bruce Dubinsky, CPA
KLAUSNER, BARTKO & DUBINSKY, P.A.
Michael L. Gansen
WOOD OPTICIANS
P. David Gavin
ATTORNEY
Benson Klein
WARD, KLEIN & MILLER
Eric G. Meyers
CAPITAL FINANCIAL GROUP,INC.
Richard C. Meyers
COLONIAL STORAGE CO.
Stephen A. Ness
CENTURY 21
Benjamin W. Posin, P.D.
CARE DRUG CO.
T/A WHEATON PHARMACY
Edward J. Quinn, Jr.
QUINN CONSULTING,INC.
Gary L. Sapperstein
GARY L. SAPPERSTEIN & ASSOCIATES
Kathryn T. Singleton
TASCON
Sherron Skibo
PATRIOT HOMES, INC.
David B. Torchinsky,
ATTORNEY, CPA
THE LAW OFFICES OF SHELTON M. BINSTOCK
<PAGE>
APPENDIX V
ALLEGIANCE'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter Ended March 31, 1996
Commission file number 0-16706
Allegiance Banc Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-1494123
(State or other jurisdiction of (IRS employer identification)
Incorporation or organization)
4719 Hampden Lane, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 656-5300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock:
Common Stock, $1.00 par value 1,727,563 shares
Class Outstanding at March 31, 1996
ALLEGIANCE BANC CORPORATION
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income
Three months ended March 31, 1996, and 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
Three months ended March 31, 1996 and 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . .5
Note to Financial Statements . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . 7
PART II. OTHER INFORMATION. . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
ALLEGIANCE BANC CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
March 31, December 31,
1996 1995
ASSETS
Cash and due from banks $ 7,052 $ 5,448
Federal funds sold and
interest earning balances 9,867 5,590
Investment securities:
Available for sale-at
fair value 11,411 11,627
Held to maturity-at
amortized cost (fair value
was $11,594 at 3/31/96 and
$11,696 at 12/31/95) 12,053 12,054
Loans (including loans held
for sale at March 31, 1996
in the amount of $2,680) 94,913 93,313
Less: Allowance for credit
losses (1,007) (1,041)
Loans, net 93,906 92,272
Premises and equipment, net 1,574 1,626
Foreclosed real estate, net 792 792
Accrued interest receivable
and other assets 1,435 1,690
TOTAL ASSETS $138,090 $131,099
LIABILITIES
Deposits:
Noninterest bearing $ 20,776 $ 21,837
Interest bearing 91,942 86,022
Total deposits 112,718 107,859
Short-term borrowing 11,854 10,005
Long-term borrowing 1,000 1,000
Other liabilities 507 605
Total liabilities 126,079 119,469
SHAREHOLDERS' EQUITY
Common Stock-$1.00 par value 1,728 1,696
3-31-96 12-31-95
Authorized 10,000,000 10,000,000
Issued 1,727,563 1,695,863
Surplus 10,793 10,640
Accumulated deficit (311) (590)
Net unrealized holding
losses on Securities
available for sale (199) (116)
Total shareholders' equity 12,011 11,630
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $138,090 $131,099
<PAGE>
ALLEGIANCE BANC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share data)
Three Months
ended March 31,
1996 1995
Interest Income
Interest and fees on loans $ 2,226 $ 1,650
Interest and dividends on investments 309 438
Interest on federal funds sold 32 29
Total interest income 2,567 2,117
Interest Expense
Interest on deposits 946 804
Interest on short-term borrowing 114 19
Interest on long-term borrowing 18 17
Total interest expense 1,078 840
Net Interest Income 1,489 1,277
(Benefit) Provision for credit losses 0 (100)
Net Interest Income After (Benefit)
Provision for Credit Losses 1,489 1,377
Other Operating Income
Service charges on deposit accounts 194 120
Other income 40 24
Total other operating income 234 144
Other Operating Expense
Salaries and employee benefits 613 641
Net occupancy and equipment expense 302 241
Foreclosed real estate expense 9 115
Other expense 371 396
Total other operating expense 1,295 1,393
Income Before Income Taxes 428 128
Applicable income tax expense 148 44
Net Income $ 280 $ 84
Per share information:
Net Income $ 0.16 $ 0.05
Dividends $ -0- $ -0-
<PAGE>
ALLEGIANCE BANC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
Three months ended March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 280 $ 84
Noncash items included in net income:
