PROXY STATEMENT/PROSPECTUS
Up to 1,400,000 Shares
F&M BANCORP
Common Stock
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Home Federal Corporation ("Home Federal") into F&M Bancorp. In
connection with the Merger, up to 1,400,000 shares of the Common Stock of F&M
Bancorp, par value $5.00 per share, are to be issued to holders of the Common
Stock, par value $1.00 per share, of Home Federal. On the effective date of the
Merger, each issued and outstanding share of the Common Stock of Home Federal
will be automatically converted into a number of shares of the Common Stock of
F&M Bancorp determined using the Conversion Ratio described in this Proxy
Statement/Prospectus. Cash will be paid in lieu of fractional shares. This Proxy
Statement/Prospectus is being provided to the holders of the Common Stock of
Home Federal (the "Home Federal Stockholders") and to the holders of the Common
Stock of F&M Bancorp (the "F&M Bancorp Stockholders") in connection with the
respective Special Meetings at which they will vote on a proposal to approve the
Merger. In addition to other events of termination, either F&M Bancorp or Home
Federal may terminate the Merger if the average market value of a share of F&M
Bancorp's Common Stock (on which the calculation of the Conversion Ratio will be
based) is less than 1.6 times its book value. See "Summary of the Transaction --
Amendment and Termination of the Merger Agreement" and "Proposed Merger of Home
Federal and F&M Bancorp -- Amendment and Termination of the Merger Agreement."
F&M Bancorp's principal executive office is located at 110 Thomas Johnson
Drive, Frederick, Maryland 21702, telephone number (301) 694-4000. Home
Federal's principal executive office is located at 122-128 West Washington
Street, Hagerstown, Maryland 21740, telephone number (301) 733-6300. The
information presented in this Proxy Statement/Prospectus concerning F&M Bancorp
has been provided by F&M Bancorp, and the information concerning Home Federal
has been provided by Home Federal.
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to any
person to exchange or sell, or a solicitation from any person of an offer to
exchange or purchase, the securities offered by this Proxy Statement/Prospectus,
or the solicitation of a proxy from any person, in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities to which this
Proxy Statement/Prospectus relates shall under any circumstances create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
See "Risk Factors" on page 13 for certain information that should be considered
by the Home Federal Stockholders and by the F&M Bancorp Stockholders.
The date of this Proxy Statement/Prospectus, and the approximate date on which
it is being furnished to the Home Federal Stockholders and F&M Bancorp
Stockholders, is ^ July 16, 1996.
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THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF
F&M BANCORP AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
AVAILABLE INFORMATION
F&M Bancorp and Home Federal are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
periodic 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 the Commission's
Regional Offices located at 7 World Trade Center, 13th floor, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such materials may be obtained, at
prescribed rates, by delivering a request to the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock
of F&M Bancorp and the Common Stock of Home Federal are listed on the NASDAQ
National Market. Reports, proxy statements and other information concerning F&M
Bancorp and Home Federal may be inspected at the NASDAQ Department of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
F&M Bancorp has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the securities to which this Proxy
Statement/Prospectus relates. This Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement. For further
information, reference is made to the Registration Statement. Statements
contained herein concerning any document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herein or delivered herewith. These documents, which are
listed below, are available upon request, without charge, from Gordon M. Cooley,
Esquire, Secretary and Legal Officer, F&M Bancorp, 110 Thomas Johnson Drive,
Frederick, Maryland 21702, telephone number (301) 694-4000. In order to ensure
timely delivery of the documents, any request by F&M Bancorp Stockholders should
be made by five business days before the date of the F&M Bancorp Special
Meeting, and any request by Home Federal Stockholders should be made by five
business days before the date of the Home Federal Special Meeting.
The following documents and information are hereby incorporated by
reference into this Proxy Statement/Prospectus:
(a) F&M Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 0-12638); the financial and statistical
information incorporated therein from its Annual Report to
Stockholders for the year ended December 31, 1995, including
Statistical Information incorporated into Item 1 to its Form 10-K;
Item 6, Selected Financial Data; Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations; and Item 8,
Financial Statements and Supplementary Data; and the information
incorporated therein from its Proxy Statement dated March 13, 1996,
including Item 11 to its Form 10-K, Executive Compensation; and Item
13, Certain Relationships and Related Transactions.
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(b) F&M Bancorp's Quarterly Report on Form 10-Q for the period
ended March 31, 1996 (File No. 0-12638).
(c) F&M Bancorp's Current Report on Form 8-K filed on July 15,
1996 (File No. 0-12638).
(d) The description of F&M Bancorp's capital stock which is
contained in the Registration Statement on Form 8-B (File No. 0-12638)
filed with the Commission pursuant to the Exchange Act, including all
amendments or reports filed for the purpose of updating such
description.
^(e) Home Federal's Annual Report on Form 10-KSB for the year
ended December 31, 1995 (File No. 0-16463); the financial and
statistical information incorporated therein from its Annual Report to
Stockholders for the year ended December 31, 1995, including
Statistical Information incorporated into Item 1 to its Form 10-KSB;
Item 6, Selected Financial Data; Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations; and Item 8,
Financial Statements and Supplementary Data; and the information
incorporated therein from its Proxy Statement dated April 1, 1996,
including Item 11 to its Form 10-KSB, Executive Compensation; and Item
13, Certain Relationships and Related Transactions.
^(f) Home Federal's Quarterly Report on Form 10-QSB for the
period ended March 31, 1996 (File No. 0-16463).
^(g) The description of Home Federal's capital stock which is
contained in the Registration Statement on Form 8-A (File No. 0-16463)
filed with the Commission pursuant to the Exchange Act, including all
amendments or reports filed for the purpose of updating such
description.
All documents filed by F&M Bancorp and Home Federal pursuant to Sections
13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the F&M Bancorp Special Meeting and the Home
Federal Special Meeting are hereby incorporated by reference into this Proxy
Statement/Prospectus and shall be deemed a part hereof from the date of filing
of each such document. Any statement contained in a document 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 which is also incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
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F&M BANCORP
110 Thomas Johnson Drive
Frederick, Maryland 21702
^ July 16, 1996
To Our Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
F&M Bancorp to be held at ^ the Holiday Inn FSK, 5400 Holiday Drive, Frederick,
Maryland ^ on Tuesday, August 27, 1996 at ^ 4:00 p.m. local time.
At the Special Meeting, you will be asked to consider and vote on the Plan
and Agreement to Merge (the "Merger Agreement"), dated as of April 2, 1996, by
and among F&M Bancorp and Home Federal Corporation ("Home Federal"), pursuant to
which Home Federal will merge with and into F&M Bancorp, and stockholders of
Home Federal will receive Common Stock of F&M Bancorp (the "Merger"), all as
more fully described in the enclosed Proxy Statement/Prospectus. Based in
Hagerstown, Maryland, Home Federal is a Maryland thrift holding company which
had approximately $216.7 million in total assets at March 31, 1996. Its
operations are currently conducted through the 8 banking offices in Western
Maryland of its subsidiary, Home Federal Savings Bank.
Under the terms of the Merger Agreement, F&M Bancorp will acquire Home
Federal and all of its subsidiaries. As a result of the Merger, the separate
corporate existence of Home Federal will cease, and the subsidiaries of Home
Federal will become subsidiaries of F&M Bancorp. Following the consummation of
the Merger, the operations of Home Federal Savings Bank will be continued by F&M
Bancorp. Each share of the Common Stock of Home Federal outstanding immediately
prior to the Merger will automatically become and be converted into a number of
shares of Common Stock of F&M Bancorp determined using the Conversion Ratio
described in the accompanying Proxy Statement/Prospectus. Cash will be paid in
lieu of fractional shares. Details of the proposed transaction are set forth in
the accompanying Proxy Statement/Prospectus. You are urged to read it carefully
in its entirety. Approval of the transaction requires the affirmative vote of at
least two-thirds of the outstanding shares of the Common Stock of F&M Bancorp.
Your Board of Directors unanimously approved the Merger and believes that
it is in the best interest of F&M Bancorp and our stockholders. Accordingly, the
Board of Directors unanimously recommends that you vote TO APPROVE, RATIFY AND
CONFIRM the Merger Agreement and the Merger provided for therein.
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.
Sincerely,
Faye E. Cannon Charles W. Hoff, III
President and Chief Executive Officer Chairman of the Board
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<PAGE>
F&M BANCORP
Frederick, Maryland
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held on ^ Tuesday, August 27, 1996
The Special Meeting of Stockholders of F&M Bancorp will be held on ^
Tuesday, August 27, 1996 at ^ 4:00 p.m. local time at ^ the Holiday Inn FSK,
5400 Holiday Drive, Frederick, Maryland ^, for the following purposes:
(a) To consider and vote upon a proposal to approve, ratify and
confirm the Plan and Agreement to Merge, dated as of April 2, 1996
(the "Merger Agreement") by and among F&M Bancorp and Home Federal
Corporation ("Home Federal") and the merger provided for therein (the
"Merger"). A copy of the Merger Agreement is included as Annex A to
the accompanying Proxy Statement/Prospectus. Pursuant to the Merger
Agreement, (i) F&M Bancorp will acquire Home Federal and all of its
subsidiaries through the Merger, the separate corporate existence of
Home Federal will cease, and the subsidiaries of Home Federal will
become subsidiaries of F&M Bancorp; and (ii) each share of the
outstanding Common Stock of Home Federal shall be automatically
converted into and become a number of shares of the Common Stock of
F&M Bancorp determined using the Conversion Ratio described in the
accompanying Proxy Statement/Prospectus. Cash will be paid in lieu of
fractional shares.
(b) To vote on such other business as may properly come before
the Special Meeting of Stockholders.
Under Section 3-202 of the Maryland General Corporation Law, stockholders
of F&M Bancorp who vote against the Merger will not receive appraisal rights and
will not be entitled to the payment in cash of the fair value of their shares.
The Board of Directors has fixed ^ July 1, 1996 as the record date for the
Special Meeting. Only holders of record of Common Stock of F&M Bancorp 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.
By Order of the Board of Directors
Gordon M. Cooley
Secretary and Legal Officer
^ July 16, 1996
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING.
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<PAGE>
THE BOARD OF DIRECTORS OF F&M BANCORP RECOMMENDS THAT ITS STOCKHOLDERS VOTE
TO APPROVE, RATIFY AND CONFIRM THE MERGER AGREEMENT AND THE MERGER PROVIDED FOR
THEREIN.
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<PAGE>
HOME FEDERAL CORPORATION
122-128 West Washington Street
Hagerstown, Maryland 21740
^ July 16, 1996
To Our Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Home Federal Corporation ("Home Federal") to be held at the Four Points
Hotel/Sheraton Inn, 1910 Dual Highway, Hagerstown, Maryland 21740 on ^ Thursday,
August 29, 1996 at ^ 2:00 p.m. local time.
At the Special Meeting, you will be asked to consider and vote on the Plan
and Agreement to Merge (the "Merger Agreement"), dated as of April 2, 1996, by
and among Home Federal and F&M Bancorp, pursuant to which Home Federal will
merge with and into F&M Bancorp, and stockholders of Home Federal will receive
Common Stock of F&M Bancorp (the "Merger"), all as more fully described in the
enclosed Proxy Statement/Prospectus. Based in Frederick, Maryland, F&M Bancorp
is a Maryland bank holding company which had approximately $739.1 million in
total assets at March 31, 1996. Its operations are currently conducted through
24 offices and 32 ATM locations in three counties in central Maryland.
Under the terms of the Merger Agreement, each share of the Common Stock of
Home Federal outstanding immediately prior to the Merger will automatically
become and be converted into a number of shares of Common Stock of F&M Bancorp
determined using the Conversion Ratio described in the accompanying Proxy
Statement/Prospectus. Cash will be paid in lieu of fractional shares. Following
the consummation of the Merger, the operations of Home Federal Savings Bank will
be continued by F&M Bancorp, and the separate corporate existence of Home
Federal will cease.
Your Board of Directors has retained the investment banking firm of Charles
Webb & Company to act as its financial advisor in connection with the Merger. As
discussed in the accompanying Proxy Statement/Prospectus, Charles Webb & Company
has delivered to the Board of Directors its written opinion that, as of this
date, the financial terms of the proposed Merger as set forth in the Merger
Agreement are fair, from a financial point of view, to our stockholders.
The exchange of Common Stock of F&M Bancorp for Common Stock of Home
Federal will be a tax-free transaction for federal income tax purposes; however,
any exchange of cash in lieu of fractional shares will be taxable. Details of
the proposed transaction are set forth in the accompanying Proxy
Statement/Prospectus. You are urged to read it carefully in its entirety.
Approval of the transaction requires the affirmative vote of at least two-thirds
of the outstanding shares of the Common Stock of Home Federal.
Your Board of Directors unanimously approved the Merger and believes that
it is in the best interest of Home Federal and our stockholders. Accordingly,
the Board of Directors unanimously recommends that you vote TO APPROVE, RATIFY
AND CONFIRM the Merger Agreement and the Merger provided for therein.
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.
Sincerely,
Richard W. Phoebus, Sr. Benjamin F. Kunkleman
President and Chief Executive Officer Chairman of the Board
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<PAGE>
HOME FEDERAL CORPORATION
Hagerstown, Maryland
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held on ^ Thursday, August 29, 1996
The Special Meeting of Stockholders of Home Federal Corporation ("Home
Federal") will be held on ^ Thursday, August 29, 1996 at ^ 2:00 p.m. local time
at the Four Points Hotel/Sheraton Inn, 1910 Dual Highway, Hagerstown, Maryland
21740, for the following purposes:
(a) To consider and vote upon a proposal to approve, ratify and
confirm the Plan and Agreement to Merge, dated as of April 2, 1996
(the "Merger Agreement") by and among F&M Bancorp and Home Federal,
and the merger provided for therein (the "Merger"). A copy of the
Merger Agreement is included as Annex A to the accompanying Proxy
Statement/Prospectus. Pursuant to the Merger Agreement, (i) Home
Federal shall merge with and into F&M Bancorp; and (ii) each share of
the outstanding Common Stock of Home Federal shall be automatically
converted into and become a number of shares of the Common Stock of
F&M Bancorp determined using the Conversion Ratio described in the
accompanying Proxy Statement/Prospectus. Cash will be paid in lieu of
fractional shares.
(b) To vote on such other business as may properly come before
the Special Meeting of Stockholders.
Under Section 3-202 of the Maryland General Corporation Law, stockholders
of Home Federal who vote against the Merger will not receive appraisal rights
and will not be entitled to the payment in cash of the fair value of their
shares.
The Board of Directors has fixed ^ July 12, 1996 as the record date for the
Special Meeting. Only holders of record of Common Stock of Home Federal 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.
By Order of the Board of Directors
Celia S. Ausherman
Secretary
^ July 16, 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 HOME FEDERAL RECOMMENDS THAT ITS STOCKHOLDERS
VOTE TO APPROVE, RATIFY AND CONFIRM THE MERGER AGREEMENT AND THE MERGER PROVIDED
FOR THEREIN.
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<PAGE>
TABLE OF CONTENTS
SUMMARY OF THE TRANSACTION..................................................1
Parties to the Merger.....................................................1
The Merger; Effective Date................................................1
The Conversion Ratio......................................................1
Stockholders' Meetings..................................................^ 3
Record Dates; Votes Required..............................................3
Reasons for the Merger; Recommendations of the F&M Bancorp Board
and of the Home Federal Board......................................^ 4
Opinion of Financial Advisor..............................................4
Dissenters' Rights........................................................4
Conditions to Consummation..............................................^ 5
Business of F&M Bancorp and Home Federal Pending the Merger...............5
Amendment and Termination of the Merger Agreement.........................5
Interests of Certain Persons in the Merger................................6
Resale of F&M Bancorp Common Stock........................................6
Certain Federal Income Tax Consequences of the Merger.....................6
Stock Option Agreement..................................................^ 7
Market Prices Prior to Announcement of the Merger and at a Recent Date....7
Comparative Per Share Data................................................7
Selected Financial Data..................................................10 ^
RISK FACTORS.............................................................^ 14
Financial Performance of Home Federal and F&M Bancorp; No Assurance
of Continued Profitability........................................^ 14
Government Regulation..................................................^ 14
Recapitalization of SAIF and Related Legislative Proposals.............^ 15
Competition............................................................^ 15
Economic Conditions....................................................^ 16
Limitations on Payment of Dividends....................................^ 16
Adequacy of Allowance for Credit Losses................................^ 16
Additional Classes and Series of Stock.................................^ 16
PROPOSED MERGER OF HOME FEDERAL AND F&M BANCORP..........................^ 17
General................................................................^ 17
Background of the Merger...............................................^ 17
Reasons for the Merger; Recommendations of the F&M Bancorp Board
and of the Home Federal Board.....................................^ 18
Additional Reasons for the Merger......................................^ 20
Opinion of Financial Advisor...........................................^ 21
Determination of Conversion Ratio......................................^ 24
Effective Date of the Merger...........................................^ 26
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<PAGE>
Exchange Procedure for F&M Bancorp Common Stock........................^ 26
Business of F&M Bancorp and Home Federal Pending the Merger............^ 26
Conditions to Consummation of the Merger...............................^ 27
Stock Option Agreement.................................................^ 29
Amendment and Termination of the Merger Agreement......................^ 29
Accounting Treatment...................................................^ 30
Operations after the Merger............................................^ 30
Interests of Certain Persons in the Merger.............................^ 31
Stock Options..........................................................^ 32
Home Federal Employee Benefit Plans....................................^ 32
Certain Federal Income Tax Consequences................................^ 33
VOTING INFORMATION.......................................................^ 34
Proxy Solicitation.....................................................^ 34
Votes Required.........................................................^ 35
Dissenters' Rights.....................................................^ 36
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......................^ 36
CAPITALIZATION...........................................................^ 43
BUSINESS OF F&M BANCORP..................................................^ 44
BUSINESS OF HOME FEDERAL.................................................^ 44
PRICE RANGE OF HOME FEDERAL COMMON STOCK AND DIVIDEND POLICY.............^ 45
HOME FEDERAL SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.............^ 46
PRICE RANGE OF F&M BANCORP COMMON STOCK....................................47
DESCRIPTION OF F&M BANCORP CAPITAL STOCK.................................^ 48
Common Stock...........................................................^ 48
Preferred Stock........................................................^ 48
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................................^ 48
Capitalization.........................................................^ 48
Amendment of Charter and By-Laws.......................................^ 49
Required Stockholder Vote for Certain Actions..........................^ 49
Directors and Classes of Directors; Vacancies and Removal of Directors.^ 50
Maryland Business Combinations and Control Share Statutes..............^ 50
Preemptive Rights......................................................^ 52
Assessment.............................................................^ 52
Conversion; Redemption; Sinking Fund...................................^ 52
Liquidation Rights.....................................................^ 52
Dividends and Other Distributions......................................^ 52
Special Meetings of Stockholders.......................................^ 52
Indemnification........................................................^ 53
Stockholder Proposals and Nominations of Directors.....................^ 54
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Stockholder Inspection Rights; Stockholder Lists.......................^ 54
Dissenters' Rights.....................................................^ 54
RESALE OF F&M BANCORP COMMON STOCK.......................................^ 55
EXPERTS..................................................................^ 55
LEGAL MATTERS............................................................^ 55
OTHER MATTERS............................................................^ 56
ADDITIONAL INFORMATION ABOUT F&M BANCORP.................................^ 56
^ GLOSSARY.................................................................57
PLAN AND AGREEMENT TO MERGE...............................................A-1
STOCK OPTION AGREEMENT....................................................B-1
OPINION OF CHARLES WEBB & COMPANY.........................................C-1
ANNUAL REPORT TO STOCKHOLDERS OF HOME FEDERAL CORPORATION
FOR THE YEAR ENDED DECEMBER 31, 1995.................................D-1
QUARTERLY REPORT ON FORM 10-QSB OF HOME FEDERAL CORPORATION
FOR THE PERIOD ENDED MARCH 31, 1996..................................E-1
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<PAGE>
SUMMARY OF THE TRANSACTION
Parties to the Merger
F&M Bancorp. F&M Bancorp is a Maryland corporation registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended. At March
31, 1996, F&M Bancorp had assets of approximately $739.1 million, deposits of
$627.0 million, and loans, net of unearned income, of $476.4 million. F&M
Bancorp's sole direct subsidiary is Farmers and Mechanics National Bank ("F&M
Bank"), a national banking association based in Frederick, Maryland. F&M Bank
currently conducts business through 24 offices and 32 ATM locations in three
counties in central Maryland.
Home Federal Corporation. Home Federal Corporation ("Home Federal") is a
Maryland corporation and unitary thrift holding company. Its principal
subsidiary is Home Federal Savings Bank ("Home Bank"), a federally-chartered
savings bank based in Hagerstown, Maryland. At March 31, 1996, Home Federal had
assets of approximately $216.7 million, deposits of $168.0 million, and loans
receivable, net of unearned income, of $141.5 million. Home Bank currently
conducts business through 8 offices and 11 ATM locations in western Maryland.
The Merger; Effective Date
Pursuant to the Plan and Agreement to Merge (the "Merger Agreement") dated
as of April 2, 1996 by and among F&M Bancorp and Home Federal, Home Federal is
to merge with and into F&M Bancorp (the "Merger"). The separate corporate
existence of Home Federal will terminate, and F&M Bancorp will become the parent
corporation of Home Bank and all other subsidiaries of Home Federal. A copy of
the Merger Agreement is attached to this Proxy Statement/Prospectus as Annex A
and is incorporated herein by reference.
The Merger is to become effective on the 15th day of the month following
the month during which all approvals and events required for the Merger
(including the stockholder approvals to which this Proxy Statement/Prospectus
relates) shall have occurred and all conditions precedent to the Merger shall
have been fulfilled or waived, or on such other date as F&M Bancorp and Home
Federal may agree upon (the "Effective Date"). It is expected that the Effective
Date will be ^ in the fourth quarter of 1996.
The Conversion Ratio
On the Effective Date of the Merger, each issued and outstanding share of
the Common Stock of Home Federal will be automatically canceled and converted
into shares of the Common Stock of F&M Bancorp determined using the Conversion
Ratio described in the following paragraphs, rounded to the nearest
one-hundredth of a share. Cash will be paid in lieu of fractional shares.
The Conversion Ratio will be calculated promptly after the last day of the
month during which all conditions precedent to the Merger shall have been
fulfilled or waived (the "Calculation Date"). The Conversion Ratio will be a
fraction, the numerator of which will be 1.65 times the book value per share of
Home Federal Common Stock on the Calculation Date, and the denominator of which
will be the "Average Market Value" of a share of F&M Bancorp Common Stock. The
"Average Market Value" of each share of the F&M Bancorp Common Stock shall be
the arithmetic average of closing prices of F&M Bancorp Common Stock as reported
in The Wall Street Journal for the 20 consecutive trading days preceding the
Calculation Date. If the Average Market Value of a share of F&M Bancorp Common
Stock is greater than 1.9 times the book value per share of F&M Bancorp Common
Stock, then F&M Bancorp will instead use a per share price for its Common Stock
equal to 1.9 times its book value per share as of the Calculation Date. If the
<PAGE>
Average Market Value of a share of F&M Bancorp Common Stock is less than 1.6
times the book value per share of F&M Bancorp Common Stock, then either F&M
Bancorp or Home Federal may terminate the Merger Agreement or, if Home Federal
agrees, F&M Bancorp may instead use a per share price for its Common Stock equal
to 1.6 times its book value per share as of the Calculation Date.
For purposes of the calculation of the Conversion Ratio, the book value of
Home Federal shall mean the calculation as of the Calculation Date of Home
Federal's total assets minus its total liabilities, calculated in conformity
with generally accepted accounting principles applied on a basis consistent with
past practices of Home Federal. This calculation is subject to addition or
subtraction if certain adjustments set forth in the Merger Agreement become
necessary for purposes of this calculation. First, Home Federal's book value
shall be adjusted by the amount (net of tax effects) by which Home Federal's
Allowance for Possible Losses as of the close of business on the Calculation
Date is greater or less than 35.12% of its Problem Assets on the Calculation
Date. Home Federal's Problem Assets (except for consumer loans and one-to-four
family residential loans) shall only be reduced as a result of receipt of loan
payments by Home Bank or as a result of the sale of other real estate owned. For
purposes of this calculation, the term "Problem Assets" is defined in the Merger
Agreement as (a) loans classified as substandard, doubtful or loss and (b) other
real estate owned at the Calculation Date. Second, if a special recapitalization
assessment for the Savings Association Insurance Fund is imposed on Home Bank on
or before the Calculation Date, the amount of the special recapitalization
assessment, net of any tax effects shall be added back to Home Federal's book
value (up to $925,000) as of the close of business on the Calculation Date.
Third, only normal and recurring items of income and expense (including any
additional premiums to obtain extended directors' and officers' liability
coverage) will be considered in determining Home Federal's book value.
Transactional expenses related to the Merger Agreement and the Merger will not
be deducted as an expense.
The Conversion Ratio is subject to adjustment for stock dividends, splits
or reverse splits, or any distribution other than cash dividends, on shares of
the Common Stock of F&M Bancorp.
If the Conversion Ratio were computed using March 31, 1996 as the
Calculation Date, the Conversion Ratio would have been 0.433 shares of F&M
Bancorp Common Stock for each share of Home Federal Common Stock (the "Assumed
Conversion Ratio"). This calculation is based upon an Average Market Value for
F&M Bancorp Common Stock of $28.98 per share (or 1.81 times the book value per
share at that date) and an adjusted book value of Home Federal Common Stock of
$7.61 per share. If the Average Market Value for F&M Bancorp Common Stock had
been $25.664 per share or 1.6 times the book value per share at that date (i.e.,
the minimum of the range), the Conversion Ratio would have been 0.489 shares of
F&M Bancorp Common Stock for each share of Home Federal Common Stock. If the
Average Market Value for F&M Common Stock had been $30.476 per share or 1.9
times the book value per share at that date (i.e., the maximum of the range),
the Conversion Ratio would have been 0.412 shares of F&M Bancorp Common Stock
for each share of Home Federal Common Stock. If the Conversion Ratio were
computed using May 31, 1996 as the assumed Calculation Date, the Assumed
Conversion Ratio would have been 0.499 shares of F&M Bancorp Common Stock for
each share of Home Federal Common Stock. This calculation is based upon $25.73
per share of F&M Bancorp, which is 1.6 times the book value per share (i.e., the
minimum of the range) of $16.08 for F&M Bancorp and an adjusted book value of
$7.78 for Home Federal, both as of May 31, 1996. The book values for both Home
Federal and F&M Bancorp as of May 31, 1996 are based on unaudited, unreviewed,
internally prepared financial statements. The Average Market Value for F&M
Bancorp Common Stock of $25.425 as of May 31, 1996 was not used in the
calculation of the Assumed Conversion Ratio at May 31, 1996 since such Average
Market Value was below 1.6 times the book value (i.e., the minimum of the range)
for F&M Bancorp at such time. However, if the Average Market Value for F&M
Bancorp Common Stock had been $30.55 per share or 1.9 times the book value per
share at that date (i.e., the maximum of the range), the Conversion Ratio would
have been 0.420 shares of F&M Bancorp Common Stock for each share of Home
Federal Common Stock. If the Home Federal Stockholders vote to approve the
Merger Agreement and the Merger at the Home Federal Special Meeting, but the
actual Conversion Ratio, when it is calculated on the Calculation Date, differs
materially from the range of examples presented herein, the Home Federal
Stockholders will be resolicited and asked to approve the Merger Agreement and
the Merger based on the revised Conversion Ratio.
<PAGE>
Stockholders' Meetings
This Proxy Statement/Prospectus is being provided to the Home Federal
Stockholders in connection with the Special Meeting of Stockholders of Home
Federal (the "Home Federal Special Meeting"), which is to be held at the Four
Points Hotel/Sheraton Inn, 1910 Dual Highway, Hagerstown, Maryland 21740. Notice
of the Home Federal Special Meeting is being delivered together with this Proxy
Statement/Prospectus. The purpose of the Home Federal Special Meeting will be to
consider and vote on a proposal to approve, ratify and confirm the Merger
Agreement and the Merger, and to vote on such other business as may properly
come before the Home Federal Special Meeting.
This Proxy Statement/Prospectus is also being provided to the F&M Bancorp
Stockholders in connection with the Special Meeting of Stockholders of F&M
Bancorp (the "F&M Bancorp Special Meeting"), which is to be held at ^ the
Holiday Inn FSK, 5400 Holiday Drive, Frederick, Maryland ^. Notice of the F&M
Bancorp Special Meeting is being delivered together with this Proxy
Statement/Prospectus. The purpose of the F&M Bancorp Special Meeting will be to
consider and vote on a proposal to approve, ratify and confirm the Merger
Agreement and the Merger, and to vote on such other business as may properly
come before the F&M Bancorp Special Meeting.
Record Dates; Votes Required
Only Home Federal Stockholders of record at the close of business on ^ July
12, 1996 (the "Home Federal Record Date") will be entitled to notice of and to
vote at the Home Federal Special Meeting or any adjournments or postponements
thereof. Each holder of shares of Home Federal Common Stock on the Home Federal
Record Date is entitled to cast one vote per share, in person or by properly
executed proxy, on any matter that may properly come before the Home Federal
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the shares of Home Federal Common Stock outstanding on
the Home Federal Record Date is necessary to constitute a quorum at the Home
Federal Stockholder Meeting. The directors of Home Federal have passed a
resolution declaring the Merger advisable and unanimously recommending that the
stockholders of Home Federal vote to approve, ratify and confirm the Merger
Agreement and the Merger at the Home Federal Special Meeting. As of the record
date, directors, executive officers, and affiliates of Home Federal held an
aggregate of ^ 208,810 shares, or ^ 8.3%, of the issued and outstanding voting
stock of Home Federal. The directors and certain related Home Federal
Stockholders have signed an agreement to support and vote their shares to
approve, ratify and confirm the Merger Agreement and the Merger.
An affirmative vote of not less than two-thirds of the issued and
outstanding voting stock of Home Federal is required to approve, ratify and
confirm the Merger Agreement and the Merger.
Only F&M Bancorp Stockholders of record at the close of business on ^ July
1, 1996 (the "F&M Bancorp Record Date") will be entitled to notice of and to
vote at the F&M Bancorp Special Meeting or any adjournments or postponements
thereof. Each holder of shares of F&M Bancorp Common Stock on the F&M Bancorp
Record Date is entitled to cast one vote per share, in person or by properly
executed proxy, on any matter that may properly come before the F&M Bancorp
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the shares of F&M Bancorp Common Stock outstanding on
the F&M Bancorp Record Date is necessary to constitute a quorum at the F&M
Bancorp Stockholder Meeting. The directors of F&M Bancorp have passed a
resolution declaring the Merger advisable and unanimously recommending that the
stockholders of F&M Bancorp vote to approve, ratify and confirm the Merger
Agreement and the Merger at the F&M Bancorp Special Meeting. As of the record
date, directors, executive officers, and affiliates of F&M Bancorp held an
aggregate of ^ 389,030 shares, or ^ 8.8%, of the issued and outstanding voting
stock of F&M Bancorp.
An affirmative vote of not less than two-thirds of the issued and
outstanding voting stock of F&M Bancorp is required to approve, ratify and
confirm the Merger Agreement and the Merger.
<PAGE>
Because the required vote of the Home Federal Stockholders and of the F&M
Bancorp Stockholders on the Merger Agreement and the Merger is based upon the
total number of issued and outstanding shares of the voting stock of Home
Federal and F&M Bancorp, the failure to submit a proxy card (or the failure to
vote in person at either Special Meeting), the abstention from voting and any
broker non-vote will have the same effect as a vote against the Merger Agreement
and the Merger.
Reasons for the Merger; Recommendations of the F&M Bancorp Board and of the Home
Federal Board
The Home Federal Board believes that the Merger Agreement and the Merger
are advisable, are fair to, and are in the best interests of Home Federal and
the Home Federal Stockholders. In considering the terms and conditions of the
Merger, the Home Federal Board considered its financial terms, in particular
that the Conversion Ratio provides the Home Federal Stockholders with a
substantial increase in the value of the securities held by them. Among other
things, the Home Federal Board also considered the opinion of its financial
advisor that consideration to be received in the Merger is fair to the Home
Federal Stockholders from a financial point of view; the operational and
competitive benefits of operating as part of a larger financial institution in a
broader geographic area; the fact that the Merger would qualify as a tax-free
reorganization under the Code; and the financial condition and history of
performance of F&M Bancorp. See "Proposed Merger of Home Federal and F&M Bancorp
- -- Background of the Merger," "-- Reasons for the Merger; Recommendations of the
F&M Bancorp Board and of the Home Federal Board," and "-- Opinion of Financial
Advisor." The Home Federal Board unanimously recommends that Home Federal
Stockholders vote TO APPROVE, RATIFY AND CONFIRM the Merger Agreement and the
Merger provided for therein.
The F&M Bancorp Board believes that the Merger Agreement and the Merger are
advisable, are fair to, and are in the best interests of F&M Bancorp and the F&M
Bancorp Stockholders. In considering the terms and conditions of the Merger, the
F&M Bancorp Board considered that enlarging its operations would enable it to
better compete with larger financial institutions; that the Merger would provide
F&M Bancorp with an immediate and substantial depositor base and market presence
in a new and desirable geographic market; that the consideration to be paid by
it to the Home Federal Stockholders is fair in relation to the access to new
customers and new markets that the Merger would provide; and the recent
financial condition and history of performance of Home Federal had been
consistently improving, particularly with respect to its resolution of much of
its real estate owned and classified loan portfolios. See "Proposed Merger of
Home Federal and F&M Bancorp -Background of the Merger" and "-- Reasons for the
Merger; Recommendations of the F&M Bancorp Board and of the Home Federal Board."
The F&M Bancorp Board unanimously recommends that F&M Bancorp Stockholders vote
TO APPROVE, RATIFY AND CONFIRM the Plan and the Merger provided for therein.
Opinion of Financial Advisor
Home Federal has received a written opinion from Charles Webb & Company
("Webb"), an investment banking firm located in Dublin, Ohio, that the
consideration to be received in the Merger is fair to the Home Federal
Stockholders from a financial point of view. The opinion of Webb, which sets
forth the assumptions made, matters considered and limits on the review
undertaken, is attached as Annex C to this Proxy Statement/Prospectus. Webb's
opinion is directed only to the financial terms of the proposed Merger and does
not constitute a recommendation to any Home Federal Stockholder as to how such
Home Federal Stockholder should vote with respect to the Merger. Webb will be
paid a fee for its services at the closing of the Merger. See "Proposed Merger
of Home Federal and F&M Bancorp -- Opinion of Financial Advisor."
Dissenters' Rights
Neither holders of the Common Stock of F&M Bancorp nor holders of the
Common Stock of Home Federal who vote against the Merger will receive appraisal
rights or be entitled to payment in cash of the fair value of their shares under
<PAGE>
the Maryland General Corporation Law (the "MGCL"). See "Comparative Rights of
Stockholders -- Dissenters' Rights."
Conditions to Consummation
Consummation of the Merger would be accomplished by the statutory merger of
Home Federal into F&M Bancorp. The Merger is contingent upon the approvals of
the Office of Thrift Supervision (the "OTS") and the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Applications for the
approvals of the OTS and the Board of Governors of the Federal Reserve System
have been prepared and filed by F&M Bancorp. The Merger is also subject to other
customary conditions, including the receipt by F&M Bancorp and Home Federal of
the legal opinion of Piper & Marbury L.L.P., tax counsel to F&M Bancorp, that
the Merger will constitute a tax-free reorganization under Section 368(a)(1)(A)
of the Internal Revenue Code and the receipt by F&M Bancorp of a letter from an
independent accounting firm to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if consummated in accordance with the
Merger Agreement. See "Proposed Merger of Home Federal and F&M Bancorp --
Conditions to Consummation of the Merger."
Business of F&M Bancorp and Home Federal Pending the Merger
Home Federal and its subsidiaries have covenanted to conduct their business
only in the ordinary course pending the Effective Date. They have also
covenanted not to amend their organizational documents, change their authorized,
issued or outstanding capital stock, alter certain existing employment
arrangements, change any of their accounting policies or practices, or take any
action which would cause the Merger not to be accounted for as a
pooling-of-interests. Home Federal has covenanted not to declare any dividends
in respect of its Common Stock pending the Effective Date. F&M Bancorp has
covenanted to use commercially reasonable efforts to secure favorable action on
its applications requesting the required governmental and regulatory approvals,
to obtain any required consents, approvals or waivers from third parties, and to
assure that each of the events otherwise specified in the Merger Agreement as
conditions to the Merger shall have occurred on or before the Effective Date.
Home Federal and F&M Bancorp have each agreed to give the other party and
its representatives reasonable access throughout the period prior to the
Effective Date to their respective books and records. Home Federal and F&M
Bancorp have also agreed to cause their designated representatives to confer
periodically and to deliver to each other copies of their periodic reports filed
with the Commission under the Exchange Act. Home Federal and F&M Bancorp have
also agreed to promptly advise each other in writing of certain material facts
pertaining to the Merger Agreement and the Merger. See "Proposed Merger of Home
Federal and F&M Bancorp -- Business of F&M Bancorp and Home Federal Pending the
Merger."
Amendment and Termination of the Merger Agreement
F&M Bancorp and Home Federal may amend the Merger Agreement in writing in
response to comments of governmental regulatory authorities or otherwise.
Home Federal and F&M Bancorp each have the right to terminate the Merger
Agreement if the Merger is not consummated by December 31, 1996. Prior to that
date, the Merger Agreement may be terminated and abandoned by mutual consent of
Home Federal and F&M Bancorp. Either party may terminate the Merger Agreement
prior to December 31, 1996 if the stockholders of either party fail to approve
the Merger Agreement, or if the other party commits an uncured material breach
of any representation, warranty, covenant or agreement contained in the Merger
Agreement. F&M Bancorp may terminate the Merger Agreement prior to December 31,
1996 if any required governmental approval, consent or waiver is denied or
includes any condition or requirement that would result in a materially adverse
effect, or if there is any pending action or proceeding which seeks to prevent
the Merger, or if a court enters an order prohibiting the Merger. The Home
<PAGE>
Federal Board may terminate the Merger Agreement prior to December 31, 1996 in
their sole discretion if it may be legally required for the discharge of their
fiduciary duties.
Finally, the Merger Agreement may be terminated by either party if, at the
Calculation Date, the average market value of F&M Bancorp Common Stock for the
20 consecutive trading days preceding the Calculation Date is less than 1.6
times the book value per share of F&M Bancorp Common Stock; however, in such
case F&M Bancorp may elect (with Home Federal's agreement) to continue with its
obligations under the Merger Agreement and use a per share price for its Common
Stock of 1.6 times its book value per share on the Calculation Date. See
"Proposed Merger of Home Federal and F&M Bancorp -- Amendment and Termination of
the Merger Agreement."
Interests of Certain Persons in the Merger
Four officers of Home Bank have executed employment agreements with F&M
Bancorp that are to become effective upon the consummation of the Merger. These
four employment agreements provide for continued employment with Home Bank for a
three-year term after the Effective Date of the Merger. One officer, Richard W.
Phoebus, Sr., will also be appointed to a position as an officer of F&M Bancorp
after the Effective Date. See "Proposed Merger of Home Federal and F&M Bancorp
- -- Interests of Certain Persons in the Merger."
Two of the directors of Home Bank have signed an agreement with F&M Bancorp
which clarifies the level of benefits they are to receive pursuant to Home
Bank's Amended and Restated Executive Compensation Plan for Directors, and the
manner in which it is to be paid to them. Finally, certain members of the Board
of Directors of Home Federal and of its management are also holders of the
Common Stock of Home Federal or options to purchase shares of its Common Stock,
and will therefore receive a number of shares (calculated using the Conversion
Ratio) of the Common Stock of F&M Bancorp or options to purchase shares of its
Common Stock if the Merger Agreement and the Merger are approved. See "Proposed
Merger of Home Federal and F&M Bancorp -- Interests of Certain Persons in the
Merger" and "Home Federal Security Ownership of Certain Beneficial Owners."
Resale of F&M Bancorp Common Stock
The shares of Common Stock of F&M Bancorp offered to Home Federal
Stockholders by this Proxy Statement/Prospectus have been registered under the
Securities Act. Home Federal Stockholders who are not also "affiliates" of Home
Federal or F&M Bancorp may therefore trade them freely and without restriction.
Certain restrictions apply to the resale of shares of F&M Bancorp Common Stock
offered hereby which are received by "affiliates" of Home Federal or F&M
Bancorp. See "Resale of F&M Bancorp Common Stock."
Certain Federal Income Tax Consequences of the Merger
F&M Bancorp and Home Federal have received an opinion from Piper & Marbury
L.L.P., tax counsel to F&M Bancorp, to the effect that the Merger will qualify
as a tax-free "reorganization" as defined in Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Under this tax-free status, Home
Federal Stockholders will not recognize gain or loss on the conversion of Common
Stock of Home Corporation into shares of the Common Stock of F&M Bancorp. The
payment of cash to Home Federal Stockholders in lieu of fractional shares will
not be a tax-free transaction. The receipt by F&M Bancorp and Home Federal of
this opinion from Piper & Marbury L.L.P. was a condition to consummation of the
Merger. See "Proposed Merger of Home Federal and F&M Bancorp -- Certain Federal
Income Tax Consequences."
<PAGE>
Stock Option Agreement
F&M Bancorp and Home Federal have entered into a Stock Option Agreement,
dated as of April 2, 1996 (the "Option Agreement"), pursuant to which Home
Federal issued to F&M Bancorp an option (the "Option") to purchase up to 501,282
shares of Home Federal Common Stock at a purchase price of $8.25 per share. The
Option may be exercised in whole or in part, at any time or from time to time if
a Purchase Event (as defined therein) shall have occurred and be continuing and
before the Option Agreement is terminated. The Option Agreement provides that to
the extent that it shall have not been exercised, the Option shall terminate (a)
on the Effective Date of the Merger; (b) upon the termination of the Merger
Agreement in accordance with the provisions thereof prior to the occurrence of a
Purchase Event (other than as a result of a willful breach by Home Federal of
certain specified covenants contained therein or as a result of failure of the
Home Federal Stockholders to approve the Merger Agreement by the vote required
under applicable law or under Home Federal's charter); or (c) 12 months after
termination of the Merger Agreement due to a willful breach by Home Federal of
certain specified covenants contained therein or failure of the Home Federal
Stockholders to approve the Merger Agreement by the vote required under
applicable law or under Home Federal's charter. The Option Agreement is attached
hereto as Annex B. See also "Proposed Merger of Home Federal and F&M Bancorp --
Stock Option Agreement."
Market Prices Prior to Announcement of the Merger and at a Recent Date
The following table discloses the price per share of F&M Bancorp Common
Stock and Home Federal Common Stock based on the last reported sales prices per
share on the NASDAQ National Market on April 1, 1996, the last day prior to the
public announcement of the execution of the Merger Agreement, and the equivalent
pro forma price per share of Home Federal Common Stock, computed by multiplying
the price per share of F&M Bancorp Common Stock based on the last reported sale
price per share on the NASDAQ National Market on April 1, 1996 by the Assumed
Conversion Ratio (0.433 shares of F&M Bancorp Common Stock for each share of
Home Federal Common Stock), computed as of March 31, 1996. See "Price Range of
Home Federal Common Stock and Dividend Policy." The following table also
discloses the price per share of F&M Bancorp Common Stock and Home Federal
Common Stock based on the last reported sales prices per share on the NASDAQ
National Market on May 31, 1996, and the equivalent pro forma price per share of
Home Federal Common Stock, computed by multiplying the price per share of F&M
Bancorp Common Stock based on the last reported sale price per share on the
NASDAQ National Market on May 31, 1996 by 0.499, the Conversion Ratio computed
as of May 31, 1996 using a price per share for F&M Bancorp of 1.6 times its book
value, the minimum of the range provided in the Merger Agreement.
Historical Equivalent
---------------------------- pro forma
F&M Bancorp Home Federal Home Federal
----------- ------------ ------------
At April 1, 1996............ $29.625 $8.25 $12.828
At May 31, 1996............. $24.00 $10.75 $11.976
============================ ====== ====== =======
Comparative Per Share Data
The following table presents historical and pro forma per share data for
F&M Bancorp, and historical and equivalent pro forma per share data for Home
Federal. Home Federal pro forma equivalent amounts are derived by multiplying
the appropriate pro forma combined amounts by the Assumed Conversion Ratio of
0.433 shares of F&M Bancorp Common Stock for each share of Home Federal Common
Stock. As discussed in "Proposed Merger of Home Federal and F&M Bancorp --
Determination of Conversion Ratio," the final Conversion Ratio will be
determined based on the book value per share of Home Federal Common Stock and
the Average Market Value for F&M Bancorp Common Stock.
<PAGE>
The following table is based on the assumption that all issued and
outstanding shares of Home Federal Common Stock are converted into shares of F&M
Bancorp Common Stock. The Merger is reflected under the pooling-of-interests
method of accounting and pro forma information is derived accordingly. The per
share data included in the following table should be read in conjunction with
the consolidated financial statements of F&M Bancorp and the consolidated
financial statements of Home Federal appearing elsewhere or incorporated by
reference herein and the notes accompanying all such consolidated financial
statements. The data presented below are not necessarily indicative of the
results of operations which would have been obtained if the Merger had been
consummated in the past or which may be obtainable in the future.
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
------------------------ ---------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
F&M Bancorp Common Stock
Earnings per Common Share:
Historical:
Income before cumulative effect of accounting
change...................................... $1.38 $1.66 $1.77 $1.86 $1.86 $0.44 $0.47
Cumulative effect of accounting change........ (0.23) -- -- -- -- -- --
Net Income.................................... 1.15 1.66 1.77 1.86 1.86 0.44 0.47
Pro forma combined - Assumed Conversion Ratio:
Income (loss) from continuing operations before
loss from discontinued operation, cumulative
effect of accounting change and extraordinary (0.26) 1.46 1.64 1.76 1.95 0.42 0.45
item........................................
Loss from discontinued operation.............. (0.01) -- (0.01) -- -- -- --
Cumulative effect of accounting change........ (0.21) -- 0.04 -- -- -- --
Extraordinary item-tax benefit of net operating
loss carryforward........................... -- 0.08 -- -- -- -- --
Net Income (loss)............................. (0.48) 1.54 1.67 1.76 1.95 0.42 0.45
Dividends per Common Share:
Historical...................................... 0.63 0.64 0.69 0.71 0.76 0.18 0.20
Pro forma combined - Assumed Conversion Ratio... 0.55 0.57 0.58 0.57 0.65 0.15 0.18
Book Value per Common Share (period end):
Historical...................................... 11.50 12.51 13.93 14.06 15.86 15.21 16.04
Pro forma combined - Assumed Conversion Ratio... 12.34 13.31 13.83 13.94 16.06 15.04 16.25
Home Federal Common Stock
Earnings per Common Share:
Historical:
Income (loss) from continuing operations before
loss from discontinued operation, cumulative
effect of accounting change and extraordinary $(5.48) $(0.01) $0.40 $0.59 $1.00 $0.15 $0.15
item........................................
Loss from discontinued operation.............. (0.03) (0.02) (0.04) -- -- -- --
Cumulative effect of accounting change........ -- -- 0.13 -- -- -- --
Extraordinary item-tax benefit of net operating
loss carryforward........................... -- 0.30 -- -- -- -- --
Net Income (loss)............................. (5.51) 0.27 0.49 0.59 1.00 0.15 0.15
Pro forma equivalent - Assumed Conversion Ratio:
Income (loss) from continuing operations before
loss from discontinued operation, cumulative
effect of accounting change and extraordinary (0.11) 0.63 0.71 0.76 0.84 0.18 $0.19
item........................................
Loss from discontinued operation.............. (0.01) -- (0.01) -- -- -- --
Cumulative effect of accounting change........ (0.09) -- 0.02 -- -- -- --
Extraordinary item-tax benefit of net operating
loss carryforward........................... -- 0.04 -- -- -- -- --
Net Income (loss)............................. (0.21) 0.67 0.72 0.76 0.84 0.18 0.19
Dividends per Common Share:
Historical...................................... -- -- -- -- 0.08 -- 0.04
Pro forma equivalent - Assumed Conversion Ratio. 0.24 0.25 0.24 0.25 0.28 0.06 0.08
Book Value per Common Share (period end):
Historical...................................... 8.08 8.35 5.80 5.84 7.30 6.24 7.41
Pro forma equivalent - Assumed Conversion Ratio. 5.34 5.76 5.99 6.04 6.95 6.51 7.04
</TABLE>
<PAGE>
Selected Financial Data
The following tables set forth selected historical financial data for F&M
Bancorp for the five years ended December 31, 1995 and the unaudited three month
periods ended March 31, 1995 and 1996, respectively, selected historical
financial data for Home Federal for these periods, and selected unaudited pro
forma combined financial data reflecting the Merger of F&M Bancorp and Home
Federal. The Assumed Conversion Ratio of 0.433 shares of F&M Bancorp Common
Stock for each share of Home Federal Common Stock was used to compute weighted
average shares outstanding in the selected unaudited pro forma combined
financial data. See "Proposed Merger of Home Federal and F&M Bancorp --
Determination of Conversion Ratio."
The selected historical financial data of F&M Bancorp and Home Federal set
forth in the following tables does not purport to be complete. It should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information appearing elsewhere or incorporated by reference herein, including
the consolidated financial statements and related notes.
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR F&M BANCORP
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
------------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Operating Data:
Interest income...................... $50,835 $48,004 $45,857 $47,105 $54,120 $13,120 $13,284
Interest expense..................... 27,331 20,551 17,391 17,858 23,618 5,504 5,790
Net interest income.................. 23,504 27,453 28,466 29,247 30,502 7,616 7,494
Provision for credit losses.......... 1,895 2,662 1,530 910 2,000 300 300
Net interest income after provision
for credit losses.................. 21,609 24,791 26,936 28,337 28,502 7,316 7,194
Net gains (losses) on sales of -- 618 2 -- (256) -- 2
securities.........................
Other noninterest income............. 4,652 5,374 6,174 6,990 10,439 1,773 1,991
Noninterest expenses................. 18,100 20,698 22,146 24,185 27,553 6,497 6,371
Provision for income taxes........... 2,117 2,817 3,203 2,991 2,933 652 727
Income before cumulative effect of
accounting change.................. 6,044 7,268 7,763 8,151 8,199 1,940 2,089
Cumulative effect of accounting change (1,023) -- -- -- -- -- --
Net income........................... 5,021 7,268 7,763 8,151 8,199 1,940 2,089
Per Share Data:
Income before cumulative effect of
accounting change.................. $ 1.38 $ 1.66 $ 1.77 $ 1.86 $ 1.86 $ 0.44 $ 0.47
Cumulative effect of accounting change (0.23) -- -- -- -- -- --
Net income........................... 1.15 1.66 1.77 1.86 1.86 0.44 0.47
Cash dividends paid.................. 0.63 0.64 0.69 0.71 0.76 0.18 0.20
Period end book value................ 11.50 12.51 13.93 14.06 15.86 15.21 16.04
Balance Sheet Data (at period end):
Loans, net of unearned income........ $404,085 $406,440 $415,632 $480,399 $484,694 $489,601 $476,432
Total assets......................... 579,247 613,581 646,604 703,859 739,854 703,786 739,120
Total deposits....................... 501,924 525,781 548,548 602,179 621,057 590,922 627,044
Total shareholders' equity........... 50,244 54,728 61,130 61,882 70,019 64,018 70,917
Ratios:
Return on average assets............. 0.90% 1.22% 1.24% 1.23% 1.15% 1.12% 1.15%
Return on average shareholders' equity 10.11 13.88 13.59 13.32 12.53 12.57 11.87
Average shareholders' equity to total
average assets..................... 8.89 8.76 9.13 9.24 9.15 8.90 9.68
Dividend payout ratio................ 54.78 38.55 38.98 38.17 40.86 40.91 42.55
Other Information:
Total average assets................. $558,698 $597,593 $625,679 $662,190 $715,446 $703,271 $730,810
Total average shareholders' equity... 49,644 52,349 57,143 61,206 65,456 62,612 70,771
Weighted average shares outstanding.. 4,382,180 4,372,433 4,378,445 4,393,312 4,409,089 4,403,399 4,419,189
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA FOR HOME FEDERAL
Three months
Years ended December 31, ended March 31,
------------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Operating Data:
Interest income....................... $24,164 $18,877 $14,931 $14,488 $15,987 $3,858 $4,053
Interest expense...................... 18,747 12,058 7,696 6,983 8,718 2,052 2,187
Net interest income................... 5,417 6,819 7,235 7,505 7,269 1,806 1,866
Provision for credit losses........... 7,226 719 1,687 278 (349) -- --
Net interest income (loss) after
provision for credit losses......... (1,809) 6,100 5,548 7,227 7,618 1,806 1,866
Net gains (losses) on sales of (6) 487 199 -- -- -- (30)
securities..........................