Benefit) Provision for credit losses 0 (100)
Depreciation and amortization 75 62
Decrease (increase) in accrued interest
receivable and other assets 257 156
Increase (decrease) in other liabilities (98) 101
Other-net 27 223
Net cash provided by operating activities 541 526
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities (73) 0
Proceeds from maturities and principal payments
of investment securities 143 152
Net (increase) decrease in loans (1,600) (1,383)
Bank premises and equipment purchased (23) (107)
Net cash (used) provided by
investing activities (1,553) (1,338)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 4,859 1,354
Net increase in short-term borrowing 1,849 258
Sale of common stock 185 0
Net cash provided by financing activities 6,893 1,612
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,881 800
CASH AND CASH EQUIV. , BEG. OF PERIOD 11,038 8,339
CASH AND CASH EQUIV. , END OF PERIOD $ 16,919 $ 9,139
<PAGE>
ALLEGIANCE BANC CORPORATION
NOTE TO FINANCIAL STATEMENTS
Note
1. In the opinion of management, the accompanying unaudited consolidated
financial statements for March 31, 1996, and December 31, 1995, contain all
adjustments (consisting of normal recurring adjustments) in conformity with
generally accepted accounting principles necessary to present fairly the
financial position as of March 31, 1996, and December 31, 1995, and the results
of operations and cash flows for the three months ended March 31, 1996 and 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements present the financial
condition of Allegiance Banc Corporation (the Company) and its wholly owned
subsidiary, Allegiance Bank, N.A. (the Bank), as of March 31, 1996, and
December 31, 1995, and the results of operations and cash flows for the first
quarters of 1996 and 1995.
FINANCIAL CONDITION
During the first three months of 1996, total assets increased by 5.3
percent, from $131.1 million to $138.1 million. Short term investments in
federal funds sold and interest earning balances increased by $4.3 million to
$9.9 million at March 31, 1996, while loans increased during the period by $1.6
million, or 1.7 percent and now stand at $94.9 million. The growth in total
assets was funded by deposit increases of $4.9 million, as well as short-term
borrowing increases of $1.8 million.
Cash balances and federal funds sold increased by $5.9 million in the
period as some of the funds from increased deposits were yet to be deployed.
Federal funds sold and investment securities available-for-sale represent
liquidity available for the Bank's use.
As of March 31, 1996, outstanding loan balances were $94.9 million compared
to $93.3 million at December 31, 1995, which was an increase of 1.7 percent. At
March 31, 1996, the Bank had approximately $2.7 million of loan commitments
which were expected to funded in the near future. Also at March 31, 1996, the
Bank had approximately $2.7 million of loans held for sale.
The investment portfolio decreased by a nominal $0.2 million during the
first three months of 1996. This net decrease was the result of principal
repayments in mortgage backed securities, a reduction in the market value of
available for sale securities, and the purchase of additional shares of stock in
the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond.
The change in the market value recorded for available for sale securities
amounted to approximately $138 thousand in the quarter ended March 31, 1996.
The unrealized loss in the held-to-maturity portfolio now stands at $463
thousand compared to $356 thousand at December 31, 1995. The net unrealized
holding losses represent a reduction in the market value of investment
securities. Investment securities continue to be primarily in U.S. Treasury and
U.S. Government Agency obligations which do not represent a credit risk. As of
March 31, 1996, held to maturity investment securities included $1.1 million in
bank qualified, tax-exempt municipal bonds. Premises and equipment had a net
decrease of $52 thousand in the first three months of 1996, reflecting
depreciation and amortization of $75 thousand and equipment purchases of $23
thousand.