Other noninterest income.............. 2,861 4,567 2,664 1,992 1,980 420 696
Noninterest expenses.................. 11,176 10,752 7,791 7,416 7,624 1,849 1,874
Provision for (benefit from) income (2,771) 414 (154) 306 (554) (4) 273
taxes...............................
Income (loss) from continuing
operations before loss from
discontinued operation, cumulative
effect of accounting change and
extraordinary item.................. (7,359) (12) 774 1,497 2,528 381 385
Loss from discontinued operation...... (48) (33) (71) -- -- -- --
Cumulative effect of accounting change -- -- 245 -- -- -- --
Extraordinary item - tax benefit of
net operating loss carryforward..... -- 407 -- -- -- -- --
Net income (loss)..................... (7,407) 362 948 1,497 2,528 381 385
Per Share Data:
Income (loss) from continuing operations
before loss from discontinued
operation, cumulative effect of
accounting change and
extraordinary item.................. $(5.48) $(0.01) $ 0.40 $ 0.59 $ 1.00 $ 0.15 $ 0.15
Loss from discontinued operation...... (0.03) (0.02) (0.04) -- -- -- --
Cumulative effect of accounting change -- -- 0.13 -- -- -- --
Extraordinary item - tax benefit of
net operating loss carryforward..... -- 0.30 -- -- -- -- --
Net income (loss)..................... (5.51) 0.27 0.49 0.59 1.00 0.15 0.15
Cash dividends paid................... -- -- -- -- 0.08 -- 0.04
Period end book value................. 8.08 8.35 5.80 5.84 7.30 6.24 7.41
Balance Sheet Data (at period end):
Loans, net of unearned income......... $221,666 $149,732 $130,815 $141,154 $140,648 $142,700 $141,496
Total assets.......................... 265,625 209,132 194,848 206,517 214,615 208,966 216,684
Total deposits........................ 201,656 148,769 148,397 151,203 163,663 157,350 167,989
Total shareholders' equity............ 10,857 11,219 14,614 14,700 18,382 15,714 18,673
Ratios:
Return on average assets.............. (2.60)% 0.15% 0.47% 0.76% 1.20% 0.75% 0.72%
Return on average shareholders' equity (52.29) 3.32 7.32 10.24 15.02 10.16 8.35
Average shareholders' equity to total
average assets...................... 4.97 4.62 6.42 7.38 8.00 7.33 8.64
Dividend payout ratio................. -- -- -- -- 8.00 -- 26.67
Other Information:
Total average assets.................. $285,236 $235,458 $201,752 $198,146 $210,369 $207,298 $214,578
Total average shareholders' equity.... 14,165 10,889 12,955 14,621 16,831 15,202 18,546
Weighted average shares outstanding... 1,343,265 1,343,265 1,931,138 2,519,010 2,519,010 2,519,010 2,519,010
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Three months
Years ended December 31, ended March 31,
------------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Operating Data:
Interest income....................... $74,999 $66,881 $60,788 $61,593 $70,107 $16,978 $17,337
Interest expense...................... 46,078 32,609 25,087 24,841 32,336 7,556 7,977
Net interest income................... 28,921 34,272 35,701 36,752 37,771 9,422 9,360
Provision for credit losses........... 9,121 3,381 3,217 1,188 1,651 300 300
Net interest income after provision
for credit losses................... 19,800 30,891 32,484 35,564 36,120 9,122 9,060
Net gains (losses) on sales of (6) 1,105 201 -- (256) -- (28)
securities..........................
Other noninterest income.............. 7,513 9,941 8,838 8,982 12,419 2,193 2,687
Noninterest expenses.................. 29,276 31,450 29,937 31,601 35,177 8,346 8,245
Provision for (benefit from) income (654) 3,231 3,049 3,297 2,379 648 1,000
taxes...............................
Income (loss) from continuing
operations before loss from
discontinued operation, cumulative
effect of accounting change and
extraordinary item.................. (1,315) 7,256 8,537 9,648 10,727 2,321 2,474
Loss from discontinued operation...... (48) (33) (71) -- -- -- --
Cumulative effect of accounting change (1,023) -- 245 -- -- -- --
Extraordinary item - tax benefit of
net operating loss carryforward..... -- 407 -- -- -- -- --
Net income (loss)..................... (2,386) 7,630 8,711 9,648 10,727 2,321 2,474
Per Share Data:
Income (loss) from continuing operations
before loss from discontinued
operation, cumulative effect of
accounting change and extraordinary
item................................ $(0.26) $ 1.46 $ 1.64 $ 1.76 $ 1.95 $ 0.42 $ 0.45
Loss from discontinued operation...... (0.01) -- (0.01) -- -- -- --
Cumulative effect of accounting change (0.21) -- 0.04 -- -- -- --
Extraordinary item - tax benefit of
net operating loss carryforward..... -- 0.08 -- -- -- -- --
Net income (loss)..................... (0.48) 1.54 1.67 1.76 1.95 0.42 0.45
Cash dividends paid................... 0.55 0.57 0.58 0.57 0.65 0.15 0.18
Period end book value................. 12.34 13.31 13.83 13.94 16.06 15.04 16.25
Balance Sheet Data (at period end):
Loans, net of unearned income......... $625,751 $556,172 $546,447 $621,553 $625,342 $632,301 $617,928
Total assets.......................... 844,872 822,713 841,452 910,376 954,469 912,752 955,804
Total deposits........................ 703,580 674,550 696,945 753,382 784,720 748,272 795,033
Total shareholders' equity............ 61,101 65,947 75,744 76,582 88,401 79,732 89,590
Ratios:
Return on average assets.............. (0.28)% 0.92% 1.05% 1.12% 1.16% 1.03% 1.05%
Return on average shareholders' equity (3.74) 12.07 12.43 12.72 13.04 12.10 11.14
Average shareholders' equity to total
average assets...................... 7.56 7.59 8.47 8.81 8.89 8.55 9.45
Dividend payout ratio................. (114.58) 37.01 34.73 32.39 33.33 35.71 40.00
Other Information:
Total average assets.................. $843,934 $833,051 $827,431 $860,336 $925,815 $910,569 $945,388
Total average shareholders' equity.... 63,809 63,238 70,098 75,827 82,287 77,814 89,317
Weighted average shares outstanding... 4,963,814 4,954,067 5,214,628 5,484,043 5,499,820 5,494,130 5,509,920
</TABLE>
<PAGE>
RISK FACTORS
Financial Performance of Home Federal and F&M Bancorp; No Assurance of Continued
Profitability
F&M Bancorp negotiated the Conversion Ratio partly on the basis of Home
Federal's existing market share in Washington County and partly on the basis of
its recent financial performance. The Conversion Ratio reflects Home Federal's
considerable market share in a desirable geographic market into which F&M
Bancorp would like to expand, and its success in recent years in rectifying its
holdings of problem assets and classified loans. There can be no assurance,
however, that after the Effective Date of the Merger Home Federal will continue
to have its current market position, that it will continue to be able to resolve
its problem assets and classified loans, or that F&M Bancorp and Home Federal
will be able to realize the expected competitive advantages of combining into a
larger financial institution.
In the past, Home Federal had experienced significant financial and
operational problems, reflected in part by net losses of $3.1 million and $7.4
million during the years ended December 31, 1990 and 1991, respectively. These
losses were primarily due to high levels of nonperforming assets. These were
attributable, to a significant extent, to the economic recession of those years
generally, the substantial decline in real estate values in Home Bank's market
areas in particular and a high concentration of loans to certain borrowers.
Home Federal negotiated the amount of the consideration which Home Federal
Stockholders are to receive in the Merger partly on the basis of F&M Bancorp's
past financial performance. Specifically, Home Federal considered the historical
trading range of the Common Stock of F&M Bancorp and its historical dividends
per share, net income per share and book value per share. See "Proposed Merger
of Home Federal and F&M Bancorp -- Reasons for the Merger; Recommendations of
the F&M Bancorp Board and of the Home Federal Board." The recommendation of the
Home Federal Board to approve, ratify and confirm the Merger Agreement and the
Merger is also based in part upon F&M Bancorp's past financial performance.
Although F&M Bancorp's operations have been profitable in recent years, no
assurance can be given that they will be as profitable in the future. A decline
in F&M Bancorp's financial performance could adversely affect the value of the
consideration which Home Federal Stockholders will receive. Among many factors
which could adversely affect F&M Bancorp's financial performance are government
regulation, increased competition, and unfavorable economic conditions. See "--
Government Regulation;" "-- Competition;" and "-- Economic Conditions." These
are discussed below.
Government Regulation
F&M Bancorp, F&M Bank and Home Bank are subject to extensive governmental
supervision, regulation and control. The various regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities which have generally been used to protect depositors and the deposit
insurance funds and not to protect stockholders. Future legislation and
government policy could also adversely affect the banking industry, the
operations of F&M Bank and Home Bank, and consequently the financial performance
of F&M Bancorp. There can be no assurance that the profitability of F&M Bancorp,
F&M Bank and Home Bank will not be adversely affected by changes in the
applicable laws, regulations, and policies. For example, recent changes in
Federal banking laws will result in increased competition in the banking
industry. See "-- Competition."
Like other depository institutions, F&M Bank and Home Bank are affected by
the monetary policies of the Federal Reserve Board and other federal
instrumentalities. A primary instrument of the Federal Reserve Board's monetary
policy is the restriction on expansion of the money supply. This is accomplished
through open market operations, including the purchase and sale of government
securities and the adjustment of reserve requirements. These actions may at
times result in significant fluctuations in interest rates, which could have
adverse effects on the operations of F&M Bank and Home Bank. In particular, F&M
<PAGE>
Bank's and Home Bank's abilities to make loans and attract deposits, as well as
public demand for loans, could be adversely affected.
Recapitalization of SAIF and Related Legislative Proposals
The deposits of Home Bank, and a portion of the deposits of F&M Bank, are
currently insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Both the SAIF and the Bank
Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits (including the remainder of the deposits of F&M Bank),
are required by law to attain and thereafter maintain a reserve ratio of 1.25%
of insured deposits. The BIF has achieved a fully funded status in contrast to
the SAIF and the FDIC recently reduced the average deposit insurance premium
paid by BIF-insured commercial banks to a level substantially below the average
premium paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with the semiannual premium assessment on January 1,
1996, reduced deposit insurance premiums for BIF member institutions to zero
(subject to an annual minimum of $2,000) for institutions in the lowest risk
category. Deposit insurance premiums for SAIF members were maintained at their
existing levels (23 basis points for institutions in the lowest risk category).
Accordingly, in the absence of further legislative action, until the SAIF
attains a reserve ratio of 1.25% of insured deposits, SAIF members such as Home
Bank (and to a lesser extent, F&M Bank) will be competitively disadvantaged as
compared to those commercial banks which have no SAIF-insured deposits due to
this premium differential. It is anticipated that, under present conditions, it
will be at least several years before the SAIF reaches a reserve ratio of 1.25%
of insured deposits.
The U.S. House of Representatives and Senate had actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The legislation had been, for some time,
included as part of a fiscal 1996 federal budget bill, but was eliminated prior
to the bill's enactment on April 26,1996. In light of the legislation's
elimination and the uncertainty of the legislative process generally, management
cannot predict whether legislation reducing SAIF premiums and/or imposing a
special one-time assessment will be adopted, or, if adopted, the amount of the
assessment, if any, that would be imposed on Home Bank.
Competition
F&M Bancorp operates in a competitive environment, competing for deposits
and loans with commercial banks, thrift institutions and other financial
institutions. Numerous mergers and consolidations involving Maryland banks have
recently occurred, resulting in an intensification of competition in the banking
industry. Many of F&M Bancorp's competitors possess greater financial resources
or have substantially higher lending limits than does F&M Bancorp. F&M Bancorp
also competes with money market mutual funds for funds from depositors.
Recent changes in Federal banking laws will facilitate interstate
acquisitions of banks by bank holding companies, as well as interstate mergers
and branching by banks. For example, since September 29, 1995, certain bank
holding companies have been permitted to acquire banks located outside the state
in which their principal banking operations are located. In addition, on June 1,
1997 (and sooner if permitted by relevant state law), certain banks will be
permitted to merge with banks organized under the laws of different states. In
1995, Maryland adopted a statute allowing out-of-state banks to merge with
Maryland banks and establish branches in Maryland. Such changes may result in an
even greater degree of competition in the banking industry. F&M Bancorp may be
brought into competition with institutions with which it does not presently
compete. There can be no assurance that the profitability of F&M Bancorp will
not be adversely affected by the increased competition which may characterize
the banking industry in the future.
<PAGE>
Economic Conditions
An adverse change in general economic conditions could adversely affect F&M
Bancorp's financial performance. F&M Bancorp's operating results depend upon the
rate differentials which result from the difference between the income it
receives from its loans, securities and other earning assets and the interest
expense it pays on its deposits and other interest-bearing liabilities. These
rate differentials are highly sensitive to many factors beyond the control of
F&M Bancorp. Also, an adverse change in general economic conditions could impair
borrowers' ability to repay loans as they mature, thus reducing the income F&M
Bancorp receives from its loans and reducing the amount of the rate
differentials.
Limitations on Payment of Dividends
Following the Merger, F&M Bank and Home Bank will be the wholly-owned
subsidiaries of F&M Bancorp and will be its principal income-producing
operations. Accordingly, dividends payable by F&M Bancorp are subject to the
financial conditions of F&M Bank, Home Bank and F&M Bancorp and to other
business considerations. Even if F&M Bank and Home Bank are able to generate
sufficient earnings to pay dividends, there can be no assurance that the Board
of Directors might not decide or be required to retain a greater portion of
their earnings in order to maintain existing capital or achieve additional
capital.
In addition, F&M Bank's ability to pay dividends may be restricted by
applicable provisions of national banking laws and regulations of the
Comptroller, the FDIC, and the Federal Reserve Board. Home Bank's ability to pay
dividends may also be restricted by applicable provisions of regulations of the
OTS. Any one or a combination of these could have the effect of reducing the
amount of dividends payable by F&M Bancorp.
Adequacy of Allowance for Credit Losses
To address the risk of credit losses, the managements of F&M Bank and Home
Bank maintain an allowance for credit losses based upon a percentage of the
outstanding balances of all loans. The respective managements also maintain an
allowance for specific loans when their ultimate collectability becomes
questionable. The amount of the allowance for credit losses is established on
the basis of, among other things, historical experience, an evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality. If management's assumptions and judgments prove to be incorrect and the
allowance for credit losses is inadequate to absorb future losses, or if
regulatory authorities require F&M Bank or Home Bank to increase the allowance
for credit losses, the respective earnings of F&M Bank and Home Bank could be
significantly and adversely affected.
Additional Classes and Series of Stock
The Board of Directors of F&M Bancorp is authorized to establish one or
more classes and series of stock, including series of preferred stock, from time
to time and to establish the number of shares in each class or series and to fix
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of such class or series, without any further vote or action by its
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which F&M Bancorp's
securities may be listed or traded. The issuance of additional classes or series
of capital stock with voting and conversion rights may adversely affect the
voting power of the holders of capital stock of F&M Bancorp, including the loss
of voting control to others. The ability of the Board of Directors of F&M
Bancorp to issue additional classes or series of capital stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of F&M Bancorp. However, the Board of Directors of F&M
Bancorp is not aware of any present attempt or efforts by any person to
accumulate Common Stock of F&M Bancorp or obtain control of F&M Bancorp.
<PAGE>
PROPOSED MERGER OF HOME FEDERAL AND F&M BANCORP
General
On the Effective Date of the Merger, Home Federal will merge with and into
F&M Bancorp, and F&M Bancorp shall continue as the successor corporation under
its Charter and By-Laws as in effect immediately before the Effective Date. The
separate corporate existence of Home Federal shall cease, and Home Bank shall
become a wholly-owned direct subsidiary of F&M Bancorp. Each share of the Home
Federal Common Stock outstanding immediately prior to the Effective Date will,
without any action on the part of the holder thereof, be canceled and converted
into the number of shares of F&M Bancorp Common Stock which results after
multiplication by the Conversion Ratio, rounded to the nearest one-hundredth of
a share. Cash will be paid in lieu of fractional shares, and no certificates for
fractional shares of F&M Bancorp Common Stock will be issued.
Background of the Merger
The first discussions between F&M Bancorp and Home Federal regarding the
possibility of a merger occurred in March 1995. At the June 15, 1995 meeting of
the Home Federal Board, the Research Committee (which the Home Federal Board had
established to consider and evaluate possibilities for an acquisition involving
Home Federal) reported to the full Board on inquiries and responses from F&M
Bancorp. The consensus among members of the full Board of Home Federal was that
the Home Federal Board should indicate to F&M Bancorp an interest in meeting to
determine the next step to be taken in these discussions. The Home Federal Board
instructed the Research Committee to develop an agenda for that meeting. In the
ensuing months, representatives of the two institutions periodically discussed
the possibility of a merger. Both F&M Bancorp and Home Federal conducted these
discussions without the involvement of an investment bank or other financial
advisor.
In July and August of 1995, officers of F&M Bancorp discussed Home
Federal's problem assets situation with certain Home Federal officers. The
adequacy of Home Federal's Allowance for Possible Losses in relation to its
problem assets, and its management of its real estate owned portfolio were
particularly discussed. At the July 11, 1995 meeting of the F&M Bancorp Board,
management of F&M Bancorp presented a summary of Home Federal's financial
performance. The F&M Bancorp Board directed its management to continue to obtain
information on Home Federal, and to report again at its August meeting. At the
August 8, 1995 meeting, management of F&M Bancorp again reported on the status
of the possible acquisition of Home Federal. Before the August meeting,
management of F&M Bancorp visited Home Federal to review its loan portfolio.
They concluded on the basis of their research that Home Federal's classified
loans were adequately reserved for, and that Home Federal had adopted business
plans that were likely to effectively address its problem asset portfolio. At
the August 17, 1995 meeting of the Home Federal Board, it was reported that Home
Federal had provided F&M Bancorp its financial information for the most recently
completed fiscal quarter. F&M Bancorp had requested this information for its due
diligence review of Home Federal's operations. The Home Federal Board determined
at this meeting that the Research Committee should contact F&M Bancorp again to
suggest another meeting.
Discussions between F&M Bancorp and Home Federal slowed through November
1995 primarily due to the distraction and uncertainty created by the
Congressional discussions of the possibility of a special recapitalization
assessment on savings and loan associations for the Savings Association
Insurance Fund and of the possible elimination of federal thrift charters.
Nevertheless, the merger was again discussed at the October 20, 1995 meeting of
the F&M Bancorp Board. At this meeting, possible pricing parameters of the
transaction were considered. Management of F&M Bancorp presented a preliminary
analysis of Home Federal and of the financial and capital impacts an acquisition
of Home Federal would have on F&M Bancorp. The F&M Bancorp Board agreed to offer
a conversion ratio based on a multiple of not more than 1.65 times Home
Federal's book value and approved the continuation of the discussions with Home
Federal.
<PAGE>
The discussions resumed in December 1995. At that time, the management of
both F&M Bancorp and Home Federal met for the first time to discuss the terms of
the Merger and other business matters. At its meeting on January 18, 1996, the
Home Federal Board considered activities of the Research Committee and the due
diligence review that had so far been completed. It was decided at this meeting
to involve Elias, Matz, Tiernan & Herrick L.L.P. in the merger negotiations. At
its February 15, 1996 meeting, the Home Federal Board reviewed a report from its
Research Committee, and decided to continue the negotiations with F&M Bancorp.
At the meeting of the F&M Bancorp Board on February 20, 1996, the results of a
meeting between representatives of F&M Bancorp and representatives of Home
Federal were discussed, and the F&M Bancorp Board approved further discussion of
the proposed transaction as its terms were presented at this meeting. F&M
Bancorp involved its counsel, Piper & Marbury L.L.P., in the merger negotiations
after this meeting. Drafts of the proposed Merger Agreement and related
documents (such as the Option Agreement) were prepared, circulated, and
discussed in the ensuing weeks. At its March 7, 1996 meeting, the Research
Committee of the Home Federal Board reported that additional meetings with
representatives of F&M Bancorp had been held. An officer of Home Federal was
asked to summarize the terms of the proposed Merger Agreement, and was directed
to pursue further discussion of several terms of the proposed Merger Agreement
that the Home Federal Board believed should be clarified by F&M Bancorp. Further
negotiations continued and the Home Federal Board retained Charles Webb &
Company ("Webb") as its financial advisor to issue an opinion as to the
fairness, from a financial point of view, of the terms of the Merger with
respect to the stockholders of Home Federal.
F&M Bancorp held a meeting of its full Board of Directors on March 19, 1996
to discuss the proposed Merger Agreement and Merger. Though certain terms of the
Merger Agreement remained to be finalized, its principal terms had by then been
determined, and F&M Bancorp's Board had been kept apprised of the status of the
negotiations and had been provided with ongoing drafts of the Merger Agreement.
At this meeting, therefore, F&M Bancorp's Board decided that it was in a
position to make a decision on the Merger Agreement and the Merger, and passed a
unanimous resolution approving the Merger Agreement and the Merger under the
terms that had by then been decided upon. At this meeting, F&M Bancorp's Board
also approved other actions to be taken in connection with the consummation of
the Merger, including the preparation of this Proxy Statement/Prospectus.
Home Federal's Board held its meeting to approve the Merger Agreement and
the Merger on April 1, 1996. By this time virtually all major terms of the
Merger Agreement and Merger were agreed upon. Home Federal's Board members were
provided with an advanced draft of the Merger Agreement, and discussed the
status of the proposed transaction and the terms of the Merger Agreement as they
had been finalized. Home Federal's Board decided to approve the Merger Agreement
and the Merger and the Option Agreement, and passed a unanimous resolution
approving the Merger Agreement and the Merger and the Option Agreement, and
providing for the Home Federal Special Meeting. The Merger Agreement, together
with the Option Agreement and other documents related to the Merger, were
executed on April 2, 1996.
Reasons for the Merger; Recommendations of the F&M Bancorp Board and of the Home
Federal Board
By the end of 1994, F&M Bancorp had decided it needed to expand in order to
compete with larger financial institutions, but found it had already attained a
sufficiently strong position in its existing banking relationships that could
only be marginally improved upon. F&M Bancorp already held 26% of the market
share for deposits in the Frederick, Maryland area and increasing its market
share there could only come at a high marginal operational cost. Increasing its
market share in Frederick County, Maryland would also incur regulatory costs, as
an increasingly dominant market position would create increasingly large
anti-competitive implications. F&M Bancorp could expand its operations less
expensively by growing into new geographic markets. Expansion into new
geographic markets would also make F&M Bancorp's customer base less concentrated
in any one area, and therefore make its financial performance less susceptible
to changes in localized economic conditions. The management and directors of F&M
Bancorp therefore concluded that the best means to enhance its stockholder value
would be to seek new customer bases and new business opportunities. As the most
<PAGE>
effective means of rapidly gaining market share in new markets, F&M Bancorp thus
began to consider undertaking acquisitions of other banking institutions.
In January 1995, F&M Bancorp entered into an agreement to acquire The Bank
of Brunswick. Located in Brunswick, Maryland, the acquisition increased F&M
Bancorp's deposits by approximately $26 million and added two full-service
banking offices in central and western Frederick County to its retail banking
system. During 1995, F&M Bancorp also pursued its strategy of expansion by
acquiring two offices of First Union Bank in northeastern Montgomery County and
Frederick County and by adding its own additional banking offices and ATM
locations.
F&M Bancorp had also identified Hagerstown as a desirable new geographic
market into which to expand. Located in Washington County, Maryland, Hagerstown
is approximately 70 miles west of Baltimore and 70 miles northwest of
Washington, D.C. It is an important point of transit for east-west and
north-south truck and rail shipments. Significant bank merger activity has
occurred there in recent years. In 1989, Farmers and Merchants Bank and Trust
was acquired by Susquehanna Bancshares, Inc. of Lititz, Pennsylvania, and in
1994 Hagerstown Trust Company was acquired by Fulton Financial Corporation of
Lancaster, Pennsylvania. Home Federal was one of the few remaining independent
banking institutions in Washington County and the last independent banking
institution in Hagerstown, and the one which represented the most attractive
potential acquisition target for F&M Bancorp.
F&M Bancorp currently operates no banking offices in Washington County. The
acquisition of Home Federal would allow F&M Bancorp to establish a significant
and immediate market presence there. Despite the level of problem assets and
classified loans in its portfolio, Home Federal enjoys a strong retail banking
business in Washington County. With savings accounts of approximately $164
million as of December 31, 1995, by the beginning of April 1996 Home Federal
controlled 10.5% of the county's deposit market share. Home Federal shares a
community banking philosophy with F&M Bancorp, which has given Home Federal a
loyal customer base which is similar to F&M Bancorp's.
In addition to acquiring Home Federal's existing retail market share, the
Merger would present F&M Bancorp with additional business opportunities in
Washington County. F&M Bancorp's new affiliation with Home Federal would allow
it to offer its commercial banking products in a new market. A final, though
secondary, reason for the Merger is that it gives F&M Bancorp a direct market
presence in a market where it had begun to have an indirect presence through its
purchase of automobile loans from automobile dealers and trust and other
business through its mobile office known as "Express Bank". The more direct
presence in Washington County resulting from the Merger would enable F&M Bancorp
to solidify these and similar initial banking relationships.
For Home Federal, the Merger also represents an immediate means of
accomplishing substantial stockholder gains. In recent years, management of Home
Federal has concentrated its efforts on rectifying its holdings of problem
assets and classified loans. In 1992, Home Federal recorded net income of
approximately $362,000 after having recorded a net loss of approximately $7.4
million in the previous year. Home Federal then recorded increasing amounts of
net income in each of the following years, recording approximately $2.5 million
in net income in 1995. Similar improvements occurred in other Home Federal
financial indicators. For instance, in 1995 Home Federal increased its book
value by 25%, to $7.30, over its level of a year earlier, and decreased its
problem assets by 43%, to $12.9 million, from their level of a year earlier.
These improvements in Home Federal's performance also caused Home Federal
to become an increasingly attractive acquisition candidate. Before having been
contacted by F&M Bancorp, Home Federal had had discussions with other financial
institutions over the past several years as its financial performance gradually
improved. These earlier considerations, however, did not result in any
acceptable merger proposals.
Though Home Federal could continue to exist as an independent financial
institution, it would need to further improve its performance through resolving
its problem assets and classified loans, and increase its capabilities to be
<PAGE>
better able to originate and administer loans. The Merger represents a more
immediate means of realizing substantial shareholder gains. The Conversion Ratio
at which the issued and outstanding shares of the Common Stock of Home Federal
will be converted into shares of the Common Stock of F&M Bancorp would represent
an immediate and significant increase in the value of the shares held by the
Home Federal Stockholders. Home Federal does not believe that it could
immediately create this element of value for its stockholders outside of an
acquisition context.
The Home Federal Board believes that the Merger Agreement and the Merger
are advisable, are fair to, and are in the best interests of Home Federal and
the Home Federal Stockholders. The Home Federal Board unanimously recommends
that Home Federal Stockholders vote TO APPROVE, RATIFY AND CONFIRM the Merger
Agreement and the Merger provided for therein.
The F&M Bancorp Board believes that the Merger Agreement and the Merger are
advisable, are fair to, and are in the best interests of F&M Bancorp and the F&M
Bancorp Stockholders. The F&M Bancorp Board unanimously recommends that F&M
Bancorp Stockholders vote TO APPROVE, RATIFY AND CONFIRM the Merger Agreement
and the Merger provided for therein.
Additional Reasons for the Merger
Recent changes in federal and state banking laws and regulations have had a
major impact upon the banking industry in Maryland and throughout the United
States. For example, Maryland law permits statewide branching by Maryland banks
and also permits bank holding companies located in other states to acquire
Maryland banks under specified conditions. In response to these and other recent
changes, many mergers and consolidations involving Maryland banks and bank
holding companies have occurred.
F&M Bancorp and Home Federal believe that further merger activity within
Maryland is likely to occur in the future, resulting in increased concentration
levels in banking markets in Maryland and other significant changes in the
competitive environment. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act"), a federal law, allows adequately capitalized
and managed bank holding companies to acquire banks in any state starting
September 29, 1995. Another provision of the Act allows interstate merger
transactions between banks beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks and convert those offices into branches of the resulting
bank. The Act provides that it will be the exclusive means for bank holding
companies to obtain interstate branches. Under the Act, banks may establish and
operate a "de novo branch" in any state that expressly "opts-in" to de novo
branching. Foreign (non-U.S.) banks are allowed to establish and operate
branches, either de novo or by merger, to the same extent that the establishment
and operation of such branches would be permitted if the foreign bank were a
national bank or State bank. Maryland has adopted a statute, effective September
29, 1995, allowing out-of-state banks to merge with Maryland banks, and to
establish and operate de novo branches in Maryland, subject to certain
conditions. All these changes are expected to intensify competition in local,
regional and national banking markets.
In addition, changes in federal banking laws have significantly increased
the severity and complexity of federal banking regulations, as well as the costs
that banks must incur in complying with those regulations. For example, pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the federal banking agencies have established guidelines for real estate lending
by FDIC-insured banks, including maximum loan-to-value ratios for various types
of real estate loans. FDICIA also contains "Truth in Savings" provisions that
require extensive disclosures regarding the rates of interest paid and the fees
charged by FDIC-insured banks with respect to their deposit accounts. FDICIA
further provides greatly expanded authority to the federal banking agencies to
impose administrative enforcement sanctions (including cease-and-desist orders,
civil money penalties, officer removal or suspension orders, and in certain
cases the appointment of a conservator or receiver) against FDIC-insured banks
that fail to maintain adequate capital levels or that engage in unsafe or
unsound banking practices. These changes in federal law have added significantly
<PAGE>
to the cost and complexity of operating a bank, and have made it more difficult
for smaller independent banks to compete with larger banking organizations.
The Merger would benefit both parties by allowing them to combine into a
larger financial institution with considerable market share in a larger
geographic market. This would place them in a better position to compete
effectively with larger organizations in the rapidly changing market for
financial services; however, F&M Bancorp and Home Bank will not abandon the
community banking philosophy (and the degree of local involvement and autonomy
it implies) that has enabled their businesses to succeed thus far. F&M Bancorp
intends to operate Home Bank as a separate savings bank subsidiary for at least
three years after the Merger. While F&M Bancorp will exercise an oversight role
and provide financial backing, administrative support services and other
resources to Home Bank, Home Bank is expected to operate as a semi-autonomous
community savings institution. Accordingly, it is not anticipated, following the
Merger, that Home Bank will effect any substantive changes in its present
business practices.
As described above, the Boards of Directors of F&M Bancorp and Home Federal
have unanimously approved the terms of the Merger Agreement. The Boards of
Directors of F&M Bancorp and Home Federal believe that the terms of the Merger
are fair to and in the best interests of F&M Bancorp and Home Federal and their
stockholders.
Opinion of Financial Advisor
The Home Federal Board retained Webb as its financial advisor to issue an
opinion (the "Fairness Opinion") as to the fairness, from a financial point of
view, of the terms of the Merger with respect to the stockholders of Home
Federal. Webb, as part of its investment banking business, is regularly engaged
in the evaluation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, and distributions of listed and unlisted
securities. Webb is familiar with the market for common stocks of publicly
traded banks, thrifts and bank and thrift holding companies. The Home Federal
Board selected Webb on the basis of the firm's reputation, its experience and
expertise in transactions similar to the Merger, and its prior work for and
relationship with Home Federal in connection with a public offering of common
stock completed by Home Federal in 1993.
Webb delivered to the Home Federal Board its Fairness Opinion, which stated
that, as of April 2, 1996 and updated as of the date of this Proxy
Statement/Prospectus, the financial terms of the Merger as set forth in the
Merger Agreement are fair, from a financial point of view, to the stockholders
of Home Federal. No limitations were imposed by the Home Federal Board upon Webb
with respect to the investigations made or procedures followed by it in
rendering either Fairness Opinion. Webb has consented to the inclusion in this
Proxy Statement/Prospectus of this summary of the Fairness Opinion and the
update letter and to the attachment as Annex C to this Proxy
Statement/Prospectus of the entire text of the subsequent Fairness Opinion and
the update letter.
The full text of the Fairness Opinion updated as of the date of this Proxy
Statement/Prospectus, which is attached as Annex C to this Proxy
Statement/Prospectus, sets forth certain assumptions made, matters considered
and limitations on the review undertaken by Webb, and should be read in its
entirety. The summary of the Fairness Opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of the Fairness Opinion.
In rendering the Fairness Opinion, Webb (a) reviewed drafts of the Merger
Agreement, (b) reviewed Home Federal's and F&M Bancorp's annual reports, proxy
statements and Forms 10-K for the years ended December 31, 1995, 1994, 1993,
Forms 10-Q and 10-QSB for the quarters ended March 31, 1996, and certain other
internal financial analysis it considered relevant, (c) discussed the current
position and prospective outlook for Home Federal with senior management and the
boards of directors of Home Federal and Home Bank, (d) discussed F&M Bancorp's
operations, financial performance and future plans and prospects with its senior
<PAGE>
management and several of its directors, (e) considered historical quotations,
levels of activity and prices of recorded transactions in Home Federal's and F&M
Bancorp's Common Stock, (f) reviewed financial and stock market data of other
thrifts in an asset range comparable to Home Federal's assets, (g) reviewed
financial and stock market data of other banks in an asset range comparable to
F&M Bancorp's assets, (h) reviewed certain recent business combinations
involving a thrift as the acquired company which it deemed comparable in whole
or in part, and (i) performed other analysis which it considered appropriate.
In rendering its Fairness Opinion, Webb assumed and relied upon the
accuracy and completeness of the financial information provided to it by Home
Federal and F&M Bancorp. In its review, with the consent of the Home Federal
Board, Webb did not undertake any independent verification of the information
provided to it; nor did it make any independent appraisal or evaluation of the
assets or liabilities, or of any potential or contingent liabilities, of Home
Federal or F&M Bancorp.
Analysis of Comparable Publicly Traded Companies. Webb compared selected
publicly available financial information of a comparable peer group of Home
Federal consisting of financial institutions which have assets between $100 and
$300 million and are located in the Mid-Atlantic region. The peer group
consisted of the following seventeen institutions: Equitable Federal Savings
Bank, Harbor Federal Bancorp, Inc., Washington Savings Bank (Maryland), Chester
Valley Bancorp, Inc., First Keystone Financial, Fidelity Bancorp, Inc.,
Harleysville Savings Bank, Laurel Capital Group, Inc., Patriot Bank Corp., WVS
Financial Corp. (Pennsylvania), Center Banks, Inc., Elmira Savings Bank,
Financial Bancorp, Inc., Peekskill Financial Corp., SFS Bancorp, Inc., Tappan
Zee Financial, Inc. (New York), and Independence Federal Savings (Washington,
D.C.). Financial data and comparisons included, but were not limited to, (a)
stock price to tangible book value (Home Federal's stock price was 107% of its
tangible book value, compared to the peer group median of 92%); (b) stock price
to last twelve months' ("LTM") earnings (giving effect to an adjustment to Home
Federal's last twelve months' earnings to reflect the non-recurring credit to
income tax expense for the change in valuation allowance, which would have
reduced reported 1995 earnings from $2.5 million to $1.2 million ("Adjusted LTM
Earnings"), Home Federal's stock price was 16 times its Adjusted LTM Earnings,
compared to the peer group median of 12.3 times); (c) return on average assets
(Home Federal's return on average assets, based on its Adjusted LTM Earnings,
was 0.57%, compared to the peer group median of 0.69%); (d) return on average
equity (Home Federal's return on average equity, based on Adjusted LTM earnings,
was 7.1%, compared to the peer group median of 7.5%); and (e) tangible equity as
a percentage of total assets (Home Federal reported tangible equity of 8.4% of
total assets, compared to the peer group median of 9.2%).
Webb also analyzed the performance and financial condition of F&M Bancorp
relative to a peer group consisting of commercial banks which have assets
between $750 million and $1 billion and are located in the Mid-Atlantic region.
This peer group consisted of the following nine banks: Mason-Dixon Bancshares
(Maryland), Harleysville National Corp., JeffBanks, Inc., Omega Financial Corp.,
Southwest National Corp. (Pennsylvania), Arrow Financial Corp., Evergreen
Bancorp, Inc., Sterling Bancorp, and Suffolk Bancorp (New York). Financial data
and comparisons included but were not limited to (a) stock price to tangible
book value (F&M Bancorp's stock price was 200% of its tangible book value,
compared to the peer group median of 167%); (b) stock price to LTM earnings (F&M
Bancorp's stock price was 16.2 times its LTM earnings, compared to the peer
group median of 13.6 times); (c) return on average assets (F&M Bancorp reported
return on average assets of 1.15%, compared to the peer group median of 1.18%);
(d) return on average equity (F&M Bancorp reported return on average equity of
12.5%, compared to the peer group median of 12.0%); and (e) tangible equity as a
percentage of total assets (F&M Bancorp reported tangible equity of 8.9% of
total assets, compared to the peer group median of 8.4%).
Analysis of Recent Comparable Acquisition Transactions. In preparing its
Fairness Opinion, Webb analyzed certain comparable pending and completed
acquisitions of thrift institutions, comparing the acquisition price to stated
book value, tangible book value, LTM earnings, total assets, total deposits, and
premium to core deposits. The analysis included a comparison of the high, low
and median of these ratios based on the following four comparable groups: (a)
all acquisitions of thrifts since June 30, 1995 ("Recent Transactions"), (b) all
acquisitions of thrifts since June 30, 1995 with a transaction value between $20
million and $50 million ("Comparable Transaction Size"), (c) all acquisitions
<PAGE>
since June 30, 1995 of thrifts having equity to total assets of 10% or less
("Comparable Equity Ratio"), and (d) all acquisitions of thrifts located in the
Mid-Atlantic or Midwest regions ("Comparable Regionals").
<TABLE>
<CAPTION>
Price to:
-----------------------------------------------------------------------------------
Core
Tangible LTM deposit
Book value book value EPS (a) Deposits Assets premium
(%) (%) (x) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
Consideration - $12.05 per
share (b)................ 165.0 165.0 25.9(c) 18.7 14.3 7.5
Recent Transactions
High..................... 229.6 364.5 75.8 50.5 34.1 34.2
Low...................... 72.0 72.0 9.9 3.5 3.0 NM(d)
Median................... 149.1 150.8 18.2 18.1 13.5 6.1
Comparable Transaction Size
High..................... 173.9 177.5 75.8 37.2 28.0 15.5
Low...................... 104.2 106.4 9.9 10.0 8.0 1.0
Median................... 148.3 148.7 20.4 20.2 13.7 5.8
Comparable Equity Ratio
High..................... 229.6 232.9 35.6 32.0 23.5 18.4
Low...................... 72.0 72.0 9.9 3.5 3.0 NM
Median................... 152.6 153.1 17.2 14.7 10.9 5.5
Comparable Regionals
High..................... 212.6 218.8 75.8 50.5 34.1 20.2
Low...................... 90.2 90.2 9.9 6.5 6.0 NM
Median................... 149.1 150.1 20.4 22.0 14.4 6.6
- ---------------
</TABLE>
(a) Last twelve months' earnings per share.
(b) For illustration purposes only, based on Home Federal's book value at
December 31, 1995. The actual Conversion Ratio will be determined as of the
Calculation Date. See ""Proposed Merger of Home Federal and F&M Bancorp --
Determination of Conversion Ratio."
(c) Adjusted last twelve months' earnings of $1.2 million were used in
calculating Home Federal's price to last twelve months' earnings.
(d) Not meaningful.
Based on this information, Webb concluded that the multiples implied by the
Conversion Ratio, which would have approximated $12.05 per share if the
Conversion Ratio were determined as of December 31, 1995, were in the ranges of
each mentioned comparable group and, with only a couple of exceptions, exceeded
all of the medians. This summary does not purport to be a complete description
of the analysis performed by Webb and should not be construed independently of
the other information considered by Webb in rendering its Fairness Opinion.
Selecting portions of Webb's analysis or isolating certain aspects of the
comparable transactions without considering all analyses and factors could
create an incomplete or potentially misleading view of the evaluation process.
Discounted Cash Flow Analysis. Webb performed a discounted cash flow
analysis under various projections to estimate the fair market value of the Home
Federal Common Stock. Among other things, Webb considered a range of earnings
and dividend growth assumptions over the next five years, and a terminal value
for Home Federal at the end of five years based on the application of assumed
book values of 165% to 180% and assumed earnings acquisition multiples of 15 to
20 times to the fifth year's projected earnings. The cash flows generated under
<PAGE>
these assumptions were discounted to their present values using discount rates
ranging from 12% to 14%, which represent estimated rates of returns that
stockholders would require. Webb concluded from the discounted cash flow
analysis that the merger consideration to be received exceeded the present value
of the projected cash flows as detailed above.
In preparing its analysis, Webb made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Webb and Home Federal. The analyses performed
by Webb are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses and
do not purport to be appraisals or to reflect the prices at which a business may
be sold.
Webb will receive a fee of $75,000 for services rendered in connection with
advising Home Federal and issuing the Fairness Opinion. As of the date of this
Proxy Statement/Prospectus, Webb has received $25,000 of this fee. The remainder
is due immediately after the approval of the Merger by the stockholders of Home
Federal. Webb was also paid a fee in connection with services it performed for
Home Federal in connection with its stock offering in 1993.
Determination of Conversion Ratio
The Calculation Date shall be the last day of the month during which all
conditions precedent to the Merger shall have been fulfilled or waived. On or
promptly after the Calculation Date, the number of shares of the Common Stock of
F&M Bancorp into which each share of the Common Stock of Home Federal will be
converted (the "Conversion Ratio") will be calculated. The Conversion Ratio
shall be a fraction, the numerator of which is 1.65 times the book value per
share of Home Federal Common Stock on the Calculation Date, and the denominator
of which is the Average Market Value of a share of F&M Bancorp Common Stock. The
"Average Market Value" of each share of the F&M Bancorp Common Stock shall be
the arithmetic average of closing prices of F&M Bancorp Common Stock as reported
in The Wall Street Journal for the 20 consecutive trading days preceding the
Calculation Date. (However, if the Average Market Value of a share of F&M
Bancorp Common Stock is greater than 1.9 times the book value per share of F&M
Bancorp Common Stock, then F&M Bancorp shall instead use a per share price for
its Common Stock equal to 1.9 times its book value per share as of the
Calculation Date). If the Average Market Value of a share of F&M Bancorp Common
Stock is less than 1.6 times the book value per share of F&M Bancorp Common
Stock, then either F&M Bancorp or Home Federal may terminate the Merger
Agreement or, if Home Federal agrees, F&M Bancorp may instead use a per share
price for its Common Stock equal to 1.6 times its book value per share as of the
Calculation Date.
For purposes of the calculation of the Conversion Ratio, the book value of
Home Federal shall mean the calculation as of the Calculation Date of Home
Federal's total assets minus its total liabilities, calculated in conformity
with generally accepted accounting principles applied on a basis consistent with
past practices of Home Federal. This calculation is subject to addition or
subtraction if certain adjustments set forth in the Merger Agreement become
necessary for purposes of this calculation. First, Home Federal's book value
shall be adjusted by the amount (net of tax effects) by which Home Federal's
Allowance for Possible Losses as of the close of business on the Calculation
Date is greater or less than 35.12% of its Problem Assets on the Calculation
Date. Home Federal's Problem Assets (except for consumer loans and one-to-four
family residential loans) shall only be reduced as a result of receipt of loan
payments by Home Bank or as a result of the sale of other real estate owned. For
purposes of this calculation, the term "Problem Assets" is defined in the Merger
Agreement as (a) loans classified as substandard, doubtful or loss and (b) other
real estate owned at the Calculation Date. Second, if a special recapitalization
assessment for the Savings Association Insurance Fund is imposed on Home Bank on
or before the Calculation Date, the amount of the special recapitalization
assessment, net of any tax effects shall be added back to Home Federal's book
value (up to $925,000) as of the close of business on the Calculation Date.
Third, only normal and recurring items of income and expense (including any
<PAGE>
additional premiums to obtain extended directors' and officers' liability
coverage) will be considered in determining Home Federal's book value.
Transactional expenses related to the Merger Agreement and the Merger will not
be deducted as an expense.
Within 10 days of the Calculation Date, Home Federal will prepare and
provide to F&M Bancorp a schedule reflecting the calculation of its book value
as of the Calculation Date. Home Federal will also submit a report of Home
Federal's independent auditors indicating that they have reviewed the
consolidated financial statements included in each of the reports filed by Home
Federal with the Commission since the date of the 1995 audited consolidated
financial statements, specifying that they are not aware of any material
modifications that should be made to such financial statements in order for them
to be presented in conformity with generally accepted accounting principles
applied on a basis consistent with past practice of Home Federal. Home Federal's
independent auditors will also indicate that they have reviewed the schedule
reflecting the calculation of the book value as of the Calculation Date,
specifying that nothing came to their attention that caused them to believe that
the calculation of book value is not in accordance with the terms of the Merger
Agreement. F&M Bancorp's certified public accountants will, within 5 days of the
receipt of the schedule and the report, either confirm in writing to Home
Federal that it finds the determination of book value to be acceptable, or will
set forth specifically and with particularity the basis for any disagreement. In
the event that F&M Bancorp believes that an adjustment to book value is
required, representatives of F&M Bancorp, Home Federal and each of their
independent certified public accountants will meet within 5 days to discuss any
areas of disagreement. Home Federal will promptly make the appropriate
adjustments to its book value or, if the parties cannot reach agreement within 5
days of first meeting on this matter, they will submit the matter for
determination to a mutually acceptable independent third party accounting firm,
whose determination will be made within 10 days thereafter and will be binding
upon the parties.
If F&M Bancorp takes any action which establishes, prior to the Effective
Date, a record date or effective date for a stock dividend on its Common Stock,
a split or reverse split of its Common Stock or any distribution on all shares
of its Common Stock other than cash dividends, F&M Bancorp will take such action
as shall be necessary in order that each share of Common Stock of Home Federal
will be converted into the same number of shares of the Common Stock of F&M
Bancorp that the owner of such shares would have owned immediately after the
record date or effective date of such event had the Effective Date occurred
immediately before such record date or effective date, and the Conversion Ratio
shall be adjusted accordingly.
Except to the extent required to permit the Merger to be treated as a
pooling-of-interests, nothing in the Merger Agreement limits the right of F&M
Bancorp to issue or repurchase any of its stock or other securities in any
manner and for any consideration permitted by law either in connection with
acquisitions of new affiliates or otherwise, prior to or after the Effective
Date.
If the Conversion Ratio were computed using March 31, 1996 as the assumed
Calculation Date, the Assumed Conversion Ratio would have been 0.433 shares of
F&M Bancorp Common Stock for each share of Home Federal Common Stock. This
calculation is based upon an Average Market Value for F&M Bancorp Common Stock
of $28.98 per share (or 1.81 times the book value per share at that date) and an
adjusted book value of Home Federal Common Stock of $7.61 per share. If the
Average Market Value for F&M Bancorp Common Stock had been $25.664 per share or
1.6 times the book value per share at that date (i.e., the minimum of the
range), the Conversion Ratio would have been 0.489 shares of F&M Bancorp Common
Stock for each share of Home Federal Common Stock. If the Average Market Value
for F&M Common Stock had been $30.476 per share or 1.9 times the book value per
share at that date (i.e., the maximum of the range), the Conversion Ratio would
have been 0.412 shares of F&M Bancorp Common Stock for each share of Home
Federal Common Stock. If the Conversion Ratio were computed using May 31, 1996
as the assumed Calculation Date, the Assumed Conversion Ratio would have been
0.499 shares of F&M Bancorp Common Stock for each share of Home Federal Common
Stock. This calculation is based upon $25.73 per share of F&M Bancorp, which is
1.6 times the book value per share (i.e., the minimum of the range) of $16.08
for F&M Bancorp and an adjusted book value of $7.78 for Home Federal, both as of
May 31, 1996. The book values for both Home Federal and F&M Bancorp as of May
31, 1996 are based on unaudited, unreviewed, internally prepared financial
statements. The Average Market Value for F&M Bancorp Common Stock of $25.425 was
<PAGE>
not used in the calculation of the Assumed Conversion Ratio at May 31, 1996
since such Average Market Value was below 1.6 times the book value (i.e., the
minimum of the range) for F&M Bancorp at such time. However, if the Average
Market Value for F&M Bancorp Common Stock had been $30.55 per share or 1.9 times
the book value per share at that date (i.e., the maximum of the range), the
Conversion Ratio would have been 0.420 shares of F&M Bancorp Common Stock for
each share of Home Federal Common Stock. If the Home Federal Stockholders vote
to approve the Merger Agreement and the Merger at the Home Federal Special
Meeting, but the actual Conversion Ratio, when it is calculated on the
Calculation Date, differs materially from the range of examples presented
herein, the Home Federal Stockholders will be resolicited and asked to approve
the Merger Agreement and the Merger based on the revised Conversion Ratio.
Effective Date of the Merger
The effective date of the Merger Agreement and the Merger (the "Effective
Date") shall be the 15th day of the month following the month in which the
Calculation Date occurs. F&M Bancorp and Home Federal may also agree that the
Effective Date will occur on another date following the Calculation Date. On the
Effective Date, F&M Bancorp and Home Federal will prepare and execute
appropriate Articles of Merger, and will file them with the Maryland State
Department of Assessments and Taxation.
Exchange Procedure for F&M Bancorp Common Stock
After the Effective Date, certificates representing such shares of Common
Stock of Home Federal shall represent the right to receive certificates
representing shares of Common Stock of F&M Bancorp determined in accordance with
the procedures described above. As soon as possible after the Effective Date,
the transfer agent for F&M Bancorp Common Stock shall send or cause to be sent a
notice and transmittal form to each ^ record holder of a certificate theretofore
evidencing shares of the Home Federal Common Stock. At any time after the
Effective Date, the former holders of Home Federal Common Stock may exchange the
certificates formerly evidencing shares of the Common Stock of Home Federal
certificates for new certificates for the appropriate number of shares of Common
Stock of F&M Bancorp by forwarding such Home Federal Common Stock certificates
and the letter of transmittal provided by F&M Bancorp to the transfer agent for
F&M Bancorp Common Stock. The payment of cash in lieu of fractions, dividends,
and other distributions on said stock may be withheld until the Home Federal
certificates are surrendered for exchange to the transfer agent for F&M Bancorp
Common Stock. When the new certificates are issued, the holders thereof shall be
entitled to be paid the amount (without any interest thereon) of all such
withheld cash in lieu of fractions, dividends, or other distributions payable
with respect to the corresponding shares of Common Stock of F&M Bancorp. All
shares of F&M Bancorp Common Stock into which shares of Home Federal Common
Stock shall have been converted shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Home Federal Common
Stock.
Business of F&M Bancorp and Home Federal Pending the Merger
Home Federal and its subsidiaries have covenanted to conduct their business
only in the ordinary course pending the Effective Date. They have also
covenanted not to effect any change or amendment in their respective Charters or
By-Laws, not to change their authorized, issued or outstanding capital stock,
not to increase employee compensation or benefit levels (except for annual
increases not in excess of amounts established by its regular past practices) or
to establish or make any increase in any employment, compensation, or similar
agreements or benefits of any of its past, present or future officers or
employees (other than additional premiums to obtain an extension of directors'
and officers' liability coverage), not to modify the existing employment
agreements with Richard W. Phoebus, Sr., Celia S. Ausherman, Steven G. Hull and
Salvatore M. Savino, not to make any change in any of their accounting policies
or practices or take any action which would cause the Merger not to be accounted
for as a pooling-of-interests, and not to incur any liability for borrowed money
(except extensions of credit from the Federal Home Loan Bank of Atlanta in which
no single transaction shall exceed $5,000,000 and otherwise in the ordinary
<PAGE>
course of their banking business) or place upon or permit any lien or
encumbrance (with permitted exceptions) upon any of their properties or assets.
Home Federal has covenanted not to declare any dividends in respect of its
Common Stock, and Home Bank has covenanted not to accept any further
applications from its directors for participation in, and not to designate any
of its directors as additional participants in, its Amended and Restated
Executive Compensation Plan for Directors. Pending the Effective Date, Home
Federal and its subsidiaries have agreed to use commercially reasonable efforts
to preserve their business organizations and assets and to keep available the
services of their full-time officers and employees, to continue in effect the
present method of conducting their business, and to consult with F&M Bancorp
when making decisions or taking actions in matters other than those in the
ordinary course of business or (except as already disclosed) involving any
capital expenditures in excess of $25,000.
F&M Bancorp has covenanted to promptly prepare and file with the
appropriate governmental regulatory authorities applications requesting the
required regulatory approvals, and to use commercially reasonable efforts to
secure favorable action on these applications (including without limitation
commercially reasonable efforts to pursue an appeal of a denial of a regulatory
approval). F&M Bancorp has also covenanted to use commercially reasonable
efforts to obtain any consents, approvals or waivers from third parties required
in connection with the Merger, and use commercially reasonable efforts to assure
that each of the events otherwise specified in the Merger Agreement as
conditions to the Merger shall have occurred on or before the Effective Date.
Home Federal and F&M Bancorp have each agreed, upon reasonable notice, to
give the other party and its officers, accountants, counsel, financial advisers,
and other representatives reasonable access during their normal business hours
throughout the period prior to the Effective Date to all of their properties,
books, contracts, commitments, reports of examination (consistent with
applicable law), depositor and stockholder lists, and records. Home Federal and
F&M Bancorp have also each agreed to furnish to the other party, at their own
expense, during such period with all such information concerning their affairs
as the other party may reasonably request. Home Federal and F&M Bancorp have
also agreed to maintain the confidentiality of information they may obtain
pursuant to this provision.
Home Federal and F&M Bancorp have agreed to cause one or more of their
designated representatives to confer on a monthly or more frequent basis with
representatives of the other party regarding their businesses, operations,
properties, assets and financial condition and matters relating to the
completion of the Merger. Home Federal and F&M Bancorp have also agreed to
deliver to the other party their quarterly reports on Form 10-QSB and Form 10-Q,
respectively, and their Annual Reports on Form 10-KSB and Form 10-K,
respectively, as filed with the Commission under the Exchange Act. Home Federal
and F&M Bancorp have also agreed to promptly advise the other party in writing
of any fact which, if existing or known on the date of the Merger Agreement,
would have been required to be set forth or disclosed in or pursuant to the
Merger Agreement or of any fact which, if existing or known as of the date of
the Merger Agreement, would have made any of the representations contained in
the Merger Agreement untrue in any material respect.
Conditions to Consummation of the Merger
Consummation of the Merger is conditioned upon the approval of the holders
of not less than two-thirds of the issued and outstanding voting stock of Home
Federal and of F&M Bancorp. The Merger must also be approved by the OTS and by
the Board of Governors of the Federal Reserve System. Applications for the
approvals of the OTS and the Board of Governors of the Federal Reserve System
have been prepared and filed by F&M Bancorp.
The obligations of F&M Bancorp to consummate the Merger are further
conditioned upon the following conditions: (a) the representations and
warranties of Home Federal shall be true in all material respects as of the
Effective Date, and Home Federal and its subsidiaries shall in all material
respects have performed and complied with all obligations, agreements, covenants
and conditions required by the Merger Agreement to be performed or complied with
by them; (b) there shall not have been any materially adverse change in the
<PAGE>
financial condition, results of operations, assets, liabilities, or business of
Home Federal and its subsidiaries, taken as a whole, from December 31, 1995 to
the Effective Date; (c) each of the events and approvals set forth in the Merger
Agreement shall have occurred or been obtained; (d) Home Federal shall have
delivered to F&M Bancorp certificates and documents evidencing due action in
accordance with the Merger Agreement as F&M Bancorp shall reasonably request;
(e) no action or proceeding against F&M Bancorp or any of its subsidiaries or
against Home Federal or any of its subsidiaries shall be pending which seeks to
prevent consummation of the transactions contemplated by the Merger Agreement,
no order of any court shall have been entered which prohibits consummation of
the Merger and the transactions contemplated by the Merger Agreement, and no
approval, consent, waiver or administrative action shall have included any
condition or requirement that would result in a materially adverse effect on F&M
Bancorp or Home Federal or materially and adversely affect the economic or
business benefits of the Merger; (f) F&M Bancorp shall have obtained or waived
all requisite consents, undertakings, memoranda, agreements, exercises, and
terminations by third parties which Home Federal and its subsidiaries have
covenanted in the Merger Agreement to use commercially reasonable efforts to
obtain; (g) F&M Bancorp shall have received the opinion from Piper & Marbury
L.L.P. with respect to certain of the tax consequences of the Merger described
herein under "-- Certain Federal Income Tax Consequences;" (h) F&M Bancorp shall
have received an opinion from Elias, Matz, Tiernan & Herrick L.L.P., dated the
Effective Date, with respect to certain legal matters relating to the Merger;
(i) F&M Bancorp shall have received a letter from an independent accounting firm
chosen by F&M Bancorp to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if consummated in accordance with the
Merger Agreement; and (j) each of Howard B. Bowen and John J. McElwee, Jr. shall
have entered into an agreement with F&M Bancorp with respect to certain benefits
payable to them pursuant to Home Bank's Amended and Restated Executive
Compensation Plan. As of the date of this Proxy Statement/Prospectus, items (g)
and (j) have been satisfied.
The obligations of Home Federal to consummate the Merger are further
conditioned upon the following conditions: (a) the representations and
warranties of F&M Bancorp shall be true in all material respects as of the
Effective Date, and F&M Bancorp and its subsidiaries shall in all material
respects have performed and complied with all obligations, agreements, covenants
and conditions required by the Merger Agreement to be performed or complied with
by them; (b) there shall not have been any materially adverse change in the
financial condition, results of operations, assets, liabilities, or business of
F&M Bancorp from December 31, 1995 to the Effective Date; (c) each of the events
and approvals set forth in the Merger Agreement shall have occurred or been
obtained; (d) F&M Bancorp shall have delivered to Home Federal certificates and
documents evidencing due action in accordance with the Merger Agreement as Home
Federal shall reasonably request; (e) Home Federal shall have obtained or waived
all requisite consents, approvals or waivers which F&M Bancorp has covenanted in
the Merger Agreement to use commercially reasonable efforts to obtain; (f) Home
Federal shall have received the opinion from Piper & Marbury L.L.P. with respect
to certain of the tax consequences of the Merger described herein under "--
Certain Federal Income Tax Consequences;" (g) Home Federal shall have received a
written opinion from Webb (or such other recognized investment firm as Home
Federal may select), dated the date of this Proxy Statement/Prospectus, to the
effect that the consideration to be received in the Merger is fair to the Home
Federal Stockholders from a financial point of view; (h) F&M Bancorp shall have
offered to enter into employment agreements with each of Richard W. Phoebus,
Sr., Celia S. Ausherman, Steven G. Hull and Salvatore M. Savino; and (i) Home
Federal shall have received an opinion from Piper & Marbury L.L.P., dated the
Effective Date, with respect to certain legal matters relating to the Merger. As
of the date of this Proxy Statement/Prospectus, items (f), (g) and (h) have been
satisfied.
F&M Bancorp and Home Federal may waive in writing any condition to their
obligations to consummate the Merger, except for the approvals of their
respective stockholders and of the OTS and the Board of Governors of the Federal
Reserve System.
<PAGE>
Stock Option Agreement
F&M Bancorp and Home Federal have entered into a Stock Option Agreement,
dated as of April 2, 1996 (the "Option Agreement"), pursuant to which Home
Federal issued to F&M Bancorp an option (the "Option") to purchase up to 501,282
shares of Home Federal Common Stock at a purchase price of $8.25 per share.
F&M Bancorp may exercise the Option upon the occurrence of certain events
(each a "Purchase Event"). The Option Agreement provides that a Purchase Event
shall mean the occurrence of any of the following events after the date of
execution of the Option Agreement: (a) Home Federal or Home Bank, without having
received F&M Bancorp's prior written consent, shall have entered into an
agreement with any person to: (i) merge, consolidate or enter into any similar
transaction with Home Federal except as contemplated in the Merger Agreement;
(ii) purchase, lease or otherwise acquire all or substantially all of the assets
of Home Federal or Home Bank; or (iii) purchase or otherwise acquire (including
by way of merger, consolidation, share exchange or any similar transaction)
securities representing 15% or more of the voting power of Home Federal or Home
Bank; (b) any person (other than Home Federal and Home Bank in a fiduciary
capacity, or F&M Bancorp or F&M Bank in a fiduciary capacity) shall have
acquired beneficial ownership or the right to acquire beneficial ownership of
15% or more of the outstanding shares of Home Federal Common Stock; (c) any
person shall have made a bona fide proposal to Home Federal by public
announcement or written communication that is or becomes the subject of public
disclosure to acquire Home Federal or Home Bank by merger, consolidation,
purchase of all or substantially all of its assets or any other similar
transaction, and following such bona fide proposal the Home Federal Stockholders
vote not to adopt the Merger Agreement; or (d) Home Federal shall have willfully
breached certain specified covenants contained in the Option Agreement following
a bona fide proposal to Home Federal or Home Bank to acquire Home Federal or
Home Bank by merger, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, which breach would entitle F&M Bancorp
to terminate the Merger Agreement (without regard to the cure periods provided
for therein) and such breach shall not have been cured prior to the date on
which F&M Bancorp shall notify Home Federal of its intent to exercise the
Option.
The Option may be exercised in whole or in part, at any time or from time
to time if a Purchase Event shall have occurred and be continuing and before the
Option Agreement is terminated. The Option Agreement provides that to the extent
that it shall have not been exercised, the Option shall terminate (a) on the
Effective Date of the Merger; (b) upon the termination of the Merger Agreement
in accordance with the provisions thereof prior to the occurrence of a Purchase
Event (other than as a result of a willful breach by Home Federal of certain
specified covenants contained therein or as a result of failure of the Home
Federal Stockholders to approve the Merger Agreement by the vote required under
applicable law or under Home Federal's charter); or (c) 12 months after
termination of the Merger Agreement due to a willful breach by Home Federal of
certain specified covenants contained therein or failure of the Home Federal
Stockholders to approve the Merger Agreement by the vote required under
applicable law or under Home Federal's charter.
Amendment and Termination of the Merger Agreement
Amendment. The Merger Agreement may be amended at any time prior to the
Effective Date in response to comments of governmental regulatory authorities or
otherwise; provided that any such amendment must be in writing and must be
approved by the Board of Directors of each of F&M Bancorp and Home Federal.
Termination. The Merger Agreement may be terminated and abandoned
notwithstanding any stockholder vote or approval. The Merger Agreement may be
terminated and abandoned by mutual consent of Home Federal and F&M Bancorp, by
F&M Bancorp or Home Federal if the F&M Bancorp Stockholders or Home Federal
Stockholders fail to approve the Merger Agreement, or by F&M Bancorp or Home
Federal if the other party commits an uncured material breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement.
<PAGE>
The Merger Agreement may also be terminated by F&M Bancorp prior to
December 31, 1996 if any required governmental approval, consent or waiver shall
have been denied or shall include any condition or requirement that would result
in a materially adverse effect on F&M Bancorp or Home Federal or on the business
benefits of the Merger, or if any action or proceeding shall be pending which
seeks to prevent the Merger, or if any court shall have entered an order which
prohibits the Merger.
Furthermore, the Merger Agreement may be terminated by F&M Bancorp or Home
Federal if the Merger is not consummated by December 31, 1996, unless the
failure to so consummate by such time is due to the breach of any
representation, warranty, agreement or covenant contained in the Merger
Agreement by the party seeking to terminate, or if any governmental entity shall
have issued a final, unappealable order or ruling which prohibits the Merger.
The Merger Agreement may be terminated by the directors of Home Federal if their
fiduciary duties require them to engage in negotiations or discussions
concerning a merger or acquisition with a party other than F&M Bancorp.
Finally, the Merger Agreement may be terminated by either F&M Bancorp or
Home Federal if, at the Calculation Date, the average market value of F&M
Bancorp Common Stock for the 20 consecutive trading days preceding the
Calculation Date is less than 1.6 times the book value per share of F&M Bancorp
Common Stock; however, in such case F&M Bancorp may elect (with Home Federal's
agreement), to continue with its obligations under the Merger Agreement and use
a per share price for its Common Stock of 1.6 times its book value per share on
the Calculation Date. No abandonment or termination would then be deemed to have
occurred, and the Merger Agreement would remain in full force and effect in
accordance with its terms (except for the modification of the per share price
for the Common Stock of F&M Bancorp).
In the event of the termination of the Merger Agreement by either F&M
Bancorp or Home Federal, the Merger Agreement shall thereafter become void and
there shall be no liability on the part of F&M Bancorp or Home Federal or their
respective officers or directors, except that any such termination shall be
without prejudice to the rights of F&M Bancorp or Home Federal arising out of
the willful breach of the other party of any covenant or willful
misrepresentation contained in the Merger Agreement.
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by F&M Bancorp
of a letter from an independent accounting firm chosen by it to the effect that
the Merger qualifies for pooling-of-interests accounting treatment if
consummated in accordance with the Merger Agreement. See "-- Conditions to
Consummation of the Merger." Home Federal has covenanted to use its best efforts
not to permit any of the directors, officers, employees, stockholders, agents,
consultants or other representatives of Home Federal or any of its subsidiaries
to take any action that would preclude F&M Bancorp from treating the Merger as a
pooling-of-interests for financial reporting purposes. Under this accounting
treatment, as of the Effective Date of the Merger, the assets and liabilities of
Home Federal would be added to those of F&M Bancorp at their recorded book
values and the stockholders' equity accounts of F&M Bancorp and Home Federal
would be combined on F&M Bancorp's consolidated balance sheet. On the
pooling-of-interests accounting basis, income and other financial statements of
F&M Bancorp issued after consummation of the Merger would be restated
retroactively to reflect the consolidated combined financial position and
results of operations of F&M Bancorp and Home Federal as if the Merger had taken
place prior to the periods covered by such financial statements.
Operations after the Merger
For a period of 3 years after the Effective Date, F&M Bancorp will preserve
the separate corporate existence of Home Bank and continue in office the
directors of Home Bank who are serving in such capacity on the Effective Date
for the remainder of their current terms and until their successors are elected
and have qualified; however, during the three-year period following the
Effective Date, F&M Bancorp may terminate the separate corporate existence of
<PAGE>
Home Bank if Maryland or federal laws or regulations governing financial
institutions are amended in such a way as to have a materially adverse effect on
the business, operations or future prospects of F&M Bancorp if it were to
continue to operate Home Bank as a separate corporate entity.
Promptly after the Effective Date of the Merger, F&M Bancorp will cause its
Board of Directors to be expanded to include two additional members. Two of the
directors of Home Federal will then be elected to fill the two newly created
vacancies until the next annual meeting of the F&M Bancorp Stockholders and
until their successors are elected and have qualified. Prior to the Effective
Date of the Merger, the Board of Directors of Home Federal will have designated
the directors to be so elected, subject to the approval of the Nominating
Committee of the Board of Directors of F&M Bancorp. The members of the Board of
Directors of Home Bank on the Effective Date will serve for the remainder of
their current terms and until their successors are elected and have qualified;
however, after the Effective Date, F&M Bancorp, as the sole stockholder of Home
Bank, will cause the Board of Directors of Home Bank to be expanded to include
two additional members, and shall appoint two individuals designated by the
Nominating Committee of its Board of Directors to fill the two newly created
vacancies.
The employment of all officers and employees of Home Federal will terminate
on the Effective Date. Pursuant to the terms of the Merger Agreement, Richard W.
Phoebus was designated to serve as an officer of F&M Bancorp. Under the terms of
the employment agreement which he has entered into with F&M Bancorp, Mr. Phoebus
has agreed to serve as an officer of F&M Bancorp. See "-- Interests of Certain
Persons in the Merger."
The officers and employees of Home Bank (other than Messrs. Phoebus, Hull
and Savino and Ms. Ausherman, who have entered into employment agreements
relating to their employment with Home Bank after the Effective Date) will
continue in their employment with Home Bank as at-will employees at the same
compensation level they received with Home Bank before the Effective Date.
Payments of $1,000, $500, or $250 will be made to each of those officers,
full-time employees, or part-time employees, respectively, of Home Bank who
either remain employed by Home Bank for six months continuously thereafter or
leave such employment at the request of Home Bank within six months after the
Effective Date. Such payments shall be made six months after the Effective Date,
in the case of those who remain in the employment of Home Bank, or within 15
business days after the date of termination, in the case of those who are
requested to leave employment. In addition, a severance payment of two weeks'
pay at the most recent compensation level will be made to those employees of
Home Bank (other than Messrs. Phoebus, Hull and Savino and Ms. Ausherman) who
remain employed by Home Bank on the Effective Date, but leave such employment at
the request of Home Bank within six months after the Effective Date for other
than just cause. The severance payment shall be made within 15 business days
after the date of termination of the employee.
Interests of Certain Persons in the Merger
In connection with the Merger Agreement, F&M Bancorp has entered into
employment agreements with each of Richard W. Phoebus, Sr., Celia S. Ausherman,
Steven G. Hull and Salvatore M. Savino. Under these employment agreements, Mr.
Phoebus is to serve as an officer of F&M Bancorp and as the President and Chief
Executive Officer of Home Bank for an annual compensation of at least $111,000,
Ms. Ausherman is to serve as a Senior Vice President and Secretary of Home Bank
for an annual compensation of at least $53,000, Mr. Hull is to serve as the
Executive Vice President of Home Bank for an annual compensation of at least
$87,000, and Mr. Savino is to serve as a Senior Vice President and Chief
Financial Officer of Home Bank for an annual compensation of at least $83,500.
The effectiveness of each employment agreement is conditioned upon completion of
the Merger. The term of each employment agreement is three years, commencing on
the Effective Date of the Merger.
Pursuant to these employment agreements, each of the four executives has
agreed to maintain the confidentiality of certain information pertaining to the
businesses of F&M Bancorp and Home Bank. The employment agreements contain
certain non-competition provisions in the event the executive's employment is
<PAGE>
terminated during its term. For two years after such termination, the executive
has agreed not to accept employment in Frederick or Washington County, Maryland
with any other banking institution, not to solicit any of the banking business
of clients or customers of Home Bank or any of its affiliates in Frederick or
Washington County, Maryland, and not to solicit the banking business of
potential clients who had been identified as such prior to his or her
termination.
The employment agreements also provide for payments of three times the
executive's annual compensation if the executive is terminated after a change in
control of Home Bank or F&M Bancorp, three times the executive's annual
compensation if within one year after the Effective Date of the Merger the
executive terminates his or her employment or is terminated without cause, and
the compensation payable during the remaining term of the agreement if the
executive terminates his or her employment or is terminated without cause more
than one year after the Effective Date of the Merger. Under the terms of his
employment agreement, Mr. Phoebus may also receive 1.5 times his annual
compensation if he terminates his employment or is terminated without cause more
than one year after the Effective Date of the Merger, or if he remains employed
by F&M Bancorp and Home Bank for the entire term of the employment agreement and
is terminated thereafter.
Howard B. Bowen and John J. McElwee, Jr., both of whom are directors of
Home Bank, have entered into agreements with F&M Bancorp which are intended to
clarify the treatment of the benefits payable to them pursuant to Home Bank's
Amended and Restated Executive Compensation Plan for Directors. Mr. Bowen was to
receive a ten year annuity of $81,832 per year upon his retirement from Home
Bank's board of directors, and Mr. McElwee was to receive a ten year annuity of
$32,363 per year upon his retirement from Home Bank's board of directors. Under
these agreements, F&M Bancorp has agreed to pay the present value of these
benefits in a lump sum, using a discount rate of 6.5%. One condition to the
completion of the Merger has been satisfied by the execution of these
agreements.
Certain members of the Board of Directors of Home Federal and of its
management are also holders of the Common Stock of Home Federal or options to
purchase shares of its Common Stock, and will therefore receive a number of
shares (calculated using the Conversion Ratio) of the Common Stock of F&M
Bancorp or options to purchase shares of its Common Stock if the Merger
Agreement and the Merger are approved. See "Home Federal Security Ownership of
Certain Beneficial Owners."
Stock Options
At the Effective Date, all outstanding and unexercised options to purchase
shares of the Common Stock of Home Federal (each, an "Outstanding Option") shall
be converted into an option (each, an "Exchange Option") to purchase shares of
the Common Stock of F&M Bancorp. The number of shares of the Common Stock of F&M
Bancorp which may be purchased under the Exchange Option shall be equal to the
number of shares of Home Federal Common Stock which could have been purchased
under the Outstanding Option multiplied by the Conversion Ratio. The per share
exercise price of each Exchange Option shall be equal to the price per share set
forth in the Outstanding Option divided by the Conversion Ratio, rounded up to
the nearest whole cent. The Exchange Option shall otherwise have the same
duration and other terms as the Outstanding Option. Adjustments to any
Outstanding Options which are "incentive stock options" under Section 422 of the
Code shall be effected in a manner consistent with Section 424(a) of the Code.
Home Federal Employee Benefit Plans
Under the terms of the Merger Agreement, F&M Bancorp will review the
benefits provided to employees of Home Bank under the employee benefit plans
maintained by Home Bank, and will provide the employees of Home Bank who
continue as at-will employees of F&M Bancorp after the Effective Date either
with benefits under F&M Bancorp's employee benefit plans or with benefits under
Home Bank's employee benefit plans, whichever F&M Bancorp in its sole discretion
deems to be more advantageous taken as a whole (and not on a plan-by-plan basis)
<PAGE>
to the employees of Home Bank. In that connection, F&M Bancorp may, in its sole
discretion, freeze or terminate the employee benefit plans of Home Bank, merge
them with one or more employee benefit plans of F&M Bancorp, or continue to
maintain them. If F&M Bancorp decides to freeze, terminate or merge the employee
benefit plans of Home Bank, after the Effective Date all full-time officers and
employees of Home Bank who continue as at-will employees of Home Bank may
participate in the equivalent employee benefit plans of F&M Bancorp to the
extent they are eligible to do so under the terms of such plans or programs as
are in force on the Effective Date. Credit would be given for their prior
service with Home Bank for purposes of allocation, eligibility and vesting. F&M
Bancorp will discontinue health and life insurance benefits to retired officers
and employees of Home Federal except, with respect to four employees, to the
extent that coverage may continue after, and Home Federal may have paid for the
coverage prior to, the Effective Date.
Certain Federal Income Tax Consequences
F&M Bancorp and Home Federal have received an opinion from Piper & Marbury
L.L.P., tax counsel to F&M Bancorp, to the effect that:
(a) The transfer of all of the assets of Home Federal to F&M Bancorp,
and the assumption by F&M Bancorp of the liabilities of Home Federal
pursuant to the terms of the Merger Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(A) of the Code. Home
Federal and F&M Bancorp will each be a "party to the reorganization" within
the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized to a Home Federal Stockholder
on the conversion of Common Stock of Home Federal solely into shares of the
Common Stock of F&M Bancorp (including any fractional share of F&M Bancorp
Common Stock deemed issued as described in paragraph (f) below). No gain or
loss will be recognized by Home Federal upon the transfer of all of its
assets to F&M Bancorp in exchange for shares of the Common Stock of F&M
Bancorp and the assumption by F&M Bancorp of the liabilities of Home
Federal. No gain or loss will be recognized to F&M Bancorp upon the receipt
by F&M Bancorp of all of the assets of Home Federal in exchange for shares
of the Common Stock of F&M Bancorp and the assumption by F&M Bancorp of the
liabilities of Home Federal.
(c) The basis of the shares of the Common Stock of F&M Bancorp
received by a Home Federal Stockholder (including any fractional share of
F&M Bancorp Common Stock deemed issued as described in paragraph (f) below)
will be the same as the basis of the shares of the Common Stock of Home
Federal which were converted into F&M Bancorp shares pursuant to the
Merger. The holding period of shares of the Common Stock of F&M Bancorp
received by a Home Federal Stockholder will include the period during which
he held the shares of the Common Stock of Home Federal which were converted
into F&M Bancorp shares pursuant to the Merger, provided that the shares of
Common Stock of Home Federal are held as a capital asset by the Home
Federal Stockholder on the Effective Date.
(d) The basis of each asset of Home Federal in the hands of F&M
Bancorp will be the same as the basis of such asset in the hands of Home
Federal immediately prior to the Merger; the holding period of each such
asset in the hands of F&M Bancorp will include the period during which such
asset was held by Home Federal.
(e) No gain or loss will be recognized to the F&M Bancorp Stockholders
as a result of the transactions contemplated by the Merger Agreement.
<PAGE>
(f) A holder of Home Federal Common Stock who receives cash in lieu of
a fractional share of F&M Bancorp Common Stock will be treated as if he
received a fractional share of F&M Bancorp Common Stock pursuant to the
Merger and F&M Bancorp then redeemed such fractional share for cash. Such a
holder will recognize capital gain or loss on the constructive redemption
of the fractional share in an amount equal to the difference between the
cash received and the adjusted basis of the fractional share.
(g) The accumulated earnings and profits of Home Federal on the
Effective Date will be added to the accumulated earnings and profits of F&M
Bancorp and will be available for subsequent distributions of dividends
within the meaning of Section 316 of the Code.
The opinion of Piper & Marbury L.L.P. has been filed as an exhibit to the
Registration Statement. Receipt of this opinion was a condition to consummation
of the Merger. The opinion of Piper & Marbury L.L.P. is based on certain
customary assumptions and representations regarding, among other things, the
lack of previous dealings between Home Federal and F&M Bancorp, the existing and
future ownership of Home Federal capital stock and F&M Bancorp capital stock and
the future business plans for F&M Bancorp.
The preceding discussion summarizes for general information the material
federal income tax consequences of the Merger to Home Federal Stockholders. It
does not discuss all potentially relevant federal income tax matters (in
particular, consequences to any foreign or other stockholders subject to special
tax treatment are not discussed), 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 stockholder may depend on the stockholder's
individual circumstances. Home Federal Stockholders are urged to consult their
own tax advisors with regard to federal, state, and local tax consequences.
VOTING INFORMATION
Proxy Solicitation
This Proxy Statement/Prospectus and the accompanying proxy material are
furnished in connection with the solicitation of proxies by the respective
Boards of Directors of Home Federal and F&M Bancorp for the Home Federal Special
Meeting and for the F&M Bancorp Special Meeting.
The Home Federal Special Meeting will be held at the Four Points
Hotel/Sheraton Inn, 1910 Dual Highway, Hagerstown, Maryland 21740 on ^ Thursday,
August 29, 1996 at ^ 2:00 p.m. local time. Only Home Federal Stockholders of
record at the close of business on ^ July 12, 1996 will be entitled to notice of
and to vote at the Home Federal Special Meeting. At such record date, Home
Federal had outstanding and entitled to vote 2,519,010 shares of Common Stock.
Each share of Home Federal Common Stock entitles the holder to one vote. Any
proxy given may be revoked by a Home Federal Stockholder at any time prior to
its exercise. Such right of revocation is not limited or subject to compliance
with any formal procedure.
The F&M Bancorp Special Meeting will be held at ^ the Holiday Inn FSK, 5400
Holiday Drive, Frederick, Maryland ^ on Tuesday, August 27, 1996 at ^ 4:00 p.m.
local time. Only F&M Bancorp Stockholders of record at the close of business on
^ July 1, 1996 will be entitled to notice of and to vote at the F&M Bancorp
Special Meeting. At such record date, F&M Bancorp had outstanding and entitled
to vote ^ 4,425,446 shares of Common Stock. Each share of F&M Bancorp Common
Stock entitles the holder to one vote. Any proxy given may be revoked by a F&M
Bancorp Stockholder at any time prior to its exercise. Such right of revocation
is not limited or subject to compliance with any formal procedure.
<PAGE>
F&M Bancorp will pay the costs of printing and mailing this Proxy
Statement/Prospectus. Home Federal will pay all other expenses which it may
incur in the solicitation of proxies. F&M Bancorp will pay the filing fees in
respect of regulatory approvals required in order to consummate the Merger,
including the registration fee of the Commission, the filing fees in respect of
state "blue sky" laws, and the fee payable to The National Association of
Securities Dealers, Inc. in respect of the listing on the NASDAQ National Market
of the shares of the Common Stock of F&M Bancorp to be issued pursuant to the
Merger Agreement. The parties do not expect to pay compensation for the
solicitation of proxies (but reserve the right to do so if necessary to obtain
the votes necessary). They may reimburse brokers and other persons holding stock
in their names, or in the names of nominees, for their expenses for sending
proxy material to principals and obtaining the proxies. In addition to
solicitation of proxies by mail, proxies may be solicited personally or by
telephone or telegram by directors, officers, and employees of Home Federal
without additional compensation to them.
Votes Required
The affirmative vote of not less than two-thirds of the outstanding shares
of Common Stock of Home Federal will be required to approve, ratify and confirm
the Merger Agreement and the Merger provided for therein. Because the required
vote of Home Federal Stockholders on the Merger Agreement and the Merger is
based upon the total number of outstanding shares of the Common Stock of Home
Federal, the failure to submit a proxy card (or the failure to vote in person at
the Special Meeting), the abstention from voting and any broker non-vote will
have the same effect as a vote against the Merger Agreement and the Merger. As
of ^ July 12, 1996 the directors and executive officers of Home Federal and
certain related persons as a group owned beneficially approximately 208,810
shares of the Common Stock of Home Federal, or approximately 8.3% of the shares
outstanding. All directors and executive officers of Home Federal and certain
related persons have executed a Support Agreement which contains their
respective agreements with F&M Bancorp to vote the shares they own to approve,
ratify and confirm the Merger Agreement and the Merger provided for therein.
All shares of the Common Stock of Home Federal represented by properly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such shares of the Common Stock of Home Federal
represented by such proxies will be voted to approve, ratify and confirm the
Merger Agreement and the Merger provided for therein.
The affirmative vote of not less than two-thirds of the outstanding shares
of Common Stock of F&M Bancorp will be required to approve, ratify and confirm
the Merger Agreement and the Merger provided for therein. Because the required
vote of F&M Bancorp Stockholders on the Merger Agreement and the Merger is based
upon the total number of outstanding shares of the Common Stock of F&M Bancorp,
the failure to submit a proxy card (or the failure to vote in person at the
Special Meeting), the abstention from voting and any broker non-vote will have
the same effect as a vote against the Merger Agreement and the Merger. As of ^
July 1, 1996 the directors, executive officers, and affiliates of F&M Bancorp as
a group owned beneficially approximately ^ 389,030 shares of the Common Stock of
F&M Bancorp, or approximately ^ 8.8% of the shares outstanding.
All shares of the Common Stock of F&M Bancorp represented by properly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such shares of the Common Stock of F&M Bancorp
represented by such proxies will be voted to approve, ratify and confirm the
Merger Agreement and the Merger provided for therein.
<PAGE>
Dissenters' Rights
Neither holders of the Common Stock of F&M Bancorp nor holders of the
Common Stock of Home Federal, who dissent and vote against the Merger Agreement
and the Merger, will receive appraisal rights or be entitled to the payment in
cash of the fair value of their shares under the Maryland General Corporation
Law (the "MGCL"). See "Comparative Rights of Stockholders -- Dissenters'
Rights."
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheets and the unaudited pro forma
combined statements of income of F&M Bancorp set forth on the accompanying pages
give effect, using the pooling-of-interests method of accounting, to the
proposed Merger based upon the Assumed Conversion Ratio of 0.433 shares of F&M
Bancorp Common Stock for each share of Home Federal Common Stock. The unaudited
pro forma combined balance sheets are presented as though the proposed Merger
had occurred on March 31, 1996. The unaudited pro forma combined income
statements are presented as though the proposed Merger had taken place on
January 1, 1993.
The unaudited pro forma combined financial information set forth on the
accompanying pages is for illustrative purposes only, and therefore is not
necessarily indicative of the financial condition or results of operations of
F&M Bancorp as they would have been had the proposed Merger occurred during the
periods presented or as they may be obtained in the future. This unaudited pro
forma combined financial information is derived from and should be read in
conjunction with the consolidated financial statements of F&M Bancorp, including
the notes thereto, which are incorporated by reference, and the consolidated
financial statements of Home Federal, including the notes thereto, which appear
elsewhere herein or are incorporated by reference.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
March 31, 1996
Pro
F&M Home Forma
(Dollars in thousands) Bancorp Federal Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks............................ $ 22,954 $ 10,159 $ 33,113
Federal funds sold................................. 21,800 30 21,830
------ ------ ------
Total cash and cash equivalents........... 44,754 10,189 54,943
------ ------ ------
Loans held for sale................................ 597 495 1,092
------ ------ ------
Investment securities:
Held-to-maturity................................ 62,299 43,828 106,127
Available-for-sale, at fair value............... 122,652 8,973 131,625
------- ----- -------
Total investment securities............... 184,951 52,801 237,752
------- ------ -------
Loans, net of unearned income...................... 476,432 141,496 617,928
Less: Allowance for credit losses................. (6,013) (3,672) (9,685)
------- ------- -------
Net loans................................. 470,419 137,824 608,243
------- ------- -------
Bank premises and equipment, net................... 16,929 4,156 21,085
Other assets....................................... 21,470 11,219 32,689
------- ------ -------
Total assets....................................... $ 739,120 $ 216,684 $ 955,804
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing............................. $ 94,785 $ 11,297 $106,082
Interest-bearing................................ 532,259 156,692 688,951
------- ------- -------
Total deposits............................ 627,044 167,989 795,033
------- ------- -------
Federal funds purchased and securities sold
under agreements to repurchase.................. 32,127 -- 32,127
Other short-term borrowings........................ 1,649 -- 1,649
Advances from the Federal Home Loan Bank
of Atlanta...................................... 145 27,132 27,277
Accrued interest and other liabilities............. 7,238 2,890 10,128
------- ------- -------
Total liabilities......................... 668,203 198,011 866,214
------- ------- -------
Shareholders' Equity
Common Stock....................................... 22,107 2,519 2,934 27,560
Surplus............................................ 24,782 7,903 (2,934) 29,751
Retained earnings.................................. 24,284 8,419 32,703
Net unrealized loss on securities available for sale (256) (168) (424)
------- ------- -------
Total shareholders' equity......................... 70,917 18,673 89,590
------- ------- -------
Total liabilities and shareholders' equity......... $ 739,120 $216,684 $ 955,804
========= ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Three months ended March 31, 1996
F&M Home Pro Forma
(Dollars in thousands except for per share amounts) Bancorp Federal Combined
------- ------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans...................... $10,545 $3,171 $13,716
Interest and dividends on investment securities:
Taxable....................................... 1,594 763 2,357
Tax-exempt.................................... 928 -- 928
Interest on deposits with banks................. -- 118 118
Interest on federal funds sold.................. 217 1 218
------ ----- ------
Total interest income..................... 13,284 4,053 17,337
------ ----- ------
Interest expense:
Interest on deposits............................ 5,346 1,724 7,070
Interest on federal funds purchased and
securities sold under agreements to repurchase 425 -- 425
Interest on advances from the FHLB of Atlanta... -- 463 463
Interest on other borrowings.................... 19 -- 19
------ ----- ------
Total interest expense.................... 5,790 2,187 7,977
------ ----- ------
Net interest income................................ 7,494 1,866 9,360
Provision for credit losses........................ 300 -- 300
------ ----- ------
Net interest income after provision for credit losses 7,194 1,866 9,060
------ ----- ------
Noninterest income:
Trust income.................................... 427 -- 427
Service charges on deposit accounts............. 799 285 1,084
Net gains on sales of loans..................... 78 64 142
Net gains (losses) on sales of securities....... 2 (30) (28)
Other operating income.......................... 687 347 1,034
------ ----- ------
Total noninterest income.................. 1,993 666 2,659
------ ----- ------
Noninterest expense:
Salaries and employee benefits.................. 3,350 920 4,270
Occupancy and equipment expense................. 877 412 1,289
Other operating expense......................... 2,144 542 2,686
------ ----- ------
Total noninterest expense................. 6,371 1,874 8,245
------ ----- ------
Income before provision for income taxes........... 2,816 658 3,474
Provision for income taxes......................... 727 273 1,000
------ ----- ------
Net income......................................... $ 2,089 $ 385 $ 2,474
======= ====== =======
Earnings per Common Share:
Net income...................................... $ 0.47 $ 0.15 $ 0.45
Weighted average number of shares.................. 4,419,189 2,519,010 5,509,920
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Three months ended March 31, 1995
F&M Home Pro Forma
(Dollars in thousands except for per share amounts) Bancorp Federal Combined
<S> <C> <C> <C>
Interest income:
Interest and fees on loans...................... $10,807 $3,076 $13,883
Interest and dividends on investment securities:
Taxable....................................... 1,407 734 2,141
Tax-exempt.................................... 902 -- 902
Interest on deposits with banks................. 1 28 29
Interest on federal funds sold.................. 3 20 23
Total interest income..................... 13,120 3,858 16,978
------ ----- ------
Interest expense:
Interest on deposits............................ 4,863 1,477 6,340
Interest on federal funds purchased and
securities sold under agreements to repurchase 608 -- 608
Interest on advances from the FHLB of Atlanta... 11 575 586
Interest on other borrowings.................... 22 -- 22
Total interest expense.................... 5,504 2,052 7,556
------ ----- ------
Net interest income................................ 7,616 1,806 9,422
Provision for credit losses........................ 300 -- 300
------ ----- ------
Net interest income after provision for credit losses 7,316 1,806 9,122
------ ----- ------
Noninterest income:
Trust income.................................... 341 -- 341
Service charges on deposit accounts............. 691 250 941
Net gains on sales of loans..................... 5 4 9
Other operating income.......................... 736 166 902
------ ----- ------
Total noninterest income.................. 1,773 420 2,193
------ ----- ------
Noninterest expense:
Salaries and employee benefits.................. 3,196 822 4,018
Occupancy and equipment expense................. 715 393 1,108
Other operating expense......................... 2,586 634 3,220
------ ----- ------
Total noninterest expense................. 6,497 1,849 8,346
------ ----- ------
Income before provision for (benefit from) income
taxes........................................... 2,592 377 2,969
Provision for (benefit from) income taxes.......... 652 (4) 648
------ ----- ------
Net income......................................... $ 1,940 $ 381 $ 2,321
======= ======= =======
Earnings per Common Share:
Net income...................................... $ 0.44 $ 0.15 $ 0.42
Weighted average number of shares.................. 4,403,399 2,519,010 5,494,130
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year ended December 31, 1995
F&M Home Pro Forma
(Dollars in thousands except for per share amounts) Bancorp Federal Combined
<S> <C> <C> <C>
Interest income:
Interest and fees on loans...................... $44,566 $12,925 $57,491
Interest and dividends on investment securities:
Taxable....................................... 5,697 2,804 8,501
Tax-exempt.................................... 3,570 -- 3,570
Interest on deposits with banks................. 1 163 164
Interest on federal funds sold.................. 286 95 381
------ ------ ------
Total interest income..................... 54,120 15,987 70,107
------ ------ ------
Interest expense:
Interest on deposits............................ 21,218 6,652 27,870
Interest on federal funds purchased and
securities sold under agreements to repurchase 2,215 -- 2,215
Interest on advances from the FHLB of Atlanta... 96 2,066 2,162
Interest on other borrowings.................... 89 -- 89
------ ------ ------
Total interest expense.................... 23,618 8,718 32,336
------ ------ ------
Net interest income................................ 30,502 7,269 37,771
Provision for credit losses........................ 2,000 (349) 1,651
------ ------ ------
Net interest income after provision for credit losses 28,502 7,618 36,120
------ ------ ------
Noninterest income:
Trust income.................................... 1,560 -- 1,560
Service charges on deposit accounts............. 2,943 1,154 4,097
Net gains on sales of loans..................... 3,013 48 3,061
Net losses on sales of securities............... (256) -- (256)
Net gains on sales of property 20 -- 20
Other operating income.......................... 2,903 778 3,681
------ ------ ------
Total noninterest income.................. 10,183 1,980 12,163
------ ------ ------
Noninterest expense:
Salaries and employee benefits.................. 13,241 3,205 16,446
Occupancy and equipment expense................. 3,287 1,579 4,866
Other operating expense......................... 11,025 2,840 13,865
------ ------ ------
Total noninterest expense................. 27,553 7,624 35,177
------ ------ ------
Income before provision for (benefit from) income
taxes .......................................... 11,132 1,974 13,106
Provision for (benefit from) income taxes.......... 2,933 (554) 2,379
------ ------ ------
Net income......................................... $ 8,199 $ 2,528 $10,727
======= ======= =======
Earnings per Common Share:
Net income...................................... $ 1.86 $ 1.00 $ 1.95
Weighted average number of shares.................. 4,409,089 2,519,010 5,499,820
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year ended December 31, 1994
F&M Home Pro Forma
(Dollars in thousands except for per share amounts) Bancorp Federal Combined
<S> <C> <C> <C>
Interest income:
Interest and fees on loans...................... $37,679 $11,561 $49,240
Interest and dividends on investment securities:
Taxable....................................... 5,513 2,675 8,188
Tax-exempt.................................... 3,603 -- 3,603
Interest on deposits with banks................. 20 192 212
Interest on federal funds sold.................. 290 60 350
------ ------ ------
Total interest income..................... 47,105 14,488 61,593
------ ------ ------
Interest expense:
Interest on deposits............................ 16,568 5,202 21,770
Interest on federal funds purchased and
securities sold under agreements to repurchase 1,208 -- 1,208
Interest on advances from the FHLB of Atlanta... 22 1,780 1,802
Interest on other borrowings.................... 60 1 61
------ ------ ------
Total interest expense.................... 17,858 6,983 24,841
------ ------ ------
Net interest income................................ 29,247 7,505 36,752
Provision for credit losses........................ 910 278 1,188
------ ------ ------
Net interest income after provision for credit losses 28,337 7,227 35,564
------ ------ ------
Noninterest income:
Trust income.................................... 1,144 -- 1,144
Service charges on deposit accounts............. 2,276 1,047 3,323
Net gains on sales of loans..................... 52 83 135
Net gains on sales of property.................. 725 -- 725
Other operating income.......................... 2,793 862 3,655
------ ------ ------
Total noninterest income.................. 6,990 1,992 8,982
------ ------ ------
Noninterest expense:
Salaries and employee benefits.................. 12,259 3,138 15,397
Occupancy and equipment expense................. 2,709 1,507 4,216
Other operating expense......................... 9,217 2,771 11,988
------ ------ ------
Total noninterest expense................. 24,185 7,416 31,601
------ ------ ------
Income before provision for income taxes........... 11,142 1,803 12,945
Provision for income taxes......................... 2,991 306 3,297
------ ------ ------
Net income......................................... $ 8,151 $ 1,497 $ 9,648
======= ======= =======
Earnings per Common Share:
Net income...................................... $ 1.86 $ 0.59 $ 1.76
Weighted average number of shares.................. 4,393,312 2,519,010 5,484,043
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year ended December 31, 1993
<S> <C> <C> <C>
F&M Home Pro Forma
(Dollars in thousands except for per share amounts) Bancorp Federal Combined
Interest income:
Interest and fees on loans...................... $36,581 $12,578 $49,159
Interest and dividends on investment securities:
Taxable....................................... 5,542 2,031 7,573
Tax-exempt.................................... 3,320 -- 3,320
Interest on deposits with banks................. 28 257 285
Interest on federal funds sold.................. 386 65 451
------ ------ ------
Total interest income..................... 45,857 14,931 60,788
------ ------ ------
Interest expense:
Interest on deposits............................ 16,489 5,600 22,089
Interest on federal funds purchased and
securities sold under agreements to repurchase 854 -- 854
=
Interest on advances from the FHLB of Atlanta... -- 2,069 2,069
Interest on other borrowings.................... 48 27 75
------ ------ ------
Total interest expense.................... 17,391 7,696 25,087
------ ------ ------
Net interest income................................ 28,466 7,235 35,701
Provision for credit losses........................ 1,530 1,687 3,217
------ ------ ------
Net interest income after provision for credit losses 26,936 5,548 32,484
------ ------ ------
Noninterest income:
Trust income.................................... 1,091 -- 1,091
Service charges on deposit accounts............. 1,936 1,036 2,972
Net gains on sales of loans 633 370 1,003
Net gains on sales of securities................ 2 199 201
Net gains on sales of property.................. 92 -- 92
Other operating income.......................... 2,422 1,258 3,680
------ ------ ------
Total noninterest income.................. 6,176 2,863 9,039
------ ------ ------
Noninterest expense:
Salaries and employee benefits.................. 11,206 3,031 14,237
Occupancy and equipment expense................. 2,631 1,410 4,041
Other operating expense......................... 8,309 3,350 11,659
------ ------ ------
Total noninterest expense................. 22,146 7,791 29,937
------ ------ ------
Income from continuing operations before provision
for (benefit from) income taxes and cumulative
effect of accounting change..................... 10,966 620 11,586
Provision for (benefit from) income taxes.......... 3,203 (154) 3,049
------ ------ ------
Income from continuing operations before cumulative
effect of accounting change..................... $ 7,763 $ 774 $ 8,537
======= ====== =======
Earnings per Common Share:
Income from continuing operations before
cumulative effect of accounting change........ $ 1.77 $ 0.40 $ 1.64
Weighted average number of shares.................. 4,378,445 1,931,138 5,214,628
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
F&M Bancorp as of March 31, 1996, the unaudited historical capitalization of
Home Federal as of March 31, 1996, and the unaudited pro forma capitalization of
F&M Bancorp and Home Federal assuming the Merger had been consummated on March
31, 1996. For additional information, reference is made to the historical
consolidated financial statements and notes thereto of F&M Bancorp, incorporated
by reference herein and the historical consolidated financial statements and
notes thereto of Home Federal, appearing elsewhere or incorporated by reference
herein.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pro Forma
(Dollars in thousands) F&M Bancorp Home Federal Adjustments(a) Combined
----------- ------------ -------------- --------
Long-term debt:
F&M Bancorp:
2% Federal Home Loan Bank obligations,
payable through 2016................. $ 145 $ 145
Home Federal:
5.46-6.20% Federal Home Loan Bank
obligations, payable through 2005.... $ 16,000 16,000
--------- --------- ------
Total long-term debt..................... 145 16,000 16,145
--------- --------- ------
Shareholders' equity:
F&M Bancorp:
Common Stock, par value $5.00 per share,
10,000,000 shares authorized, 4,421,337
shares issued and outstanding actual,
5,512,068 shares issued and outstanding
pro forma combined................... 22,107 $ 5,453 27,560
Surplus................................ 24,782 4,969 29,751
Retained earnings...................... 24,284 8,419 32,703
Net unrealized loss on securities available (256) (168) (424)
for sale.............................
Home Federal:
Common Stock, par value $1.00 per share,
10,000,000 shares authorized, 2,519,010
shares issued and outstanding actual. 2,519 (2,519) --
Additional paid-in capital............. 7,903 (7,903) --
Retained earnings...................... 8,419 (8,419) --
Net unrealized loss on securities available
for sale............................. (168) 168 --
--------- --------- ---------
Total shareholders' equity............... 70,917 18,673 89,590
--------- --------- ---------
Total long-term debt and shareholders'equity $ 71,062 $ 34,673 $ 105,735
========= ========= =========
- ---------------
(a) Reflects the conversion of Home Federal Common Stock at the Assumed
Conversion Ratio of 0.433 shares of F&M Bancorp Common Stock for each share
of Home Federal Common Stock.
</TABLE>
<PAGE>
BUSINESS OF F&M BANCORP
F&M Bancorp is a registered bank holding company headquartered in
Frederick, Maryland. F&M Bancorp was organized under the laws of the State of
Maryland in 1983, and became the sole stockholder of F&M Bank through a
reorganization completed in 1984. F&M Bank is F&M Bancorp's sole direct
subsidiary. As a bank holding company, F&M Bancorp engages in a general banking
and trust company business through F&M Bank. The latter operates 24 offices and
32 ATMs in Frederick, Carroll, and Montgomery Counties of central Maryland. As
of March 31, 1996, F&M Bancorp had consolidated total assets of approximately
$739.1 million.
F&M Bancorp's principal asset is all of the issued and outstanding capital
stock of F&M Bank. F&M Bank is insured by the FDIC and is a member of the
Federal Reserve Board.
As a registered bank holding company, F&M Bancorp is subject to regulation
under the Federal Bank Holding Company Act of 1956, as amended, and the rules
adopted by the Federal Reserve Board thereunder. Under applicable Federal
Reserve Board policies, a bank holding company such as F&M Bancorp is expected
to act as a source of financial strength to its subsidiary banks and to commit
resources to support its subsidiary banks in circumstances when it might not do
so absent such a policy. Any capital loans made by a bank holding company to a
subsidiary bank would be subordinate in right of payment to the claims of
depositors and certain other creditors of such subsidiary bank.
The principal executive offices of F&M Bancorp are located at 110 Thomas
Johnson Drive, Frederick, Maryland 21702. Its telephone number is (301)
694-4000.
BUSINESS OF HOME FEDERAL
Home Federal is a unitary savings and loan holding company for Home Bank.
It was incorporated under the laws of the State of Maryland on March 10, 1989.
At March 31, 1996, Home Federal had approximately $216.7 million in total
assets, $168.0 million in total deposits, and $18.7 million in total
stockholders' equity. Currently, the principal asset of Home Federal is all of
the issued and outstanding Common Stock of Home Bank. Home Bank is a
federally-chartered stock savings bank with approximately 53,000 deposit
accounts through a network of seven banking centers in Washington and Allegany
Counties of western Maryland. Home Bank also operates eleven automated teller
machines and has one loan office in Frostburg, Maryland. Home Bank commenced
operations in 1898. Through Home Bank, Home Federal acts as a financial
intermediary which accepts deposits from the general public and invests such
deposits, together with other borrowings, primarily in real estate loans secured
by liens on residential and other real property, and in consumer and other
loans. Primarily through its other subsidiaries, Home Bank also engages in
securities brokerage services and insurance brokerage services. Home Federal and
Home Bank are subject primarily to the regulation of the OTS.
Home Federal is a successor to a Delaware corporation incorporated on
February 27, 1987. On December 18, 1987, the Delaware predecessor corporation
acquired all of the Common Stock of Home Bank. Home Bank converted from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank on February 10, 1984.
Home Federal's executive offices are located at 122-128 West Washington
Street, Hagerstown, Maryland 21740. Its telephone number is (301) 733-6300.
<PAGE>
PRICE RANGE OF HOME FEDERAL COMMON STOCK AND DIVIDEND POLICY
Home Federal Common Stock is traded on the NASDAQ National Market under the
symbol "HFMD." The following table sets forth the high and low closing prices of
Home Federal Common Stock as reported on the NASDAQ National Market for the
following calendar quarters:
Year and Quarter High Low
1993:
First Quarter ........................ $ 5.25 $ 1.75
Second Quarter ....................... 5.00 2.50
Third Quarter ........................ 3.875 2.50
Fourth Quarter ....................... 4.00 2.875
1994:
First Quarter ........................ 5.00 3.625
Second Quarter ....................... 5.75 4.25
Third Quarter ........................ 5.75 4.75
Fourth Quarter ....................... 6.00 5.25
1995:
First Quarter ........................ 6.00 5.25
Second Quarter ....................... 6.75 5.50
Third Quarter ........................ 9.00 6.25
Fourth Quarter ....................... 8.75 7.25
1996:
First Quarter ........................ 8.75 7.75
Second Quarter ....................... 11.50 8.21875
===== =======
Third Quarter
(through ^ July 12, 1996)........... 10.75 10.25
===== =====
On ^ July 12, 1996, the Home Federal Record Date, the outstanding shares of
Home Federal Common Stock were held by approximately 1,885 record holders. The
closing price per share of Home Federal Common Stock on ^ July 12, 1996 on the
NASDAQ National Market was ^ $10.25.