<PAGE>
Deposits increased by $4.9 million, or 4.5 percent, in the first three
months of 1996, and now stand at $112.7 million, up from $107.9 million at
year-end 1995. A $1.0 million decline in demand deposits was more than offset
by an $5.2 million increase in certificates of deposit balances. Money market
and NOW accounts increased by a combined $0.8 million during the period. The
Bank successfully introduced telephone banking, a new sweep product, and
computer banking in 1995. These new products and the opening of the Bank's
seventh branch in Silver Spring, Maryland, are contributing to further deposit
growth and providing business and association customers with more sophisticated
tools to manage their businesses. The ability to provide these products is a
result of the Bank's conversion to a new computer system which was completed in
early 1995.
Long-term borrowing remained unchanged at $1.0 million. These funds were
borrowed in 1994 to fund a specific loan. This borrowing is a secured advance
from the Federal Home Loan Bank of Atlanta, matures in August 1998, and carries
a rate of 7.12 percent.
Shareholders' Equity increased in the first quarter of 1996 by $382
thousand, as a result of $280 thousand in net earnings, an $83 thousand
decrease in the market value of investment securities available-for-sale, and
$185 thousand from the issue of common stock to employees exercising stock
options.
RESULTS OF OPERATIONS
The Company recorded net income of $280 thousand, or $.17 per share for
the three months ended March 31. These results compare to net income of $84
thousand, or $.05 per share for the three months ended March 31, 1995. In 1995,
pre-tax earnings were held down by non-recurring expenses associated with a
conversion to a new computer system. There were no securities gains recorded in
the first quarter of 1996 or 1995.
There was no provision for credit losses recorded in the first quarter of
1996 or 1995. In the first quarter of 1995, however, the Company recorded a
$100 thousand credit to the provision for credit losses, and a established a
$100 thousand valuation allowance for foreclosed real estate.
NET INTEREST INCOME
Net interest income for the first quarter of 1996 was $1.489 million, an
increase of 16.6 percent over the $1.377 million earned in the first quarter of
1995. Interest income for the first three months of 1996 included $11 thousand
of interest collected that had been charged-off in prior years.
<PAGE>
The Bank's net interest rate spread during the first three months of 1996
was 4.24 percent compared to 4.40 percent in 1995. The net interest margin, or
net interest income as a percent of average earning assets, was 5.13 percent in
the first three months of 1996, compared to 5.22 percent in 1995. The decrease
in the net interest margin in 1996 was due primarily to the higher cost of funds
in 1996 for short term borrowing and certificates of deposit issued at higher
rates during 1995. The cost of funds has been dropping, and will continue to
drop, as certificates of deposit are renewed or replaced at lower rates, and
short term borrowings are being reduced. The percentage of average earning
assets in loans in the first quarter increased to 77 percent in 1996 from 68
percent in 1995 providing a positive impact on the net interest margin.
Overall, during the first quarter of 1996, the yield on earning assets
increased to 8.76 percent from 8.73 percent in 1995, while the rate paid on
interest bearing liabilities increased by 22 basis points to 4.52 percent in
1996 from 4.33 percent in 1995. The increase in the rates paid on
interest-bearing liabilities was reflected in a 15 basis point rise in CD rates,
while rates paid on money market deposit accounts and NOW accounts declined in
1996 compared to 1995.
PROVISION FOR CREDIT LOSSES
The Bank maintains an allowance for credit losses to absorb losses which
could occur in the loan portfolio. The provision for credit losses is a charge
to earnings to maintain the allowance at an adequate level. On a quarterly
basis, management conducts a review of the loan portfolio, evaluating factors
such as historical loss experience, historical delinquency, portfolio trends
in composition, collateral and industry concentrations, peer bank loss and
delinquency experience, credit commitments, economic trends, effectiveness of
loan policies and procedures, and an individual analysis of loans classified as
Substandard and Doubtful to determine probability of loss based on collateral,
restructuring and alternative repayment sources. Between reviews, events may
occur which dictate immediate adjustments to the allowance, and these are
addressed as required. No provision for possible credit losses was recorded in
the first quarter of 1996 or 1995.