Home Federal has agreed that it will not make, declare or pay any dividend
on Home Federal Common Stock after the quarterly cash dividend of $0.04 per
share paid on March 29, 1996. The payment and amounts of dividends in the
future, if the merger is not consummated, will be determined by the Home Federal
Board, based upon the results of operations and financial condition of Home
Federal, economic conditions at the time of declaration and OTS and other
regulatory restrictions.
Home Federal is a legal entity separate and distinct from Home Bank, its
wholly-owned subsidiary. A large portion of Home Federal's revenues derives from
dividends paid to Home Federal by Home Bank. Home Bank is subject to various
statutory restrictions on its ability to pay dividends to Home Federal. Under
federal regulations, Home Bank may not declare or pay a cash dividend on any of
its stock if the dividend would cause Home Bank's capital to be reduced below
the amount required for the liquidation account or the capital requirements
imposed by the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") and the OTS. Since Home Bank currently meets the fully phased-in
capital requirements under FIRREA, it may pay a cash dividend on its capital
stock up to the higher of (a) 100% of its net income to date during the calendar
year plus an amount not to exceed 50% of its surplus capital ratio at the
beginning of the calendar year or (b) 75% or its net income over the most recent
four-quarter period. Based upon this calculation, the amount available for
payment of a dividend was $4.6 million on March 31, 1996.
<PAGE>
See also "Comparative Rights of Stockholders -- Dividends and Other
Distributions."
HOME FEDERAL SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of Home Federal Common Stock as of ^ July 12, 1996 by each of Home
Federal's directors and by all directors and executive officers of Home Bank.
<TABLE>
<CAPTION>
Direct
ownership of
Common Stock(b) Stock Percent
Name(a) options(c) Total of class
<S> <C> <C> <C> <C>
Directors:
Howard B. Bowen....................... 15,080 1,778 16,858 0.7%
Lois Harrison......................... 157,275(d) 1,778 159,053 6.2(d)
Benjamin F. Kunkleman................. 7,734(e) 1,778 9,512 0.4
John ^ J. McElwee, Jr................. 1,750 1,778 3,528 0.1
=
Richard W. Phoebus, Sr................ 18,494(f) 12,311 30,805 1.2
Salvatore M. Savino................... 1,855(e) 7,498 9,353 0.4
J. Franklin Shank..................... 1,130(e) 1,778 2,908 0.1
Ronald Z. Sulchek..................... 1,500(g) 1,778 3,278 0.1
Executive Officers:
Steven G. Hull........................ 2,000(e) 7,951 9,951 0.4
Celia S. Ausherman.................... 1,992(e) 4,763 6,755 0.3
All Directors and Executive Officers as a
Group (10 persons)..................... 208,810 43,191 252,001(h) 9.8
- ---------------
</TABLE>
(a) An individual is considered to "beneficially own" any shares of Home
Federal Common Stock over which he or she has or shares, (i) voting power,
which includes power to vote or direct the voting of the shares; or (ii)
investment power, which includes the power to dispose, or direct the
disposition of the shares. A person is also deemed to have beneficial
ownership of any shares of Home Federal Common Stock which may be acquired
within 60 days pursuant to the exercise of stock options. Unless otherwise
indicated, the individuals listed in the table have sole voting power and
sole investment power with respect to the indicated shares. Shares of
Common Stock which may be acquired within 60 days of the Home Federal
Record Date are deemed to be outstanding shares of Home Federal Common
Stock beneficially owned by such person(s) but are not deemed to be
outstanding for the purposes of computing the percentage of Home Federal
Common Stock owned by any other person.
(b) Except as otherwise noted, the named individuals effectively exercise sole
voting power and sole dispositive power over these shares.
(c) Includes shares which the named individuals have the right to acquire
pursuant to stock options which are exercisable within 60 days of ^ July
12, 1996.
(d) This is the only person or entity known to Home Federal to be the
beneficial owner of 5% or more of its Common Stock. Her address is 12835
Fountain Head Road, Hagerstown, Maryland 21742. Mrs. Harrison disclaims
beneficial ownership of 38,181 shares included herein which are owned
individually by her spouse and 101,565 shares included herein which are
held in her spouse's profit sharing plans.
(e) All shares are owned jointly with the individual's spouse.
(f) Includes 118 shares owned jointly with Mr. Phoebus's children and 1,000
shares owned solely by Mr. Phoebus's spouse.
<PAGE>
(g) Includes 1,000 shares owned jointly with Mr. Sulchek's spouse and 500
shares owned by Mr. Sulchek's son with Mr. Sulchek as custodian under the
Maryland Uniform Gift to Minors Act.
(h) Includes executive officers of Home Bank. Includes 43,191 shares with
respect to which certain officers and directors have the right to acquire
beneficial ownership through the exercise of stock options, which stock
options are exercisable within 60 days of ^ July 12, 1996. Such shares are
deemed to be outstanding for the purpose of computing the percentage
outstanding shares of Home Federal's Common Stock beneficially owned by
directors and executive officers as a group.
PRICE RANGE OF F&M BANCORP COMMON STOCK
F&M Bancorp Common Stock is traded on the NASDAQ National Market under the
symbol "FMBN." The following table sets forth the high and low closing prices of
F&M Bancorp Common Stock as reported on the NASDAQ National Market for the
following calendar quarters:
Year and Quarter High(a) Low(a)
1993:
First Quarter ........................ $ 19.95 $ 17.46
====================================== ======= =======
Second Quarter ....................... 19.95 19.05
====================================== ===== =====
Third Quarter ........................ 21.54 18.14
====================================== ===== =====
Fourth Quarter ....................... 22.22 20.41
====================================== ===== =====
1994:
First Quarter ........................ 22.22 20.86
====================================== ===== =====
Second Quarter ....................... 22.90 20.18
====================================== ===== =====
Third Quarter ........................ 28.81 23.10
====================================== ===== =====
Fourth Quarter ....................... 29.05 27.14
====================================== ===== =====
1995:
First Quarter ........................ 28.81 27.14
====================================== ===== =====
Second Quarter ....................... 26.19 25.75
====================================== ===== =====
Third Quarter ........................ 27.00 25.50
====================================== ===== =====
Fourth Quarter ....................... 30.00 25.50
====================================== ===== =====
1996:
First Quarter ........................ 30.00 28.25
====================================== ===== =====
Second Quarter........................ 29.625 22.50
====================================== ====== =====
Third Quarter
=============
(through July 12, 1996)............. 23.375 22.50
==================================== ====== =====
- ---------------
(a) As adjusted for five percent stock dividends issued in 1994 and 1995.
On July 1, 1996, the F&M Bancorp Record Date, the outstanding shares of F&M
Bancorp Common Stock were held by approximately 2,994 record holders. The
closing price per share of F&M Bancorp Common Stock on July 12, 1996 on the
NASDAQ National Market was $23.00.
<PAGE>
DESCRIPTION OF F&M BANCORP CAPITAL STOCK
The authorized capital of F&M Bancorp consists exclusively of 10,000,000
shares of capital stock, par value $5.00 per share. All are currently classified
as Common Stock. As of ^ July 1, 1996, there were issued and outstanding ^
4,425,446 shares of the Common Stock of F&M Bancorp, which were held by ^ 2,994
owners of record, and there were ^ 203,746 shares issuable upon the exercise of
options to purchase its Common Stock. F&M Bancorp has issued no warrants to
purchase its Common Stock. The Common Stock of F&M Bancorp is listed for
quotation on the NASDAQ National Market under the symbol "FMBN."
Common Stock
The holders of the Common Stock of F&M Bancorp are entitled to one vote per
share on all matters submitted to a vote of the stockholders and may not
cumulate their votes for the election of directors. Subject to the voting rights
of the holders of preferred stock, if any, the exclusive voting power for all
purposes is vested in the holders of the Common Stock. Each share of the Common
Stock of F&M Bancorp is entitled to participate on a pro rata basis in dividends
and other distributions. The holders of the Common Stock of F&M Bancorp Stock do
not have preemptive rights to subscribe for additional shares that may be issued
by F&M Bancorp, and no share is entitled in any manner to any preference over
any other share. The shares of the Common Stock of F&M Bancorp to be issued to
Home Federal Stockholders pursuant to the Merger will be fully paid and
non-assessable and the holders thereof will not be subject to call or assessment
under Maryland law. Norwest Shareowner Services serves as the transfer agent for
F&M Bancorp.
Preferred Stock
The Board of Directors of F&M Bancorp may classify and reclassify any
unissued shares of capital stock into other classes and series, including one or
more series of preferred stock, by setting or changing in any one or more
respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock. Such stock may rank senior to
the Common Stock in one or more respects.
COMPARATIVE RIGHTS OF STOCKHOLDERS
Both Home Federal and F&M Bancorp are Maryland corporations and therefore
are both subject to certain general provisions of the Maryland General Corporate
Law (the "MGCL"). As a result, many of the contract rights attaching to shares
of the Common Stock of Home Federal will not be affected as a result of the
Merger; however, the respective Charters and By-Laws of F&M Bancorp and Home
Federal create some differences in the contract rights attaching to their
respective Common Stocks. To the extent that such differences exist, they would
be affected as a result of the Merger. The following discussion sets forth,
where applicable, certain provisions of Maryland law to which the securities
held by Home Federal Stockholders would be subject both before and after the
Merger, certain provisions of Home Federal's Charter and By-Laws relating to
contract rights to which the securities held by Home Federal Stockholders would
no longer be subject after the Merger, and certain provisions of F&M Bancorp's
Charter and By-Laws relating to contract rights to which the securities held by
Home Federal Stockholders would become subject as a result of the Merger.
Capitalization
Home Federal. The authorized capital of Home Federal consists of 10,000,000
shares of common stock, par value $1.00 per share, and 5,000,000 shares of
preferred stock, par value $0.10 per share. As of ^ July 12, 1996, there were
issued and outstanding 2,519,010 shares of the Common Stock of Home Federal,
<PAGE>
which were held by approximately 1,885 owners of record. No shares of the
Preferred Stock of Home Federal are issued or outstanding. Home Federal has
granted F&M Bancorp an option to purchase 501,282 shares of its Common Stock at
$8.25 per share, and there are 68,601 shares issuable upon the exercise of
options to purchase its Common Stock. The Common Stock of Home Federal is listed
for quotation on the NASDAQ National Market under the symbol "HFMD."
F&M Bancorp. F&M Bancorp's authorized capital is set forth under
"Description of F&M Bancorp Capital Stock -- Common Stock."
Amendment of Charter and By-Laws
Home Federal. Home Federal may amend, alter, change or repeal any provision
contained in its Charter pursuant to a resolution adopted by the affirmative
vote of a majority of the directors then in office and thereafter approved by
the holders of two-thirds of the issued and outstanding shares of Home Federal
entitled to vote generally in an election of directors, voting together as a
single class, as well as any additional vote which may be required by the
provisions of any series of preferred stock. Unless approved by a resolution
adopted by an affirmative vote of two-thirds of the directors then in office,
the affirmative vote of at least three-quarters of the issued and outstanding
shares of Home Federal entitled to vote generally in an election of directors,
voting together as a single class, as well as any additional vote which may be
required by the provisions of any series of preferred stock, is required to
amend, adopt, alter, change or repeal any provision that is not consistent with
existing Charter provisions pertaining to preemptive rights, the Board of
Directors, limitation of liability of directors and officers for money damages
to Home Federal or its stockholders, indemnification of directors, officers,
employees and agents of Home Federal, amendment of Home Federal's By-Laws, or
amendment of its Charter.
The By-Laws of Home Federal may be altered, amended or repealed by the
affirmative vote of a majority of the Board of Directors or by the affirmative
vote of the holders of not less than two-thirds of the issued and outstanding
shares of capital stock of Home Federal entitled to vote generally in an
election of directors, voting together as a single class, as well as any
additional vote which may be required by the provisions of any series of
preferred stock.
F&M Bancorp. F&M Bancorp's Charter may be amended by resolution of its
Board of Directors, setting forth the proposed amendment and declaring it
advisable, followed by the affirmative vote of a majority of all stockholders
entitled to vote on the matter. F&M Bancorp's By-Laws may be amended by a
majority of the votes cast at an annual or special meeting of the stockholders
at which a quorum is present, or by a majority of votes cast at a regular or
special meeting of directors at which a quorum is present.
Required Stockholder Vote for Certain Actions
Home Federal. Subject to the voting rights of the holders of preferred
stock, if any, the exclusive voting power of the Home Federal Stockholders is
vested in its Common Stock. Holders of Home Federal Common Stock are entitled to
one vote for each share of Home Federal Common Stock standing in the holder's
name on the books of Home Federal. Directors are to be elected by a plurality of
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present. Home Federal Stockholders are not permitted to cumulate
their votes for the election of directors.
F&M Bancorp. The voting rights pertaining to the Common Stock of F&M
Bancorp is set forth under "Description of F&M Bancorp Capital Stock -- Common
Stock."
<PAGE>
Directors and Classes of Directors; Vacancies and Removal of Directors
Home Federal. Home Federal's Charter provides that the initial number of
directors of Home Federal shall be 11. Pursuant to Home Federal's By-Laws, the
number of directors may at any time be increased or decreased by a vote of the
majority of its Board of Directors, but may not be less than seven nor more than
15. Home Federal's Board of Directors is divided into five classes as nearly
equal in number as possible. Each director serves for a five-year term. Home
Federal currently has eight directors.
Pursuant to the By-Laws of Home Federal, subject to the rights of any
holders of preferred stock to elect directors, any director (including persons
elected by directors to fill vacancies in the Board of Directors) may be removed
from office only with cause by the affirmative vote of the holders of not less
than a majority of the issued and outstanding shares of Home Federal Common
Stock. Except as otherwise fixed by the rights of holders of any preferred
stock, the holders of the Home Federal Common Stock may elect a successor to
fill a vacancy on its Board of Directors which results from a removal of a
director. A director elected by the stockholders to fill a vacancy which results
from the removal of a director shall serve for the balance of the term of the
removed director.
A majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on Home Federal's Board of Directors
which results from any cause except an increase in the number of directors, and
a majority of the entire Board of Directors may fill a vacancy which results
from an increase in the number of directors; however, if the stockholders of any
class or series are entitled separately to elect one or more directors, a
majority of the remaining directors elected by that class or series or the sole
remaining director elected by that class or series may fill any vacancy among
the number of directors elected by the class or series. A director elected by
the Board of Directors of Home Federal to fill a vacancy serves until the next
annual meeting of stockholders and until his successor is elected and qualified.
F&M Bancorp. F&M Bancorp's Charter provides that the number of directors of
F&M Bancorp shall be 15 and thereafter may be increased or decreased pursuant to
the By-Laws of F&M Bancorp, but shall never be less than the minimum number
permitted by Maryland law. The By-Laws allow a maximum of 25 directors. The
Charter of F&M Bancorp does not classify the Board of Directors; therefore, all
directors are elected as a single class each year.
Pursuant to its By-Laws, the holders of the Common Stock of F&M Bancorp may
remove any director, with or without cause, by the affirmative vote of a
majority of all the votes entitled to be cast for the election of directors.
Subject to the rights of the holders of preferred stock, if any, the holders of
the Common Stock of F&M Bancorp may elect a successor to fill a vacancy on the
Board of Directors which results from the removal of a director. A director
elected by the stockholders to fill such a vacancy serves for the balance of the
term of the removed director. A majority of the remaining directors, whether or
not sufficient to constitute a quorum, may fill a vacancy on the Board of
Directors which results from any cause except an increase in the number of
directors. A majority of the entire Board of Directors may fill a vacancy which
results from an increase in the number of directors. A director elected by the
Board of Directors to fill a vacancy serves until the next annual meeting of
stockholders and until his successor is elected and qualifies.
Maryland Business Combinations and Control Share Statutes
Both F&M Bancorp and Home Federal are subject to certain provisions of
Maryland law which may have the effect of discouraging attempts to acquire
control of either corporation. Since both Home Federal and F&M Bancorp are
Maryland corporations, the securities held by Home Federal Stockholders will be
subject to these same provisions both before and after the Effective Date of the
Merger.
Business Combinations Statute. The MGCL prohibits certain "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
<PAGE>
securities) between a Maryland corporation and an "Interested Stockholder."
Interested Stockholders are all persons (a) who beneficially own 10% or more of
the voting power of the corporation's shares or (b) an affiliate or associate of
the corporation who, at any time within the two-year period prior to the date in
question, was an Interested Stockholder or an affiliate or an associate thereof.
Such business combinations are prohibited for five years after the most recent
date on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be case by all holders of voting shares of the
corporation, and (b) 66 2/3% of the votes entitled to be cast by all holders of
voting shares of the corporation other than voting shares held by the Interested
Stockholder or an affiliate or associate of the Interested Stockholder, with
whom the business combination is to be effected, unless, among other things, the
corporation's stockholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the Board of Directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. F&M
Bancorp and its affiliates and associates were exempted from these provisions of
Maryland law by the Home Federal Board. A Maryland corporation may adopt an
amendment to its charter electing not to be subject to the special voting
requirements of the foregoing legislation. Any such amendment would have to be
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Stockholders. Home Federal has not adopted such an amendment
to the Home Federal Charter.
Control Shares Statute. The MGCL provides the "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquirer or by officers or directors who are employees of the corporation.
Control shares are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person, would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (a) 20% or more but less than 33 1/3%; (b) 33 1/3% or
more but less than a majority; or (c) a majority of all voting power. Control
Shares do not include shares of stock an acquiring person is entitled to vote as
a result of having previously obtained stockholder approval. A control share
acquisition means, subject to certain exceptions, the acquisition of, ownership
of or the power to direct the exercise of voting power with respect to, control
shares.
A person who has made or proposed to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand therefore to consider the
voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute, then
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to voting rights, as of
the date of the last control share acquisition or of any meeting of stockholders
at which the voting rights of such shares are considered and not approved. If
voting rights for "control shares" are approved at a stockholders' meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
stock as determined for purposes of such appraisal rights may not be less than
the highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the charter or by-laws of the corporation.
<PAGE>
Preemptive Rights
Neither the F&M Bancorp Stockholders nor the Home Federal Stockholders have
preemptive rights. Thus, no holder of the capital stock of either F&M Bancorp or
Home Federal is entitled as such, as a matter of right, to subscribe for or
purchase any part of any new or additional issue of capital stock of any class.
As a result, if additional shares of F&M Bancorp's Common Stock or Preferred
Stock, or Home Federal's Common Stock or Preferred Stock are issued, holders of
such stock, to the extent they do not participate in such additional issuance of
shares, would own proportionately smaller interests in a larger amount of
outstanding capital stock.
Assessment
All issued and outstanding shares of Home Federal Common Stock and F&M
Bancorp Common Stock are, and all shares of F&M Bancorp Common Stock to be
issued to Home Federal Stockholders pursuant to the Merger Agreement will be,
fully paid and nonassessable.
Conversion; Redemption; Sinking Fund
Neither Home Federal Common Stock nor F&M Bancorp Common Stock is
convertible, redeemable or entitled to any sinking fund.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of F&M Bancorp
or Home Federal, whether voluntary or involuntary, the F&M Bancorp Stockholders
and the Home Federal Stockholders are entitled, after payment or provision for
payment of the debts and other liabilities of F&M Bancorp or Home Federal and
the amount to which the holders of any class of stock having a preference on
distribution in the liquidation, dissolution or winding up of F&M Bancorp or
Home Federal, if any, are entitled, to share ratably in the remaining net assets
of F&M Bancorp or Home Federal, as the case may be.
Dividends and Other Distributions
Subject to any rights and preferences of any class of stock having
preference over the F&M Bancorp Common Stock and Home Federal Common Stock, F&M
Bancorp Stockholders and Home Federal Stockholders are entitled to such
dividends as may be declared by their respective Boards of Directors out of
funds lawfully available therefor. Each share of the Common Stock of F&M Bancorp
and each share of the Common Stock of Home Federal is entitled to participate on
a pro rata basis in dividends and other distributions.
Special Meetings of Stockholders
Certain Provisions of Maryland Law. A special meeting of the stockholders
of a Maryland corporation may be called by the board of directors, the
president, stockholders entitled to cast at least 25% (or any lower percentage
specified in the charter) of the votes at such meeting, and other persons
designated in the by-laws; however, Maryland law provides that a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any special meeting of stockholders held during the preceding
12 months unless the meeting is requested by stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting.
<PAGE>
Home Federal. Special meetings of Home Federal Stockholders for any purpose
may be called at any time by the affirmative vote of a majority of its Board of
Directors, by its Chairman of the Board, or by its President, and may be called
upon the written request of the holders of at least 25% of the votes entitled to
be cast at the meeting.
F&M Bancorp. Special meetings of F&M Bancorp Stockholders may be called by
its Chairman of the Board or its President or by a majority of its Board of
Directors by vote at a meeting or in writing with or without a meeting.
Indemnification
Certain Provisions of Maryland Law. The MGCL permits a Maryland corporation
to indemnify its present and former directors, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their services in those or other capacities, unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty; or (b) the director or officer
actually received an improper personal benefit in money, property, or services;
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. The MGCL
permits a Maryland corporation to indemnify a present and former officer to the
same extent as a director, and to provide additional indemnification to an
officer who is not also a director. In addition, the MGCL permits a Maryland
corporation to pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses (including attorney's fees) incurred by a
present or former director or officer made a party to the proceeding by reason
of his service in that capacity, provided that the corporation shall have
received (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the corporation; and (b) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met.
Home Federal's Charter requires it to indemnify its directors, officers,
employees and agents to the fullest extent authorized by the MGCL. F&M Bancorp's
Charter requires it to indemnify its directors and officers to the fullest
extent provided by the MGCL, and to indemnify its officers who are not directors
to such further extent as may be authorized by its Board of Directors and be
consistent with law. F&M Bancorp is also permitted to indemnify other employees
and agents in any other manner consistent with law.
Certain Provisions of the Merger Agreement. Under the terms of the Merger
Agreement, after the Effective Date F&M Bancorp has agreed to cause Home Bank,
or if Home Bank is no longer in existence, F&M Bancorp has agreed to continue to
indemnify all persons who, as of the Effective Date, were directors, officers,
employees and agents of Home Federal or its subsidiaries to the same extent that
they were indemnified pursuant to the Articles of Incorporation or By-Laws of
Home Federal and/or its subsidiaries on April 2, 1996 with respect to matters
occurring prior to the Effective Date. Such indemnification will continue for
such period of time as is covered by any extension of the directors' and
officers' liability coverage of Home Federal and its subsidiaries, but in no
event longer than 6 years from the Effective Date.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling F&M Bancorp
pursuant to the foregoing provisions, F&M Bancorp has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
<PAGE>
Stockholder Proposals and Nominations of Directors
Certain Provisions of Maryland Law. The charter and by-laws of a Maryland
corporation may provide that any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at an annual meeting of
stockholders must submit written notice to the corporation in advance of the
meeting.
Home Federal. Pursuant to its By-Laws, at annual meetings of the Home
Federal Stockholders, only such business may be conducted, and only such
proposals may be acted upon, as have been properly brought before the meeting.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to Home
Federal's Secretary. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of Home Federal not
later than 60 days prior to the anniversary date of the mailing of proxy
materials by Home Federal in connection with the immediately preceding annual
meeting of its stockholders. The stockholder's notice must set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the matter, (b) the name and address of the stockholder, (c) the
class and number of shares of Home Federal which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Subject to the rights of the holders of any class or series of stock having
a preference over the Common Stock, nominations for the election of directors of
Home Federal may be made by its Board of Directors or a committee appointed by
its Board of Directors or by any stockholder entitled to vote generally in an
election of directors. A stockholder making such a nomination must comply with
the procedures described in the preceding paragraph with respect to stockholder
proposals.
F&M Bancorp. Pursuant to its By-Laws, F&M Bancorp holds annual meetings of
its stockholders to elect directors. Except as may be otherwise provided by its
Charter or by statute, any business may be considered at an annual meeting
without the purpose of the meeting having been specified in the notice sent to
stockholders with respect thereto.
Stockholder Inspection Rights; Stockholder Lists
Certain Provisions of Maryland Law. Under Maryland law, any stockholder has
the right to inspect and copy the by-laws, minutes of the proceedings of
stockholders, annual statement of affairs, and voting trust agreements on file
at the corporation's principal office. In addition, any stockholder or
stockholders who together are, and for at least six months have been, holders of
record of at least 5% of the outstanding stock of any class of the corporation
may inspect and copy the corporation's books of account, stock ledger and
stockholders' list and may require the corporation to produce a verified
statement of affairs. Both F&M Bancorp and Home Federal are subject to these
provisions.
Dissenters' Rights
Certain Provisions of Maryland Law. The provisions of Title 3 of the MGCL,
which provide stockholders of a Maryland corporation the right to demand and
receive payment of the fair value of their shares in the event of mergers,
consolidations and certain other corporate transactions, are applicable to both
F&M Bancorp and Home Federal as Maryland corporations; however, because the
Common Stocks of both F&M Bancorp and Home Federal are designated as national
market system securities on an interdealer quotation system by the National
Association of Securities Dealers, Inc., stockholders of both F&M Bancorp and
Home Federal generally do not have rights to demand and receive payment of the
fair value of their shares in the event of mergers, consolidations and certain
other corporate transactions to which F&M Bancorp or Home Federal may be
parties. In addition, F&M Bancorp Stockholders also will not have dissenters'
rights with respect to the Merger Agreement and the Merger because the stock
held by them is that of the successor corporation in the Merger, and the
contract rights of the Common Stock of F&M Bancorp as set forth in its Charter
<PAGE>
are not altered by the Merger, and will not be changed or converted in the
Merger into anything other than shares of the Common Stock of F&M Bancorp.
RESALE OF F&M BANCORP COMMON STOCK
The shares of Common Stock of F&M Bancorp offered by this Proxy
Statement/Prospectus have been registered under the Securities Act, thereby
allowing Home Federal Stockholders who are not "affiliates" of Home Federal or
F&M Bancorp (as defined under the Securities Act, but generally including
directors, certain executive officers and 10% or more stockholders of Home
Federal or F&M Bancorp) to trade them freely and without restriction. Each
holder of Home Federal Common Stock who may be deemed to be an "affiliate" of
Home Corporation has entered into agreements with F&M Bancorp in which the
"affiliate" acknowledged and agreed to abide by all limitations imposed by the
Securities Act and by all rules, regulations and releases promulgated thereunder
by the Commission with respect to the sale or other disposition of the shares of
the Common Stock of F&M Bancorp to be received by the "affiliate" pursuant to
the Merger, to abide by all limitations imposed by the accounting rules for the
Merger to be accounted for as a pooling-of-interests, and to support and vote
the shares of Common Stock of Home Federal owned or controlled by him or her to
ratify and confirm the Merger Agreement and the Merger. This Proxy
Statement/Prospectus does not cover any resales of F&M Bancorp Common Stock
received by affiliates of Home Federal.
EXPERTS
The financial statements of F&M Bancorp as of December 31, 1995 and 1994
and for the three years ended December 31, 1995, which are included in F&M
Bancorp's Annual Report on Form 10-K for the year ended December 31, 1995 and
are presented or incorporated by reference in this Proxy Statement/Prospectus,
have been audited by Keller Bruner & Company, L.L.C., independent public
accountants as indicated in their reports with respect thereto, and are
presented or incorporated herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Home Federal as of December 31, 1995 and 1994
and for the three years ended December 31, 1995, which are included in Home
Federal's Annual Report on Form 10-KSB for the year ended December 31, 1995 and
as part of Annex E to this Proxy Statement/Prospectus, have been audited by
Smith Elliott Kearns & Company, independent public accountants as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of the Common Stock of F&M Bancorp to be issued
in connection with the Merger will be passed upon by the law firm of Piper &
Marbury L.L.P., Baltimore, Maryland. Piper & Marbury L.L.P. will also pass upon
the tax consequences of the Merger. As of April 15, 1996, the partners and
associates of Piper & Marbury L.L.P. owned beneficially in the aggregate 2,565
shares of the Common Stock of F&M Bancorp.
The law firm of Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.,
has acted as special counsel to Home Federal in connection with the Merger.
<PAGE>
OTHER MATTERS
The F&M Bancorp Board and the Home Federal Board know of no other matters
other than those discussed in this Proxy Statement/Prospectus which will be
presented at the respective Special Meetings; however, if any other matters are
properly brought before the respective Special Meetings, any proxy given
pursuant to this solicitation will be voted in accordance with the
recommendations of the management of F&M Bancorp and the management of Home
Federal.
ADDITIONAL INFORMATION ABOUT F&M BANCORP
Additional information relating to the business of F&M Bancorp,
consolidated financial statements of F&M Bancorp and other related matters is
set forth in or incorporated by reference in F&M Bancorp's Annual Report on Form
10-K and the Annual Report to Stockholders for the year ended December 31, 1995
and its Form 10-Q for the period ended March 31, 1996, which are incorporated by
reference herein. See "Incorporation of Certain Documents by Reference."
<PAGE>
GLOSSARY
Capitalized terms will have the following meanings when used in this Proxy
Statement/Prospectus:
Act. The ^ Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.
Assumed Conversion Ratio. The number of shares of F&M Bancorp Common Stock
into which each share of Home Federal Common Stock would have been converted if
the Conversion Ratio were computed using March 31, 1996 as the Calculation Date.
The Assumed Conversion Ratio is 0.433 shares of F&M Bancorp Common Stock for
each share of Home Federal Common Stock
Average Market Value. The arithmetic average of closing prices of F&M
Bancorp Common Stock in the Composite Transaction Summary to the extent reported
in The Wall Street Journal for the 20 consecutive trading days preceding the
Calculation Date.
Calculation Date. The date as of which the Conversion Ratio will be
calculated, which will be the last day of the month during which all required
events listed in the Merger Agreement shall have occurred, and all conditions
precedent to the Merger shall have been fulfilled or waived.
Code. The Internal Revenue Code of 1986, as amended.
Commission. The Securities and Exchange Commission.
Comptroller. The Office of the Comptroller of the Currency.
Conversion Ratio. The number of shares of F&M Bancorp Common Stock into
which each share of Home Federal Common Stock will be converted on the Effective
Date.
Exchange Act. The Securities Exchange Act of 1934, as amended.
Exchange Option. The options to purchase shares of F&M Bancorp Common Stock
which will be issued to holders of the Outstanding Options in connection with
the Merger.
Effective Date. The effective date of the Merger, which will be the 15th
day of the month following the month during which all approvals and events
required for the Merger shall have occurred and all conditions precedent to the
Merger shall have been fulfilled or waived, or on such other date as F&M Bancorp
and Home Federal may agree upon.
F&M Bancorp. F&M Bancorp, a Maryland corporation and bank holding company
located in Frederick, Maryland.
F&M Bancorp Board. The Board of Directors of F&M Bancorp.
F&M Bancorp Common Stock. The Common Stock, par value $5.00 per share, of
F&M Bancorp.
<PAGE>
F&M Bancorp Record Date. The close of business on ^ July 1, 1996. Only F&M
Bancorp Stockholders of record on the F&M Bancorp Record Date will be entitled
to notice of and to vote at the F&M Bancorp Special Meeting or any adjournments
or postponements thereof.
F&M Bancorp Special Meeting. The Special Meeting of Stockholders of F&M
Bancorp to which this Proxy Statement/Prospectus relates, which is to be held at
^ the Holiday Inn FSK, 5400 Holiday Drive, Frederick, Maryland ^ on Tuesday,
August 27, 1996 at ^ 4:00 p.m. local time.
F&M Bancorp Stockholders. The holders of the Common Stock of F&M Bancorp.
F&M Bank. Farmers and Mechanics National Bank, a national banking
association located in Frederick, Maryland which is the wholly-owned subsidiary
of F&M Bancorp.
FDIC. The Federal Deposit Insurance Corporation.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991.
Federal Reserve Board. The Board of Governors of the Federal Reserve
System.
Home Bank. Home Federal Savings Bank, a federally-chartered savings bank
located in Hagerstown, Maryland which is the wholly-owned subsidiary of Home
Federal.
Home Federal. Home Federal Corporation, a Maryland corporation and savings
and loan holding company located in Hagerstown, Maryland.
Home Federal Board. The Board of Directors of Home Federal.
Home Federal Common Stock. The Common Stock, par value $1.00 per share, of
Home Federal.
Home Federal Record Date. The close of business on ^ July 12, 1996. Only
Home Federal Stockholders of record on the Home Federal Record Date will be
entitled to notice of and to vote at the Home Federal Special Meeting or any
adjournments or postponements thereof.
Home Federal Special Meeting. The Special Meeting of Stockholders of Home
Federal to which this Proxy Statement/Prospectus relates, which is to be held at
the Four Points Hotel/Sheraton Inn, 1910 Dual Highway, Hagerstown, Maryland
21740 on ^ Thursday, August 29, 1996 at ^ 2:00 local time.
Home Federal Stockholders. The holders of the Common Stock of Home Federal.
MGCL. The Maryland General Corporation Law.
Merger. The merger of Home Federal with and into F&M Bancorp.
<PAGE>
Merger Agreement. Plan and Agreement to Merge, dated as of April 2, 1996,
by and among F&M Bancorp and Home Federal.
Option. An option held by F&M Bancorp to purchase up to 501,282 shares of
Home Federal Common Stock at $8.25 per share upon the occurrence of certain
events, granted to F&M Bancorp by Home Federal pursuant to the Option Agreement.
Option Agreement. The Stock Option Agreement, dated as of April 2, 1996
between F&M Bancorp and Home Federal.
OTS. The Office of Thrift Supervision.
Outstanding Option. The outstanding and unexercised options to purchase
shares of Home Federal Common Stock.
Registration Statement. The registration statement on Form S-4 of which
this Proxy Statement/Prospectus forms a part, filed by F&M Bancorp in connection
with the Merger.
Securities Act. The Securities Act of 1933, as amended.
Webb. Charles Webb & Company, an investment banking firm located in Dublin,
Ohio which is serving as financial advisor to Home Federal in connection with
the Merger.
<PAGE>
ANNEX A
PLAN AND AGREEMENT TO MERGE
PLAN AND AGREEMENT TO MERGE (this "Plan"), dated as of April 2, 1996 by and
among F&M Bancorp ("F&M Bancorp"), a Maryland corporation, and Home Federal
Corporation ("Home Corporation"), a Maryland corporation.
W I T N E S S E T H:
WHEREAS, F&M Bancorp is a bank holding company and the holder of all of the
issued and outstanding capital stock of Farmers and Mechanics National Bank
("F&M Bank"), a national banking association; and Home Corporation is a thrift
holding company and the holder of all of the issued and outstanding capital
stock of Home Federal Savings Bank ("Home Bank"), a federally-chartered savings
bank; and
WHEREAS, F&M Bancorp desires to have Home Corporation merge with F&M
Bancorp in such a manner that, upon the merger becoming effective, F&M Bancorp
will be the surviving Maryland corporation and all of the issued and outstanding
shares of the Common Stock of Home Corporation will be converted into shares of
the Common Stock of F&M Bancorp, subject to the terms and conditions and based
upon Home Corporation's representations, warranties and covenants hereinafter
set forth, such merger hereinafter referred to as the "Merger;" and
WHEREAS, Home Corporation desires that it be merged with F&M Bancorp in the
manner set forth above, and that the issued and outstanding shares of the Common
Stock of Home Corporation be converted into shares of the Common Stock of F&M
Bancorp, subject to the terms and conditions and based upon F&M Bancorp's
representations, warranties and covenants hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and the mutual benefits to be derived herefrom, the parties
agree as follows:
1. Effective Date. Pursuant to MD. CORPS. & ASS'NS CODE SS. 3-113(a), the
effective date of this Plan and the Merger (the "Effective Date") shall be
either (a) the 15th day of the month following the month in which the
Calculation Date (defined in Section 9.2(a) hereof) occurs; or (b) such other
date as F&M Bancorp and Home Corporation may agree upon. F&M Bancorp and Home
Corporation will prepare and execute Articles of Merger in substantially the
form attached hereto as Appendix II which will set forth the Effective Date, and
will file the Articles of Merger with the Maryland State Department of
Assessments and Taxation.
2. Events Preceding Effectiveness. On or before the Effective Date the
following shall have occurred:
(a) A majority of the Boards If Directors of each of Home Corporation
and F&M Bancorp shall have approved and agreed to this Plan and the Merger;
(b) A majority of the Boards of Directors of each of Home Corporation
and F&M Bancorp shall have approved and agreed to the Stock Option
Agreement in the form attached hereto as Appendix III; and Home Corporation
shall have authorized and reserved an adequate number of shares of its
Common Stock for issuance upon exercise of the option granted by such Stock
Option Agreement, and taken all actions necessary to fulfill its
obligations thereunder;
<PAGE>
(c) the Board of Directors of Home Corporation shall call a meeting of
the stockholders of Home Corporation. Notice of the time and place of the
meeting shall be provided in accordance with MD. CORPS. & ASS'NS CODE SS.
2-504, and this Plan and the Merger shall have been ratified and confirmed
by the affirmative vote of not less than two-thirds of the issued and
outstanding voting stock of Home Corporation at the meeting, in accordance
with MD. CORPS. & ASS'NS CODE SS. 3-105(d);
(d) the Board of Directors of F&M Bancorp shall call a meeting of the
stockholders of F&M Bancorp. Notice of the time and place of the meeting
shall be provided in accordance with MD. CORPS. & ASS'NS CODE SS. 2-504,
and this Plan and the Merger shall have been ratified and confirmed by the
affirmative vote of not less than two-thirds of the issued and outstanding
voting stock of F&M Bank at the meeting, in accordance with MD. CORPS. &
ASS'NS CODE SS. 3-105(d);
(e) F&M Bancorp shall have procured the required approval, consent,
waiver or other administrative action with respect to this Plan and the
transactions contemplated hereby (i) by the Office of Thrift Supervision
under the Savings and Loan Holding Company Act and (ii) by the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act
of 1956;
(f) the parties shall have procured all other regulatory approvals,
consents, waivers or administrative actions of governmental entities or
other persons or agencies that are necessary or appropriate to the
consummation of the transactions contemplated by this Plan, and no
approval, consent, waiver or administrative action referred to in this
Section 2(f) shall have included any condition or requirement that would
(i) result in a materially adverse effect on F&M Bancorp or Home
Corporation or (ii) so materially and adversely affect the economic or
business benefits of the Merger that F&M Bancorp, in the sole judgment of
F&M Bancorp, would not have entered into this Plan had such conditions or
requirements been known at the date hereof;
(g) F&M Bancorp shall have filed a Registration Statement with the
Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act"), pertaining to the shares of Common
Stock of F&M Bancorp to be issued to the stockholders of Home Corporation
pursuant to this Plan and the Merger, and such Registration Statement shall
have become effective and there shall not be in effect a stop order with
respect thereto;
(h) F&M Bancorp shall have made such filings and obtained such
approvals as are necessary under the state securities or "blue sky" laws
pertaining to the shares of Common Stock of F&M Bancorp to be issued to the
stockholders of Home Corporation pursuant to this Plan and the Merger; and
(i) In accordance with Section 10(c) of this Plan, F&M Bancorp shall
have offered to enter into an employment agreement with Richard W. Phoebus,
Sr. substantially in the form attached hereto as Appendix VI, and with each
of Celia S. Ausherman, Steven G. Hull and Salvatore M. Savino substantially
in the form attached hereto as Appendix VII.
3. Representations and Warranties of Home Corporation. Home Corporation
represents and warrants to F&M Bancorp as follows:
<PAGE>
3.1. Organization, Standing, and Capitalization of Home
Corporation and Home Bank.
(a) Home Corporation is a duly organized and validly existing
corporation and is in good standing under the laws of the State of
Maryland. Home Corporation has the corporate power and authority to own and
hold its material properties and to carry on its business as it is now
being conducted. Home Corporation is a registered thrift holding company
under the Savings and Loan Holding Company Act. Home Corporation has no
subsidiaries or affiliated companies and is not a party to any joint
venture or partnership other than as listed on Schedule 3.1(a) hereto
(collectively, the "Home Subsidiaries").
(b) Home Bank is a duly organized and validly existing
federally-chartered savings bank and is in good standing under the federal
laws of the United States. Home Bank's deposits are insured under the
provisions of the Federal Deposit Insurance Act, as amended. Each of the
other Home Subsidiaries is a duly organized and validly existing
corporation and is in good standing under the laws of the jurisdiction of
its incorporation as set forth on Schedule 3.1(a). Each of the Home
Subsidiaries has the corporate power and authority to own and hold its
material properties and to carry on its business as it is now being
conducted. All shares of capital stock of all of the Home Subsidiaries are
validly issued and outstanding, fully paid, and non-assessable. Except as
disclosed in Schedule 3.1(b), each of the Home Subsidiaries is wholly owned
by its parent corporation. There are no outstanding options, warrants,
rights, or obligations of any kind entitling the holder thereof to acquire
shares of the capital stock of any of the Home Subsidiaries, and there are
no outstanding securities or instruments of any kind that are convertible
into shares of the capital stock of any of the Home Subsidiaries. Except as
disclosed in Schedule 3.1(b), none of the Home Subsidiaries is a party to
any joint venture or partnership.
(c) Copies of all charter documents and by-laws of Home Corporation
and each of the Home Subsidiaries are attached as Schedule 3.1(c) hereto,
and all such copies are true and correct as of the date hereof. The minute
books of Home Corporation and each of the Home Subsidiaries, which have
been made available to F&M Bancorp for inspection, are complete in all
material respects and accurately record the actions taken by the
stockholders and directors of Home Corporation and each of the Home
Subsidiaries.
(d) The authorized capital stock of Home Corporation consists
exclusively of 10,000,000 shares of Common Stock, par value $1.00 per
share, 2,519,010 shares of which are validly issued and outstanding, fully
paid, and non-assessable, and 5,000,000 shares of Preferred Stock, par
value $0.10 per shares, none of which are issued or outstanding. Except for
the option to be granted to F&M Bancorp pursuant to the Stock Option
Agreement attached hereto as Appendix III and as disclosed in Schedule
3.1(d), there are no outstanding options, warrants, rights, or obligations
of any kind entitling the holder thereof to acquire shares of the Common
Stock of Home Corporation, and there are no outstanding securities or
instruments of any kind that are convertible into shares of the Common
Stock of Home Corporation.
3.2. Financial Statements. Home Corporation has provided in Schedule 3.2
hereto copies of the following consolidated financial statements of Home
Corporation and the Home Subsidiaries, all of which are true and complete in all
material respects, have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods covered by
such consolidated financial statements, and present fairly the consolidated
financial position, results of operations, cash flows, and changes in
stockholders' equity of Home Corporation and the Home Subsidiaries at the dates
of and for the periods covered by such financial statements:
<PAGE>
Consolidated Financial Statements of Home Corporation and the Home
Subsidiaries at December 31, 1991, 1992, 1993, 1994 and 1995 and for
each of the years then ended, as reported upon by Smith Elliott Kearns
& Company.
3.3. Taxes. Schedule 3.3 hereto sets forth the tax returns to federal,
state, county, municipal or foreign taxing authorities for the taxable year 1991
and all taxable years through and including 1994 for Home Corporation and the
Home Subsidiaries. Home Corporation and the Home Subsidiaries have filed with
appropriate federal, state, county, municipal or foreign taxing authorities all
tax returns required to be filed (taking any applicable extensions into
consideration) and have paid or reserved for all taxes shown to be due on such
returns and all penalties and interest payable in respect thereof. Except as
disclosed in Schedule 3.3, neither Home Corporation nor any of the Home
Subsidiaries have received from any taxing authority any notice of deficiency or
assessment of additional taxes not paid or any notice of an intention to
commence an examination or audit of its tax returns, and no tax audits by any
taxing authority are in process. Except as disclosed on Schedule 3.3, neither
Home Corporation nor any of the Home Subsidiaries have granted any waiver of any
statute of limitations or otherwise agreed to any extension of a period for the
assessment of any federal, state, county, municipal or foreign income tax. The
accruals and reserves reflected in the consolidated financial statements which
Home Corporation has provided to F&M Bancorp as described in Section 3.2 are
adequate to cover all taxes (including interest and penalties, if any, thereon)
that are payable or accrued as a result of the operations of Home Corporation
and the Home Subsidiaries for all periods prior to the date of such consolidated
financial statements. For purposes of this Section 3.3, any reference to the
Home Subsidiaries shall be deemed to include any entity listed on Schedules
3.1(a) and 3.1 (b).
3.4. No Undisclosed Liabilities. Except as and to the extent reflected or
reserved against in the consolidated financial statements referred to in Section
3.2, neither Home Corporation nor any of the Home Subsidiaries at the dates of
such consolidated financial statements had any material liabilities or
obligations (whether accrued, absolute, or contingent) required under generally
accepted accounting principles to be reflected thereon which would materially
and adversely affect the fair presentation of such financial statements. Neither
Home Corporation nor any of the Home Subsidiaries have incurred any liability
since the date of the consolidated financial statements referred to in Section
3.2 which would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business or operations of Home Corporation and
the Home Subsidiaries, taken as a whole, other than liabilities which have been
incurred in the ordinary course of business.
3.5. Absence of Certain Changes or Events. Since December 31, 1995, there
has not been:
(a) Any materially adverse change in the financial position, results
of operations, assets, liabilities, or business of Home Corporation or the
Home Subsidiaries, other than changes in the ordinary course of business;
(b) any increase in salaries or wages of directors, officers, or
employees of Home Corporation or the Home Subsidiaries other than in the
ordinary course of business; or any establishment or increase of any
employment, compensation, bonus, pension, option, incentive or deferred
compensation, retirement payments, profit sharing, or similar agreement or
benefit, authorized, granted, or accrued to any directors, officers or
employees of Home Corporation or the Home Subsidiaries other than in the
ordinary course of business, except as set forth in Schedule 3.5; or
(c) except with respect to the dividend payment of $0.04 per share of
Common Stock declared on February 15, 1996, to be paid on March 29, 1996,
any declaration, payment, or set aside by Home Corporation of any dividend
or distribution in respect of its Common Stock, or any purchase, issuance
or sale of any of its Common Stock.
<PAGE>
3.6. Complete and Accurate Disclosure. Neither this Plan (insofar as it
relates to Home Corporation and the Home Subsidiaries, the Common Stock of Home
Corporation, and the involvement of Home Corporation in the transactions
contemplated hereby) nor any financial statement, schedule, certificate, or
other statement or document set forth on a schedule by Home Corporation to F&M
Bancorp in connection with this Plan, when considered in the aggregate, contains
any statement which, at the time and in light of the circumstances under which
it is made, is false or misleading with respect to any material fact or omits to
state any material fact necessary to make the statements contained herein or
therein not false or misleading.
3.7. Title to Properties; Absence of Liens and Encumbrances; Compliance
with Laws. Except as disclosed on Schedule 3.7, Home Corporation and each of the
Home Subsidiaries has good and marketable title to all of their respective
properties and assets, including those reflected in the consolidated financial
statements referred to in Section 3.2, except as sold or otherwise disposed of
for fair value and only in the ordinary course of business, free and clear of
all liens and encumbrances, except (i) with respect to property as to which they
are lessees, (ii) with respect to real estate owned by Home Corporation or the
Home Subsidiaries, for use, occupancy and similar restrictions of public record
that may be observed by an inspection of the property, and such other utility
and other easements and encumbrances as do not materially adversely affect the
fair market value of such real property, and (iii) liens to secure borrowings,
liens to secure governmental deposits, and liens for current taxes not yet due
and payable. Neither Home Corporation nor any of the Home Subsidiaries owns or
leases real property except as disclosed on Schedule 3.7, and is not in default
under any material lease of real or personal property to which it is a party. As
of the date hereof, except as disclosed on Schedule 3.7, the real properties,
structures, buildings, equipment, and the tangible personal property owned,
operated or leased by Home Corporation or any of the Home Subsidiaries are (x)
in good repair, order and condition, except for depletion, depreciation and
ordinary wear and tear, (y) suitable for the uses for which they were intended
and (z) free from any known structural defects. As of the date hereof, there are
no laws, conditions of record or other impediments which materially interfere
with the intended uses by Home Corporation or any of the Home Subsidiaries of
the real property or tangible personal property owned or leased by it, except as
set forth in Schedule 3.7. Neither Home Corporation nor any of the Home
Subsidiaries have received any notice of any violation of any applicable law,
building code, zoning ordinance or other similar law. Home Corporation and the
Home Subsidiaries own or have the rights to use all real and personal properties
and assets that are material to the conduct of the business as presently
conducted of Home Corporation and the Home Subsidiaries, taken as a whole.
3.8. Contracts. Except for the plans, contracts and agreements of Home
Corporation and the Home Subsidiaries disclosed on Schedule 3.8, neither Home
Corporation nor any of the Home Subsidiaries is a party to or subject to:
(a) Any employment, consultation, or compensation contract or
arrangement (other than those terminable at will) with any officer,
consultant, director, or employee;
(b) any plan, contract, program, understanding, or agreement providing
for bonuses, pensions, severance pay, options, stock purchases or any other
form of retirement, incentive or deferred compensation, retirement
payments, death benefits, profit sharing, or any health, accident or other
welfare benefit, or any other employee or retired employee benefit in which
any employee, former employee, retired employee (or beneficiary of any of
them) of Home Corporation or any of the Home Subsidiaries is entitled to
participate except as disclosed on Schedule 3.8;
(c) any contract or agreement with any labor union;
(d) any lease of real or personal property with annual rentals in
excess of $5,000;
<PAGE>
(e) any agreement for services in excess of $5,000 per year or for the
purchase or disposition of any equipment or supplies except individual
purchase orders for office supplies incurred in the ordinary course of
business of $5,000 or less;
(f) any instrument evidencing or relating to indebtedness for borrowed
money except for customer accounts, deposits, certificates of deposit,
federal funds purchased, and the like which may be construed as borrowings
and except for loans made by Home Bank as lender in the ordinary course of
its business;
(g) any lease or other contract containing covenants not to enter into
or consummate the transactions contemplated hereby or which provides for
payments in excess of $2,000 and will be terminated or violated by the
Merger or in respect of which the Merger would cause a default or
acceleration of obligations; or
(h) any other contract or agreement not of the type covered by any of
the other specific terms of this Section 3.8 obligating Home Corporation or
any Home Subsidiary to expenditures in excess of $25,000.
Each of the instruments disclosed on Section 3.8 is valid and in full force and
effect. Neither Home Corporation nor any of the Home Subsidiaries are in default
nor have any of them received any notice that they are in default, nor to their
actual knowledge is any other party in default, under any material agreements,
instruments, or obligations to which Home Corporation or any of the Home
Subsidiaries is a party or by which they are bound.
3.9. Litigation, Etc. Except as disclosed on Schedule 3.9, (a) there is no
litigation, proceeding, or investigation pending or, to the knowledge of Home
Corporation, threatened against Home Corporation or any of the Home Subsidiaries
which would result in any materially adverse change in the condition (financial
or otherwise), assets, liabilities, business, operations, or future prospects of
Home Corporation and the Home Subsidiaries, taken as a whole; (b) there are no
outstanding orders, writs, injunctions, judgments, decrees, directives, consent
agreements or memoranda of understanding issued by any federal, state or local
court or governmental authority or arbitration tribunal issued against or with
the consent of Home Corporation or any of the Home Subsidiaries that materially
and adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations, or future prospects or that in any manner
restrict Home Corporation's right to carry on its business or that of the Home
Subsidiaries as presently conducted; and (c) Home Corporation is aware of no
fact or condition presently existing that might give rise to any litigation,
investigation or proceeding which, if determined adversely to Home Corporation
or any of the Home Subsidiaries, would materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations,
or future prospects of Home Corporation and the Home Subsidiaries, taken as a
whole, or would restrict in any manner Home Corporation's right to carry on its
business or that of the Home Subsidiaries as presently conducted. Home
Corporation has disclosed on Schedule 3.9 all litigation in which Home
Corporation or any of the Home Subsidiaries is involved as a party (other than
bankruptcy proceedings in which Home Corporation or any of the Home Subsidiaries
has filed proofs of claim or routine collection and foreclosure suits initiated
in the ordinary course of business).
3.10. Environmental Matters. (a) For purposes of this Section 3.10, the
following terms shall have the indicated meaning:
"Property" or "Properties" means all branch properties presently or
formerly owned or operated by Home Corporation and each of the Home
Subsidiaries, all other real property presently owned or operated by Home
Corporation and each of the Home Subsidiaries, and any real properties formerly
owned or operated by Home Corporation and each of the Home Subsidiaries on or
after January 1, 1994 and subsequently disposed of.
"Environmental Law" means (i) any applicable federal, state or local
statute, law, ordinance, rule, regulation, code, license, permit, authorization,
<PAGE>
approval, consent, order, judgment, decree, directive, requirement or agreement
with any court, governmental authority or other regulatory or administrative
agency or commission, domestic or foreign ("Governmental Entity") now existing,
relating to the use, storage, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of Hazardous Substances,
each as amended, or (ii) any common law that may impose liability or obligations
for injuries or damages due to the presence of or exposure to any Hazardous
Substance.
"Hazardous Substance" means any substance, whether liquid, solid or gas,
listed, defined, designated or classified as hazardous, toxic, radioactive or
dangerous, under any applicable Environmental Law, whether by type or by
quantity. Hazardous Substance includes, without limitation, (i) any "hazardous
substance" as defined in the Comprehensive Environmental Response, Compensation
and Liability Act, as amended, and (ii) any substance regulated by the Resource
Conservation and Recovery Act, as amended.
(b) Except as disclosed on Schedule 3.10 or as would not individually or in
the aggregate have a materially adverse effect on the condition (financial or
otherwise), assets, liabilities, business or operations of Home Corporation and
the Home Subsidiaries, taken as a whole:
(i) neither Home Corporation nor any of the Home Subsidiaries has
received any written notices, demand letters or written requests for
information from any Governmental Entity or any third party indicating
that Home Corporation or any Home Subsidiary may be in violation of,
or liable under, any Environmental Law;
(ii) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings
pending or threatened against Home Corporation or any Home Subsidiary
alleging that they may be in violation of, or liable under, any
Environmental Law;
(iii) no reports have been filed with any Governmental Entity,
nor to the knowledge of Home Corporation are any reports required to
be filed with any Governmental Entity, by Home Corporation or any of
the Home Subsidiaries concerning the release of any Hazardous
Substance or the violation of any Environmental Law on or at any of
the Properties;
(iv) to the knowledge of Home Corporation or except as disclosed
on Schedule 3.10, there are no underground storage tanks on, in or
under any of the Properties and no underground storage tanks have been
closed or removed from any Property while such Property was owned or
operated by Home Corporation or any of the Home Subsidiaries;
(v) to the knowledge of Home Corporation or except as disclosed
on Schedule 3.10, no environmental contaminant, pollutant, toxic or
hazardous substance or other similar substance has been generated,
used, stored, processed, disposed of or discharged on or into any of
the Properties, except for such hazardous substances as may be used in
the everyday business of a bank office; and
(vi) to the knowledge of Home Corporation or except as disclosed
on Schedule 3.10, no materials containing asbestos have been used or
incorporated in any building or other structure or improvement located
on any of the Properties.
(c) There are no permits or licenses required under any Environmental Law
in respect of any of the Properties presently or formerly owned or operated by
Home Corporation or any of the Home Subsidiaries that the absence of which
could, individually or in the aggregate, have a materially adverse effect on the
condition (financial or otherwise), assets, liabilities, business or operations
of Home Corporation and the Home Subsidiaries, taken as a whole.
<PAGE>
(d) Home Corporation has disclosed on Schedule 3.10 a copy of its current
policy regarding compliance with Environmental Laws.
3.11. Labor Matters. To Home Corporation's knowledge, no organization
effort with respect to any of the employees of Home Corporation or any of the
Home Subsidiaries is pending or threatened, and no labor dispute, strike, work
stoppage, employee action or labor relation problem which may materially affect
Home Corporation or any of the Home Subsidiaries currently is pending or
threatened.
3.12. Pension and Welfare Matters. Home Corporation has disclosed on
Schedule 3.12 in respect of the plans, contracts, programs, understandings or
agreements delivered under Section 3.8(b) copies of the latest summary plan
descriptions, Forms 5500, tax determination letters from the Internal Revenue
Service (the "IRS"), and actuarial reports, as applicable, for Home Corporation
and each of the Home Subsidiaries. With respect to the plans, contracts, or
agreements delivered to F&M Bancorp under Section 3.8(b) (for purposes of this
Section 3.12, the "plans"), (a) each such plan has been operated in all material
respects in accordance with its terms in all material respects and in accordance
with all applicable laws including, but not limited to, the Employee Retirement
Income Security Act of 1974 ("ERISA"), the Internal Revenue Code of 1986, as
amended (the "Code"), the Consolidated Omnibus Budget Reconciliation Act of 1985
and state health care continuation laws; (b) all reporting and disclosure
requirements of ERISA imposed upon each such plan have been complied with in all
material respects, and all required governmental filings have been made with
respect to the plans; (c) neither any plan nor Home Corporation, nor any of the
Home Subsidiaries, nor, to Home Corporation's knowledge, any director, officer,
employee, agent or representative of Home Corporation or any of the Home
Subsidiaries, nor, to Home Corporation's knowledge, any fiduciary of any plan
has engaged in any transaction in connection with any of the plans which would
be subject to a civil penalty assessed pursuant to Section 502(i) of ERISA, or a
tax imposed by Section 4975 of the Code that could reasonably be expected to
have a material adverse effect on the condition (financial or otherwise),
assets, liabilities, business or operations of Home Corporation and the Home
Subsidiaries, taken as a whole, or on such plan, any parties in interest, or
fiduciaries; (d) no such plan has any accumulated funding deficiency (as defined
in Section 302 of ERISA and Section 412 of the Code), whether or not waived,
with respect to the latest five plan years, nor any liability to the Pension
Benefit Guaranty Corporation (the "PBGC") (other than normal premium payments);
(e) if applicable, the assets of each such funded plan equal or exceed the
liability for accrued benefits of all participants in such plan when such
liabilities are valued (i) on a termination basis using PBGC interest and other
assumptions and (ii) on a minimum funding basis using the appropriate actuarial
methods, tables, and assumptions; (f) no contributions to any such plan from
Home Corporation or any of the Home Subsidiaries are currently past due and, if
applicable, all past service and other liabilities currently existing but
payable in the future, if any, are reflected in the latest actuarial report in
accordance with sound actuarial principles; (g) no proceedings, investigations,
filings, or other matters (excluding any determination letter application that
has been or may be filed prior to the Effective Date) are pending before the
IRS, the Department of Labor, the PBGC, or other public or quasi-public body in
connection with any such plan; (h) with respect to plans intended to qualify
under Section 401(a) of the Code, (i) either Home Corporation or any of the Home
Subsidiaries have received a favorable determination letter from the IRS with
respect to the plan documents or the remedial amendment period (within the
meaning of regulation under Section 401(b) of the Code) has not ended with
respect to an application for a determination letter, and (ii) nothing has
occurred with respect to the operation or administration of any such plans which
would cause the loss of such qualifications or exemptions or the imposition of
any liability, penalty or tax under ERISA or the Code that could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), assets, liabilities, business or operations of Home Corporation and
the Home Subsidiaries, taken as a whole, or on such plan; (i) except as
disclosed in Schedule 3.12, through the Effective Date, there will be no changes
in the operation of the plans or in the documents constituting or affecting the
plans except for amendments and operational changes required by applicable law
which do not materially increase the cost of such plans; (j) no employees,
former employees, or retired employees of Home Corporation or any of the Home
Subsidiaries, as a result of their employment with Home Corporation or any of
the Home Subsidiaries, are participants in any "multiemployer plan" which is a
"pension plan," as such terms are defined in Sections 3(2) and 3(37) of ERISA
and neither Home Corporation nor any of the Home Subsidiaries has any current,
contingent or potential liability with respect to any such plan; (k) no
<PAGE>
"reportable event," as such term is defined in Section 4043(c) of ERISA, has
occurred with respect to any plan since the effective date of ERISA; (l) there
are no pending or threatened claims by or disputes with any participants or
beneficiaries of the plans, except plan benefit claims arising in the normal
course of the operations of the plans (other than terminated plans) and as to
which no dispute exists; (m) Home Corporation has no knowledge of any facts
which could give rise to any claims against any plan or the fiduciaries of any
plan, except for plan benefit claims arising in the normal course of the
operations of the plans (other than terminated plans); (n) neither Home
Corporation nor any of the Home Subsidiaries nor any fiduciary of any plan has
given notice to any fiduciary liability insurer of any claims or potential
claims in connection with any of the plans; (o) except as disclosed in Schedule
3.12, each of the plans which benefits retired employees of Home Corporation or
any of the Home Subsidiaries may effectively be terminated or amended, in any
manner and at any time, without further liability to its participants, by its
sponsoring employer; (p) Home Corporation and each of the Home Subsidiaries have
at all times in all material respects complied with all applicable employee
termination notice and similar laws; (q) Home Corporation and each of the Home
Subsidiaries have at all times complied in all material respects with all
applicable family leave and similar laws; (r) if applicable, Home Corporation
and each of the Home Subsidiaries have at all times complied in all material
respects with all applicable requirements of the Worker Adjustment and
Retraining Notification Act and all similar state laws; (s) neither Home
Corporation nor any of the Home Subsidiaries has provided, nor is required to
provide, security to any pension plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code; (t) there has been no
announcement or legally binding commitment by Home Corporation or any of the
Home Subsidiaries to create an additional plan, or to amend a plan except for
amendments required by applicable law which do not materially increase the cost
of such plan, and neither Home Corporation nor any of the Home Subsidiaries has
any obligation for retiree health and life benefits under any plan that cannot
be terminated without incurring any liability thereunder; and (u) as to any
terminated plans, all obligations for plan benefits or other liabilities have
been satisfied in full.
3.13. Related Party Transactions. Except as disclosed on Schedule 3.13,
neither Home Corporation nor any of the Home Subsidiaries has any contract,
extension of credit, business arrangement or other relationship of any kind with
any of the following persons: (a) any executive officer or director of Home
Corporation or any of the Home Subsidiaries; (b) any stockholder owning five
percent or more of the outstanding Common Stock of Home Corporation; or (c) any
"affiliate" (as defined in the SEC Rule 405) of the foregoing persons or any
business in which any of the foregoing persons is an officer, director, employee
or five percent or greater equity owner.
3.14. No Conflict with Other Documents. Except as disclosed on Schedule
3.14, neither the execution and delivery of this Plan nor the carrying out of
the transactions contemplated hereunder will result in any violation,
termination, or default or acceleration of, or be in conflict with, any terms of
any contract or other instrument to which Home Corporation or any of the Home
Subsidiaries is a party, or of any judgment, decree, or order applicable to Home
Corporation or any of the Home Subsidiaries, or result in the creation of any
lien, charge, or encumbrance upon any of its properties or assets, except for
any of the foregoing which would not have a material adverse effect upon the
financial condition, assets, liabilities, business or operations of Home
Corporation and the Home Subsidiaries, taken as a whole.
3.15. Compliance with Laws; Governmental Authorizations. (a) Except where
noncompliance would not have a material and adverse effect upon the condition
(financial or otherwise), assets, liabilities, business or operations of Home
Corporation and the Home Subsidiaries, taken as a whole, (i) Home Corporation
and each of the Home Subsidiaries is in compliance with all statutes, laws,
ordinances, rules, regulations, judgments, orders, decrees, directives, consent
agreements, memoranda of understanding, permits, concessions, grants franchises,
licenses, and other governmental authorizations or approvals applicable to Home
Corporation, the Home Subsidiaries, or any of their properties; and (ii) all
permits, concessions, grants, franchises, licenses and other governmental
authorizations and approvals necessary for the conduct of the business of Home
Corporation and the Home Subsidiaries as presently conducted have been duly
obtained and are in full force and effect, and there are no proceedings pending
or, to Home Corporation's knowledge, threatened which may result in the
revocation, cancellation, suspension or materially adverse modification of any
thereof.
<PAGE>
(b) Home Corporation has filed all reports that it was required to file
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), all of which complied in all material respects with all
applicable requirements of the Exchange Act and the rules and regulations
adopted thereunder. As of their respective dates, each such report, statement,
form or other document, including without limitation, any financial statements
or schedules included therein, did 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 therein, in light of the circumstances under
which they were made, not misleading, provided that information as of a later
date shall be deemed to modify information as of an earlier date.
3.16. Authority; Enforceability. The execution, delivery, and performance
of this Plan by Home Corporation have been duly and validly authorized by its
Board of Directors, subject only to requisite approval by appropriate
governmental regulatory authorities and stockholders. This Plan is a valid and
binding agreement of Home Corporation, enforceable against it in accordance with
its terms, subject as to enforcement to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
3.17. Insurance. All insurance policies held by Home Corporation and the
Home Subsidiaries relating to their operations (except for title insurance
policies), including without limitation all financial institutions bonds, are
set forth on Schedule 3.17. All such policies are in full force and effect.
Neither Home Corporation nor any of the Home Subsidiaries has received any
notice of cancellation with respect to any such policies and has no reason to
expect that it will receive a notice of cancellation from any of its present
insurance carriers; provided, however, that Home Corporation makes no
representation as to the effect of this Plan or the Merger on its present
financial institutions bond or bonds.
3.18. Financial Institutions Bond. Since January 1, 1989, Home Corporation
and the Home Subsidiaries have continuously maintained in full force and effect
one or more financial institutions bonds insuring Home Corporation and the Home
Subsidiaries against acts of dishonesty by each of their employees. No claim has
been made under any such bond since such date and Home Corporation is not aware
of any fact or condition presently existing which forms the basis of a claim
under any such bond. Home Corporation and the Home Subsidiaries have no reason
to expect that their present financial institutions bond or bonds will not be
renewed by their carrier on substantially the same terms as those now in effect;
provided, however, that Home Corporation makes no representation as to the
effect of this Plan or the Merger on its present financial institutions bond or
bonds.
3.19. Brokers; Financial Advisors. All negotiations relating to this Plan
and the transactions contemplated hereunder have been carried on by Home
Corporation directly or through its counsel and there has been no intervention
of any person as the result of any action of Home Corporation (and, so far as
known to Home Corporation, no intervention of any other person) in such manner
as to give rise to any valid claim against any of the parties hereto for a
brokerage commission, finder's fee, or other like payment. Home Corporation has
provided F&M Bancorp with a copy of its agreement with Charles Webb & Company,
which has been engaged to deliver an opinion as to the fairness of the
transactions contemplated by this Plan to Home Corporation.
4. Representations and Warranties of F&M Bancorp. F&M Bancorp represents
and warrants to Home Corporation as follows:
4.1. Organization and Standing of F&M Bancorp.
(a) F&M Bancorp is a duly organized and validly existing corporation
in good standing under the laws of the State of Maryland. F&M Bancorp has
the corporate power and lawful authority to own and hold its properties and
to carry on its business as it is now being conducted. F&M Bancorp is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended.
<PAGE>
(b) The authorized capital stock of F&M Bancorp consists exclusively
of 10,000,000 shares of Common Stock, par value $5.00 per share, 4,421,337
of which are validly issued and outstanding on March 19, 1996, fully paid,
and non-assessable. F&M Bancorp has reserved 50,000 shares of its Common
Stock for issuance under its Dividend Reinvestment and Stock Purchase Plan,
50,000 shares of its Common Stock for issuance under its Employee Stock
Purchase Plan, and 346,480 shares of its Common Stock for issuance under
its Stock Option Plans. On March 19, 1996, there were outstanding options
to purchase 211,209 shares of F&M Bancorp's Common Stock at prices ranging
from $11.75 to $29.125 pursuant to these Stock Option Plans. There are no
other outstanding options, warrants, rights, or obligations of any kind
entitling the holder thereof to acquire shares of the Common Stock of F&M
Bancorp, and there are no outstanding securities or instruments of any kind
that are convertible into shares of the Common Stock of F&M Bancorp. The
Common Stock of F&M Bancorp deliverable pursuant to this Plan will be,
prior to its issuance, duly authorized for issuance and will, when issued
and delivered in accordance with this Plan, be duly and validly issued,
fully paid and nonassessable.
(c) F&M Bancorp has no subsidiaries other than as listed on Schedule
4.1(c) hereto (collectively, the "F&M Subsidiaries"), and is not a party to
any joint ventures or partnerships. Each of the F&M Subsidiaries is a duly
organized and validly existing corporation and is in good standing under
the laws of the jurisdiction of its incorporation. Each of the F&M
Subsidiaries has the corporate power and authority to own and hold its
material properties and to carry on its business as it is now being
conducted. All shares of capital stock of all of the F&M Subsidiaries are
validly issued and outstanding, fully paid, and non-assessable. Except as
disclosed on Schedule 4.1(c), each of the F&M Subsidiaries is wholly owned
by its parent corporation. There are no outstanding options, warrants,
rights, or obligations of any kind entitling the holder thereof to acquire
shares of the capital stock of any of the F&M Subsidiaries, and there are
no outstanding securities or instruments of any kind that are convertible
into shares of the capital stock of any of the F&M Subsidiaries. Except as
disclosed on Schedule 4.1(c) hereto, none of the F&M Subsidiaries is a
party to any joint venture or partnership.
(d) F&M Bancorp's sole direct subsidiary is F&M Bank. F&M Bank is duly
organized and validly existing as a national banking association and is in
good standing under the federal laws of the United States. F&M Bank has the
corporate power and lawful authority to own and hold its properties and to
carry on its business as it is now being conducted. F&M Bank is an insured
bank under the provisions of the Federal Deposit Insurance Act, as amended,
and is a member of the Federal Reserve System.
(e) Copies of all charter documents and by-laws of F&M Bancorp and
each of the F&M Subsidiaries are attached hereto as Schedule 4.1(e), and
all such copies are true and correct as of the date hereof. The minute
books of F&M Bancorp and each of the F&M Subsidiaries, which have been made
available to Home Corporation for inspection, are complete in all material
respects and accurately record the actions taken by the stockholders and
directors of F&M Bancorp and each of the F&M Subsidiaries.
4.2. Financial Statements. F&M Bancorp has provided in Schedule 4.2 hereto
copies of the Consolidated Financial Statements of F&M Bancorp and the F&M
Subsidiaries at December 31, 1991, 1992, 1993, 1994 and 1995 and for each of the
years then ended, as reported upon by Keller Bruner & Company, L.L.C., all of
which are true and complete in all material respects, have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods covered by such consolidated financial statements and
present fairly the financial position, results of operations, cash flows, and
changes in shareholders' equity of F&M Bancorp and the F&M Subsidiaries at the
dates of and for the periods covered by such financial statements.
<PAGE>
4.3. No Undisclosed Liabilities. Except as and to the extent reflected or
reserved against in the consolidated financial statements referred to in Section
4.2, neither F&M Bancorp nor any of the F&M Subsidiaries at the dates of such
consolidated financial statements had any material liabilities or obligations
(whether accrued, absolute, or contingent) required under generally accepted
accounting principles to be reflected thereon which would materially and
adversely affect the fair presentation of such financial statements. Neither F&M
Bancorp nor any of the F&M Subsidiaries has incurred any liability since the
date of the financial statements referred to in Section 4.2 which would
materially and adversely affect the condition (financial or otherwise), assets,
liabilities, business or operations of F&M Bancorp and the F&M Subsidiaries,
taken as a whole, other than liabilities which have been reasonably incurred in
the ordinary course of business.
4.4. Absence of Certain Changes or Events. Since December 31, 1995, there
has not been any materially adverse change in the financial position, results of
operations, assets, liabilities, or business of F&M Bancorp or any of the F&M
Subsidiaries, other than changes in the ordinary course of business.
4.5. Complete and Accurate Disclosure. Neither this Plan (insofar as it
relates to F&M Bancorp, the Common Stock of F&M Bancorp, and the involvement of
F&M Bancorp in the transactions contemplated hereby) nor any financial
statement, certificate, or other statement or document set forth on a schedule
delivered by F&M Bancorp to Home Corporation in connection with this Plan,
contains any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material fact
or omits to state any material fact necessary to make the statements contained
herein or therein not false or misleading.
4.6. Litigation, Etc. Except as disclosed on Schedule 4.6, (a) there is no
litigation, proceeding, or investigation pending or, to the knowledge of F&M
Bancorp, threatened against F&M Bancorp or any of the F&M Subsidiaries which
would result in any materially adverse change in the condition (financial or
otherwise), assets, liabilities, business, operations, or future prospects of
F&M Bancorp and the F&M Subsidiaries, taken as a whole; (b) there are no
outstanding orders, writs, injunctions, judgments, decrees, directives, consent
agreements or memoranda of understanding issued by any federal, state or local
court or governmental authority or arbitration tribunal issued against or with
the consent of F&M Bancorp or any of the F&M Subsidiaries that materially and
adversely affect the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects or that in any manner restrict F&M
Bancorp's right to carry on its business or that of the F&M Subsidiaries as
presently conducted; and (c) F&M Bancorp is aware of no fact or condition
presently existing that might give rise to any litigation, investigation or
proceeding which, if determined adversely to F&M Bancorp or any of the F&M
Subsidiaries, would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations, or future prospects of
F&M Bancorp and the F&M Subsidiaries, taken as a whole, or would restrict in any
manner F&M Bancorp's right to carry on its business or that of the F&M
Subsidiaries as presently conducted. F&M Bancorp has disclosed on Schedule 4.6
all litigation in which F&M Bancorp or any of the F&M Subsidiaries is involved
as a party (other than bankruptcy proceedings in which F&M Bancorp or any of the
F&M Subsidiaries has filed proofs of claim or routine collection and foreclosure
suits initiated in the ordinary course of business).
4.7. No Conflict with Other Documents. Neither the execution and delivery
of this Plan nor the carrying out of the transactions contemplated hereunder
will result in any violation, termination, or modification of, or be in conflict
with, any terms of any contract or other instrument to which F&M Bancorp or any
of the F&M Subsidiaries are a party, or of any judgment, decree, or order
applicable to F&M Bancorp or any of the F&M Subsidiaries, or result in the
creation of any lien, charge, or encumbrance upon any of their properties or
assets, except for any of the foregoing which would not have a material adverse
effect upon the financial condition, assets, liabilities, business or operations
of F&M Bancorp and the F&M Subsidiaries, taken as a whole.
4.8. Compliance with Laws; Governmental Authorizations. (a) Except where
noncompliance would not have a material and adverse effect upon the condition
(financial or otherwise), assets, liabilities, business or operations of F&M
<PAGE>
Bancorp and the F&M Subsidiaries, taken as a whole, (i) F&M Bancorp and the F&M
Subsidiaries are in compliance with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants franchises, licenses,
and other governmental authorizations or approvals applicable to F&M Bancorp and
the F&M Subsidiaries or to any of their properties; and (ii) all permits,
concessions, grants, franchises, licenses and other governmental authorizations
and approvals necessary for the conduct of the business of F&M Bancorp and the
F&M Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are no proceedings pending or threatened which may
result in the revocation, cancellation, suspension or materially adverse
modification of any thereof.
(b) F&M Bancorp has filed all reports that it was required to file with the
SEC under the Exchange Act, all of which complied in all material respects with
all applicable requirements of the Exchange Act and the rules and regulations
adopted thereunder. As of their respective dates, each such report, statement,
form or other document, including without limitation, any financial statements
or schedules included therein, did 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 therein, in light of the circumstances under
which they were made, not misleading, provided that information as of a later
date shall be deemed to modify information as of an earlier date.
4.9. Authority; Enforceability. The execution, delivery, and performance of
this Plan by F&M Bancorp has been duly and validly authorized by its Board of
Directors, subject only to requisite approval by the stockholders of F&M Bancorp
and appropriate governmental regulatory authorities. This Plan is a valid and
binding agreement of F&M Bancorp, enforceable against it in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
4.10. Brokers. All negotiations relating to this Plan and the transactions
contemplated hereunder have been carried on by F&M Bancorp directly or through
its counsel and there has been no intervention of any person as the result of
any action of F&M Bancorp (and, so far as known to F&M Bancorp, no intervention
of any other person) in such manner as to give rise to any valid claim against
any of the parties hereto for a brokerage commission, finder's fee, or other
like payment.
4.11. Beneficial Ownership of Home Corporation Common Stock. As of the date
hereof, F&M Bancorp does not beneficially own any shares of Home Corporation
Common Stock or have any option, warrant or right of any kind to acquire the
beneficial ownership of any Home Corporation Common Stock, except pursuant to
the terms of this Plan, the terms of the Stock Option Agreement, attached hereto
as Appendix III, or in a fiduciary capacity.
5. Covenants of Home Corporation. Except as otherwise consented to in
writing by F&M Bancorp after the date of this Plan, Home Corporation covenants
to and agrees with F&M Bancorp as follows:
5.1. Information. (a) Home Corporation shall, upon reasonable notice,
give to F&M Bancorp and to its officers, accountants, counsel, financial
advisers, and other representatives reasonable access during Home
Corporation's and the Home Subsidiaries' normal business hours throughout
the period prior to the Effective Date to all of their properties, books,
contracts, commitments, reports of examination (consistent with applicable
law), depositor and stockholder lists, and records. Home Corporation and
the Home Subsidiaries will, at their own expense, furnish F&M Bancorp
during such period with all such information concerning their affairs as
F&M Bancorp may reasonably request, including information for use in
determining if the conditions of Section 7.3 have been satisfied, necessary
to prepare the regulatory filings or applications to be filed with
governmental regulatory authorities to obtain the approvals referred to in
Section 2, and for use in any other necessary filings to be made with
appropriate governmental regulatory authorities.
(b) Home Corporation will not, and will cause its representatives not to,
use any information obtained pursuant to Section 6.3 for any purpose unrelated
<PAGE>
to the consummation of the transactions contemplated by this Plan. Subject to
the requirements of law, Home Corporation will keep confidential, and will cause
its representatives to keep confidential, all information and documents obtained
pursuant to Section 6.3 unless such information (i) was already known to Home
Corporation, (ii) becomes available to Home Corporation from other sources not
known by Home Corporation to be bound by a confidentiality obligation, (iii) is
disclosed with prior written approval of F&M Bancorp and the F&M Subsidiaries,
or (iv) is or becomes readily ascertainable from published information or trade
sources. In the event that this Plan is terminated or the transactions
contemplated by this Plan shall otherwise fail to be consummated, Home
Corporation shall promptly cause all copies of documents or extracts thereof
containing information and data as to F&M Bancorp and the F&M Subsidiaries to be
returned.
5.2. Conduct of Business. After the date of this Plan and pending the
Effective Date, (a) Home Corporation and the Home Subsidiaries will conduct
their business only in the ordinary course; (b) Home Corporation and the Home
Subsidiaries shall not effect any change or amendment in their respective
Charters or By-Laws; (c) except with respect to Home Corporation stock options
outstanding on the date of this Plan which are or may become subject to
exercise, Home Corporation and the Home Subsidiaries shall not change their
authorized, issued or outstanding capital stock; (d) Home Corporation shall not
declare any dividends in respect of its Common Stock; (e) except as disclosed in
Schedule 5.2(d), Home Corporation and the Home Subsidiaries shall not increase
employee compensation or benefit levels (except for annual increases not in
excess of amounts established by its regular past practices), shall not
establish or make any increase in any employment, compensation, bonus, pension,
option, incentive or deferred compensation, retirement, death, profit sharing,
or similar agreements or benefits of any of its past, present or future officers
or employees, other than additional premiums to obtain an extension of
directors' and officers' liability coverage for six years (which Home
Corporation is authorized to obtain), and shall not modify the existing
employment agreements with Richard W. Phoebus, Sr., Celia S. Ausherman, Steven
G. Hull and Salvatore M. Savino; (f) Home Corporation and the Home Subsidiaries
shall not make any change in any of their accounting policies or practices
unless required by generally accepted accounting principles or take any action
which would cause the Merger not to be accounted for as a pooling-of-interests;
(g) Home Corporation and the Home Subsidiaries shall not incur any liability for
borrowed money except extensions of credit from the Federal Home Loan Bank of
Atlanta (in which no single transaction shall exceed $5,000,000) and otherwise
in the ordinary course of their banking business or place upon or permit any
lien or encumbrance upon any of their properties or assets except liens of the
type permitted in the exceptions to Section 3.7; and (h) Home Bank shall accept
no further applications from its directors for participation in, and shall not
designate any of its directors as additional participants in, its Amended and
Restated Executive Compensation Plan for Directors. Pending the Effective Date,
Home Corporation and the Home Subsidiaries shall (x) use commercially reasonable
efforts to preserve their business organization and assets and to keep available
the services of their full-time officers and employees, (y) continue in effect
the present method of conducting their business, and (z) consult with F&M
Bancorp as to making decisions or actions in matters (i) other than those in the
ordinary course of business or (ii) except as disclosed in Schedule 5.2(z)(ii),
involving any capital expenditures in excess of $25,000.
5.3. Consents. Home Corporation and the Home Subsidiaries will use
commercially reasonable efforts to obtain any consents, approvals, or waivers
from third parties necessary to the assignments and transfers contemplated
hereby with respect to leases or other contracts, if any, delivered to F&M
Bancorp pursuant to Section 3.8 or any other agreements requiring the same.
5.4. Meeting of Stockholders of Home Corporation; Document Preparation. (a)
Home Corporation will duly call and will convene a meeting of its stockholders
to act upon the transactions contemplated hereby as soon as practicable. Except
to the extent legally required for the discharge by the board of directors of
its fiduciary duties, Home Corporation will recommend approval of this Plan and
the Merger to its stockholders, and will use commercially reasonable efforts to
obtain a favorable vote thereon. The calling and holding of such meeting and all
notices, transactions, documents, and information related thereto will be in
compliance with all applicable laws.
<PAGE>
(b) Home Corporation shall furnish F&M Bancorp with such information
concerning Home Corporation and the Home Subsidiaries as is necessary in order
to cause the Proxy Statement/Prospectus (as defined in Section 6.2 hereof),
insofar as it relates to such corporations, to comply with Section 6.2 hereof.
Home Corporation agrees promptly to advise F&M Bancorp if at any time prior to
the Home Corporation stockholder's meeting, any information provided by Home
Corporation in the Proxy Statement/Prospectus becomes incorrect or incomplete in
any material respect and to provide F&M Bancorp with the information needed to
correct such inaccuracy or omission. Home Corporation shall furnish F&M Bancorp
with such supplemental information as may be necessary in order to cause the
Proxy Statement/Prospectus, insofar as it relates to Home Corporation and the
Home Subsidiaries, to comply with Section 6.2 after the mailing thereof to Home
Corporation stockholders. The information provided and the representations made
by Home Corporation and Home Bank to F&M Bancorp in connection with the
Registration Statement described in Section 6.2, both at the time such
information and representations are provided and made and at the Effective Date,
will be true and accurate in all material respects and will not contain any
false or misleading statement with respect to any material fact or omit to state
any material fact required to be stated therein or necessary in order (a) to
make the statements made therein not false or misleading, or (b) to correct any
statement contained in an earlier communication with respect to such information
or representations which has become false or misleading. Home Corporation may
rely upon all information provided to it by F&M Bancorp and its representatives
in the preparation of the Proxy Statement/Prospectus and shall not be liable for
any untrue statement of a material fact or any omission to state a material fact
in the Proxy Statement/Prospectus, if such statement is made in reliance upon
any information provided to it by F&M Bancorp or by any of its officers or
authorized representatives.
(c) Home Corporation shall promptly furnish F&M Bancorp with such
information regarding the Home Corporation stockholders as F&M Bancorp requires
to enable it to determine what filings are required under applicable state
securities laws. Home Corporation authorizes F&M Bancorp to utilize in such
filings the information concerning Home Corporation and the Home Subsidiaries
provided to F&M Bancorp in connection with, or contained in, the Proxy
Statement/Prospectus. Home Corporation shall promptly notify F&M Bancorp of all
communications, oral or written, with the SEC concerning the Registration
Statement and the Proxy Statement/Prospectus.
5.5. Events Preceding Effectiveness. Home Corporation and the Home
Subsidiaries will use commercially reasonable efforts to assure that each of the
events specified in Section 2 which require action on its part shall occur on or
before the Effective Date.
5.6. No Solicitation of Other Offers. Home Corporation agrees that
neither it nor any of the Home Subsidiaries nor any of their respective
officers, directors and employees shall, and Home Corporation shall direct and
use its best efforts to cause its and the Home Subsidiaries' agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of the Home Subsidiaries) not to, directly
or indirectly, take any action to solicit or initiate any inquiries or the
making of any offer or proposal (including without limitation any proposal to
stockholders of Home Corporation) with respect to a merger, consolidation,
business combination, liquidation, reorganization, sale or other disposition of
any significant portion of assets (except Problem Assets, as defined in Section
9.7(a)), sale of shares of capital stock, or similar transactions involving Home
Corporation or any of the Home Subsidiaries (any such inquiry, offer or
proposal, an "Acquisition Proposal"), or, except as may be legally required for
the discharge by the board of directors of its fiduciary duties, engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal. As of
the time hereof, Home Corporation is not engaged in any negotiations or
discussions relating to an Acquisition Proposal. Home Corporation shall promptly
notify F&M Bancorp orally and in writing of any Acquisition Proposal or any
inquiries with respect thereto, such written notification to include the
identity of the Person making such inquiry or Acquisition Proposal and such
other information with respect thereto as is reasonably necessary to apprise F&M
Bancorp of the material terms of such Acquisition Proposal. Home Corporation
shall give F&M Bancorp contemporaneous written notice upon engaging in
discussions or negotiations with, or providing any information regarding Home
Corporation or any of the Home Subsidiaries to, any such person regarding an
Acquisition Proposal.
<PAGE>
5.7. Reservation of Shares. Home Corporation shall have reserved a
sufficient number of shares of its Common Stock for issuance upon exercise of
the option granted pursuant to the Stock Option Agreement, attached hereto as
Appendix III, which is to be executed by F&M Bancorp and Home Corporation, and
shall have taken all other actions necessary to fulfill its obligations
thereunder.
5.8. Affiliate Agreements. Within 10 days of the date of this Plan,
Home Corporation shall deliver or cause to be delivered to F&M Bancorp memoranda
substantially in the form attached hereto as Appendix IV (the "Affiliates'
Memoranda") and agreements substantially in the form attached hereto as Appendix
V (the "Support Agreements") from each of its executive officers and directors
(and shall use commercially reasonable efforts to obtain and deliver such
memoranda and agreements from each stockholder of Home Corporation who (a) may
be deemed to be an "affiliate" of Home Corporation, as that term is defined for
purposes of the SEC Rules 145 and 405 or (b) may be restricted under the
accounting rules applicable to a pooling-of-interests). Under the terms of the
Affiliates' Memoranda, each such officer, director or stockholder shall
acknowledge and agree (i) to abide by all limitations imposed by the Securities
Act and by all rules, regulations and releases promulgated thereunder by the SEC
with respect to the sale or other disposition of the shares of the Common Stock
of F&M Bancorp to be received by such person pursuant to the Merger, and (ii) to
abide by all limitations imposed by the accounting rules for the Merger to be
accounted for as a pooling-of-interests. Under the terms of the Support
Agreements, each such officer, director or stockholder shall agree to support
and vote the shares of Common Stock of Home Corporation owned or controlled by
him or her to ratify and confirm this Plan and the Merger.
5.9. Regulatory Approvals. Home Corporation and the Home Subsidiaries
will, where necessary, cooperate with F&M Bancorp's efforts to obtain all
necessary regulatory approvals of the transactions contemplated by this Plan.
5.10. Current Information; Advice of Changes. (a) During the period
from the date of this Plan to the Effective Date, Home Corporation will cause
one or more of its designated representatives to confer on a monthly or more
frequent basis with representatives of F&M Bancorp regarding its business,
operations, properties, assets and financial condition and matters relating to
the completion of the transactions contemplated herein. As soon as reasonably
available, but in no event more than 45 days after the end of each fiscal
quarter (other than the last fiscal quarter of each fiscal year) ending after
the date of this Plan, Home Corporation will deliver to F&M Bancorp its
quarterly reports on Form 10-Q, as filed with the SEC under the Exchange Act. As
soon as reasonably available, but in no event more than 90 days after the
calendar year, Home Corporation will deliver to F&M Bancorp its Annual Report on
Form 10-K as filed with the SEC under the Exchange Act.
(b) Between the date of this Plan and the Effective Date, Home Corporation
shall promptly advise F&M Bancorp in writing of any fact which, if existing or
known at the date hereof, would have been required to be set forth or disclosed
in or pursuant to this Plan or of any fact which, if existing or known as of the
date hereof, would have made any of the representations contained herein untrue
in any material respect.
5.11. Public Announcements. Between the date of this Plan and the
Effective Date, Home Corporation and the Home Subsidiaries will consult with F&M
Bancorp before issuing any press release or otherwise making any public
statements with respect to this Plan and the transactions contemplated hereby
and shall not issue any such press release or make any such public statement
prior to such consultation, except as counsel may advise is required by law.
5.12. Taxes. Home Corporation shall have filed with appropriate
federal, state, county, municipal or foreign taxing authorities all tax returns
required to be filed (taking any applicable extensions into consideration) on or
before the Effective Date and shall have paid (or shall have made adequate
provision or set up an adequate actual reserve on the financial statements
referred to in Section 3.2 for the payment of) all taxes imposed by any taxing
authority with respect to any Pre-Closing Tax Period (as hereinafter defined),
together with any interest, additions or penalties related to any such taxes.
For purposes of this Section 5.12, any reference to Home Corporation shall be
<PAGE>
deemed to include any corporation more than 50% of the outstanding capital stock
(by vote or value) of which is owned by Home Corporation. "Pre-Closing Tax
Period" shall mean (i) each taxable period that ends on or before the Effective
Date and (ii) any taxable period that includes (but does not end on) the
Effective Date (the period described in this clause (ii) being hereafter
referred to as a "Straddle Period"). In the case of any tax for a Straddle
Period, the covenant in the first sentence of this Section 5.12 shall be limited
to the Pre-Closing Tax Amount determined as follows:
(a) In the case of a periodic tax that is not based on income or
receipts (e.g., an ad valorem property tax), the "Pre-Closing Tax
Amount" shall be an amount equal to the amount of such tax for the
entire Straddle Period multiplied by a fraction the numerator of which
is the number of days elapsed between the beginning of the Straddle
Period and the Effective Date and the denominator of which is the
total number of days in the Straddle Period; and
(b) in the case of any other tax, the "Pre-Closing Tax Amount"
shall be the amount of such tax for which Home Corporation would have
been liable if the Straddle Period had ended as of the close of
business on the day of the Effective Date.
5.13. Pooling-of-Interests. Home Corporation shall use its best
efforts not to permit any of the directors, officers, employees, stockholders,
agents, consultants or other representatives of Home Corporation or any of the
Home Subsidiaries to take any action that would preclude F&M Bancorp from
treating the Merger as a "pooling-of-interests" for financial reporting
purposes.
5.14. Directors' Agreement. Home Corporation shall present the
Directors' Agreement, in substantially the form attached hereto as Appendix X,
to each of Howard B. Bowen and John J. McElwee, Jr., both of whom are directors
of Home Bank and participants in its Amended and Restated Executive Compensation
Plan for Directors, and shall cause each of them to enter into such Directors'
Agreement with F&M Bancorp.
6. Covenants of F&M Bancorp. Except as otherwise consented to in writing by
Home Corporation after the date of this Plan, F&M Bancorp covenants to and
agrees with Home Corporation as follows:
6.1. Applications to Governmental Regulatory Authorities. F&M Bancorp
will promptly prepare and file with the appropriate governmental regulatory
authorities an application requesting the regulatory approvals referred to in
Section 2(e) and 2(f) and will use commercially reasonable efforts to secure
favorable action on such applications, including without limitation commercially
reasonable efforts to pursue an appeal of a denial of a regulatory approval.
6.2. Registration of Shares. F&M Bancorp, with the assistance of Home
Corporation and its representatives, will promptly file a Registration Statement
with the SEC which shall include a joint proxy statement for F&M Bancorp and
Home Corporation and a prospectus which shall satisfy all applicable
requirements of applicable state and federal laws, including the Securities Act,
the Exchange Act and applicable state securities laws and the rules and
regulations thereunder (such joint proxy statement and prospectus, together with
any and all amendments or supplements thereto, being herein referred to as the
"Proxy Statement/Prospectus," and the various documents to be filed by F&M
Bancorp under the Securities Act with the SEC to register the F&M Bancorp Common
Stock into which shares of the Common Stock of Home Corporation held by
non-dissenting stockholders will be converted, including the Proxy
Statement/Prospectus, are referred to herein as the "Registration Statement").
The number of shares to be registered will be an amount sufficient to allow all
of the shares of the Common Stock of F&M Bancorp issued to holders of the Common
Stock of Home Corporation pursuant to this Plan to be registered under the
Securities Act. F&M Bancorp will use commercially reasonable efforts to secure
the effectiveness of the Registration Statement and, after the Registration
Statement has been declared effective, will issue the shares so registered to
the non-dissenting holders of the Common Stock of Home Corporation on the
Effective Date. F&M Bancorp may rely upon all information provided to it by Home
Corporation and its representatives in the preparation of the Registration
<PAGE>
Statement, any post-effective amendment thereto and the Proxy Statement and
shall not be liable for any untrue statement of a material fact or any omission
to state a material fact in the Registration Statement, the post-effective
amendment or the Proxy Statement, if such statement is made in reliance upon any
information provided to it by Home Corporation or by any of its officers or
authorized representatives. F&M Bancorp shall promptly take all such actions as
may be necessary or appropriate in order to comply in all material respects with
all applicable securities laws of any state having jurisdiction over the
transactions contemplated by this Plan and the Merger. F&M Bancorp shall furnish
Home Corporation with copies of all such filings and keep Home Corporation
advised of the status thereof. F&M Bancorp shall promptly notify Home
Corporation of all communications, oral or written, with the SEC concerning the
Registration Statement and the Proxy Statement/Prospectus. Prior to the
Effective Date, F&M Bancorp will cause the listing of the Common Stock of F&M
Bancorp deliverable pursuant to this Plan on The National Market of The National
Association of Securities Dealers, Inc. ("Nasdaq").
6.3. Information.
(a) F&M Bancorp shall, upon reasonable notice, give to Home Corporation and
to its officers, accountants, counsel, financial advisors, and other
representatives, reasonable access during F&M Bancorp's normal business hours
throughout the period prior to the Effective Date to all of their properties,
books, contracts, commitments, reports of examination (consistent with
applicable law), depositor and stockholder lists, and records. F&M Bancorp and
the F&M Subsidiaries will, at their own expense, furnish Home Corporation during
such period with all such information concerning their affairs as Home
Corporation may reasonably request.
(b) F&M Bancorp acknowledges that information received by it concerning
Home Corporation and the Home Subsidiaries and their operations is subject to
the Confidentiality Agreement dated July 3, 1995 between F&M Bancorp and Home
Corporation. Without limiting the foregoing, F&M Bancorp will not, and will
cause its representatives not to, use any information obtained pursuant to
Section 5.1 for any purpose unrelated to the consummation of the transactions
contemplated by this Plan. Subject to the requirements of law, F&M Bancorp will
keep confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to Section 5.1 unless such
information (i) was already known to F&M Bancorp, (ii) becomes available to F&M
Bancorp from other sources not known by F&M Bancorp to be bound by a
confidentiality obligation, (iii) is disclosed with prior written approval of
Home Corporation and the Home Subsidiaries, or (iv) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Plan is terminated or the transactions contemplated by this Plan shall
otherwise fail to be consummated, F&M Bancorp shall promptly cause all copies of
documents or extracts thereof containing information and data as to Home
Corporation and the Home Subsidiaries to be returned; provided that the legal
department of F&M Bancorp may retain one copy of such documents and materials.
In the event that this Plan has been terminated or the transactions contemplated
hereby shall have failed to be consummated and F&M Bancorp or any of its agents
or representatives are requested or required (by oral questions,
interrogatories, requests for information or documents in legal proceedings,
subpoena, civil investigative demand or other similar process) to disclose any
of the materials delivered or obtained pursuant to the Plan (the "Home
Corporation Documentation"), F&M Bancorp shall provide Home Corporation with
prompt written notice of any such request or requirement so that Home
Corporation may seek a protective order or other appropriate remedy. If, in the
absence of a protective order or other remedy, F&M Bancorp or any of its agents
or representatives are compelled to disclose any of such Home Corporation
Documentation to any tribunal or else stand liable for contempt or suffer other
censure or penalty, F&M Bancorp or its agents or representatives may, without
liability hereunder, disclose to such tribunal only that portion of the Home
Corporation Documentation which F&M Bancorp's counsel advises F&M Bancorp is
legally required to be disclosed, provided that F&M Bancorp shall exercise its
best efforts to preserve the confidentiality of the Home Corporation
Documentation, including, without limitation, by cooperating with Home
Corporation to obtain an appropriate protective order or other reliable
assurance that confidential treatment will be accorded the Home Corporation
Documentation by such tribunal.
6.4. Events Preceding Effectiveness. F&M Bancorp will use commercially
reasonable efforts to assure that each of the events specified in Section 2
shall occur on or before the Effective Date.
<PAGE>
6.5. Consents. F&M Bancorp will use commercially reasonable efforts to
obtain any consents, approvals or waivers from third parties required in
connection with the transactions contemplated hereunder.
6.6. Current Information; Advice of Changes. (a) During the period
from the date of this Plan to the Effective Date, F&M Bancorp will cause one or
more of its designated representatives to confer on a monthly or more frequent
basis with representatives of Home Corporation regarding its business,
operations, properties, assets and financial condition and matters relating to
the completion of the transactions contemplated herein. As soon as reasonably
available, but in no event more than 45 days after the end of each fiscal
quarter (other than the last fiscal quarter of each fiscal year) ending after
the date of this Plan, F&M Bancorp will deliver to Home Corporation its
quarterly reports on Form 10-Q, as filed with the SEC under the Exchange Act. As
soon as reasonably available, but in no event more than 90 days after the
calendar year, F&M Bancorp will deliver to Home Corporation its Annual Report on
Form 10-K as filed with the SEC under the Exchange Act.
(b) Between the date of this Plan and the Effective Date, F&M Bancorp shall
promptly advise Home Corporation in writing of any fact which, if existing or
known at the date hereof, would have been required to be set forth or disclosed
in or pursuant to this Plan or of any fact which, if existing or known as of the
date hereof, would have made any of the representations contained herein untrue
in any material respect.
6.7. Meeting of Stockholders of F&M Bancorp; Document Preparation. (a)
F&M Bancorp shall duly call and convene a stockholders' meeting to act upon the
transactions contemplated hereby as soon as practicable, will recommend approval
of this Plan and the Merger to its stockholders, and will use commercially
reasonable efforts to obtain a favorable vote thereon. The calling and holding
of such meeting and all notices, transactions, documents, and information
related thereto will be in compliance with all applicable laws.
(b) F&M Bancorp shall furnish such information concerning F&M Bancorp and
the F&M Subsidiaries as is necessary in order to cause the Proxy
Statement/Prospectus, insofar as it relates to such corporations, to comply with
Section 6.2 hereof. F&M Bancorp agrees promptly to advise Home Corporation if at
any time prior to the F&M Bancorp stockholders' meeting, any information
provided by F&M Bancorp in the Proxy Statement/Prospectus becomes incorrect or
incomplete in any material respect and to provide Home Corporation with the
information needed to correct such inaccuracy or omission. F&M Bancorp shall
furnish Home Corporation with such supplemental information as may be necessary
in order to cause the Proxy Statement/Prospectus, insofar as it relates to F&M
Bancorp and the F&M Subsidiaries, to comply with Section 6.2 after the mailing
thereof to F&M Bancorp stockholders. The information provided and the
representations made by F&M Bancorp in connection with the Proxy
Statement/Prospectus, both at the time such information and representations are
provided and made and at the Effective Date, will be true and accurate in all
material respects and will not contain any false or misleading statement with
respect to any material fact or omit to state any material fact required to be
stated therein or necessary in order (a) to make the statements made therein not
false or misleading, or (b) to correct any statement contained in an earlier
communication with respect to such information or representations which has
become false or misleading.
6.8. Employment Agreements. Pursuant to Section 10(c) of this Plan,
between the date of this Plan and the Effective Date, F&M Bancorp shall offer to
enter into an employment agreement with Richard W. Phoebus, Sr. substantially in
the form attached hereto as Appendix VI, and with each of Celia S. Ausherman,
Steven G. Hull and Salvatore M. Savino substantially in the form attached hereto
as Appendix VII.
6.9. F&M Bancorp Common Stock. At the Effective Date, the F&M Bancorp
Common Stock to be issued in exchange for the Home Corporation Common Stock
pursuant to the terms of this Plan shall be duly authorized, validly issued,
fully paid, and non-assessable, free of preemptive rights and free and clear of
all liens, encumbrances or restrictions created by or through F&M Bancorp, with
no personal liability attaching to the ownership thereof. The F&M Bancorp Common
Stock to be issued upon exchange for the Home Corporation Common Stock pursuant
to the terms of this Plan will be issued in all material respects in accordance
with applicable state and federal laws, rules and regulations.
6.10. Maintenance of Separate Existence. For a period of three (3)
years after the Effective Date, F&M Bancorp shall (i) preserve the separate
corporate existence of Home Bank; and (ii) continue in office the directors of
Home Bank who are serving in such capacity on the Effective Date for the
remainder of their current terms and until their successors are elected and have
qualified (subject to the addition of two directors pursuant to Section 10(b) of
this Plan); provided, however, that during the three-year period following the
Effective Date, F&M Bancorp may terminate the separate corporate existence of
Home Bank if Maryland or federal laws or regulations governing financial
institutions are amended in such a way as to have a materially adverse effect on
the business, operations or future prospects of F&M Bancorp if it were to
continue to operate Home Bank as a separate corporate entity.
7. Conditions Precedent to F&M Bancorp's Obligations. Unless waived in
writing by F&M Bancorp in its sole discretion, all obligations of F&M Bancorp
hereunder shall be subject to the fulfillment prior to or at the Effective Date
of the following conditions:
7.1. Representations, Warranties, and Covenants. The representations
and warranties of Home Corporation herein contained shall be true in all
material respects as of the date hereof, shall be deemed made again at and as of
the Effective Date, and shall be true in all material respects as so made again;
Home Corporation and the Home Subsidiaries shall have performed in all material
respects all obligations and agreements, and complied in all material respects
with all covenants and conditions required by this Plan to be performed or
complied with by them on or prior to the Effective Date; and F&M Bancorp shall
have received from Home Corporation an officers' certificate to their knowledge,
information and belief in such detail as F&M Bancorp may reasonably request,
dated the Effective Date and signed by its Chairman and Chief Executive Officer
and Secretary, to the foregoing effect.
7.2. No Adverse Changes. There shall not have been any materially
adverse change in the financial condition, results of operations, assets,
liabilities, or business of Home Corporation and the Home Subsidiaries, taken as
a whole, from December 31, 1995 to the Effective Date. For purposes of this
Section 7.2, a "materially adverse change" shall include, without limitation,
(a) a reduction of the stockholders' equity of Home Corporation to less than
$18,382,000, (b) a decrease in the net income of Home Corporation for fiscal
year 1996 to less than $1,000,000 on an annualized basis, (c) the reduction of
core deposits (i.e., all deposits excepting certificates of deposit in excess of
$100,000) of Home Bank to less than 95% of core deposits of Home Bank on
December 31, 1995, or (d) an increase in Home Corporation's ratio of
non-performing assets to total assets from that reported as of December 31, 1995
to greater than 7.5 % at any time before the Effective Date (in the case of (a)
and (b), the expenses of the transaction under this Plan shall not be taken into
account).