However, during the first quarter of 1995, management reduced the
Allowance for Credit Losses by $100 thousand. At the same time, there was a
corresponding transaction to establish a reserve for the Bank's Foreclosed Real
Estate. When appropriate, Bank accounting rules recommend the establishment
of a specific reserve for possible losses on Foreclosed Real Estate. The
transfer from the allowance for credit losses was possible because internal and
external analysis indicated that the Bank had sufficient reserves for the loan
portfolio. The Bank had $12 thousand of net recoveries added to the Allowance
for Credit Losses during the first three months of 1995, while there were net
chargeoffs of $34 thousand in the first quarter of 1996.
Foreclosed Real Estate was unchanged at $792 thousand at March 31, 1996 and
December 31, 1995.
<PAGE>
At March 31, 996, the Allowance for Credit Losses was $1.007 million, or
1.06 percent of loans, compared to $1.114 million at December 31, 1995.
Credit quality continues to improve at the Bank, as reflected in a decline
in past-due credits. There were no loans past-due 90 days or more at March 31,
1996. or at December 31, 1995. Non-accrual loans totaled $267 thousand at March
31, 1996. This was a decline from $327 thousand at the end of 1995. Loans
secured by real estate account for $234 thousand of the total non-accrual loans
at March 31, 1996. The remaining loan is a commercial loan of $33 thousand.
NON-INTEREST INCOME
Non-interest income for the first three months of 1996 was $234 thousand,
compared to $144 thousand in the first quarter of 1995. There were no
securities gains in the first quarter of 1996 or 1995. Service charges on
deposit accounts increased by $74 thousand or 62 percent to $194 thousand in the
first quarter of 1996 compared to $120 thousand in the corresponding period of
1995.
NON-INTEREST EXPENSE
Non-interest expense for the first three months of 1996 was $1.295 million,
down 7 percent, compared to $1.393 million in the first three months of 1995.
$100 thousand of this decrease was related to the foreclosed real estate reserve
recorded in 1995. Although the Bank has added lending officers and branch
staff, and opened a new branch in June 1995, salaries and employee benefits
expenses during the first quarter of 1996 were $28 thousand less than the
corresponding period of 1995. In the first quarter of 1995, there were
approximately $30 thousand of non-recurring expenses due to severance payments
when staff reductions were made to coincide with the completion of the
conversion to a new computer system.
Occupancy and equipment expenses rose 25 percent from $241 thousand for the
first three months in 1995 to $302 in 1996. These increases were due to opening
a new branch office in Silver Spring, and communication and computer equipment
purchased for the Bank's conversion to a new computer system.
Other expenses decreased by a net $24 thousand during the first three
months of 1996 reflecting non-recurring expenses incurred in the first quarter
of 1995 relating to consulting and ATM expenses incurred as a result of the
computer conversion. Otherwise, increases in consulting services, advertising,
and data processing expenses were largely offset by decreases in insurance
expense and the FDIC insurance rate reduction.
INCOME TAXES
In the first three months of 1996 the Company recorded tax expense of $148
thousand compared to $44 thousand in 1995. The effective tax rate was
approximately 34.6 percent in 1996 and 34.4 percent in 1995, compared to a
statutory rate of 38.62 percent in each period. Certain loans and investment
securities are exempt, in whole or in part, from federal and state income taxes,
thereby reducing the Company's effective tax rate. The Company plans to acquire
additional tax advantaged assets during 1996 to further manage and reduce the
effective tax rate.
<PAGE>
CAPITAL REQUIREMENTS
Risk based capital requirements require banks and bank holding companies to
maintain minimum ratios of capital to risk-weighted assets and off-balance sheet
credit arrangements. Total capital is classified into two tiers, referred to
as Tier 1 and Tier 2. The Bank's Tier 1 capital is composed of common
stockholders' equity, while Tier 2 capital includes the allowance for credit
losses. For bank holding companies with assets of less than $150 million, the
risk-based capital guidelines generally are applied on a bank-only basis.
The regulatory minimums for the Bank's Tier 1 risk-based capital ratio and
total risk-based capital ratios are 4.0 percent and 8.0 percent, respectively.