7.3. Events Preceding the Effective Date. Each of the events set forth
in Section 2 shall have occurred and any other required regulatory approvals
shall have been obtained.
7.4. Other Evidence. Home Corporation shall have delivered to F&M
Bancorp such further certificates and documents evidencing due action in
accordance with this Plan, including certified copies of all applicable
proceedings of stockholders or directors of Home Corporation pertaining to the
transactions under this Plan, as F&M Bancorp shall reasonably request.
7.5. No Adverse Proceedings, Events or Regulatory Requirements. No
action or proceeding against F&M Bancorp or any of the F&M Subsidiaries or
against Home Corporation or any of the Home Subsidiaries shall be pending which
seeks to prevent consummation of the transactions contemplated by this Plan; and
no order of any court shall have been entered which prohibits consummation of
the Merger and the transactions contemplated by this Plan. No approval, consent,
waiver or administrative action shall have included any condition or requirement
that would (i) result in a materially adverse effect on F&M Bancorp or Home
Corporation or (ii) so materially and adversely affect the economic or business
benefits of the Merger that F&M Bancorp, in the sole judgment of F&M Bancorp,
would not have entered into this Plan had such conditions or requirements been
known at the date hereof.
7.6. Consents, Etc. All requisite consents, undertakings, memoranda,
agreements, exercises, and terminations by third parties which Home Corporation
and the Home Subsidiaries have covenanted to use commercially reasonable efforts
to obtain under Sections 5.3 and 5.8 shall have been obtained or waived by F&M
Bancorp.
7.7. Opinion of Tax Counsel. F&M Bancorp shall have received the
opinion from its tax counsel required by Section 11.
7.8. Opinion of Counsel. F&M Bancorp shall have received an opinion of
counsel to Home Corporation, dated the Effective Date, in form and substance
reasonably satisfactory to F&M Bancorp, covering the matters set forth in
Appendix VIII hereto.
7.9 Pooling-of-Interests Accounting. The holders of no more than 8% of
the outstanding Common Stock of Home Corporation shall have taken all
appropriate steps required by MD. CORPS. & ASS'NS CODE SS. 3-203(a)(1) and (2)
to dissent to this Plan, and F&M Bancorp shall have received a letter from an
independent accounting firm chosen by F&M Bancorp to the effect that the Merger
qualifies for pooling-of-interests accounting treatment if consummated in
accordance with this Plan; provided, that such condition shall be void and of no
further force and effect if F&M Bancorp has not received such letter because of
any action or inaction of F&M Bancorp.
7.10. Directors' Agreement. Each of Howard B. Bowen and John J.
McElwee, Jr. shall have entered into a Directors' Agreement with F&M Bancorp in
the form attached hereto as Appendix X.
8. Conditions Precedent to Home Corporation's Obligations. Unless waived in
writing by Home Corporation in its sole discretion, all obligations of Home
Corporation hereunder shall be subject to the fulfillment prior to or at the
Effective Date of the following conditions:
8.1. Representations, Warranties, and Covenants. The representations
and warranties of F&M Bancorp herein contained shall be true in all material
respects as of the date hereof, shall be deemed made again at and as of the
Effective Date, and shall be true in all material respects as so made again; F&M
Bancorp shall have performed in all material respects all obligations and
agreements, and complied in all material respects with all covenants and
conditions required by this Plan to be performed or complied with by it on or
prior to the Effective Date; and Home Corporation shall have received from F&M
Bancorp an officers' certificate to their knowledge, information and belief in
such detail as Home Corporation may reasonably request, dated the Effective Date
and signed by its President and Secretary or Cashier, to the foregoing effect.
8.2. No Adverse Changes. There shall not have been any materially
adverse change in the financial condition, results of operations, assets,
liabilities, or business of F&M Bancorp from December 31, 1995 to the Effective
Date.
8.3. Events Preceding the Effective Date. Each of the events set forth
in Section 2 shall have occurred and any other required regulatory approvals
shall have been obtained.
8.4. Other Evidence. F&M Bancorp shall have delivered to Home
Corporation such further certificates and documents evidencing due action in
accordance with this Plan, including certified copies of all applicable
proceedings of directors of F&M Bancorp pertaining to the transactions under
this Plan, as Home Corporation shall reasonably request.
<PAGE>
8.5. Consents, Etc. All requisite consents, approvals or waivers which
F&M Bancorp has covenanted to use commercially reasonable efforts to obtain
under Section 6.5 shall have been obtained or waived by Home Corporation.
8.6. Opinion of Tax Counsel. Home Corporation shall have received the
opinion from tax counsel to F&M Bancorp required by Section 11.
8.7. Fairness Opinion. Home Corporation shall have received a written
opinion from Charles Webb & Company (or such other recognized investment firm as
Home Corporation may select), dated contemporaneously with the date of the Proxy
Statement, to the effect that the consideration to be received in the Merger is
fair to the stockholders of Home Corporation from a financial point of view.
8.8. Employment Agreements. Pursuant to Section 10(c) of this Plan,
F&M Bancorp shall have offered to enter into an employment agreement with
Richard W. Phoebus, Sr. substantially in the form attached hereto as Appendix
VI, and shall have offered to enter into an employment agreement with each of
Celia S. Ausherman, Steven G. Hull and Salvatore M. Savino substantially in the
form attached hereto as Appendix VII.
8.9. Opinion of Counsel. Home Corporation shall have received an
opinion of counsel to F&M Bancorp, dated the Effective Date, in form and
substance reasonably satisfactory to Home Corporation, covering the matters set
forth in Appendix IX hereto.
9. Terms of the Merger.
9.1. Structure of the Merger. At the Effective Date, subject to the
terms and conditions of this Plan, Home Corporation will merge (the "Merger")
with and into F&M Bancorp, the separate corporate existence of Home Corporation
shall cease, and F&M Bancorp shall continue as the successor corporation (the
"Successor Corporation"). Home Bank shall become a wholly-owned direct
subsidiary of the Successor Corporation. From and after the Effective Date, the
Merger shall have the effects set forth in MD. CORPS. & ASS'NS CODE SS. 3-114.
9.2. Conversion of Stock; Conversion Ratio.
(a) On the Effective Date, each share of the Home Corporation
Common Stock outstanding immediately prior to the Effective Date
(other than shares held by persons who perfect their dissenters'
rights under Maryland law), shall, without any action on the part of
the holder thereof, be canceled and converted into the number of
shares of F&M Bancorp Common Stock (rounded to the nearest 0.01 share)
which results after multiplication by the Conversion Ratio. The
Conversion Ratio shall be a fraction, the numerator of which is the
product of (i) 1.65 multiplied by (ii) the book value (calculated in
accordance with Section 9.7) per share of Home Corporation Common
Stock on the Calculation Date, and the denominator of which is the
Average Market Value of a share of F&M Bancorp Common Stock. The
Calculation Date shall be the last day of the month during which (i)
all events listed in Section 2 shall have occurred and (ii) all
conditions precedent listed in Sections 7 and 8 shall have been
fulfilled or waived.
(b) For purposes of the computation of the Conversion Ratio, if,
at the Calculation Date, the Average Market Value of F&M Bancorp
Common Stock is greater than 1.9 times the book value per share of F&M
Bancorp Common Stock determined in accordance with generally accepted
accounting principles, then in lieu of the Average Market Value, F&M
Bancorp shall use a per share price for its Common Stock equal to 1.9
times the book value per share of its Common Stock as of the
Calculation Date, determined in accordance with generally accepted
accounting principles.
<PAGE>
(c) The Average Market Value of each share of the F&M Bancorp
Common Stock shall be the arithmetic average of closing prices of F&M
Bancorp Common Stock in the Composite Transaction Summary to the
extent reported in The Wall Street Journal for the twenty (20)
consecutive trading days preceding the Calculation Date.
(d) No certificates for fractional shares of F&M Bancorp Common
Stock shall be issued; in lieu thereof, each holder otherwise entitled
to a fractional interest shall receive an amount in cash based on the
Average Market Value of F&M Bancorp Common Stock on the Calculation
Date. Each such holder shall have no other rights with respect to such
fractional interest.
9.3. Exchange Procedure.
(a) After the Effective Date, certificates representing such
shares of Common Stock of Home Corporation shall represent the right
to receive certificates representing shares of Common Stock of F&M
Bancorp determined in accordance with Section 9.2 hereof; such Home
Corporation certificates at any time after the Effective Date may be
exchanged by the holders thereof for new certificates for the
appropriate number of shares of Common Stock of F&M Bancorp by
forwarding such Home Corporation Common Stock certificates and the
letter of transmittal provided by F&M Bancorp to the transfer agent
for F&M Bancorp Common Stock, and the payment of cash in lieu of
fractions, dividends, and other distributions on said stock may be
withheld until the Home Corporation certificates are surrendered for
exchange to the transfer agent for F&M Bancorp Common Stock; when such
new certificates are issued, the holders thereof shall be entitled to
be paid the amount (without any interest thereon) of all such withheld
cash in lieu of fractions, dividends, or other distributions which
have theretofore become payable with respect to such shares of Common
Stock of F&M Bancorp.
(b) As soon as possible after the Effective Date, the transfer
agent for F&M Bancorp Common Stock shall send or cause to be sent a
notice and transmittal form to each recordholder of a certificate
theretofore evidencing shares of the Home Corporation Common Stock
(other than to holders who have perfected their dissenters' rights
under Maryland law).
(c) All shares of F&M Bancorp Common Stock into which shares of
Home Corporation Common Stock shall have been converted shall be
deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Home Corporation Common Stock.
9.4. Stock Options.
(a) At the Effective Date, all options granted by Home
Corporation which are outstanding under all Stock Option Plans
previously adopted by Home Corporation to purchase shares of Home
Corporation Common Stock, which are outstanding and unexercised
immediately prior thereto (each, an "Outstanding Option"), shall be
converted as to each whole share subject to such Outstanding Option
into an option (each, an "Exchange Option") to purchase a number of
shares of the Common Stock of F&M Bancorp equal to the number of
shares of Home Corporation Common Stock which could have been
purchased under the Outstanding Option multiplied by the Conversion
Ratio.
(b) The per share exercise price of each Exchange Option shall be
equal to the price per share set forth in the Outstanding Option
divided by the Conversion Ratio, rounded up to the nearest whole cent.
<PAGE>
(c) The Exchange Option shall otherwise have the same duration
and other terms as the Outstanding Option.
(d) The adjustments provided herein with respect to any options
which are "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) shall be
effected in a manner consistent with Section 424(a) of the Code.
9.5. Articles of Incorporation of the Successor Corporation. The
Articles of Incorporation of F&M Bancorp, as in effect immediately prior to the
Effective Date, shall be the Articles of Incorporation of the Successor
Corporation until thereafter amended as provided by law.
9.6. By-Laws of the Successor Corporation. The By-Laws of F&M Bancorp,
as in effect immediately prior to the Effective Date, shall be the By-Laws of
the Successor Corporation until thereafter amended as provided by law.
9.7. Calculation of Home Corporation's Book Value. For purposes of
Section 9.2 hereof, the book value of Home Corporation shall mean, subject to
addition or subtraction for the items set forth in paragraphs (a) through (c)
below, the calculation as of the Calculation Date of Home Corporation's total
assets minus its total liabilities, calculated in conformity with generally
accepted accounting principles applied on a basis consistent with past practices
of Home Corporation:
(a) Home Corporation's Allowance for Possible Losses (as shown on
Schedule 9.7(a) hereof) (its "Total Allowance") as of the close of
business on the Calculation Date shall be 35.12% of its Problem Assets
on the Calculation Date, with any adjustments to the Total Allowance
and other accounts necessary to achieve this percentage being
accounted for in a manner that reflects the principles of Financial
Accounting Standards Board Statement 109 ("FAS 109") and any other
generally accepted accounting principles applicable to income taxes.
For purposes of this calculation, Problem Assets consist of (i) loans
classified as substandard, doubtful or loss and (ii) other real estate
owned at the Calculation Date, based upon loan classification
standards in effect as of December 31, 1995. No Problem Assets at
December 31, 1995 (except for consumer loans and one-to-four family
residential loans) shall be reduced or eliminated at the Calculation
Date except to the extent payment is received by Home Bank or written
off. Home Corporation has scheduled its Problem Assets at December 31,
1995 on Schedule 9.7(a).
(b) If a special recapitalization assessment for the Savings
Association Insurance Fund is imposed on Home Bank on or before the
Calculation Date, the amount of the special recapitalization
assessment shall be added back to Home Corporation's book value as of
the close of business on the Calculation Date and the income tax
accounts of Home Corporation shall be adjusted to reflect the
treatment that would have been required under FAS 109 and any other
generally accepted accounting principles applicable to income taxes as
if the amount added back had never been imposed; provided that such
calculation shall not increase book value by more than $925,000.
(c) For purposes of determining book value, only normal and
recurring items of income and expense (including any additional
premiums to obtain extended directors' and officers' liability
coverage) shall be considered; provided, that transactional expenses
hereunder (other than such additional premiums) shall not be deducted
as an expense.
(d) Home Corporation shall prepare and provide to F&M Bancorp a
schedule reflecting the calculation of its book value as of the
Calculation Date, determined in accordance with the terms of this
Section 9.7 within 10 days of the Calculation Date. Such schedule
<PAGE>
shall be submitted along with a report of Home Corporation's
independent auditors which shall indicate that they have reviewed (i)
each of the reports filed by Home Corporation with the SEC since the
date of the 1995 audited consolidated financial statements, and
specifying that they are not aware of any material modifications that
should be made to such financial statements in order for them to be
calculated in conformity with generally accepted accounting principles
applied on a basis consistent with past practice of Home Corporation,
and (ii) the schedule reflecting the calculation of the book value as
of the Calculation Date in accordance with the terms of this Section
9.7 and specifying that nothing came to their attention that caused
them to believe that the calculation of book value is not in
accordance with the terms of this Section 9.7. Such schedule and
supporting documentation are referred to as the Book Value
Documentation. F&M Bancorp's certified public accountants shall,
within 5 days of the receipt of the Book Value Documentation, either
confirm in writing to Home Corporation that it finds the determination
of book value to be acceptable or, if such is not the case, F&M
Bancorp's independent certified public accountants shall set forth
specifically and with particularity the basis for its disagreement. In
the event that F&M Bancorp believes that an adjustment to book value
is required, representatives of F&M Bancorp, Home Corporation and each
of their independent certified public accountants shall meet within 5
days to discuss any areas of disagreement. In the event that the
parties hereto determine to adjust Home Corporation's book value from
that previously determined, Home Corporation shall promptly make the
appropriate adjustments. If the parties hereto cannot reach agreement
within 5 days of first meeting on this matter, they shall submit the
matter for determination to a mutually acceptable independent third
party independent accounting firm, whose determination shall be
required within 10 days thereafter and shall be binding upon the
parties.
9.8. Anti-Dilution Provision. If F&M Bancorp takes any action which
establishes, prior to the Effective Date, a record date or effective date for a
stock dividend on its Common Stock, a split or reverse split of its Common Stock
or any distribution on all shares of its Common Stock other than cash dividends,
F&M Bancorp will take such action as shall be necessary in order that each share
of Common Stock of Home Corporation will be converted into the same number of
shares of the Common Stock of F&M Bancorp (whether such number is greater or
less than the number otherwise provided for herein) that the owner of such
shares would have owned immediately after the record date or effective date of
such event had the Effective Date occurred immediately before such record date
or effective date, and the Conversion Ratio set forth in Section 9.2 shall be
adjusted accordingly. Home Corporation hereby agrees to any revision in the
exchange ratio pursuant to this Section 9.8.
9.9. Rights of Dissenting Stockholders. Each holder of shares of the
Common Stock of Home Corporation which are voted against the approval of the
Merger who perfects his appraisal rights pursuant to the provisions of MD.
CORPS. & ASS'NS CODE SS. 3-201 et seq. (a "dissenting stockholder") shall be
entitled to receive from F&M Bancorp in cash the value of such shares of the
Common Stock of Home Corporation determined in accordance with the provisions of
MD. CORPS. & ASS'NS CODE SS. 3-201 et seq. but only to the extent required
thereunder.
9.10. Restriction on Issuance or Repurchase of Securities. Nothing in
this Plan shall limit the right of F&M Bancorp to issue or repurchase any of its
stock or other securities in any manner and for any consideration permitted by
law either in connection with acquisitions of new affiliates or otherwise, prior
to or after the Effective Date.
10. Boards of Directors and Employment Matters. Upon the Effective Date:
(a) Promptly after the Effective Date of the Merger, F&M Bancorp
will cause its Board of Directors to be expanded to include two
additional members. Two of the directors of Home Corporation will then
<PAGE>
be elected to fill the two newly created vacancies until the next
annual meeting of the stockholders of F&M Bancorp and until their
successors are elected and have qualified. Prior to the Effective Date
of the Merger, the Board of Directors of Home Corporation will
designate the directors to be so elected, subject to the approval of
the Nominating Committee of the Board of Directors of F&M Bancorp.
(b) The members of the Board of Directors of Home Bank on the
Effective Date will serve for the remainder of their current terms and
until their successors are elected and have qualified. However, after
the Effective Date, F&M Bancorp, as the sole stockholder of Home Bank,
will cause the Board of Directors of Home Bank to be expanded to
include two additional members, and shall appoint two individuals
designated by the Nominating Committee of the Board of Directors of
F&M Bancorp to fill the two newly created vacancies.
(c) F&M Bancorp will offer to enter into an employment agreement
substantially in the form attached hereto as Appendix VI with Richard
W. Phoebus, Sr., the President and Chief Executive Officer of Home
Corporation and Home Bank. F&M Bancorp will also offer to enter into
employment agreements substantially in the form attached hereto as
Appendix VII with each of Celia S. Ausherman, Steven G. Hull and
Salvatore M. Savino (collectively and together with Mr. Phoebus, the
"Contract Employees"). F&M Bancorp will offer to enter into each of
these employment agreements before the Effective Date, but the
effectiveness of each is to be conditioned upon the completion of the
Merger. All such employment agreements shall constitute the entire
understanding with respect to employment arrangements between F&M
Bancorp and each of the Contract Employees, and shall supersede any
and all prior understandings, written or oral, including any prior
employment agreements between the Contract Employees and Home
Corporation or Home Bank. The Contract Employees shall not be subject
to the employment, compensation, severance, or benefit plan
eligibility and participation arrangements set forth in Sections
10(e), (f), (g) and (h) of this Plan.
(d) The employment of all officers and employees of Home
Corporation will terminate on the Effective Date. One officer of Home
Corporation will be appointed to serve as an officer of F&M Bancorp.
Such officer will be designated by Home Corporation, subject to the
approval of the Board of Directors of F&M Bancorp. Such officer may
also continue to hold responsibilities he or she held at Home Bank
prior to the Effective Date, and shall only be compensated in his or
her capacity as an officer of Home Bank.
(e) The officers and employees of Home Bank, other than the
Contract Employees, will continue in their employment with Home Bank
as at-will employees at the same compensation level they received with
Home Bank before the Effective Date.
(f) Payments of $1,000, $500, or $250 will be made to each of
those officers, full-time employees, or part-time employees,
respectively, of Home Bank, other than the Contract Employees, who
either (i) remain employed by Home Bank for six months continuously
thereafter or (ii) leave such employment at the request of Home Bank
within six months after the Effective Date. Such payments shall be
made six months after the Effective Date, in the case of those who
remain in the employment of Home Bank, or within 15 business days
after the date of termination, in the case of those who are requested
to leave employment.
(g) In addition to any payments required under Section 10(f), a
severance payment will be made to those employees of Home Bank, other
than the Contract Employees, who remain employed by Home Bank on the
Effective Date, but leave such employment at the request of Home Bank
within six months after the Effective Date for other than just cause.
The amount of the severance payment for each such employee will be two
<PAGE>
weeks' pay at the most recent compensation level of that employee. The
severance payment shall be made within 15 business days after the date
of termination of the employee.
(h) F&M Bancorp will review the benefits provided to employees of
Home Bank under the employee benefit plans maintained by Home Bank and
disclosed pursuant to Section 3.8(b). F&M Bancorp will provide the
employees of Home Bank who continue as at-will employees of F&M
Bancorp after the Effective Date either with benefits under F&M
Bancorp's employee benefit plans or with benefits under Home Bank's
employee benefit plans, whichever F&M Bancorp in its sole discretion
deems to be more advantageous taken as a whole (and not on a
plan-by-plan basis) to the employees of Home Bank. In that connection,
F&M Bancorp may, in its sole discretion, freeze or terminate the
employee benefit plans of Home Bank, merge them with one or more
employee benefit plans of F&M Bancorp, or continue to maintain them.
If F&M Bancorp decides to freeze, terminate or merge the employee
benefit plans of Home Bank, after the Effective Date all full-time
officers and employees of Home Bank who continue as at-will employees
of Home Bank may participate in the equivalent employee benefit plans
of F&M Bancorp to the extent they are eligible to do so under the
terms of such plans or programs as are in force on the Effective Date,
with credit given for their prior service with Home Bank for purposes
of allocation, eligibility and vesting.
(i) Except as disclosed on Schedule 3.8, F&M Bancorp will
discontinue health and life insurance benefits to retired officers and
employees of Home Corporation except to the extent that coverage may
continue after, and Home Corporation may have paid for the coverage
prior to, the Effective Date.
(j) For such period of time as is covered by any extension of the
directors' and officers' liability coverage of Home Corporation and
the Home Subsidiaries, but in no event longer than 6 years from the
Effective Date, after the Effective Date F&M Bancorp agrees to cause
Home Bank, or if such entity is no longer in existence, F&M Bancorp
shall continue to indemnify all persons who, as of the Effective Date,
are directors, officers, employees and agents of Home Corporation or
the Home Subsidiaries to the same extent that such persons are
indemnified pursuant to the Articles of Incorporation or By-Laws of
Home Corporation and/or the Home Subsidiaries on the date hereof, with
respect to matters occurring prior to the Effective Date.
11. Opinion of Tax Counsel. F&M Bancorp and Home Corporation shall have
received an opinion from tax counsel to F&M Bancorp to the effect that:
(a) The transfer of all of the assets of Home Corporation to F&M
Bancorp, and the assumption by F&M Bancorp of the liabilities of Home
Corporation pursuant to the terms of this Plan, will constitute a
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
Home Corporation and F&M Bancorp will each be a "party to the
reorganization" within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized to a stockholder of Home
Corporation on the conversion of Common Stock of Home Corporation
solely into shares of the Common Stock of F&M Bancorp. No gain or loss
will be recognized by Home Corporation upon the transfer of all of its
assets to F&M Bancorp in exchange for shares of the Common Stock of
F&M Bancorp and the assumption by F&M Bancorp of the liabilities of
Home Corporation. No gain or loss will be recognized to F&M Bancorp
upon the receipt by F&M Bancorp of all of the assets of Home
Corporation in exchange for shares of the Common Stock of F&M Bancorp
and the assumption by F&M Bancorp of the liabilities of Home
Corporation.
<PAGE>
(c) The basis of the shares of the Common Stock of F&M Bancorp
received by a stockholder of Home Corporation will be the same as the
basis of the shares of the Common Stock of Home Corporation which were
converted into F&M Bancorp shares pursuant to the Merger. The holding
period of shares of the Common Stock of F&M Bancorp received by a
stockholder of Home Corporation will include the period during which
he held the shares of the Common Stock of Home Corporation which were
converted into F&M Bancorp shares pursuant to the Merger, provided
that the shares of Common Stock of Home Corporation is held as a
capital asset by the stockholder of Home Corporation on the Effective
Date.
(d) The basis of each asset of Home Corporation in the hands of
F&M Bancorp will be the same as the basis of such asset in the hands
of Home Corporation immediately prior to the Merger; the holding
period of each such asset in the hands of F&M Bancorp will include the
periods during which such asset was held by Home Corporation.
(e) No gain or loss will be recognized to the stockholders of F&M
Bancorp as a result of the transactions contemplated by this Plan.
(f) Where cash is received by a stockholder of Home Corporation
in lieu of a fractional share of the Common Stock of F&M Bancorp to
which the stockholder may be entitled, such cash will be treated as
received by the stockholder as a distribution in redemption of his
fractional share interest.
(g) The accumulated earnings and profits of Home Corporation on
the Effective Date will be added to the accumulated earnings and
profits of F&M Bancorp and will be available for subsequent
distributions of dividends within the meaning of Section 316 of the
Code.
12. Amendment of the Plan. This Plan may be amended at any time prior to
the Effective Date in response to comments of governmental regulatory
authorities or otherwise; provided that any such amendment is in writing and is
approved by the Board of Directors of each of the parties hereto.
13. Abandonment of the Plan; Effect Thereof. Anything herein to the
contrary notwithstanding, and notwithstanding any stockholder vote or approval,
this Plan may be terminated and abandoned:
(a) by mutual consent of the Boards of Directors of Home
Corporation and F&M Bancorp, or
(b) by F&M Bancorp or Home Corporation, if its Board of Directors
so determines, in the event of the failure of the stockholders of F&M
Bancorp or Home Corporation to approve this Plan at the meetings of
stockholders called to consider such approval, unless in each case the
failure of such occurrence shall be due to the failure of the party
seeking to terminate this Plan to perform or observe its agreement set
forth herein to be performed or observed by such party at or before
the Effective Date; or
(c) by F&M Bancorp or Home Corporation, if its Board of Directors
so determines, in the event of a material breach by the other party
hereto of any representation, warranty, covenant or agreement
contained herein which is not cured or not curable within 60 days
after written notice of such breach is given to the party committing
such breach by the other party; or
(d) by F&M Bancorp by written notice to Home Corporation if prior
to December 31, 1996 (i) any approval, consent or waiver of any
<PAGE>
governmental entity required to permit consummation of the
transactions contemplated hereby shall have been denied, (ii) any
approval, consent or waiver of any governmental entity required to
permit consummation of the transactions contemplated hereby shall
include any condition or requirement that would (i) result in a
materially adverse effect on F&M Bancorp or Home Corporation or (ii)
so materially and adversely affect the economic or business benefits
of the Merger that F&M Bancorp, in the sole judgment of F&M Bancorp,
would not have entered into this Plan had such conditions or
requirements been known at the date hereof, (iii) any action or
proceeding against F&M Bancorp or any of the F&M Subsidiaries or
against Home Corporation or any of the Home Subsidiaries shall be
pending which seeks to prevent consummation of the transactions
contemplated by this Plan, or (iv) any court shall have entered an
order which prohibits consummation of the Merger and the transactions
contemplated by this Plan, or
(e) by F&M Bancorp or Home Corporation, by action of the Board of
Directors of either party and the delivery of written notice by either
party to the other, in the event that the Merger is not consummated by
December 31, 1996, unless the failure to so consummate by such time is
due to the breach of any representation, warranty, agreement or
covenant contained in this Plan by the party seeking to terminate, or
if prior to December 31, 1996, any governmental entity of competent
jurisdiction shall have issued a final, unappealable order or ruling
enjoining or otherwise prohibiting consummation of the transactions
contemplated by this Plan, or
(f) by action of the Board of Directors of Home Corporation in
their sole discretion in accordance with Section 5.6, or
(g) By either F&M Bancorp or Home Corporation if, at the
Calculation Date, the Average Market Value (as defined in Section
9.2(c)) of F&M Bancorp Common Stock is less than 1.6 times the book
value per share of F&M Bancorp Common Stock determined in accordance
with generally accepted accounting principles; provided, however, that
if F&M Bancorp elects (and Home Corporation agrees), for purposes of
the computation of the Conversion Ratio (as defined in Section
9.2(a)), F&M Bancorp may use a per share price for the F&M Bancorp
Common Stock of 1.6 times the book value per share of its Common Stock
on the Calculation Date, determined in accordance with generally
accepted accounting principles, in lieu of the Average Market Value.
In either such case, F&M Bancorp or Home Corporation, as the case may
be, shall give prompt written notice to Home Corporation or F&M
Bancorp of such election and Home Corporation or F&M Bancorp, as the
case may be, shall then provide prompt written notice to F&M Bancorp
or Home Corporation of its willingness to proceed with such
modification; and, under such circumstances, no abandonment or
termination shall be deemed to have occurred pursuant to this Section
13(e), and this Plan shall remain in full force and effect in
accordance with its terms, except as the per share price for the
Common Stock of F&M Bancorp shall have been so modified; or
(h) in the event of the termination of this Plan by either F&M
Bancorp or Home Corporation, as provided above, this Plan shall
thereafter become void and there shall be no liability on the part of
any party hereto or their respective officers or directors, except
that any such termination shall be without prejudice to the rights of
any party hereto arising out of the willful breach of any other party
of any covenant or willful misrepresentation contained in this Plan.
14. Expenses. Whether or not the transactions hereunder are consummated,
each party to the Plan shall pay its own expenses relating hereto, including
fees and disbursements of its counsel and accountants; provided, however, that
F&M Bancorp shall pay (a) filing fees in respect of regulatory approvals
required in order to consummate the Merger, including the registration fee of
the SEC, filing fees in respect of state "blue sky" laws, the fee payable to The
National Association of Securities Dealers, Inc. in respect of the listing on
<PAGE>
Nasdaq of the shares of F&M Bancorp Common Stock to be issued pursuant to this
Plan and (b) the costs of printing and mailing the Proxy Statement/Prospectus.
The foregoing shall not be construed as a limitation of damages in the event of
breach.
15. Notices. All notices, requests, demands, and other communications under
or connected with this Plan shall be in writing, and (a) if to F&M Bancorp,
shall be addressed to F&M Bancorp, 110 Thomas Johnson Drive, Post Office Box
518, Frederick, Maryland 21705, attention of Gordon M. Cooley, Secretary and
Legal Officer, with a copy to its counsel, Piper & Marbury L.L.P., 36 South
Charles Street, Baltimore, Maryland 21201-3010, attention of James J. Winn, Jr.,
Esquire; or (b) if to Home Corporation, shall be addressed to Home Federal
Corporation, 122-128 West Washington Street, Hagerstown, Maryland 21740,
attention of Richard W. Phoebus, Sr., President and Chief Executive Officer,
with a copy to its counsel, Elias, Matz, Tiernan & Herrick L.L.P., 12th floor,
The Walker Building, 734 15th Street, N.W., Washington, D.C., 20005, attention
of Norman B. Antin, Esquire. Any such notices, requests, demands, and other
communications shall be mailed, postage prepaid, first class mail, or delivered
personally and shall be sufficient and effective when delivered to or received
at the address as specified. Each of the parties may change the address at which
it is to receive communications by like written notice to the other.
16. Entire Agreement; Effect. This Plan (including the financial
statements, lists, schedules, and documents delivered pursuant hereto, which are
made a part hereof) is intended by the parties to and does constitute the entire
agreement of the parties with respect to the transaction contemplated hereunder.
This Plan supersedes any and all prior understandings, including prior letters
of intent, and it may not be changed, waived, discharged, or terminated orally,
but only in writing by a party against which enforcement of the change, waiver,
discharge, or termination is sought.
17. Representations, Warranties and Agreements. Except as set forth in this
Section 17, all representations, warranties and agreements of F&M Bancorp and
Home Corporation made in this Plan, or in any instrument delivered by F&M
Bancorp or Home Corporation pursuant to this Plan, shall expire at the Effective
Date. In the event of the consummation of the transactions contemplated hereby,
the agreements contained in or referred to in Sections 9 and 10 shall survive
the Effective Date. In the event of the termination of this Plan in accordance
with its terms, the agreements contained in or referred to in Sections 5.1, 5.6,
6.3 and 14 shall survive such termination. Except as provided in the first
sentence of this Section 17, nothing contained herein shall be construed to
limit the liability of a party to another party for damages caused by a breach
of this Plan.
18. Governing Law. This Plan shall be governed by, and shall be interpreted
in accordance with, the laws of the State of Maryland or, to the extent
applicable, the federal laws of the United States of America.
19. General. The section headings contained in this Plan are for reference
purposes only and shall not affect in any way the meaning or interpretations of
this Plan. This Plan may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. This Plan shall inure to the benefit of
and be binding upon the parties hereto and their respective successors but shall
not be assigned to and shall not create any rights in favor of any other party.
Any purported assignment in violation of this Section 19 shall be void.
<PAGE>
IN WITNESS WHEREOF, F&M Bancorp and Home Corporation have caused this Plan
to be duly executed by their respective chairmen or presidents, and their
respective seals to be hereunto affixed and attested by their respective
secretaries, thereunto duly authorized as of the date first above written.
ATTEST: [SEAL] F&M BANCORP
/s/ Gordon M. Cooley By: /s/ Charles W. Hoff, III
Gordon M. Cooley Charles W. Hoff, III
Secretary Chairman of the Board and
Chief Executive Officer
ATTEST: [SEAL] HOME FEDERAL CORPORATION
/s/ Celia S. Ausherman By: /s/ Richard W. Phoebus, Sr.
Celia S. Ausherman Richard W. Phoebus, Sr.
Secretary President and Chief Executive Officer
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT (this "Option Agreement") dated as of April 2,
1996, between HOME FEDERAL CORPORATION ("Home Corporation"), a Maryland
corporation, and F&M BANCORP ("F&M Bancorp"), a Maryland corporation, recites
and provides:
A. The Board of Directors of Home Corporation and F&M Bancorp have approved
a Plan and Agreement to Merge dated April 2, 1996 (the "Plan") providing for the
merger (the "Merger") of Home Corporation with and into F&M Bancorp.
B. As a condition to and as consideration for F&M Bancorp's entry into the
Plan and to induce such entry, Home Corporation has agreed to grant to F&M
Bancorp the option set forth herein to purchase authorized but unissued shares
of Home Corporation Common Stock.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms defined in the Plan and used herein shall
have the same meanings as in the Plan.
2. Grant of Option. Subject to the terms and conditions set forth herein,
Home Corporation hereby grants to F&M Bancorp an option (the "Option") to
purchase up to 501,282 shares of Home Corporation Common Stock at an exercise
price of $8.25 per share payable in cash as provided in Section 4; provided,
however, that in the event Home Corporation issues or agrees to issue any shares
of Home Corporation Common Stock (other than as permitted under the Plan) at a
price less than $8.25 per share (as adjusted pursuant to Section 6), the
exercise price shall be such lesser price.
3. Exercise of Option.
(a) Unless F&M Bancorp shall have breached in any material respect any
covenant or representation contained in the Plan and such breach has not
been cured, F&M Bancorp 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; provided that to the extent the Option shall
not have been exercised, it shall terminate and be of no further force and
effect upon the earliest to occur of (i) the Effective Date of the Merger,
or (ii) the termination of the Plan in accordance with the provisions
thereof prior to the occurrence of a Purchase Event (other than as a result
of a willful breach by Home Corporation of any Specified Covenant or as a
result of failure of Home Corporation's stockholders to approve the Plan by
the vote required under applicable law or under Home Corporation's
Charter), or (iii) 12 months after termination of the Plan due to a willful
breach by Home Corporation of any Specified Covenant or failure of Home
Corporation's stockholders to approve the Plan by the vote required under
applicable law or under Home Corporation's Charter; provided, however, that
any purchase of shares upon exercise of the Option shall be subject to
compliance with applicable law, including, without limitation, the Bank
Holding Company Act of 1956, as amended. Any exercise of the Option shall
be subject to compliance with applicable provisions of law.
(b) As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Home Corporation or Home Federal Savings Bank ("Home Bank"),
without having received F&M Bancorp's prior written consent, shall
<PAGE>
have entered into an agreement with any person (x) to merge or
consolidate, or enter into any similar transaction, except as
contemplated in the Plan, (y) to purchase, lease or otherwise acquire
all or substantially all of the assets of Home Corporation or Home
Bank, or (z) to purchase or otherwise acquire (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing 15% or more of the voting power of Home
Corporation or Home Bank;
(ii) any person (other than Home Corporation or Home Bank in a
fiduciary capacity, or F&M Bancorp or Farmers and Mechanics National
Bank in a fiduciary capacity) shall have acquired beneficial ownership
or the right to acquire beneficial ownership of 15% or more of the
outstanding shares of Home Corporation Common Stock after the date
hereof (the term "beneficial ownership" for purposes of this Option
Agreement having the meaning assigned thereto in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") and the
regulations promulgated thereunder);
(iii) any person shall have made a bona fide proposal to Home
Corporation by public announcement or written communication that is or
becomes the subject of public disclosure to acquire Home Corporation
or Home Bank by merger, consolidation, purchase of all or
substantially all of its assets or any other similar transaction, and
following such bona fide proposal the stockholders of Home Corporation
vote not to adopt the Plan; or
(iv) Home Corporation shall have willfully breached any Specified
Covenant following a bona fide proposal to Home Corporation or Home
Bank to acquire Home Corporation or Home Bank by merger,
consolidation, purchase of all or substantially all of its assets or
any other similar transaction, which breach would entitle F&M Bancorp
to terminate the Plan (without regard to the cure periods provided for
therein) and such breach shall not have been cured prior to the Notice
Date (as defined below).
If more than one of the transactions giving rise to a Purchase Event under this
Section 3(b) is undertaken or effected, then all such transactions shall give
rise only to one Purchase Event, which Purchase Event shall be deemed continuing
for all purposes hereunder until all such transactions are abandoned. As used in
this Option Agreement, "person" shall have the meanings specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
(c) In the event F&M Bancorp wishes to exercise the Option, it shall
send to Home Corporation a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares
it will purchase pursuant to such exercise, and (ii) a place and date not
earlier than three business days nor later than 60 business days after the
Notice Date for the closing of such purchase ("Closing Date"); provided
that if prior notification to or approval of any federal or state
regulatory agency is required in connection with such purchase, F&M Bancorp
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) As used herein, "Specified Covenant" means any covenant made by
Home Corporation or Home Bank and contained in Section 5 of the Plan.
4. Payment and Delivery of Certificates.
(a) At the closing referred to in Section 3, F&M Bancorp shall pay to
Home Corporation the aggregate purchase price for the shares of Home
Corporation Common Stock purchased pursuant to the exercise of the Option
<PAGE>
in immediately available funds by a wire transfer to a bank account
designated by Home Corporation.
(b) At such closing, simultaneously with the delivery of funds as
provided in subsection (a), Home Corporation shall deliver to F&M Bancorp a
certificate or certificates representing the number of shares of Home
Corporation Common Stock purchased by F&M Bancorp, and F&M Bancorp shall
deliver to Home Corporation a letter agreeing that F&M Bancorp 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 Home Corporation Common Stock delivered at a
closing hereunder shall 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 A STOCK OPTION AGREEMENT BETWEEN THE
REGISTERED HOLDER HEREOF AND HOME FEDERAL 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 HOME
FEDERAL CORPORATION. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE
HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY HOME FEDERAL 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 Bancorp shall have
delivered to Home Corporation a copy of a letter from the staff of the
Securities and Exchange Commission, or an opinion of counsel, in form and
substance satisfactory to Home Corporation, to the effect that such legend is
not required for purposes of the Securities Act of 1933, as amended (the
"Securities Act").
5. Representations. Home Corporation represents, warrants and covenants to
F&M Bancorp as follows:
(a) Home Corporation shall at all times maintain sufficient authorized
but unissued shares of Home Corporation Common Stock so that the Option may
be exercised without authorization of additional shares of Home Corporation
Common Stock.
(b) The shares to be issued upon due exercise, in whole or in part, of
the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization. In the event of any change in
Home Corporation 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 Home Corporation Common Stock are issued or otherwise become
outstanding after the date of this Option Agreement (other than pursuant to this
Option Agreement), the number of shares of Home Corporation Common Stock subject
to the Option shall be adjusted so that, after such issuance, it equals 19.9% of
the number of shares of Home Corporation Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 6 shall be deemed to authorize
Home Corporation to breach any provision of the Plan.
7. Registration Rights. If requested by F&M Bancorp, Home Corporation shall
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 Home Corporation Common Stock that have been
acquired upon exercise of the Option in accordance with the intended method of
sale or other disposition requested by F&M Bancorp. F&M Bancorp shall provide
all information reasonably requested by Home Corporation for inclusion in any
registration statement to be filed hereunder. Home Corporation 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 day such
<PAGE>
registration statement first becomes effective as may be reasonably necessary to
effect such sales or other dispositions. Only one registration may be effected
under this Section 7 at Home Corporation's expense, and which shall not include
underwriting commissions and the fees and disbursements of F&M Bancorp's counsel
attributable to the registration of such Home Corporation Common Stock. 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 Home
Corporation of Home Corporation Common Stock. If requested by F&M Bancorp, in
connection with any such registration, Home Corporation 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 Bancorp or assignee thereof
under this Section 7, Home Corporation agrees to send a copy thereof to F&M
Bancorp and to any assignee thereof known to Home Corporation, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies.
8. Severability. If any term, provision, covenant or restriction contained
in this Option Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions and covenants and restrictions contained in
this Option Agreement shall remain in full force and effect, and shall in no way
be affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the full
number of shares of Home Corporation Common Stock provided in Section 2 (as
adjusted pursuant to Section 6), it is the express intention of Home Corporation
to allow the holder to acquire such lesser number of shares as may be
permissible, 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 in the event a Purchase Event shall have occurred
and be continuing F&M Bancorp may assign in whole or in part its rights and
obligations hereunder; provided, however, that to the extent required by
applicable regulatory authorities, F&M Bancorp may not assign its rights
under the Option except in (i) a widely dispersed public distribution, (ii)
a private placement in which no one party acquires the right to purchase in
excess of 2% of the voting shares of Home Corporation, (iii) an assignment
to a single party (e.g., a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on F&M Bancorp's behalf,
or (iv) any other manner approved by applicable regulatory authorities.
(d) Notices. All notices or other communications which 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 15 of the
Plan.
<PAGE>
(e) Counterparts. This Option Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute
but one agreement.
(f) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Option Agreement
by either party hereto and that this Option Agreement may be enforced by
either party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland applicable
to agreements made and entirely to be performed within such state and such
federal laws as may be applicable.
IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
HOME FEDERAL CORPORATION
By: /s/ Richard W. Phoebus, Sr.
Richard W. Phoebus, Sr.
President and Chief Executive Officer
F&M BANCORP
By: /s/ Charles W. Hoff, III
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
<PAGE>
ANNEX C
-------------Charles Webb & Company-------------
Investment Bankers and Financial Advisors
April 2, 1996
Board of Directors
Home Federal Corporation
122-128 West Washington Street
Hagerstown, MD 21740-1179
Dear Board of Directors:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the shareholders of
Home Federal Corporation ("HMFD"), of the conversion ratio (the "Conversion
Ratio") as set forth in Section 9.2 of the Plan and Agreement to Merge, dated
April 2, 1996, (the "Merger Agreement"), by and among F&M Bancorp ("FMBN") and
HMFD. We have not been requested to opine as to, and our opinion does not in any
matter address, HMFD's underlying business decision to proceed with or effect
the Merger.
The Merger Agreement provides that, at the Effective Time of the Merger of HMFD
with and into FMBN ("the Merger"), FMBN will issue shares of FMBN common stock
in exchange for all the issued and outstanding shares of HMFD Common Stock
(2,519,010 shares as of the date of the Agreement). All of the outstanding
shares of HMFD Common Stock at the Effective Time shall be converted by
operation of the Merger into the number of shares of FMBN common stock which
results after multiplication of the Conversion Ratio. The Conversion Ratio shall
be a fraction, the numerator of which is 1.65 multiplied by the HMFD book value
per share, as defined in Section 9.7 of the Merger Agreement, and the
denominator of which is the Average Market Value of a share of F&M Bancorp Stock
as defined in Section 9.2 of the Merger Agreement. If the Average Market Value
of F&M Bancorp Common Stock is greater than 1.9 times the FMBN book value per
share, the product of 1.9 times the FMBN book value per share shall be used in
lieu of the Average Market Value.
In addition, all unexercised and outstanding options awarded pursuant to the
HMFD's Stock Option and Incentive Plans shall be converted by FMBN to stock
options to purchase a number of shares of the Common Stock of FMBN equal to the
number of shares of HMFD Common Stock which could have been purchased under the
HMFD Option multiplied by the Conversion Ratio. The complete terms of the
proposed transaction are described in the Merger Agreement, and this summary is
qualified in its entirety by reference thereto. A copy of the Merger Agreement
will be attached as an Exhibit to the Proxy Statement of HMFD which will be
provided to HMFD's shareholders.
Charles Webb & Company, as part of its investment banking business, is regularly
engaged in the evaluation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, and distributions of listed
and unlisted securities. We are familiar with the market for common stocks of
publicly traded banks, thrifts and bank and thrift holding companies.
211 Bradenton o Dublin, Ohio 43027-3541 o 614-744-8400 o Fax: 614-766-8406
<PAGE>
In March, 1996, you engaged us to issue a fairness opinion to be delivered upon
the execution of an agreement for the acquisition of HMFD. Prior to your
execution of the Merger Agreement with FMBN, we studied financial and other
business data supplied to us by HMFD including audited financial statements for
the years ended December 31, 1995, 1994, 1993 and 1992. We discussed with senior
management and the boards of directors of HMFD and its wholly-owned subsidiary
Home Federal Savings Bank ("Home Federal"), the current position and prospective
outlook for HMFD and Home Federal. We considered historical quotations and the
prices of recorded transactions in HMFD's common stock since its conversion from
mutual to stock form and its public offering. We reviewed financial and stock
market data of other thrifts, selecting a peer group of thrifts with assets of
$100 - $300 million in the Mid-Atlantic region, and reviewed financial and
structural terms of several other recent transactions involving savings and loan
mergers and acquisitions or proposed changes of control of thrifts in a
comparable geographic region or in a comparable financial position.
For FMBN, we reviewed the audited financial statements for the years ended
December 31, 1995, 1994, 1993 and 1992, and related SEC reports, and certain
other information deemed relevant. We discussed with senior management (certain
members of the senior management group are also members of the board of
directors) of FMBN, the current position and prospective outlook for FMBN and
its wholly-owned subsidiaries, including FMBN's reasons for seeking an
affiliation and merger. We considered historical quotations and the prices of
recorded transactions in FMBN's common stock over the past five years. Further,
for comparative purposes, we reviewed financial and stock merger data of other
financial institutions, particularly in the Mid Atlantic and Midwest regions.
For purposes of this opinion we have relied without independent verification on
the accuracy and completeness of the material furnished to us by HMFD and FMBN
and the material otherwise made available to us, including information from
published sources, and we have not made any independent effort to verify such
data. With respect to the financial forecasts we received for HMFD we assumed
(with your consent) that they have been reasonably prepared reflecting the best
currently available estimates and judgment of HMFD's management. In addition, we
have not made or obtained any independent appraisals or evaluations of the
assets or liabilities, and potential and/or contingent liabilities of HMFD and
FMBN. We have further relied on the assurances of management of HMFD and FMBN
that they are not aware of any facts that would make such information inaccurate
or misleading. We express no opinion on matters of a legal, regulatory, tax or
accounting nature or the ability of the Merger as set forth in the Merger
Agreement to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to HMFD or the ability to consummate the Merger. Our opinion is
based on the market, economic and other relevant considerations as they exist
and can be evaluated on the date hereof.
We have been engaged to issue a fairness opinion for a fee, a majority of which
is contingent upon the consummation of the Merger. In addition, HMFD has agreed
to indemnify us for certain liabilities arising out of our engagement by HMFD in
connection with the Merger. We have also performed various investment banking
services for HMFD in the past and have received customary fees for such
services.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof the financial terms of the Merger as set forth in the
Merger Agreement, are fair, from a financial point of view, to the shareholders
of HMFD.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statements of HFMD used to solicit
shareholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of HMFD in its consideration of the Merger
Agreement, and is not intended to be and does not constitute a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Merger.
Very truly yours,
Charles Webb & Company
<PAGE>
-------------Charles Webb & Company-------------
Investment Bankers and Financial Advisors
July 16, 1996
Board of Directors
Home Federal Corporation
122-128 West Washington Street
Hagerstown, MD 21740-1179
Dear Board of Directors:
We hereby confirm our letter of April 2, 1996 regarding the merger proposal,
whereby Home Federal Corporation ("Home") shall merge with F&M Bancorp. In our
opinion, the above referenced transaction remains fair, from a financial point
of view, to the Home shareholders as of the date above.
Very truly yours,
Charles Webb & Company
211 Bradenton o Dublin, Ohio 43027-3541 o 614-744-8400 o Fax: 614-766-8406
<PAGE>
ANNEX D
Annual Report to Stockholders of Home Federal Corporation
for the year ended December 31, 1995
Home Federal Corporation 1995 Annual Report
Main Office
122-128 West Washington Street
Hagerstown, Maryland 21740
(301) 733-6300
Branch Offices
17708 Virginia Avenue
Hagerstown, Maryland 21740
1413 Pennsylvania Avenue
Hagerstown, Maryland 21742
1700 Dual Highway
Hagerstown, Maryland 21740
333 East Main Street
Hancock, Maryland 21750
(301) 678-7205
County Market
835 West Hillcrest Road
Hagerstown, Maryland 21742
County Market
1230 National Highway
LaVale, Maryland 21502
(301) 729-4400
Loan Center
8 East Main Street
Frostburg, Maryland 21532
(301) 689-1983
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
1995 1994
At Year-end
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
Total assets $214,615 $206,517
Loans receivable, net 137,263 135,553
Real estate owned held for sale, net 7,075 6,450
Savings accounts 163,663 151,203
Advances from the Federal Home Loan
Bank of Atlanta 30,157 38,184
Stockholders' equity 18,382 14,700
Average equity-to-average assets ratio 7.86% 7.30%
For The Year
Net interest income $ 7,270 $ 7,504
Net income 2,528 1,497
Return on average assets 1.20% 0.75%
Return on average equity 15.28% 10.21%
Average interest rate spread 3.88% 4.28%
Per Share Data
Earnings per share $ 1.00 $ 0.59
Cash dividends per share .08 --
Book value per share 7.30 5.84
</TABLE>
<PAGE>
TO OUR STOCKHOLDERS, CUSTOMERS AND FRIENDS:
Careful planning and the ability to focus efforts on the completion of the
critical elements of the plan usually will produce a favorable result.
Throughout the past four fiscal years Home Federal has been able to show
consistent improvement in operating results and to deliver superior returns for
our stockholders.
During 1995, we experienced the following outstanding results:
Net Earnings - Increased 69% over year end 1994 to $2,528,000.
This represents the largest annual profit in the
98 year history of Home Federal.
Book Value - Increased 25% to $7.30 per share.
Nonperforming Assets - Decreased 43% from 10.95% to 5.99% of total
assets.
These improvements have been reflected in the steady increase in
stockholder value. At close of business in December 1991, Home Federal stock was
trading at $1.06 per share. Years end 1992, 1993 and 1994 saw closing prices of
$1.25, $3.63 and $6.00, respectively. Home Federal shares closed 1995 at $7.75
per share. The compounded return for the four year period, exclusive of
dividends, was approximately 65%.
The numbers are impressive and it is our goal to continue steady progress
in building the franchise. The numbers do not, however, tell the whole story for
a community financial institution. Total return for such institutions includes
benefits to the individuals who work for Home Federal, their families and the
community which they serve. Home Federal employs more than 125 people. Among
other things, our loan programs have facilitated the building of homes which
provide jobs for salespersons, mechanics, craftsmen, lawyers, accountants,
suppliers, builders, developers and others too numerous to mention. Further, the
value of volunteer efforts of our employees on behalf of non-profit
organizations represents a return to our community which is nearly impossible to
measure.
Because of the dedication of our employees and the loyalty of our
customers, efforts to rebuild and deliver value to our stockholders, employees,
customers, suppliers and the community have been successful. Our goal is to
improve on this record by consistently producing a broad array of high quality
financial products and services to serve the needs of individuals, families and
the small businesses in our market. By focusing our efforts on this goal, we
believe we can produce consistent, high quality returns to our stockholders.
Sincerely,
/s/ Richard W. Phoebus, Sr.
Richard W. Phoebus, Sr.