At March 31, 1996, the Bank was well in excess of regulatory minimums with the
Tier 1 ratio at 11.32 percent and the total risk-based capital ratio at 12.57
percent. At December 31, 1995, the corresponding apital ratios were 11.39
percent and 12.64 percent. The decrease reflects the loan growth that the Bank
has experienced during the quarter.
The Bank's leverage ratio, another regulatory capital measure, is Tier 1
capital divided by average total assets. The regulatory minimum for certain
institutions is 3.0 percent, with most institutions required to maintain a
ratio of at least 4.0 percent to 5.0 percent, depending upon risk profiles and
other factors. At March 31, 1996, the Bank's leverage ratio was 8.88 percent.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is a measure of the Bank's ability to generate and maintain
sufficient cash flows to fund operations and to meet financial obligations to
depositors and borrowers promptly and in a cost-effective manner. The Bank's
liquidity is provided by amortizing and maturing loans, maturities and paydowns
of investment securities, securities and loans that can serve as collateral for
borrowing, federal funds sold and readily marketable investment securities.
Deposit growth and earnings also contribute to the Bank's liquidity. In the
event necessary, the Company may also sell securities from its available for
sale portfolio to fund its own liquidity needs.
The Bank's liquidity sources and needs are measured on a monthly basis and
forecast six months. The analysis includes a review of current and future loan
demand, and anticipated deposit growth or contraction. At March 31, 1996, the
Bank's liquidity sources were 1.8 times anticipated liquidity needs, which is
in excess of the established management guidelines of 1.5 times anticipated
liquidity needs.
<PAGE>
Because of the significant impact interest rate fluctuations may have on
the Bank's performance, management continually monitors the interest rate
sensitivity of its assets and liabilities. The common measurement term is
"gap," which refers to the relationship of earning assets to interest-bearing
liabilities within the time period in which they will mature or reprice.
A positive gap, wherein earning assets exceed interest-bearing liabilities,
positions the Bank to respond to rising interest rates. A negative gap,
wherein interest-bearing liabilities exceed earning assets, positions the
Bank to respond to declining interest rates.
Management strives to forecast far enough into the future so they can
fine-tune the earning assets and liabilities to respond to changes in rates. As
a guide, management tries to maintain a gap not greater than 15 percent, either
positive or negative, for the various periods measured. At March 31, 1996,
the Bank had a cumulative negative gap out to one year of 8.93 percent of
earning assets.
The following table presents the Bank's gap measurements as of March 31,
1995, (in thousands of dollars).
0-3 3-6 6-12
MONTHS MONTHS MONTHS 1-5 YRS 5 YRS
RATE SENSITIVE
ASSETS
Investment Securities 6,877 829 5,266 5,416 4,042
Loans 55,038 3,415 2,078 25,428 8,868
Federal Funds Sold 9,867
--------- ------- ------- ------- -------
TOTAL 71,782 4,244 7,344 30,844 12,910
RATE SENSITIVE
LIABILITIES
NOW Accounts 11,622
Money Market 34,973
CDS 11,525 4,396 21,350 8,301 141
Other Borrowing 10,854 1,000
-------- ------- ------- -------- -------
TOTAL 68,974 4,396 21,350 9,301 141
-------------------------------------------------------------------------
Cumulative Gap 2,808 2,656 (11,350) 10,193 22,962
=========================================================================
Ratio of cumulative gap
to earning assets 2.21% 2.09% -8.93% 8.02% 18.06%
<PAGE>
PART II
OTHER INFORMATION
Items 1 through 6(b)
Management notes that no occurrences have taken place during the reporting
period which require disclosure under any of the captioned headings.
Subsequent to March 31, 1996, on April 22, 1996, the Company announced
that the Boards of Directors of F&M National Corporation, Winchester, Virginia,
and Allegiance Banc Corporation had agreed to a definitive agreement for the
affiliation of the Company with F&M National Corporation. A current report on
FORM 8-K was filed with the Securities Exchange Commission on April 30, 1996.
<PAGE>
ALLEGIANCE BANC CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allegiance Banc Corporation
(Registrant)
DATE: May 14, 1996 BY: s/b CHARLES V. JOYCE III
Charles V. Joyce III
Vice President and
Chief Financial Officer