President
/s/ Benjamin F. Kunkleman
Benj. F. Kunkleman
Chairman of the Board
<PAGE>
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS*
Benjamin F. Kunkleman
Chairman of the Board
Home Federal Corporation
President
The American Cedarworks, Inc.
(Wood Products Manufacturer)
Howard B. Bowen
President
Ewing Oil Company, Inc.
(Petroleum Distributor)
William H. Gelbach, Jr.
Consultant-Home Federal Savings Bank
Former President of Waynesboro Savings Association
Lois S. Harrison
Member, Board of Trustees
Hood College
(Private College)
John J. McElwee, Jr.
President
Antietam Health Services, Inc.
(Diversified Health Care)
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Home Federal Corporation and Home Federal Savings Bank
Salvatore M. Savino
Vice President and Treasurer, Chief Financial Officer
Home Federal Corporation
Senior Vice President and Treasurer, Chief Financial Officer
Home Federal Savings Bank
J. Franklin Shank
Realtor
Coldwell Banker
(Real Estate Brokerage)
Ronald Z. Sulchek
President
Sulchek & Co.
(Accounting Firm)
Directors Emeritus
M. William Dutton, Jr.
E. Leister Mobley, Jr.
*Also Directors of Home Federal Savings Bank
OFFICERS
Home Federal Corporation
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Steven G. Hull
Executive Vice President
Celia S. Ausherman
Vice President and Secretary
Salvatore M. Savino
Vice President and Treasurer, Chief Financial Officer
Home Federal Savings Bank
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Steven G. Hull
Executive Vice President, Special Assets
Celia S. Ausherman
Senior Vice President and Secretary, Chief Retail Banking Officer
Salvatore M. Savino
Senior Vice President and Treasurer, Chief Financial Officer
Julie A. Donat
Vice President, Operations
Thomas D. Earley
Vice President, Marketing
James C. Failor
Vice President, Loan Officer
Jacqueline M. Gaver
Vice President, Special Assets
Richard L. Kidd
Vice President, Western Region
Douglas E. Metz
Vice President, Special Assets
Patricia C. Muldoon
Vice President, Controller
Edward L. Yonker
Vice President, Technology
Debra A. Doyle
Asst. Vice President, Loan Servicing
Judy L. Raidt
Asst. Vice President, Residential Lending
Helga M. Stoner
Asst. Secretary
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA
As of December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $214,615 $206,517 $194,848 $209,132 $265,625
Loans receivable, net 137,263 135,553 127,232 145,616 217,475
Mortgage-backed
securities available
for sale 17,373 29,782 24,497 -- --
Mortgage-backed
securities 29,748 11,222 4,043 36,638 6,981
Investment securities -- 5,064 -- -- 10,045
Real estate owned held
for sale, net 7,075 6,450 7,978 8,590 4,369
Savings accounts 163,663 151,203 148,397 148,769 201,656
Advances from the
Federal Home Loan
Bank of Atlanta 30,157 38,184 27,637 46,382 49,978
Stockholders' equity 18,382 14,700 14,614 11,219 10,857
Book value per share<F1> 7.30 5.84 5.80 8.35 8.08
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest income $15,987 $14,487 $14,931 $18,877 $24,164
Interest expense 8,717 6,983 7,696 12,058 18,747
------- ------- ------- ------- -------
Net interest income $ 7,270 $ 7,504 $ 7,235 $ 6,819 $ 5,417
Provision for possible
loan losses (349) 278 1,687 719 7,226
------- ------- ------- ------- -------
Net interest income
(loss) after provision
for possible loan
losses $ 7,619 $ 7,226 $ 5,548 $ 6,100 $(1,809)
Other income 1,979 1,993 2,863<F3> 5,054<F2> 2,855
Provision for losses on
real estate owned held
for sale 479 339 369 2,223 2,017
Provision for losses
(recovery) on real
estate held for
development and sale
or rental (36) (22) (91) 307 950
Other expense 7,181 7,099 7,513<F3> 8,222 8,209
------- ------- ------- ------- -------
Income (loss) before
income taxes, loss
from discontinued
operation, cumulative
effect of an
accounting change and
extraordinary item $ 1,974 $ 1,803 $ 620 $ 402 $(10,130)
Provision for (benefit
from) income taxes (554) 306 (154)<F3> 414 (2,771)
------- ------- ------- ------- -------
Income (loss) before
loss from discontinued
operation, cumulative
effect of an
accounting change and
extraordinary item $ 2,528 $ 1,497 $ 774 $ (12) $(7,359)
Loss from discontinued
operation -- -- (71)<F3> (33) (48)
Cumulative effect of
change in accounting
for income taxes -- -- 245 -- --
Extraordinary item -
tax benefit of net
operating loss
carryforward -- -- -- 407 --
------- ------- ------- ------- -------
Net income (loss) $ 2,528 $ 1,497 $ 948 $ 362 $(7,407)
======= ======= ======= ======= =======
Earnings (loss)
per share<F1> $ 1.00 $ 0.59 $ 0.49 $ 0.27 $ (5.51)
======= ======= ======= ======= =======
Dividends per share $ .08 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Other Selected Data:
Average yield earned
on interest-earning
assets 8.44% 8.15% 8.26% 9.47% 9.76%
Average rate paid on
interest-bearing
liabilities 4.56 3.87 4.14 5.44 7.00
Average interest rate
spread 3.88 4.28 4.12 4.03 2.76
Net yield on interest-
earning assets 3.84 4.22 4.00 3.42 2.19
Ratio of interest-
earning assets to
interest-bearing
liabilities 99.09 98.62 97.36 89.85 92.44
Return on average assets 1.20 0.75 0.47 0.15 (2.58)
Return on average equity 15.28 10.21 7.34 3.28 (50.87)
Ratio of average equity
to average assets 7.86 7.30 6.39 4.65 5.07
Dividend payout ratio 8.00 N/A N/A N/A N/A
Ratio of nonperforming
loans, troubled debt
restructurings and
real estate owned held
for sale to total
assets at end of period 5.99 10.95 14.60 17.71 18.29
Full-service offices at
end of period 7 7 7 7 8
<FN>
<F1> Per share data is based on 2,519,010 shares outstanding as of December 31,
1995, 1994 and 1993 and 1,343,265 shares outstanding as of December 31, 1992 and
1991, respectively, except for earnings per share data as of December 31, 1993
which is based on 1,931,138 weighted average shares outstanding.
<F2> In June, 1992, the Savings Bank sold an office in Waynesboro, Pennsylvania
resulting in a gain of $1.5 million.
<F3> In August, 1993, the Corporation sold its real estate agency and,
accordingly, restated the consolidated financial statements for the discontinued
operation.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Home Federal Corporation (Corporation) is the unitary savings and loan
holding company of Home Federal Savings Bank (Savings Bank) and its
subsidiaries. The Corporation and its subsidiaries are sometimes collectively
referred to herein as "Home Federal." The Corporation currently owns 100% of the
issued and outstanding common stock of the Savings Bank, which is the principal
asset of the Corporation.
The Savings Bank is a member of the Federal Home Loan Bank of Atlanta
(FHLB), which is one of the twelve regional banks comprising the Federal Home
Loan Bank System. Home Federal's primary regulators are the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). Home
Federal is also subject to regulations administered by the Board of Governors of
the Federal Reserve System regarding reserves required to be maintained against
deposits and certain other matters.
The Savings Bank's deposits are presently insured by the Savings
Association Insurance Fund ("SAIF"). The SAIF is statutorily required to be
recapitalized to a ratio of 1.25% of insured reserve deposits, which is not
expected to occur until 2002 at the earliest. The Bank Insurance Fund ("BIF")
met its required capitalization levels in 1995 and, as a result, most BIF
insured banks are paying significantly lower premiums than SAIF insured
institutions. Due to the disparity between the insurance funds, the U.S.
Congress is currently considering legislation which will recapitalize the SAIF
by a one-time charge of approximately $0.85 to $0.90 for every $100 of
assessable deposits held at March 31, 1995, and an eventual merger of the SAIF
with the BIF. Based on deposits as of March 31, 1995, the Savings Bank's pro
rata share of the assessment would amount to approximately $819,000 to $867,000
after taxes, respectively. If the legislation is enacted, future earnings would
be enhanced due to lower insurance premiums.
Financial Condition
General. Total assets increased $8.1 million or 3.9% to $214.6 million at
December 31, 1995 compared to $206.5 million at December 31, 1994. Such increase
was primarily due to increases in loans receivable, net and mortgage-backed
securities, which increases were partially offset by decreases in investment
securities. Total liabilities increased by $4.4 million or 2.3% to $196.2
million at December 31, 1995 compared to $191.8 million at December 31, 1994.
Such increase was primarily due to increases in savings accounts, which
increases were partially offset by decreases in borrowings. Stockholders' equity
increased $3.7 million or 25.0% to $18.4 million at December 31, 1995, compared
to $14.7 million at December 31, 1994 due to a $2.3 million increase in retained
income and a $1.4 million decrease in unrealized losses on mortgage-backed
securities available for sale, net.
Loans. Loans receivable, net, increased $1.7 million or 1.3% during 1995
due to increases primarily in single-family residential loans and consumer
loans, which were partially offset by decreases in multi-family, commercial and
construction loans.
Mortgage-backed Securities. Mortgage-backed securities amounted to $47.1
million at December 31, 1995 compared to $41.0 million at December 31, 1994, an
increase of $6.1 million during 1995. The $47.1 million of mortgage-backed
securities at December 31, 1995 consisted of $17.4 million of such securities
classified as available for sale and $29.7 million of such securities classified
as held-to-maturity. At December 31, 1994, $29.8 million of such securities were
classified as available for sale and $11.2 million of such securities were
classified as held-to-maturity. The Savings Bank purchased $10.0 million and
$22.4 million of mortgage-backed securities during 1995 and 1994, respectively,
which was partially funded by savings accounts, FHLB advances, principal
repayments and loan sales.
Nonperforming Assets. The following tables set forth the Savings Bank's
nonperforming assets by property type and related ratios at December 31, 1995
and 1994.
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Non-performing loans: (In thousands)
Non-accrual loans:
Residential $ 602 $ 499
Commercial real estate 38 38
Consumer and commercial 146 88
------- -------
Total nonaccrual loans $ 786 $ 625
------- -------
Impaired loans:
Residential $ 562 $ 4,081
Commercial real estate 731 4,920
Construction 3,712 6,292
Consumer and commercial -- 242
------- -------
Total impaired loans $ 5,005 $15,535
------- -------
Total nonperforming loans $ 5,791 $16,160
------- -------
Real estate owned held for sale, net (REO):
Residential $ 2,822 $ 816
Commercial 3,917 4,723
Construction 1,952 3,436
------- -------
$ 8,691 $ 8,975
Less:
Allowance for losses 1,492 2,337
Accumulated depreciation 124 188
------- -------
Total REO $ 7,075 $ 6,450
------- -------
Total nonperforming loans and REO $12,866 $22,610
======= =======
Total nonperforming loans to total
loans receivable-net 4.22% 11.92%
==== =====
Total nonperforming loans and REO
to total assets 5.99% 10.95%
==== =====
</TABLE>
<PAGE>
The Savings Bank's nonperforming loans decreased from $16.2 million or 7.8%
of total assets at December 31, 1994 to $5.8 million or 2.7% of total assets at
December 31, 1995 and total nonperforming loans and REO decreased by $9.7
million or 43.1%. The decrease in nonperforming loans were primarily due to five
loans with an aggregate principal balance of $4.2 million being transferred to
REO at an aggregate amount of $3.9 million, 15 loans which had principal
reductions totaling $5.9 million which included net charge-offs of $1.0 million,
and one loan totaling $417,000 which was reclassified to performing.
At December 31, 1995, the Savings Bank's allowances for possible loan
losses amounted to $3.6 million or 2.6% of the net loans receivable portfolio
and 62.7% of total nonperforming loans, and its allowance for losses on REO
amounted to $1.5 million or 21.1% of total REO. Although management believes
that it uses the best information available to recognize losses on loans and to
estimate fair value less disposition costs of REO, no assurance can be given
that future significant additions to the allowances for possible loan losses or
further reductions in the net carrying values of REO may be necessary if
economic conditions or other factors differ substantially from the assumptions
used in making the initial determinations. In addition, the OTS and the FDIC, as
an integral part of their examination process, periodically review the Savings
Bank's allowances for possible loan losses and the net carrying values of REO.
Such agencies may require the Savings Bank to recognize additions to the
allowances or reductions in net carrying values based on their judgments about
information available to them at the time of examination. See Notes 4 and 5 of
the Notes to Consolidated Financial Statements.
Deposits. Deposits increased by $12.5 million or 8.2% to $163.7 million at
December 31, 1995 from $151.2 million at December 31, 1994. Such increase was
due to the public's acceptance of the Savings Bank's checking account programs
and its varied certificate of deposit programs, the general economic conditions
and the competitive rates offered by the Savings Bank on its deposits.
Borrowings. Advances from the FHLB of Atlanta decreased by $8.0 million or
21.0% to $30.2 million at December 31, 1995 from $38.2 million at December 31,
1994. The decrease in borrowing was primarily due to the Savings Bank utilizing
cash generated from savings deposits to repay borrowings.
Stockholders' Equity. At December 31, 1995, the Corporation's stockholders'
equity amounted to $18.4 million or 8.6% of total assets.
Results of Operations
Home Federal's results of operations in recent years reflect the
fundamental changes that have occurred in the regulatory, economic and
competitive environment in which thrift institutions operate. Like most thrift
institutions, Home Federal's results of operations are primarily dependent upon
its net interest income, which is determined by (i) the difference between
yields earned on interest-earning assets and rates paid on interest-bearing
liabilities (interest rate spread) and (ii) the amounts of interest-earning
assets and interest-bearing liabilities outstanding. Deposit flows and the cost
of funds are influenced by interest rates on competing investments and general
market rates of interest. Lending activities are affected by the demand for
mortgage financing and for consumer and other types of loans, which in turn are
impacted by the interest rates at which such financing may be offered and by
other factors affecting the supply of housing and the availability of funds.
Home Federal's operating results also are affected by the level of its other
income, including loan origination and other fees, and operating expenses. Also
of importance is the level of nonperforming assets and the amount of Home
Federal's provisions for possible loan losses and for losses on REO, the former
reducing interest income on loans, and the latter being a significant element of
expense.
Summary of Net Interest Income. Net interest income totaled $7.3 million,
$7.5 million and $7.2 million for the years ended December 31, 1995, 1994 and
1993, respectively. The decrease of $234,000 in 1995 was due to increased
interest expense resulting primarily from an increase in the average balance of
savings accounts and advances from the FHLB of Atlanta and rates paid thereon,
which more than offset the increase in interest income resulting primarily from
an increase in the average balance of loans and the rates earned thereon. The
increase of $269,000 in 1994 was due to a decrease in interest expense resulting
primarily from a decline in the average balance of advances from the FHLB of
Atlanta and rates paid on savings accounts, which more than offset a decrease in
interest income resulting primarily from a decline in the average balance of
loans and the rates earned thereon. In addition, the Savings Bank's interest
rate spread decreased from 4.3% in 1994 to 3.9% in 1995, and the ratio of
interest-earning assets to interest-bearing liabilities increased from 98.6% in
1994 to 99.1% in 1995. The change in the interest rate spread in 1995 and 1994
is attributable to changes in the asset and liability mix during the respective
<PAGE>
periods. The following average balance sheet table sets forth for the periods
indicated, information on Home Federal regarding: (i) the total dollar amounts
of interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average yields; (iii) net interest income; (iv)
interest rate spread; (v) net interest-bearing liabilities; (vi) the net yield
earned on interest-earning assets; and (vii) the ratio of total interest-earning
assets to total interest-bearing liabilities. Average balances are calculated on
a monthly basis. Non-accrual and impaired loans are included in loans receivable
for purposes of these tables.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $139,086 $12,925 9.29%
Mortgage-backed securities 42,144 2,387 5.66
Investment securities 5,519 417 7.56
Short-term interest-bearing deposits 1,244 163 13.11
Federal funds sold 1,334 95 7.11
-------- -------
Total interest-earning assets $189,327 $15,987 8.44%
------- =====
Noninterest-earning assets 21,042
--------
Total assets $210,369
========
Interest-bearing liabilities:
Savings accounts $158,341 $6,652 4.20%
Advances from the FHLB of Atlanta 32,729 2,065 6.31
-------- -------
Total interest-bearing liabilities $191,070 $ 8,717 4.56%
-------- ------- =====
Noninterest-bearing liabilities 2,468
--------
Total liabilities $193,538
Stockholders' equity 16,831
--------
Total liabilities and stockholders' equity $210,369
========
Net interest-bearing liabilities $ (1,743)
========
Net interest income/interest rate spread $7,270 3.88%
====== =====
Net yield on interest-earning assets<F1> 3.84%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 99.09%
=====
<CAPTION>
Year Ended December 31, 1994
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $126,655 $11,561 9.13%
Mortgage-backed securities 40,578 2,319 5.72
Investment securities 5,226 355 6.79
Short-term interest-bearing deposits 3,721 192 5.16
Federal funds sold 1,551 60 3.86
-------- -------
Total interest-earning assets $177,731 $14,487 8.15%
------- ====
Noninterest-earning assets 20,415
--------
Total assets $198,146
========
Interest-bearing liabilities:
Savings accounts $149,031 $ 5,202 3.49%
Advances from the FHLB of Atlanta 31,188 1,780 5.71
Other 7 1 7.70
-------- -------
Total interest-bearing liabilities $180,226 $ 6,983 3.87%
------- ====
Noninterest-bearing liabilities 3,299
--------
Total liabilities $183,525
Stockholders' equity 14,621
--------
Total liabilities and stockholders' equity $198,146
========
Net interest-bearing liabilities $ (2,495)
========
Net interest income/interest rate spread $7,504 4.28%
====== =====
Net yield on interest-earning assets<F1> 4.22%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 98.62%
=====
<CAPTION>
Year Ended December 31, 1993
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $136,789 $12,578 9.20%
Mortgage-backed securities 33,031 1,883 5.70
Investment securities 2,658 148 5.56
Short-term interest-bearing deposits 6,428 257 4.00
Federal funds sold 1,950 65 3.31
-------- -------
Total interest-earning assets $180,856 $14,931 8.26%
------- ====
Noninterest-earning assets 20,896
--------
Total assets $201,752
========
Interest-bearing liabilities:
Savings accounts $149,133 $ 5,600 3.76%
Advances from the FHLB of Atlanta 36,343 2,069 5.69
Other 283 27 9.46
-------- -------
Total interest-bearing liabilities $185,759 $ 7,696 4.14%
------- ====
Noninterest-bearing liabilities 3,038
--------
Total liabilities $188,797
Stockholders' equity 12,955
--------
Total liabilities and stockholders' equity $201,752
========
Net interest-bearing liabilities $ (4,903)
========
Net interest income/interest rate spread $ 7,235 4.12%
======= =====
Net yield on interest-earning assets<F1> 4.00%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 97.36%
=====
<FN>
<F1> Net interest income divided by interest-earning assets.
</FN>
</TABLE>
<PAGE>
The following table shows, for the periods indicated, the changes in
interest income and interest expense attributable to (i) changes in volume
(changes in volume multiplied by prior year); (ii) changes in rate (changes in
rate multiplied by prior year volume); and (iii) changes in rate/volume
(determined by multiplying the change in rate by the change in volume).
<TABLE>
<CAPTION>
1995 Compared to 1994
Increase (Decrease) Due to
-----------------------------------
Rate/
Volume Rate Volume Total
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets: (In thousands)
Loans receivable $1,134 $ 209 $ 21 $1,364
Mortgage-backed securities 90 (21) (1) 68
Investment securities 20 40 2 62
Short-term interest-bearing deposits (128) 296 (197) (29)
Federal funds sold (8) 50 (7) 35
------ ------ ----- ------
Total $1,108 $ 574 $(182) $1,500
------ ------ ----- ------
Interest expense on interest-bearing liabilities:
Savings accounts $ 325 $1,059 $ 66 $1,450
Advances from the FHLB of Atlanta 88 188 9 285
Other (1) -- -- (1)
------ ------ ----- ------
Total $ 412 $1,247 $ 75 $1,734
------ ------ ----- ------
Net change in net interest income $ 696 $ (673) $(257) $ (234)
====== ====== ===== ======
<CAPTION>
1994 Compared to 1993
Increase (Decrease) Due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ------ ------ -------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets: (In thousands) (In thousands)
Loans receivable $(932) $ (92) $ 7 $(1,017)
Mortgage-backed securities 430 5 1 436
Investment securities 143 33 31 207
Short-term interest-bearing deposits (108) 74 (31) (65)
Federal funds sold (13) 10 (2) (5)
----- ----- ---- -------
Total $(480) $ 30 $ 6 $ (444)
----- ----- ---- -------
Interest expense on interest-bearing liabilities:
Savings accounts $ (4) $(394) $ -- $ (398)
Advances from the FHLB of Atlanta (293) 5 (1) (289)
Other (26) (5) 5 (26)
----- ----- ---- -------
Total $(323) $(394) $ 4 $ (713)
----- ----- ---- -------
Net change in net interest income $(157) $ 424 $ 2 $ 269
===== ===== ==== =======
</TABLE>
Interest Income. Interest on loans increased by $1.4 million or 11.8% in
1995 compared to the prior year. The increase was due to a $12.4 million or 9.8%
increase in the average balance of loans receivable and a 16 basis point
increase in the average yield earned on such assets. The primary reason for the
increase on the average balance of loans receivable during 1995 was the Savings
Bank's emphasis on originations of adjustable rate mortgages, fixed rate 10 to
15 year mortgages and consumer loans. Interest on loans decreased by $1.0
million or 8.1% in 1994 compared to the prior year. The decrease was due to a
$10.1 million or 7.4% decrease in the average balance of loans receivable and a
7 basis point decrease in the average yield earned on such assets. During 1994,
the decrease in the average balance of loans receivable was due to continued
lower general market rates of interest and, accordingly, the continued
refinancing of loans receivable into fixed rate instruments which the Savings
Bank sells into the secondary market without recourse.
Interest on mortgage-backed securities increased by $68,000 or 2.9% in 1995
compared to 1994 and by $436,000 or 23.2% in 1994 over the prior year. Such
increases were due to an increase in the average balance of such securities. The
average balance of mortgage-backed securities increased in 1995 and 1994 due to
the Savings Bank's utilization of excess cash flow from loan sales, repayments,
savings accounts and FHLB advances to invest in mortgage-backed securities.
Interest and dividends on investment securities increased by $62,000 or
17.5% in 1995 compared to 1994 and by $207,000 or 139.9% in 1994 compared to the
prior year. Such increases were due to an increase in the average balance of
investment securities and the rates earned thereon.
Other interest income, which consists primarily of income from short-term
interest-bearing deposits in the FHLB of Atlanta and federal funds, increased by
$6,000 or 2.4% during the year ended December 31, 1995 compared to the prior
period. The increase was primarily due to an increase in the average yield on
such investments which was partially offset by a decrease in the average balance
outstanding. Other interest income decreased by $70,000 or 21.7% during the year
ended December 31, 1994 compared to the prior period. The decrease was primarily
due to a decrease in the average balance outstanding which was partially offset
by an increase in the average yield on such investments. The changes in the
average balance of other interest-earning assets during 1995 and 1994 were due
to management's investment of funds in short-term investments prior to either
purchasing mortgage-backed securities or repaying borrowings. The changes in the
average yield on such investments were primarily due to general market rates of
interest.
Interest Expense. Interest expense on savings accounts increased by $1.5
million or 27.9% during the year ended December 31, 1995 as a result of a $9.3
million or 6.2% increase in the average balance of savings accounts and a 71
basis point increase in the average rate paid on such accounts. The increase in
the average balance of savings accounts during 1995 was due to competitive
pricing as the Savings Bank sought funds in order to originate loans and repay
advances. Interest expense on savings accounts decreased by $398,000 or 7.1%
during the year ended December 31, 1994 as a result of a 27 basis point decrease
in the average rate paid on such accounts. Such decrease in the rate paid
thereon in 1994 was due, in general, to lower market rates of interest.
<PAGE>
Interest on advances from the FHLB of Atlanta increased by $285,000 or
16.0% in 1995 compared to the prior year. The increase was primarily a result of
a $1.5 million or 4.9% increase in the average balance of advances from the FHLB
of Atlanta as well as a 60 basis point increase in the average rate paid on such
advances. During 1995, the average balance of such advances increased primarily
due to the Savings Bank utilizing advances from the FHLB of Atlanta to purchase
investment and mortgage-backed securities, and during 1994, to originate loans.
Interest on advances from the FHLB of Atlanta decreased by $289,000 or 14.0%
during 1994, compared to the prior period. The decrease was due to a $5.2
million or 14.2% decrease in the average balance of FHLB advances, due to the
maturity and repayment of certain advances.
Provision for Possible Loan Losses. The provision for possible loan losses
represents the charge against earnings that is required to fund the allowances
for possible loan losses to levels deemed adequate by management. The level of
the allowances for possible loan losses is determined by management based upon
their evaluation of the known as well as the inherent risks within the Savings
Bank's loan portfolio. This evaluation consists of an ongoing analysis of
individual loans and the overall risk characteristics and size of the different
loan portfolios. The Savings Bank also considers, among other things, present
and prospective industry trends and regional and national economic conditions,
past estimates of possible loan losses as compared to actual losses, potential
problems with sizable loans, large loan concentrations and historical losses on
loans. This ongoing managerial assessment is reviewed periodically by the
Savings Bank's independent public accountants. As adjustments become identified,
they are reported in the earnings of the period in which they become known.
At December 31, 1995, the Savings Bank's nonaccrual and impaired loans
amounted to $5.8 million, a $10.4 million or 64.2% decrease as compared to $16.2
million at December 31, 1994 and a $14.7 million or 71.7% decrease as compared
to $20.5 million at December 31, 1993. During 1995, the Savings Bank recovered
provisions to the allowances for possible loan losses of $349,000. The recovery
in 1995 was the result of the significantly reduced level of nonperforming loans
in 1995. The Savings Bank established provisions to the allowances for possible
loan losses of $278,000 and $1.7 million during 1994 and 1993, respectively. The
level of the provision for possible loan losses during these periods was due to
the significant levels of nonperforming loans and was necessitated in part to
restore the allowances for possible loan losses, which were reduced by aggregate
net charge-offs of $1.1 million and $1.1 million during 1994 and 1993,
respectively. At December 31, 1995, the Savings Bank had $3.6 million in its
allowances for possible loan losses, or 2.6% of the Savings Bank's net loan
portfolio and 62.7% of nonperforming loans.
Although management utilizes its best judgement in providing for possible
losses and believes that the Savings Bank's allowances for possible loan losses
were adequate as of December 31, 1995, there can be no assurance that the
Savings Bank will not have to increase its provision for possible loan losses in
the future. Arriving at an appropriate level of allowances for possible loan
losses necessarily involves a high degree of judgement. See Note 4 of the Notes
to Consolidated Financial Statements.
Other Income. Other income, which consists primarily of income from loan
origination and other fees, insurance and stockbrokerage commissions, fees on
checking and savings accounts, gains on sales of mortgage loans and
mortgage-backed securities and gross profit and rental income associated with
real estate held for development and sale or rental, decreased by $13,000 or
0.7% during 1995 compared to the prior period. The decrease in 1995 was
primarily due to decreased profits on sales of investment securities and real
estate owned held for development and sale or rental, which was partially offset
by increases in stockbrokerage commissions and increased fees on checking and
savings accounts.
Other income decreased by $870,000 or 30.4% during 1994 over the prior
comparable period. The decrease in 1994 was primarily due to decreased gains on
sales of mortgage loans and mortgage-backed securities, decreased loan fee
income and stockbrokerage and insurance commissions. See Note 10 of the Notes to
Consolidated Financial Statements.
Other Expenses. Total other expenses increased by $208,000 or 2.8% in 1995
and decreased by $375,000 or 4.8% in 1994, compared to the prior respective
period. The increase in 1995 was primarily due to increased provision for losses
on REO, increased employee compensation and benefits and occupancy and equipment
expenses. The decrease in 1994 was primarily due to a decrease in real estate
owned operations, net and impaired loan expenses.
Employee compensation and benefits increased by $67,000 or 2.1% in 1995
compared to the prior respective period. The increase in 1995 was attributable
to increased profit sharing expenses due to retirement plan contributions and
merit increases which were offset by decreased health insurance costs. Employee
compensation and benefits increased by $107,000 or 3.5% in 1994 compared to the
prior respective period. The increase in 1994 was attributable to increased
profit sharing expenses due to retirement plan contributions and increased
health insurance costs.
Occupancy and equipment expenses increased by $73,000 or 4.8% during 1995
and $97,000 or 6.9% in 1994 compared to the respective prior period. The
increase in 1995 was primarily due to increased depreciation on office
properties and equipment primarily due to a branch renovation in 1994. The
increase in 1994 was primarily due to expenses related to the consolidation of
several departments and the renovation of a branch location.
Advertising and promotion expenses decreased by $99,000 or 36.2% in 1995
and increased by $129,000 or 89.9% in 1994 compared to the respective prior
period. The decrease in 1995 was primarily the result of decreased use of sales
promotions and direct mailings associated with checking accounts. The increase
in 1994 was primarily the result of increased use of sales promotions,
<PAGE>
advertising and direct mailings associated with checking accounts and
stockbrokerage operations and increased expenses related to the grand opening of
a renovated branch location.
The provision for losses on REO and the provision for losses on real estate
held for development and sale or rental amounted to $443,000, $317,000 and
$277,000 in the aggregate in 1995, 1994 and 1993, respectively. The provisions
were the result of management's evaluation of the fair value less disposition
costs or the estimated net realizable value of such real estate. See Note 5 of
the Notes to Consolidated Financial Statements for a further discussion of REO.
Real estate owned operations, net and impaired loan expenses decreased by
$58,000 or 27.3% in 1995 and $589,000 or 73.4% in 1994 over the respective prior
periods. Such decreases were due to decreased costs associated with such
properties, particularly appraisal, legal, depreciation, real estate tax and
operating expenses.
Federal insurance premiums decreased by $10,000 in 1995 and increased by
$16,000 in 1994 in each case over the prior respective year. The decrease in
1995 is primarily attributable to a decrease in deposit premiums from $0.29 per
$100 of deposits to $0.26 per $100 of deposits. The increase in 1994 is
primarily attributable to Home Federal receiving the final distribution of the
secondary reserve credit during 1993, which was partially offset by a decrease
in deposit premiums from $0.31 per $100 of deposits to $0.29 per $100 of
deposits.
Other expenses, which consist primarily of professional fees, ATM network
expenses, administrative expenses and provision for loss on other assets,
increased by $109,000 or 7.1% in 1995 and decreased by $174,000 or 10.2% in 1994
over the prior comparable periods. The increase in 1995 was primarily
attributable to increases in professional fees, postage expense and provision
for losses on bad checks. The decrease in 1994 was primarily attributable to a
$223,000 decrease in the provision for losses on other assets (accounts
receivable associated with standby letters of credit issued in connection with
two housing bonds). See Note 11 of the Notes to Consolidated Financial
Statements.
Income Taxes. Home Federal's income tax (benefit) expense totalled
$(554,000) and $306,000 for the year ended December 31, 1995 and 1994,
respectively. The decrease in the provision for income taxes in 1995 is
primarily attributable to a reduction in the valuation allowance on deferred tax
assets. The increase in income tax expense in 1994 is primarily attributable to
increased taxable income. See Note 12 of the Notes to Consolidated Financial
Statements.
Asset and Liability Management
Home Federal maintains a program designed to decrease its vulnerability to
material and prolonged increases in interest rates. The principal determinant of
the exposure of Home Federal's earnings to interest rate risk is the timing
difference between the repricing or maturity of Home Federal's interest-earning
assets and the repricing or maturity of its interest-bearing liabilities. Home
Federal's asset and liability management policies seek to increase the interest
rate sensitivity and shorten the maturities of its interest-earning assets and
extend the maturities of its interest-bearing liabilities. Although Home Federal
has taken steps to reduce overall vulnerability to increases in interest rates,
Home Federal will be vulnerable to material and prolonged increases in interest
rates whenever interest-rate sensitive liabilities exceed its interest-rate
sensitive assets.
Asset and liability management is the responsibility of the Asset and
Liability Management Committee, which is comprised of the Executive Committee of
the Board of Directors, and the Chief Financial Officer. The committee generally
meets monthly and establishes strategies designed to regulate Home Federal's
flow of funds and coordinates the sources, uses and pricing of such funds. The
first priority in structuring and pricing Home Federal's assets and liabilities
is to maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates. Senior executive officers of Home Federal meet weekly
to set rates on the various deposits and, as required, loan products offered by
Home Federal and to review alternative investments or sources of funds.
Home Federal has undertaken a variety of strategies to better match the
interest-rate sensitivities of its assets and liabilities. Home Federal's
present policy is to emphasize the origination for portfolio of
interest-sensitive loan products such as adjustable-rate residential
mortgage-loans, short-term residential construction loans to individuals and a
variety of consumer loans. With respect to Home Federal's single-family
residential loan originations, Home Federal originates both fixed-rate and
adjustable-rate loans. Single-family, fixed-rate loans are originated primarily
for resale in the secondary market, thereby reducing Home Federal's interest
rate risk. Home Federal generally retains single-family adjustable-rate loans in
the portfolio. During 1995, 1994 and 1993, Home Federal originated and purchased
$29.6 million, $30.1 million and $37.2 million, respectively, of single-family
residential loans. Of such amounts, $18.3 million, $18.1 million and $13.4
million provided for periodic adjustment of interest rates, or 61.7%, 60.0% and
36.1% of single-family residential loans originated by Home Federal during the
respective periods.
Home Federal also originates residential construction loans, which
generally have shorter terms or rates that vary with shorter term market rate
indices. During 1995, 1994 and 1993, construction loan originations amounted to
$9.7 million, $10.7 million and $10.8 million, respectively, or 16.5%, 17.7% and
15.8% of total loan originations and purchases during the respective periods.
Home Federal originates both commercial business (primarily automobile
floor plan loans) and consumer loans, which generally have shorter terms and/or
rates that vary with interest rate indices and higher yields than residential
mortgage loans. Consumer and commercial business loan originations amounted to
$15.6 million, $14.2 million and $16.1 million in 1995, 1994 and 1993,
respectively.
During 1995, 1994 and 1993, Home Federal purchased investment and
mortgage-backed securities to maintain its asset mix. Purchases of investment
and mortgage-backed securities amounted to $10.0 million, $32.4 million and
$15.4 million during 1995, 1994 and 1993, respectively.
<PAGE>
Rates of interest paid on deposits at Home Federal are priced to be
sufficiently competitive in its primary market area in order to meet its
asset/liability management objectives and requirements for funds, but are
typically not the highest rates available. This policy helps Home Federal
control its cost of funds. Home Federal maintains a tiered pricing program for
some of its certificate accounts, pursuant to which higher rates of interest are
paid for longer-term certificate accounts. Home Federal relies on savings
deposits, loan repayments and advances from the FHLB of Atlanta to fund loan
originations and commitments.
Liquidity
Home Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments, including U.S. government and federal
agency securities and other investments. Regulations currently in effect require
Home Federal to maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which short-term liquid
assets must consist of not less than 1%. These levels are changed from time to
time by the OTS to reflect economic conditions. Liquidity is influenced by
general economic conditions, financial market conditions and fluctuations in the
interest rates and products offered by competing entities. Home Federal's
regulatory liquidity ratio averaged 10.3% and 6.7% for the months ended December
31, 1995 and 1994, respectively. At December 31, 1995, Home Federal was required
to maintain liquid investments amounting to $9.4 million, none of which were
pledged to secure advances from the FHLB of Atlanta.
The principal sources of funds to Home Federal are savings accounts,
amortization and prepayments of outstanding loans and mortgage-backed
securities, sales of loans and mortgage-backed securities, FHLB advances and
other borrowings. During the past several years, Home Federal has used FHLB
advances primarily to meet its ongoing commitments to fund maturing savings
certificates and savings withdrawals, fund existing and continuing loan
commitments and maintain its liquidity. The use of FHLB of Atlanta advances,
rather than savings deposits, has a slight negative impact on the Savings Bank's
net interest margin due to the typically higher weighted average cost of such
borrowings compared to savings deposits.
At December 31, 1995, the total of approved loan origination commitments
amounted to $1.5 million, exclusive of loans in process. The amount of savings
certificates which are scheduled to mature during the 12 months ended December
31, 1995 is $54.4 million. Management believes that, by evaluating competitive
instruments and prices in its market area, it can, in most circumstances, manage
and control maturing deposits so that a portion of such maturing deposits will
be redeposited in the Savings Bank.
Regulatory Capital Requirements
The Savings Bank is subject to regulations of the OTS that impose certain
minimum regulatory capital requirements. At December 31, 1995, the Savings Bank
exceeded the tangible, core and risk-based capital requirements currently
imposed by the OTS. The following table presents the Savings Bank's capital
requirements and the current excess, on both a dollar and percentage basis, as
of December 31, 1995.
<TABLE>
<CAPTION>
Current Actual
Capital Savings Bank Capital
Requirement Capital Excess
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 3,207 1.5% $18,049 8.4% $14,842 6.9%
Core 6,413 3.0 18,049 8.4 11,636 5.4
Risk-Based 10,608 8.0 19,728 14.9 9,120 6.9
</TABLE>
There can be no assurance that the Savings Bank will not be subject to
additional capital requirements in the future, either as a result of
regulations, guidelines and policies of general applicability or individual
regulatory capital requirements which may be applied to the Savings Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial corporations, virtually all of the assets and
liabilities of Home Federal are monetary in nature. As a result, interest rates
have a more significant impact on Home Federal's performance than the effects of
general levels of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: Page
Independent Auditor's Report 14
Consolidated Statements of Financial Condition as of
December 31, 1995 and 1994 15
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1995 16
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1995 17
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1995 18
Notes to Consolidated Financial Statements 20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Home Federal Corporation
We have audited the consolidated statements of financial condition of Home
Federal Corporation and Subsidiaries (Corporation) as of December 31, 1995 and
1994, and the related consolidated statements of changes in stockholders'
equity, income and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Federal
Corporation and Subsidiaries as of December 31, 1995 and 1994, the 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.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its method of accounting for loans in 1994 and its methods
of accounting for income taxes and investments in 1993.
/s/ Smith Elliott Kearns & Co.
Hagerstown, Maryland
February 16, 1996
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 5,083,293 $ 6,044,795
Short-term interest-bearing deposits 7,343,565 315,861
Federal funds sold 28,449 1,592,588
Investment securities (approximate market
value of $4,839,097 in 1994) -- 5,064,097
Mortgage-backed securities available for sale
(at approximate market value) 17,373,035 29,781,620
Mortgage-backed securities (approximate market
value of $29,979,853 in 1995 and
$10,814,726 in 1994) 29,748,031 11,222,245
Loans receivable, net 137,262,694 135,553,111
Real estate owned held for sale, net 7,075,233 6,450,058
Federal Home Loan Bank of Atlanta stock 1,500,000 1,900,000
Office properties and equipment, net 4,107,500 4,035,817
Deferred tax assets, net 1,710,000 1,780,000
Prepaid expenses and other assets 3,382,948 2,776,557
------------ ------------
TOTAL ASSETS $214,614,748 $206,516,749
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings accounts $163,663,302 $151,202,667
Advances from Federal Home Loan Bank of Atlanta 30,156,927 38,184,372
Advances by borrowers for taxes and insurance 581,437 611,990
Other liabilities 1,831,180 1,818,095
------------ ------------
TOTAL LIABILITIES $196,232,846 $191,817,124
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value,
authorized 5,000,000 shares (None issued) $ -- $ --
Common stock, $1.00 par value,
authorized 10,000,000 shares, issued and
outstanding 2,519,010 shares in 1995 and 1994 2,519,010 2,519,010
Additional paid-in capital 7,903,106 7,903,106
Unrealized loss on mortgage-backed securities
available for sale, net (175,378) (1,531,298)
Retained income--substantially restricted 8,135,164 5,808,807
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 18,381,902 $ 14,699,625
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,614,748 $206,516,749
============ ============
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Retained
Gain(Loss)on Income Total
Additional Securities Substan- Stock
Common Paid-in Available tially holders'
Stock Capital for Sale, net Restricted Equity
---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1992 $1,343,265 $6,511,836 $ $3,363,840 $11,218,941
Proceeds from
issuance of
shares of
common stock 1,175,745 1,391,270 2,567,015
Unrealized loss
on mortgage-
backed securities
available for
sale, net (119,817) (119,817)
Net Income, 1993 947,508 947,508
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1993 $2,519,010 $7,903,106 $ (119,817) $4,311,348 $14,613,647
Unrealized loss
on mortgage-
backed
securities
available for
sale, net (1,411,481) (1,411,481)
Net Income, 1994 1,497,459 1,497,459
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1994 $2,519,010 $7,903,106 $(1,531,298) $5,808,807 $14,699,625
Unrealized gain
on mortgage-
backed
securities
available for
sale, net 1,355,920 1,355,920
Dividends
declared and
paid, 1995 (201,521) (201,521)
Net Income, 1995 2,527,878 2,527,878
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1995 $2,519,010 $7,903,106 $ (175,378) $8,135,164 $18,381,902
========== ========== =========== ========== ===========
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans receivable $12,925,124 $11,560,941 $12,578,429
Interest on mortgage-backed
securities 2,387,271 2,319,685 1,882,715
Interest or dividends on investment
securities 416,979 354,757 147,765
Other interest income 257,979 251,821 321,570
----------- ----------- -----------
Total Interest Income $15,987,353 $14,487,204 $14,930,479
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings $ 6,652,035 $ 5,202,473 $ 5,600,213
Interest on advances from the
Federal Home Loan Bank of Atlanta 2,065,614 1,780,083 2,068,743
Interest on other borrowings -- 546 26,776
----------- ----------- -----------
Total Interest Expense $ 8,717,649 $ 6,983,102 $ 7,695,732
----------- ----------- -----------
NET INTEREST INCOME $ 7,269,704 $ 7,504,102 $ 7,234,747
PROVISION FOR POSSIBLE LOAN LOSSES (349,000) 278,000 1,687,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
LOSSES $ 7,618,704 $ 7,226,102 $ 5,547,747
----------- ----------- -----------
OTHER INCOME
Loan origination and other fees $ 414,866 $ 452,759 $ 541,552
Gain on sales of mortgage-backed
securities, net -- -- 199,019
Gain on sales of mortgage loans 47,506 82,968 370,354
Other 1,517,010 1,456,849 1,752,096
----------- ----------- -----------
Total Other Income $ 1,979,382 $ 1,992,576 $ 2,863,021
----------- ----------- -----------
OTHER EXPENSES
Employee compensation and benefits $ 3,204,774 $ 3,137,783 $ 3,030,574
Occupancy and equipment 1,579,087 1,506,480 1,409,651
Advertising and promotion 173,728 272,359 143,401
Provision for losses on real
estate owned held for sale 479,000 339,000 368,667
Recoveries on real estate held for
development and sale or rental (35,973) (22,495) (91,331)
Real estate owned operations, net
and impaired loan expenses 154,901 213,143 802,146
Federal insurance premiums 420,703 430,617 414,325
Other 1,647,688 1,538,732 1,713,217
----------- ----------- -----------
Total Other Expenses $ 7,623,908 $ 7,415,619 $ 7,790,650
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, LOSS
FROM DISCONTINUED OPERATION
AND CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE $ 1,974,178 $ 1,803,059 $ 620,118
PROVISION FOR (BENEFIT FROM)
INCOME TAXES (553,700) 305,600 (154,034)
----------- ----------- -----------
INCOME BEFORE LOSS FROM
DISCONTINUED OPERATION AND
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE $ 2,527,878 $ 1,497,459 $ 774,152
LOSS FROM DISCONTINUED OPERATION -- -- (71,644)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES -- -- 245,000
----------- ----------- -----------
NET INCOME $ 2,527,878 $ 1,497,459 $ 947,508
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Before discontinued operation and
cumulative effect of an
accounting change $ 1.00 $ 0.59 $ 0.40
Discontinued operation -- -- (0.04)
Cumulative effect of an
accounting change -- -- 0.13
----------- ----------- -----------
EARNINGS PER COMMON SHARE $ 1.00 $ 0.59 $ 0.49
=========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,527,878 $ 1,497,459 $ 947,508
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 631,289 622,619 591,000
Provision for possible loan losses (349,000) 278,000 1,687,000
Provision for losses on real estate
owned held for sale 479,000 339,000 368,667
Recovery on real estate held for
development and sale or rental (35,973) (22,495) (91,331)
Amortization of intangible assets 118,340 118,340 117,297
(Increase) in real estate held for
development and sale or rental, net -- (2,860) (82,004)
Proceeds from sale of real estate
held for development and sale or
rental 92,575 178,281 1,710,469
(Increase) in prepaids and other
assets (178,310) (90,322) (981,238)
Deferred tax provision (783,000) (267,000) (305,000)
Origination of loans receivable
originated for sale (2,502,600) (2,323,550) (22,878,932)
Proceeds from sale of loans
receivable originated for sale 2,223,198 3,883,527 21,783,228
Increase (decrease) in other
liabilities 13,085 (1,660,318) 310,997
(Decrease) in deferred fee income
and unearned discounts on loans
receivable (197) (60,201) (23,822)
(Gain) on sales of mortgage-backed
securities, net -- -- (199,019)
(Gain) on sales of mortgage loans (47,506) (82,968) (370,354)
Loss on sales of property and
equipment 47,145 -- --
Other, net 301,408 168,447 448,361
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 2,537,332 $ 2,575,959 $ 3,032,827
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of
Federal Home Loan Bank stock $ 500,000 $ 1,283,500 $ --
Purchase of Federal Home Loan
Bank stock (100,000) (525,000) --
Proceeds from maturity and sales
of investment securities 5,000,000 5,018,750 --
Purchase of investment securities -- (10,000,000) --
Net (increase) decrease in loans
receivable (4,861,678) (11,857,599) 18,889,174
Purchase of mortgage-backed
securities available for sale -- (13,314,627) (15,445,500)
Purchase of mortgage-backed
securities held-to-maturity (9,969,957) (9,056,985) --
Proceeds from sales of mortgage-
backed securities available
for sale -- -- 7,915,059
Principal collections from
mortgage-backed securities
available for sale 3,988,293 5,706,181 1,105,955
Principal collections from
mortgage-backed securities
held-to-maturity 1,808,600 1,895,195 14,493,150
Proceeds from sales of real
estate owned held for sale 2,492,943 3,552,108 1,985,423
Net (increase) in real estate
owned held for sale (415,593) (575,892) (1,197,132)
Proceeds from sales of office
property and equipment 143,072 -- 29,216
Purchase of office property
and equipment (849,510) (1,029,468) (321,960)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $(2,263,830) $(28,903,837) $27,453,385
----------- ------------ -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
savings accounts $12,460,635 $ 2,805,549 $ (371,858)
Proceeds from other FHLB advances 53,000,000 41,000,000 7,000,000
Payments at maturity of other
FHLB advances (61,000,000) (30,500,000) (22,670,000)
Proceeds from short term FHLB
advances -- 7,000,000 5,500,000
Payments at maturity of short
term FHLB advances -- (7,000,000) (8,500,000)
Net (decrease) in other borrowings -- (92,192) (337,953)
Net (decrease) in advances for
taxes and insurance (30,553) (18,436) (33,784)
Proceeds from issuance of
common stock -- -- 2,567,015
Payment of dividends (201,521) -- --
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES $ 4,228,561 $13,194,921 $(16,846,580)
----------- ----------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 4,502,063 $(13,132,957) $ 13,639,632
BEGINNING CASH AND CASH EQUIVALENTS 7,953,244 21,086,201 7,446,569
----------- ------------ ------------
ENDING CASH AND CASH EQUIVALENTS $12,455,307 $ 7,953,244 $ 21,086,201
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period:
Interest $ 8,725,861 $ 6,921,440 $ 7,762,954
Income taxes 482,735 755,600 152,480
Loans originated on sale of real
estate owned held for sale 595,000 62,000 2,034,210
Net transfer to real estate
owned held for sale from loans
receivable 3,820,525 1,903,532 1,379,113
Loan receivable established in
anticipation of draw on letter
of credit -- -- 1,500,000
Net proceeds due from foreclosure
sale of properties securing
impaired loans 602,676 -- 185,000
Unrealized (gain) loss on
mortgage-backed securities
available for sale, net (1,355,920) 1,411,481 119,817
=========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
Home Federal Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Home Federal Corporation (Corporation) is incorporated in the state of
Maryland. The Corporation, a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision (OTS).
The Corporation is also subject to various reporting and other requirements of
the Securities and Exchange Commission. The Corporation currently owns 100% of
the issued and outstanding common stock of Home Federal Savings Bank (Savings
Bank), which is the principal asset of the Corporation. The Corporation also
owns 100% of the stock of DMP, Inc. (formerly Maryland General Realty, Inc.) In
August 1993, the Corporation completed the sale of certain assets, liabilities
and the name of Maryland General Realty, Inc., a real estate brokerage firm.
The consolidated financial statements conform to generally accepted
accounting principles and include the accounts of the Corporation and its
subsidiaries. All intercompany accounts and transactions have been eliminated.
The following summarizes the more significant accounting policies and
procedures.
Nature of Operations and Customer Concentration:
The Savings Bank's principal business presently consists of attracting
deposits from the general public and using these funds, together with other
available funds, to originate real estate loans, residential construction loans
and consumer loans, including automobile and property improvement loans. Home
Federal's operations also include stockbrokerage, insurance and other financial
services.
Home Federal's primary marketing area is the state of Maryland,
particularly Washington and Allegany Counties, and to a lesser extent, South
Central Pennsylvania, Northern Virginia and the eastern panhandle of West
Virginia.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents are defined as those amounts included in the
consolidated statements of financial condition captions "Cash, Short-term
interest-bearing deposits and Federal funds sold." Cash and cash equivalents
have an original maturity of three months or less. For purposes of the
consolidated statements of cash flows, the Corporation and its subsidiaries do
not include liquid debt instruments in cash equivalents.
Investment and Mortgage-Backed Securities (Securities):
Securities held-to-maturity are securities that management has the intent,
and the Corporation and its subsidiaries have the ability to hold until
maturity. These securities are carried at cost, adjusted for amortization of
premium and accretion of discounts on a method that approximates a level yield.
Available-for-sale securities consist of mortgage-backed securities not
classified as trading securities nor as held-to-maturity securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity until
realized. Premiums and discounts are recognized in interest income using a
method that approximates a level yield. Gains and losses realized from the sale
of securities are included in noninterest income and are based on specific
identification method.
In May, 1993, the Financial Accounting Standards Board (FASB) of the
Financial Accounting Foundation issued Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities affecting the accounting for investments in debt and equity
securities, which are to be classified into one of three categories. Securities
which management has positive intent and ability to hold until maturity are to
be classified as held-to-maturity and reported at amortized cost. Securities
that are bought and held principally for the purpose of selling them in the near
term are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are to be
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity until realized.
The Corporation and its subsidiaries adopted SFAS No. 115 as of December
31, 1993.
Loans Held for Sale:
Mortgage loans that are originated and held for sale to investors are
classified as held for sale. These loans are recorded at the lower of cost or
market value with the net unrealized losses recognized through a valuation
allowance by charges to income. Gains and losses realized from the sale of these
loans and adjustments to market value are included in noninterest income.
Allowances for Possible Loan Losses:
A provision for possible loan losses is charged to operations based on
management's evaluation of potential risk inherent in the loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility
may not be reasonably assured, considers among other matters the estimated fair
value of the underlying collateral. This evaluation is inherently subjective as
it requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans and the fair value of the
collateral for certain collateral dependent loans that may be susceptible to
significant change. Because of the uncertainties inherent in the estimation
process, management's estimate of the allowance for possible loan losses may
change in the near term. However, the amount of the change that is reasonably
possible cannot be estimated.
<PAGE>
In May 1993, the FASB issued SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, an amendment of FASB Statements No. 5 and 15. SFAS No.
114, which is effective for years beginning after December 15, 1994, establishes
accounting measurement, recognition and reporting standards for impaired loans.
SFAS No. 114 provides that a loan is impaired when, based on current information
and events, it is probable that the creditor will be unable to collect all
amounts due according to the contractual terms (both principal and interest).
SFAS No. 114 requires that when a loan is impaired, impairment should be
measured based on the present value of the expected cash flows, discounted at
the loan's effective interest rate. If the loan is collateral dependent, as a
practical expedient, impairment can be based on a loan's observable market price
or the fair value of the collateral. The value of the loan is adjusted through a
valuation allowance created through a charge against income. Mortgages, consumer
installment obligations and credit card loans which are homogeneous in nature
are excluded. Loans that were treated as in-substance foreclosures under
previous accounting pronouncements are considered to be impaired loans and
remain in the loan portfolio under SFAS No. 114. SFAS No. 114 was amended in
October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures." SFAS No. 118 amended SFAS No. 114
primarily to remove its income recognition requirements and add some disclosure
requirements.
The Corporation and its subsidiaries adopted SFAS No. 114 as of January 1,
1994 and, accordingly, determined that loans with a recorded investment of
$14,922,292 were impaired at such date and that the allowances for possible loan
losses applicable thereto amounted to $2,882,000 with no impact on results of
operations. The adoption of the statement resulted in the reclassification of
$10,227,513 from real estate owned in substance foreclosed to loans receivable
and $2,592,000 from allowance for loss on real estate owned held for sale to
allowances for possible loan losses at December 31, 1993. The Corporation and
its subsidiaries adopted SFAS No. 118 upon its issuance in October 1994.
Non-Accrual Loans:
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual or impaired loans. The accrual of interest is discontinued when
serious doubt exists as to the full, timely collection of interest or principal.
All interest previously accrued but not collected is reversed against current
period interest income. Interest received on such loans is generally either
applied against principal or reported as interest income to the extent that cash
is received and/or where the future collection of principal is probable.
Interest accruals are resumed when such loans are brought current with respect
to principal and interest, and when in the judgement of management are deemed to
be fully collectible.
Deferred Loan Fees and Unearned Discounts:
Loan origination and commitment fees and certain direct costs of
originating loans are deferred and the net amount amortized over the contractual
life of the loan as an adjustment of the loan's yield.
Unearned discounts are accreted to income on a method that approximates a
level yield over the estimated remaining period of maturities of the loans.
Real Estate Owned Held for Sale:
Properties acquired by foreclosure or deed in lieu of foreclosure or loans
deemed real estate owned in substance are initially recorded at the lower of
cost or estimated fair value and subsequently at the lower of the initially
recorded amount and capitalized costs less accumulated depreciation or estimated
fair value less estimated disposition costs. Costs relating to the development
and improvement of property are capitalized, but not to exceed estimated fair
value less estimated disposition costs, whereas those relating to holding the
property are charged to expense.
Loans are generally considered foreclosed in substance when the Corporation
or its subsidiaries have taken possession of the collateral regardless of
whether formal foreclosure proceeding take place. Loans previously classified as
in-substance foreclosure but for which the Corporation or its subsidiaries had
not taken possession of the collateral have been reclassified to loans. This
reclassification did not impact the Corporation's financial condition or results
of operations.
Real estate owned held for sale is reviewed regularly and valuation
allowances are adjusted to reflect the carrying values of the property at the
estimated fair value less estimated disposition costs. The amounts the
Corporation could ultimately recover from real estate owned held for sale could
differ from the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond the Corporation's control. Because of
the uncertainties inherent in the estimation process, management's estimate of
the allowance for losses on real estate owned may change in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
Real Estate Held for Development and Sale or Rental:
Real estate held for development and sale or rental was carried at the
lower of cost less accumulated depreciation or net realizable value. Development
costs, including capitalized interest and other holding costs, were capitalized
up to, but not in excess of, net realizable value.
Office Properties and Equipment:
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.
<PAGE>
Income Taxes:
The Corporation, DMP, Inc., the Savings Bank and the Savings Bank's
subsidiaries file a consolidated federal income tax return. Deferred income
taxes are provided on elements of income and expense that are recognized for
financial accounting purposes in periods different than such items are
recognized for income tax return purposes and for the differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements.
The Savings Bank is permitted under the Internal Revenue Code to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. This addition may differ significantly from the
bad debt deduction used for financial accounting purposes. Bad debt deductions
for income tax purposes are included in taxable income of later years if the bad
debt reserves are used subsequently for purposes other than to absorb bad debt
losses. Because the Savings Bank does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided.
In 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." The
statement calls for a balance sheet approach in determining income tax expense.
The Corporation and its subsidiaries adopted this statement on January 1, 1993.
Intangible Assets:
Intangible assets represent the premium on purchased deposits and the
excess of cost over net assets of acquired subsidiaries (goodwill). The "premium
on purchased deposits" represents identified intangible assets amortized using
the straight-line basis over a 10 year period.
Stock Plans:
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the fair value method. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
statement is effective for fiscal years beginning after December 15, 1995. The
effect of adopting SFAS No. 123 is not expected to have a material impact on the
Corporation's consolidated financial condition or results of operations.
Reclassifications:
Certain reclassifications have been made to the consolidated financial
statements for the years ended December 31, 1993 and 1994 to conform to the
presentations used in the consolidated financial statements for the year ended
December 31, 1995.
Note 2. Investment Securities
During 1995, proceeds from the call of investment securities amounted to
$5,000,000.
During 1994, the Savings Bank purchased investment securities in the amount
of $10,000,000. Proceeds from sales of investment securities amounted to
$5,018,750. Net gains of $18,750 were realized on sales of such investment
securities.
Note 3. Mortgage-Backed Securities
A summary of mortgage-backed securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation (FHLMC) $14,029,515 $ 85,836 $117,087 $13,998,264
Government National
Mortgage Association (GNMA) 3,247,299 16,049 38,433 3,224,915
----------- -------- -------- -----------
$17,276,814 $101,885 $155,520 $17,223,179
Accrued Interest Receivable 149,856 -- -- 149,856
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Available
for Sale $17,426,670 $101,885 $155,520 $17,373,035
=========== ======== ======== ===========
<CAPTION>
December 31, 1994
------------------------------------------
Gross
Amortized Unrealized Market
Cost Losses Value
----------- ---------- -----------
<S> <C> <C> <C>
FHLMC $14,923,923 $ 896,389 $14,027,534
Federal National Mortgage
Association (FNMA) 14,237,052 1,353,846 12,883,206
GNMA 2,930,137 244,064 2,686,073
----------- ---------- -----------
$32,091,112 $2,494,299 $29,596,813
Accrued Interest Receivable 184,807 -- 184,807
----------- ---------- -----------
Total Mortgage-Backed
Securities Available for Sale $32,275,919 $2,494,299 $29,781,620
=========== ========== ===========
</TABLE>
There were no gross unrealized gains in 1994 on mortgage-backed securities
available for sale.
<PAGE>
A comparison of the principal amount, amortized cost and approximate market
value by final maturity date of the mortgage-backed securities available for
sale at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1995
- -----------------
Maturing beyond 12 months but
less than five years $ 4,905,208 $ 4,976,661 $ 4,929,669
Maturing beyond five years but
less than ten years 650,011 648,009 665,701
Maturing beyond ten years 11,390,820 11,652,144 11,627,809
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1994
- -----------------
Maturing beyond 12 months but
less than five years $ 5,657,450 $ 5,823,894 $ 5,487,726
Maturing beyond five years but
less than ten years 13,927,790 14,237,052 12,883,206
Maturing beyond ten years 11,678,927 12,030,166 11,225,881
</TABLE>
Mortgage-backed securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------
Gross
Amortized Unrealized Market
Cost Gains Value
----------- ---------- -----------
<S> <C> <C> <C>
GNMA $ 9,946,527 $ 66,219 $10,012,746
FNMA 19,630,214 165,603 19,795,817
----------- -------- -----------
$29,576,741 $231,822 $29,808,563
Accrued interest receivable 171,290 -- 171,290
----------- -------- -----------
Total Mortgage-Backed Securities
Held-to-Maturity $29,748,031 $231,822 $29,979,853
=========== ======== ===========
</TABLE>
There were no gross unrealized losses in 1995 on mortgage-backed securities
held-to-maturity. However, the December 31, 1995 amortized cost includes
$232,090 in gross unrealized losses resulting from the reclassification to held-
to-maturity.
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA $ 562,505 $ 30,663 $ 12,453 $ 580,715
FHLMC 2,263,222 3,744 106,482 2,160,484
FNMA 8,304,786 -- 322,991 7,981,795
----------- -------- -------- -----------
$11,130,513 $ 34,407 $441,926 $10,722,994
Accrued interest receivable 91,732 -- -- 91,732
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Held-to-Maturity $11,222,245 $ 34,407 $441,926 $10,814,726
=========== ======== ======== ===========
</TABLE>
A comparison of the principal amount, amortized cost and approximate market
value by final maturity date of the mortgage-backed securities held-to-maturity
at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1995
- -----------------
Maturing beyond 12 months but
less than five years $12,510,079 $12,511,807 $12,528,719
Maturing beyond five years but
less than ten years 4,619,907 4,660,167 4,743,161
Maturing beyond ten years 12,127,699 12,404,767 12,536,683
December 31, 1994
- -----------------
Maturing beyond 12 months but
less than five years $ 48,726 $ 20,955 $ 47,690
Maturing beyond five years but
less than ten years 895,284 885,215 878,669
Maturing beyond ten years 10,054,814 10,224,343 9,796,635
</TABLE>
GNMA, FHLMC and FNMA mortgage-backed securities in the amortized cost
amount of $22,061,250 and $20,522,236 were pledged as collateral for Federal
Home Loan Bank advances at December 31, 1995 and 1994, respectively.
Mortgage-backed securities in the amortized cost amount of $36,553,525 were
fixed-rate and $10,300,030 were adjustable rate at December 31, 1995.
During 1995 and 1994, the Savings Bank purchased mortgage-backed securities
in the amount of $9,969,957 and $22,371,612, respectively. There were no sales
of mortgage-backed securities during 1995 or 1994.
On November 15, 1995, the FASB released a Special Report entitled "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities". The report was issued in question and answer format and
provided for the one-time opportunity to reclassify securities between held-to-
maturity and available for sale. Accordingly, on December 21, 1995
mortgaged-backed securities in the amortized cost amount of $12,743,896 and the
related unrealized loss of $237,445 were reclassified to held-to-maturity from
available for sale and mortgage-backed securities in the amortized cost amount
of $2,225,089 and the related unrealized gain of $25,667 were reclassified to
available for sale from held-to-maturity.
<PAGE>
Note 4. Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Real Estate Loans:
Residential:
Single-family:
FHA/VA $ 524,129 $ 668,170
Conventional 71,297,016 60,301,834
Multi-family 11,824,433 13,258,387
Land 1,837,703 3,765,657
Commercial 16,920,576 20,588,201
------------ ------------
$102,403,857 $ 98,582,249
------------ ------------
Construction:
Residential $ 12,683,288 $ 13,999,432
Commercial 350,000 700,000
Land acquisition and development 8,468,363 11,372,831
------------ ------------
Total Construction $ 21,501,651 $ 26,072,263
------------ ------------
$123,905,508 $124,654,512
Less:
Loans in process (7,740,530) (7,350,158)
Allowances for possible
loan losses (3,132,147) (4,879,682)
Deferred fee income (246,399) (210,801)
Unearned discounts (316,262) (353,906)
------------ ------------
Total Real Estate Loans $112,470,170 $111,859,965
------------ ------------
Consumer Loans:
Home improvement $ 336,119 $ 404,860
Auto 5,241,057 4,900,744
Personal 2,643,409 2,477,271
Savings 568,576 416,093
Mobile homes 10,741,702 10,359,248
Other 3,521,587 3,517,595
------------ ------------
$ 23,052,450 $ 22,075,811
Less:
Allowances for possible
loan losses (500,157) (761,521)
Unearned discounts (28,860) (27,285)
------------ ------------
Total Consumer Loans $ 22,523,433 $ 21,287,005
------------ ------------
Commercial Loans $ 1,429,015 $ 1,593,131
------------ ------------
Accrued Interest Receivable $ 840,076 $ 813,010
------------ ------------
Total Loans Receivable, net $137,262,694 $135,553,111
============ ============
</TABLE>
The Savings Bank originates loans for sale to investors without recourse,
with servicing retained or released. At December 31, 1995 and 1994, the Savings
Bank had loans held for sale in the amount of $246,300 and $40,000,
respectively.
At December 31, 1995, 1994 and 1993, the Savings Bank serviced loans for
others amounting to $47,734,928, $48,238,440 and $56,481,142, respectively.
Non-performing loans consist of nonaccrual and impaired loans and loans
which are 90 days or more delinquent. Loans are placed on nonaccrual when, in
the judgement of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. A summary of nonperforming loans
is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Non-accrual and impaired loans $ 5,791,040 $16,160,354
Accruing loans which are 90 days
or more delinquent -- --
----------- -----------
$ 5,791,040 $16,160,354
=========== ===========
</TABLE>
A summary of nonaccrual and impaired loans at recorded investment is as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
--------- -----------
<S> <C> <C>
Non-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Residential:
Single-family $ 441,154 $ 194,627
Multi-family 160,748 --
Land -- 304,185
Commercial 37,732 38,579
Consumer and Commercial Loans 145,948 87,782
---------- -----------
Total Non-Accrual Loans $ 785,582 $ 625,173
---------- -----------
Impaired Loans:
Real Estate Loans:
Residential:
Single-family $ 433,464 $ 1,113,872
Multi-family -- 1,000,000
Land 128,107 1,967,027
Commercial 731,330 4,919,359
Construction:
Residential -- 735,198
Land acquisition and development 3,712,557 5,557,425
Consumer and Commercial loans -- 242,300
---------- -----------
Total Impaired Loans $5,005,458 $15,535,181
---------- -----------
Total Non-Performing Loans $5,791,040 $16,160,354
========== ===========
</TABLE>
During 1995, a total of seven loans with an aggregate principal balance of
$3,960,525 became real estate owned held for sale, of which five loans with an
aggregate principal balance of $3,878,013 were nonaccrual or impaired at
December 31, 1994. These loans were transferred to real estate owned held for
sale at a carrying value of $3,820,525.
<PAGE>
The contractual amount of interest that would have been recorded on
nonaccrual and impaired loans during 1995 and 1994 was $397,446 and $1,999,327,
respectively. Actual interest income collected and recognized on such loans
totaled $166,479 and $494,613, of which $166,479 and $340,598 was recognized as
income and $0 and $154,015 was applied to principal in 1995 and 1994,
respectively.
At December 31, 1995, $5,005,458 of impaired loans had related allowance
for credit losses of $152,407. The average recorded investment in impaired loans
during the year ended December 31, 1995 was approximately $13,430,983.
An analysis of the allowances for possible loan losses follows:
<TABLE>
<CAPTION>
Real Estate Loans
-------------------------------------------
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Balance $ 4,879,682 $ 5,575,336 $ 4,832,483
Provision for possible
loan losses (349,000) 278,000 1,687,000
Reallocation of reserves
from consumer and
commercial loans 244,000 -- --
Recoveries 407,500 -- 317,477
Charge-offs (2,050,035) (973,654) (1,261,624)
----------- ----------- -----------
Ending Balance $ 3,132,147 $ 4,879,682 $ 5,575,336
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Consumer and Commercial Loans
-------------------------------------------
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Balance $ 761,521 $ 916,317 $ 1,082,733
Reallocation of reserves
to real estate loans (244,000) -- --
Recoveries 103,516 63,746 35,836
Charge-offs (120,880) (218,542) (202,252)
----------- ----------- -----------
Ending Balance $ 500,157 $ 761,521 $ 916,317
=========== =========== ===========
</TABLE>
The maximum aggregate amount of loans that the Savings Bank may make to any
one borrower, including related entities, subject to certain exceptions, is
limited to 15% of its unimpaired capital and surplus, or $3,216,935 at December
31, 1995. As of December 31, 1995, the Savings Bank had loans outstanding to one
borrower which exceeded its loans-to-one borrower limitation. However, all
extensions of credit to such borrower were originated or committed to prior to
the enactment of, or under the exceptions contained within current laws and
regulations. At such date, loans in an aggregate amount of $6,420,704, including
the undisbursed portion of such loans, were outstanding to the borrower.
Note 5. Real Estate Owned Held for Sale
Real estate owned held for sale is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Real Estate Owned Held for Sale:
Acquired by foreclosure:
Single-family $ 33,728 $ 139,974
Multi-family 1,239,715 427,554
Commercial 972,140 1,705,544
Land 290,068 40,000
Acquired by deed in lieu of foreclosure:
Single-family 60,963 60,963
Commercial 1,504,754 1,580,502
Land 1,197,589 1,583,640
Land acquisition and development 1,951,798 3,436,326
In substance - land 1,440,490 --
---------- ----------
Total Real Estate Owned Held for Sale $8,691,245 $8,974,503
Less:
Allowance for losses 1,492,012 2,336,945
Accumulated depreciation 124,000 187,500
---------- ----------
Total Real Estate Owned Held for Sale, net $7,075,233 $6,450,058
========== ==========
</TABLE>
An analysis of the allowance for losses on real estate owned held for sale
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance $2,336,945 $2,307,763 $2,231,253
Additional provision 479,000 339,000 368,667
Recoveries 1,643 69,561 126,343
Charge-offs (1,325,576) (379,379) (418,500)
---------- ---------- ----------
Ending Balance $1,492,012 $2,336,945 $2,307,763
========== ========== ==========
</TABLE>
Note 6. Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Land $ 445,489 $ 475,489
Land improvements 246,648 256,020
Buildings and leasehold improvements 3,333,313 3,391,001
Furniture, fixtures, equipment and automobiles 5,451,836 5,133,174
---------- ----------
$9,477,286 $9,255,684
Less accumulated depreciation 5,369,786 5,219,867
---------- ----------
Total Office Properties and Equipment, net $4,107,500 $4,035,817
========== ==========
</TABLE>
<PAGE>
Note 7. Prepaid Expenses and Other Assets
Prepaid expenses and other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Prepaid expenses $ 253,527 $ 283,902
Intangible assets 285,988 404,328
Prepaid dealer interest on mobile home loans 1,501,773 1,453,237
Accounts receivable 1,053,561 365,050
Other, net 288,099 270,040
---------- ----------
Total Prepaid Expenses and Other Assets $3,382,948 $2,776,557
========== ==========
</TABLE>
Note 8. Savings Accounts
Savings accounts consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Savings deposits $ 10,280,093 $ 10,211,133
Money market accounts 29,186,383 31,605,316
Time deposits 88,923,590 75,450,393
Interest-bearing NOW accounts 25,487,338 25,219,129
Non-interest-bearing NOW accounts 9,690,599 8,640,630
------------ ------------
$163,568,003 $151,126,601
Accrued interest 95,299 76,066
------------ ------------
Total Savings Accounts $163,663,302 $151,202,667
============ ============
</TABLE>
The composition of interest-bearing savings accounts by interest rates was
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994
----------------- -----------------
Amount % Amount %
------------ -- ------------ --
<S> <C> <C> <C> <C>
2.40% - 5.24% $ 82,146,088 53% $122,131,995 86%
5.25% - 7.00% 66,959,169 44 18,188,931 13
7.01% - 9.00% 4,757,411 3 2,151,870 1
11.01% - 13.00% 14,736 -- 13,175 --
------------ --- ------------ ---
$153,877,404 100% $142,485,971 100%
============ === ============ ===
Weighted average interest
rate of all accounts 4.29% 3.74%
==== ====
</TABLE>
Certificates of deposit classified by maturity date consisted of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1994
------------------ ------------------
Amount % Amount %
----------- -- ----------- --
<S> <C> <C> <C> <C>
Due within first year $54,397,204 61% $52,098,689 69%
Due within second year 19,317,316 22 14,068,628 19
Due within third year 4,215,776 5 3,284,212 4
Due within fourth year 3,674,123 4 1,883,043 2
Due in over four years 7,319,171 8 4,115,821 6
----------- --- ----------- ---
$88,923,590 100% $75,450,393 100%
=========== === =========== ===
</TABLE>
Certificates of deposit in the amount of $71,655,941 were fixed rate and
$17,267,649 were adjustable rate at December 31, 1995.
Note 9. Advances from the Federal Home Loan Bank of Atlanta
At December 31, 1995 and 1994, advances from the Federal Home Loan Bank of
Atlanta (FHLB) mature as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
Maturities Interest Rate 1995 1994
- ---------- ------------- ----------- -----------
<S> <C> <C> <C>
1995 4.50% - 6.99% $ -- $33,000,000
1996 5.85% - 8.03% 17,728,000 3,000,000
1997 5.79% - 6.18% 5,728,000 --
1998 6.12% - 6.18% 728,000 --
1999 5.46% - 6.18% 1,728,000 1,000,000
2000 6.12% - 6.18% 728,000 --
2001 6.12% - 6.20% 1,728,000 1,000,000
2002 6.12% - 6.18% 732,000 --
2003 6.12% 300,000 --
2004 6.12% 300,000 --
2005 6.12% 300,000 --
----------- -----------
$30,000,000 $38,000,000
Accrued Interest 156,927 184,372
----------- -----------
$30,156,927 $38,184,372
=========== ===========
</TABLE>
The weighted average interest rate on FHLB advances outstanding at December
31, 1995 was 6.3%. Advances are secured by assets amounting to $40,157,729 at
December 31, 1995. Such amount is composed of capital stock in the FHLB and
certain of the Savings Bank's mortgage loans and mortgage-backed securities.
Note 10. Other Income
Other income is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Loan origination and other loan fees $ 414,866 $ 452,759 $ 541,552
Gain on sales of mortgage loans 47,506 82,968 370,354
Gain on sales of mortgage-backed
securities, net -- -- 199,019
Stockbrokerage commissions 171,109 48,892 229,112
Insurance commissions 107,805 126,431 174,280
Service fees on checking and
savings accounts 1,154,324 1,046,538 1,036,410
Other 83,772 234,988 312,294
---------- ---------- ----------
Total Other Income $1,979,382 $1,992,576 $2,863,021
========== ========== ==========
</TABLE>
<PAGE>
Note 11. Other Expenses - Other
Other expenses - other is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Professional fees $ 254,687 $ 213,238 $ 265,875
Supplies 153,433 141,034 130,800
Postage 215,065 199,477 193,635
ATM expenses 200,319 212,821 196,614
Provision (recovery) for loss
on other assets -- (70,047) 153,000
Insurance expense 145,352 168,476 207,377
Other 678,832 673,733 565,916
---------- ---------- ----------
Total Other Expenses - Other $1,647,688 $1,538,732 $1,713,217
========== ========== ==========
</TABLE>
Note 12. Provision for (Benefit from) Income Taxes
Federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994 1993
----------- -------- ---------
<S> <C> <C> <C>
State income tax current expense $ 49,300 $108,100 $ 69,966
Federal income tax current expense 180,000 464,500 81,000
Deferred income tax expense (credit) 693,000 187,000 (418,000)
Change in valuation allowance (1,476,000) (454,000) 113,000
---------- -------- ---------
$ (553,700) $305,600 $(154,034)
========== ======== =========
</TABLE>
The Savings Bank is permitted under the Internal Revenue Code to deduct an
addition to a reserve for bad debts. This deduction for income tax purposes can
be significantly greater than the bad debts actually incurred by the Savings
Bank. The excess bad debt deduction over the amount that would have been
allowable had the reserve for bad debts been maintained for all taxable years on
the basis of actual experience is deemed to be a tax preference item and is
subject to a minimum tax. Retained income at December 31, 1995 includes
additions to the tax bad debt reserve of approximately $7,100,000 for which no
provision for income taxes has been made. The deferred tax liability related to
the tax bad debt reserve that has not been recognized would amount to
$2,745,000. If the bad debt reserve is used for any purpose other than to absorb
loan losses, Federal income taxes may be imposed at the then current tax rates.
The Savings Bank does not contemplate that such reserve will be used in any
manner that will create income tax liabilities.
The Corporation's income tax provision (benefit) differs from the tax
determined by applying the statutory Federal income tax rate to income before
taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Tax at Federal income tax rate $ 671,221 $ 613,040 $ 210,840
Bad debt deduction 177,704 44,730 (105,000)
State income tax 49,300 108,100 69,966
Net operating loss carryforward -- -- (329,000)
Change in valuation allowance (1,476,000) (454,000) 113,000
Other - net 24,075 (6,270) (113,840)
---------- --------- ---------
$ (553,700) $ 305,600 $(154,034)
========== ========= =========
</TABLE>
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in net
deferred tax assets at December 31, 1995 and 1994 relate to the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowances for losses $1,723,000 $2,391,000
Unrealized loss on securities
available for sale 110,000 963,000
Intangible assets 343,000 301,000
Deferred fees on loans 133,000 162,000
Deferred directors fees 150,000 158,000
Other, net 45,000 48,000
---------- ----------
Total deferred tax assets $2,504,000 $4,023,000
Less valuation allowance 474,000 1,950,000
---------- ----------
Total Deferred Tax Assets
less Valuation Allowance $2,030,000 $2,073,000
Deferred Tax Liabilities -
Depreciation and amortization 320,000 293,000
---------- ----------
Deferred Tax Assets, net $1,710,000 $1,780,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Federal and state current income taxes payable are as follows:
December 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Current (refundable) payable:
State $ (65,500) $ --
Federal (290,000) (70,000)
========= ========
</TABLE>
Note 13. Profit Sharing Plans
The Corporation provides a retirement savings plan and trust which is a
deferred compensation plan (401(k)) and a profit sharing plan for all employees
who are at least 21 years of age and worked at least 1,000 hours in a calendar
year. The plan permits eligible participants to defer up to 15% of their annual
salary and the Corporation or its subsidiaries to contribute to the 401(k) part
of the plan on a matching basis. Also, the Corporation or its subsidiaries can
elect to contribute a portion of its profits to the profit sharing portion of
the plan.
<PAGE>
The Corporation or its subsidiaries did not contribute to the 401(k)
portion of the plan in 1993 but in 1994 and 1995 contributions were made based
on matching 20 cents and 30 cents, respectively, on every dollar up to 5% of the
employees' salary. The Corporation and its subsidiaries made a $185,000,
$117,000 and $75,000 contribution to the profit sharing portion of the plan in
1995, 1994 and 1993, respectively.
The retirement savings plan expenses (including matching and contribution)
for 1995, 1994 and 1993 were $206,496, $141,077 and $81,930, respectively.
Note 14. Employee Benefits Other Than Pensions and Stock Options
The Corporation and/or the Savings Bank provides certain health care and
life and disability insurance benefits for active employees and certain
retirees. The Corporation and its subsidiaries do not provide postemployment or
postretirement benefits other than pensions and stock options to current
employees. The Savings Bank maintains a director's deferred compensation program
pursuant to which directors of the Savings Bank may elect to defer their fees
for attending meetings in order to provide retirement benefits. The expense for
these benefits was $220,165, $246,672 and $207,984 for 1995, 1994 and 1993,
respectively.
In addition, employment agreements with several officers of the Corporation
and the Savings Bank provide severance payments and certain benefits in the
event of an involuntary termination of employment in connection with a change in
control of the Corporation, as defined in the contract. If the employment of the
officers were to be terminated pursuant to a change in control, they would be
entitled to receive severance payments computed based on average compensation as
defined in the contracts.
Note 15. Financial Instruments With Off-Balance-Sheet Risk
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk which are not reflected in the
consolidated statements of financial condition. The contractual amounts of those
instruments reflect the extent of involvement the Savings Bank has in particular
classes of financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit written is represented by the contractual amount
of those instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend funds for a loan 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 usually require payment of a fee. The Savings Bank evaluates each
customer's creditworthiness and related real estate collateral on a case-by-case
basis.
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including construction loan tri-party agreements, bond financing,
and similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending a loan to customers. A
summary of commitments is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Commitments, excluding
Loans in Process:
To originate:
Fixed rate loans $ 241,000 $ --
Adjustable rate loans 1,249,125 1,399,500
----------- ----------
$1,490,125 $1,399,500
To sell:
Fixed rate loans 246,300 40,000
----------- ----------
Net Commitments $1,243,825 $1,359,500
========== ==========
</TABLE>
A summary of the letter of credit instruments is as follows:
<TABLE>
<CAPTION>
December 31,
----------- ----------
1995 1994
----------- ----------
<S> <C> <C>
Letters of Credit:
Construction loans $1,400,124 $1,821,280
Other 141,330 170,973
---------- ----------
Total Letters of Credit $1,541,454 $1,992,253
========== ==========
</TABLE>
No loan commitments are outstanding to any borrowers whose loans are
nonperforming. Approximately $1,118,454 of letters of credit are outstanding on
construction loans to borrowers associated with nonperforming assets.
The Savings Bank is currently obligated by seven long-term operating
leases. The first lease obligates the Savings Bank for the land on which a
branch office is located. Three lease agreements obligate the Savings Bank for
office space for branch and loan production offices and three lease agreements
obligate the Savings Bank for automated teller machine space. At December 31,
1995, minimum future rental commitments for operating leases were as follows:
Year Amount
---- ------
1996 $61,081
1997 61,386
1998 64,119
1999 64,119
2000 64,119
Rent expense amounted to $78,492, $71,662 and $55,786 for the years ended
December 31, 1995, 1994 and 1993, respectively.
<PAGE>
Note 16. Stockholders' Equity and Regulatory Capital
On June 30, 1993, the Corporation completed a Rights and Community Offering
(the Offering). The Corporation sold 1,175,745 shares of common stock at $2.50
per share. The total amount of proceeds received was $2,939,363 which resulted
in net proceeds of $2,567,015 after giving effect to related expenses. The
Corporation contributed substantially all of the net proceeds to the Savings
Bank.
At December 31, 1995, the Corporation's stockholders' equity amounted to
$18,381,902 or 8.6% of total assets. As of such date, the Savings Bank's
stockholder's equity amounted to $18,159,842 or 8.5% of the Savings Bank's total
assets.
The Savings Bank is required to maintain a specified minimum amount of
capital in accordance with regulatory requirements. The Savings Bank's
regulatory capital at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
(In thousands)
<S> <C> <C> <C>
Tangible capital $18,049 8.4% <F1> 1.5% <F1>
Core capital 18,049 8.4% <F1> 3.0% <F1>
Risk-based capital 19,728 14.9% <F1> 8.0% <F1>
<FN>
<F1> Tangible capital and core capital are computed as a percentage of adjusted
total assets while risk-based capital is computed as a percentage of total
risk-weighted assets.
</FN>
</TABLE>
There can be no assurance that the Savings Bank will not be subject to
additional capital requirements in the future, either as a result of
regulations, guidelines and policies of general applicability or individual
regulatory capital requirements which may be applied to the Savings Bank.
Note 17. Earnings Per Share and Dividends
Earnings per share has been computed based on 2,519,010, 2,519,010 and
1,931,138 weighted average number of shares outstanding in 1995, 1994 and 1993,
respectively.
The Savings Bank's earnings appropriated to bad debt reserves for losses
and deducted for federal income tax purposes are not available for dividends
without the payment of taxes at the then current income tax rates on the amount
used.
On December 29, 1995 and September 29, 1995, the Corporation paid a $0.04
per share dividend on common stock totaling $201,521. The Corporation had
suspended dividend payments on the common stock after the first quarter of 1990
until 1995. The Corporation's ability to pay dividends on the common stock
depend on the receipt of dividends from the Savings Bank which is somewhat
constricted by federal regulations.
Note 18. Stock Plans
Under the Corporation's Employee Stock Compensation Program (Program) which
terminated on February 10, 1994, options previously granted have terms of ten
years from date of grant and are still exercisable although no new awards may be
granted.
Four kinds of rights, evidenced by four plans, are contained in the Program
and were available for grant: incentive stock options, compensatory stock
options, stock appreciation rights and performance share awards. The option
price per share may not be less than the fair market value of the common stock
on the date of grant.
At December 31, 1995, incentive options for 12,092 shares (as adjusted for
stock splits and dividends) had been granted and are unexpired at exercise
prices ranging from $9.25 per share to $11.79 per share (as adjusted). All of
such options were exercisable at December 31, 1995. No options granted had been
exercised during 1995, 1994 or 1993, and no stock appreciation rights or
performance shares had been granted or awarded under the Program as of December
31, 1995.
An aggregate of 120,563 shares of authorized but unissued common stock of
the Corporation (as adjusted) has been reserved for grant under the 1988 Stock
Option and Stock Appreciation Rights Plan (Option Plan) to full-time employees,
officers and directors of the Corporation and the Savings Bank. The Option Plan
shall remain in effect until March 17, 1998, unless sooner terminated in
accordance with the provisions of the Option Plan.
Three kinds of rights are contained in the Option Plan and are available
for grant: incentive stock options, non-qualified stock options and stock
appreciation rights. For incentive stock options, the option price per share may
not be less than the fair market value of the common stock on the date of grant.
For non-qualified stock options, the option price may be less than the fair
market value of the common stock on the date of grant. The maximum number of
shares of common stock for which non-qualified stock options may be granted to
all directors who are not full-time salaried employees of the Corporation or a
subsidiary company shall not exceed 35% of the shares of common stock covered by
the Option Plan.
On October 28, 1988, non-qualified stock options for 4,882 shares (as
adjusted) were granted to a former director of Waynesboro Savings. Such options
are exercisable at a price of $8.03 per share (as adjusted) and became
exercisable on October 28, 1988. On November 16, 1995, non-qualified and
qualified stock options for 51,627 shares were granted. Such options are
exercisable on May 16, 1996 at a price of $7.50 per share. No options granted
had been exercised during 1995, 1994 or 1993.
<PAGE>
Note 19. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash, short-term interest-bearing deposits and Federal funds sold
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment and Mortgage-backed securities
For securities, fair values are based on quoted market prices or dealer
quotes.
Loans receivable
The Savings Bank has utilized data provided by the OTS market value model
to estimate the fair value of performing loans receivable. Such fair value
estimates are determined by either (1) the stated discounted cash flow approach,
where the market value of a financial instrument is estimated by discounting the
cash flows the instrument is expected to generate by the yields currently
available to investors from other instruments of comparable risk and duration,
or (2) the option-based pricing approach, where the market value of a financial
instrument is estimated by generating cash flows for each point along an
interest rate path using scheduled amortizations, coupon payments, and
prepayments and such cash flows are then discounted by interest rates associated
with the cash flows plus an option-adjusted spread.
Fair value for significant nonperforming loans is based on recent internal
or external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows.
Federal Home Loan Bank of Atlanta Stock
The carrying amount of the stock is a reasonable estimate of fair value.
Savings accounts
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using data provided
by the OTS market value model. Such fair value estimate is based on the
discounted value of contractual cash flows.
Advances from the Federal Home Loan Bank of Atlanta and other borrowings
The Savings Bank utilized data provided by the OTS market value model to
estimate fair value of existing debt. Such fair value estimate is based on the
discounted value of contractual cash flows.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
The estimated fair values of the Savings Bank's financial instruments at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------------------
Carrying Amount Fair Value
--------------- ----------
(In thousands)
<S> <C> <C>
Financial Assets:
Cash, short-term interest-bearing
deposits and Federal funds sold $ 12,455 $ 12,455
Mortgage-backed securities 47,121 47,353
Loans 140,895
Less: allowances for possible loan losses (3,632)
---------
$ 137,263 141,502
Federal Home Loan Bank of Atlanta Stock 1,500 1,500
Financial Liabilities:
Savings accounts (163,663) (164,713)
Advances from Federal Home Loan
Loan Bank of Atlanta (30,157) (30,439)
Advances by borrowers for taxes
and insurance (581) (581)
Unrecognized Financial Instruments:
Commitments to extend credit (15) (30)
Standby letters of credit (0) (19)
<CAPTION>
December 31, 1994
------------------------------
Carrying Amount Fair Value
--------------- ----------
(In thousands)
<S> <C> <C>
Financial Assets:
Cash, short-term interest-bearing
deposits and Federal funds sold $ 7,953 $ 7,953
Investment securities 5,064 4,839
Mortgage-backed securities 41,003 40,596
Loans 141,194
Less: allowances for possible loan losses (5,641)
---------
$ 135,553 140,247
Federal Home Loan Bank of Atlanta Stock 1,900 1,900
Financial Liabilities:
Savings accounts (151,203) (150,029)
Advances from Federal Home Loan
Bank of Atlanta (38,184) (37,858)
Advances by borrowers for taxes
and insurance (612) (612)
Unrecognized Financial Instruments:
Commitments to extend credit (14) (28)
Standby letters of credit (0) (25)
</TABLE>
<PAGE>
Limitations
The fair value estimates are made at a discreet point in time based on
relevant market information and information about the financial instruments.
Because no market exists for a significant portion of the Savings Bank's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and such other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, the Savings Bank has a
substantial mortgage servicing portfolio that contributes net fee income
annually. The mortgage servicing portfolio is not considered a financial
instrument and its value has not been incorporated into the fair value
estimates. Also, the fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market. Other significant assets and
liabilities that are not considered financial assets or liabilities include the
brokerage operation, net deferred tax assets, office properties and equipment,
and intangibles. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
Note 20. Condensed Financial Information (Parent Company Only)
<TABLE>
<CAPTION>
Statements of Financial Condition
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Assets:
Cash on deposit with Home
Federal Savings Bank $ 51,141 $ 154,322
Equity in net assets of Home
Federal Savings Bank 18,159,842 14,354,438
Due (to) from Home Federal Savings Bank (83,213) 92,698
Prepaids and other assets 254,507 98,541
----------- -----------
Total Assets $18,382,277 $14,699,999
=========== ===========
Liabilities:
Other liabilities $ 375 $ 374
----------- -----------
Total Liabilities $ 375 $ 374
----------- -----------
Stockholders' Equity:
Common stock $ 2,519,010 $ 2,519,010
Additional paid-in capital 7,903,106 7,903,106
Unrealized loss on Home Federal
Savings Bank's mortgage-backed
securities available for sale (175,378) (1,531,298)
Retained income 8,135,164 5,808,807
----------- -----------
Total Stockholders' Equity $18,381,902 $14,699,625
----------- -----------
Total Liabilities and
Stockholders' Equity $18,382,277 $14,699,999
=========== ===========
<CAPTION>
Statements of Income
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 4,770 $ 6,250 $ 15,394
Dividend income 105,000 -- --
---------- ---------- ----------
Total Income $ 109,770 $ 6,250 $ 15,394
---------- ---------- ----------
Expenses:
Occupancy and equipment $ 4,500 $ 7,992 $ 11,507
Provision for losses (recovery) on
real estate owned held for sale -- -- (10,333)
Other 28,842 35,239 22,750
---------- ---------- ----------
Total Expenses $ 33,342 $ 43,231 $ 23,924
---------- ---------- ----------
(Loss) before equity in net income
of subsidiaries $ 76,428 $ (36,981) $ (8,530)
Equity in undistributed net income
of subsidiaries 2,451,450 1,534,440 956,038
---------- ---------- ----------
Net Income $2,527,878 $1,497,459 $ 947,508
========== ========== ==========
<PAGE>
<CAPTION>
Statements of Cash Flows
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,527,878 $1,497,459 $ 947,508
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net (income)
of subsidiaries (2,451,450) (1,534,440) (956,038)
Depreciation -- -- 3,943
Provision (recoveries) for losses on
real estate owned held for sale -- -- (10,333)
(Increase) decrease in prepaids and other
assets and refundable income taxes 21,912 (72,178) (34,421)
Increase (decrease) in liabilities -- (1,923) 300
---------- ---------- ----------
Net cash provided by (used in)
operating activities $ (6,660) $ (111,082) $ (49,041)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of real estate
owned held for sale $ -- $ -- $ 165,939
Investment in Home Federal Savings Bank -- -- (2,500,000)
---------- ---------- -----------
Net cash provided by (used in)
investing activities $ -- $ -- $(2,334,061)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ -- $ -- $ 2,567,015
Payment of dividends (201,521) -- --
---------- ---------- -----------
Net cash provided by (used in)
financing activities $ (201,521) $ -- $ 2,567,015
---------- ---------- -----------
Net increase (decrease) in cash $ (103,181) $ (111,082) $ 183,913
Cash, beginning of year 154,322 265,404 81,491
---------- ---------- -----------
Cash, end of year $ 51,141 $ 154,322 $ 265,404
========== ========== ===========
</TABLE>
Supplementary Data - Income taxes paid in 1995, 1994 and 1993 amounted to
$355,000, $595,000 and $97,111, respectively.
Note 21. Selected Quarterly Operations Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1995:
Interest income $3,858 $3,934 $4,001 $4,194
Interest expense 2,052 2,174 2,248 2,243
Provision for possible loan losses -- -- -- (349)
Provision for losses on real
estate owned held for sale 130 -- -- 349
Net Income 381 1,496 343 308
====== ====== ====== ======
Earnings Per Share $ 0.15 $ 0.59 $ 0.14 $ 0.12
====== ====== ====== ======
1994:
Interest income $3,476 $3,575 $3,694 $3,742
Interest expense 1,655 1,655 1,784 1,889
Provision for possible loan losses -- 58 -- 220
Provision for losses on real
estate owned held for sale 204 89 46 --
Net Income 340 408 333 416
====== ====== ====== ======
Earnings Per Share $ 0.13 $ 0.16 $ 0.13 $ 0.17
====== ====== ====== ======
</TABLE>
<PAGE>
CORPORATE INFORMATION
Market for Common Stock and Related Matters
The Corporation's common stock is traded on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol: "HFMD." As of March 8, 1996, there
were two market makers in the stock, Ferris Baker Watts, Inc. and Herzog, Heine,
Geduld, Inc. On December 31, 1995, there were 2,519,010 shares outstanding.
The high and low quotations for 1995 and 1994 listed below were obtained
from Nasdaq.
<TABLE>
<CAPTION>
Market Price
---------------------------------
1995 1994
--------------- ---------------
Quarter Ended High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
December 31 $8 3/4 $7 1/4 $6 $5 1/4
September 30 9 6 1/4 5 3/4 4 3/4
June 30 6 3/4 5 1/2 5 3/4 4 1/4
March 31 6 5 1/4 5 3 5/8
</TABLE>
As of March 15, 1996, there were approximately 1,600 stockholders of record
of the Corporation.
In September 1995, the Corporation's Board of Directors determined to
resume the payment of cash dividends to its stockholders. The Corporation has
paid cash dividends on the following dates:
Record Date Payable Date Cash Dividend Per Share
Sept. 22, 1995 Sept. 29, 1995 $.04
Dec. 15, 1995 Dec. 29, 1995 $.04
The payment of cash dividends by the Corporation is subject to
determination and declaration by the Corporation's Board of Directors.
Annual Meeting
The Annual Meeting of Stockholders of Home Federal Corporation will be held
at the Four Points Hotel (formerly the Sheraton Inn), located at 1910 Dual
Highway, Hagerstown, Maryland, on April 23, 1996 at 2:00 P.M..
Form 10-K
The Corporation will furnish to any stockholder, without charge, upon
written request to Richard W. Phoebus, Sr., President, Home Federal Corporation,
128 West Washington Stree, Hagerstown, Maryland 21740, a copy of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995
and list of the exhibits thereto required to be filed with the Securities and
Exchange commission under the Securities Exchange Act of 1934.
Independent Auditors
Smith Elliott Kearns & Company
480 North Potomac Street
Hagerstown, MD 21740
Transfer Agent & Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Legal Counsel
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, DC 20005
Subsidiaries
Home Federal Savings Bank
DMP, Inc.
Subsidiaries of Savings Bank
Home Appraisals, Inc.
Family Home Insurance Agency, Inc.
Maryland General Insurance Agency, Inc.
RLC Associates, Inc.
CLC Associates, Inc.
Ronald Harris Parker Associates, Inc.
<PAGE>
ANNEX E
Quarterly Report on Form 10-QSB of Home Federal
Corporation for the period ended March 31, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
HOME FEDERAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 0-16463 52-1636831
State of Incorporation Commission I.R.S. Employer
File Number I.D. Number
122-128 West Washington Street, Hagerstown, Maryland 21740
(Address of Principal Executive Office)
Registrant's telephone number: (301) 733-6300
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Number of Shares of Common Stock Outstanding
as of April 30, 1996: 2,519,010 Shares
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Report on Review by Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Financial Condition as of
March 31, 1996 (Unaudited) and December 31, 1995 . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended March 31, 1996
(Unaudited) and the Year Ended December 31, 1995 . . . . . . 5
Consolidated Statements of Operation for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) . . . . . . 6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) . . . . . . 8
Notes to Consolidated Financial Statements (Unaudited) . . . .10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
Months Ended March 31, 1996 . . . . . . . . . . . . . . . . .15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .21
Item 2: Changes in Securities. . . . . . . . . . . . . . . . . . . . .21
Item 3: Defaults Upon Senior Securities. . . . . . . . . . . . . . . .21
Item 4: Submission of Matters to a Vote of Security Holders. . . . . .21
Item 5: Other Information. . . . . . . . . . . . . . . . . . . . . . .21
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .21
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
The Board of Directors
Home Federal Corporation
We have reviewed the accompanying consolidated statement of financial
condition of Home Federal Corporation and Subsidiaries (Corporation) as of March
31, 1996 and the related consolidated statement of changes in stockholders'
equity for the three months ended March 31, 1996 and the consolidated statements
of operation for the three months ended March 31, 1996 and 1995 and consolidated
statements of cash flows for the three months ended March 31, 1996 and 1995.
These financial statements are the responsibility of the Corporation's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company
SMITH ELLIOTT KEARNS & COMPANY
Hagerstown, Maryland
May 2, 1996
<PAGE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 6,019,585 $ 5,083,293
Short-term interest-bearing deposits 4,138,640 7,343,565
Federal funds sold 29,701 28,449
Investment securities (approximate market
value of $1,000,729 in 1996) 1,000,729 --
Mortgage-backed securities available for sale
(at approximate market value) 7,523,157 17,373,035
Mortgage-backed securities (approximate market
value of $42,331,449 in 1996, and $29,979,853
in 1995) 42,827,308 29,748,031
Loans receivable, net 138,318,892 137,262,694
Real estate owned held for sale, net 5,316,474 7,075,233
Federal Home Loan Bank of Atlanta stock 1,450,000 1,500,000
Office properties and equipment, net 4,156,462 4,107,500
Prepaid expenses and other assets 4,229,905 3,382,948
Deferred tax assets, net 1,673,000 1,710,000
------------ ------------
TOTAL ASSETS $216,683,853 $214,614,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings accounts $167,989,191 $163,663,302
Advances from the Federal Home Loan Bank
of Atlanta 27,131,569 30,156,927
Advances by borrowers for taxes and insurance 855,650 581,437
Other liabilities 2,034,617 1,831,180
------------ ------------
TOTAL LIABILITIES $198,011,027 $196,232,846
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, authorized
5,000,000 shares (None issued) $ - $ -
Common stock, $1.00 par value, authorized
10,000,000 shares, issued and outstanding
2,519,010 shares in 1996 and 1995 2,519,010 2,519,010
Additional paid-in capital 7,903,106 7,903,106
Unrealized loss on mortgage-backed securities
available for sale, net (168,618) (175,378)
Retained income-substantially restricted 8,419,328 8,135,164
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 18,672,826 $ 18,381,902
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $216,683,853 $214,614,748
============ ============
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized Retained
Gain(Loss)on Income- Total
Additional Securities Substant- Stock-
Common Paid-in Available ially holders
Stock Capital for Sale,net Restricted Equity
---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 $2,519,010 $7,903,106 $(1,531,298) $5,808,807 $14,699,625
Unrealized
gain on
mortgaged-
backed
securities
available
for sale, net 1,355,920 1,355,920
Dividends paid
and declared (201,521) (201,521)
Net Income,
1995 2,527,878 2,527,878
---------- ---------- --------- ---------- -----------
Balance December
31, 1995 $2,519,010 $ 7,903,106 $(175,378) $ 8,135,164 $ 18,381,902
Unrealized gain
on mortgaged-
backed
securities 6,760 6,760
Dividends paid
and declared (100,760) (100,760)
Net Income,
1996 384,924 384,924
---------- ---------- --------- ---------- -----------
Balance, March
31, 1996
(Unaudited) $2,519,010 $7,903,106 $(168,618) $8,419,328 $18,672,826
========== ========== ========= ========== ===========
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME
Interest on loans receivable $3,171,023 $3,075,515
Interest on mortgage-backed securities 735,199 610,064
Interest or dividends on investment securities 27,708 123,838
Other interest income 118,954 48,449
----------- -----------
Total Interest Income $4,052,884 $3,857,866
----------- -----------
INTEREST EXPENSE
Interest on savings $1,724,369 $1,477,126
Interest on advances from the Federal Home
Loan Bank of Atlanta 462,467 575,352
----------- -----------
Total Interest Expense $2,186,836 $2,052,478
----------- -----------
NET INTEREST INCOME $1,866,048 $1,805,388
PROVISION FOR POSSIBLE LOAN LOSSES -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES $1,866,048 $1,805,388
----------- -----------
OTHER INCOME
Loan fees $ 110,822 $ 96,282
Gains on sales of mortgage loans 64,076 4,077
Other 491,033 320,171
----------- -----------
Total Other Income $ 665,931 $ 420,530
----------- -----------
OTHER EXPENSES
Employee compensation and benefits $ 919,564 $ 821,540
Occupancy and equipment 411,587 393,343
Advertising and promotion 66,350 60,300
Provision for losses on real estate owned
held for sale -- 130,000
Federal insurance premiums 104,243 107,828
Other 372,311 335,680
----------- -----------
Total Other Expenses $1,874,055 $1,848,691
----------- -----------
INCOME BEFORE INCOME TAXES $ 657,924 $ 377,227
PROVISION FOR (BENEFIT FROM) INCOME TAXES 273,000 (3,800)
----------- -----------
NET INCOME $ 384,924 $ 381,027
=========== ===========
EARNINGS PER SHARE $ 0.15 0.15
=========== ===========
DIVIDENDS PER SHARE $ 0.04 $ 0.00
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 384,924 $ 381,027
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 167,836 156,920
Provision for losses on real estate
owned held for sale -- 130,000
Amortization of intangible assets 29,585 29,585
(Increase) in prepaids and other assets (368,513) (488,914)
Deferred tax provision 33,500 (154,000)
Origination of loans receivable originated
for sale (664,300) --
Proceeds from sale of loans receivable
originated for sale 1,174,947 40,000
Increase (decrease) in other liabilities 203,437 (1,397)
Increase in deferred fee income and unearned
discounts on loans receivable 535 96,201
Gains on sales of mortgage loans (64,076) (4,077)
Other, net 52,444 119,860
------------ ------------
Net cash provided by operating activities $ 950,319 $ 305,205
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of Federal Home
Loan Bank stock $ 50,000 $ 300,000
Purchase of Federal Home Loan Bank stock -- (100,000)
Purchase of investment securities (1,000,000) --
Net (increase) in loans receivable (1,542,636) (3,441,274)
Principal collections from mortgage-backed
securities available for sale 1,713,978 927,667
Purchase of mortgage-backed securities
held to maturity (14,035,915) --
Principal collections from mortgage-backed
securities held to maturity 1,015,950 370,910
Proceeds from sale of mortgage-backed
securities held for sale 8,009,069 --
Proceeds from sale of real estate owned held
for sale 1,494,060 401,908
Net (increase) in real estate owned held
for sale (206,751) (281,861)
Purchase of office property and equipment (214,797) (182,178)
------------ ------------
Net cash (used in) investing activities $ (4,717,042) $(2,004,828)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings accounts $ 4,325,889 $ 6,147,155
Payments at maturity of other FHLB advances (6,000,000) (25,000,000)
Proceeds from other FHLB advances 3,000,000 20,000,000
Net increase in advances for taxes and
insurance 274,213 311,219
Payment of dividends (100,760) --
------------ ------------
Net cash provided by financing activities $ 1,499,342 $ 1,458,374
------------ ------------
Net (decrease) in cash and cash equivalents $ (2,267,381) $ (241,249)
Beginning cash and cash equivalents 12,455,307 7,953,244
------------ ------------
Ending cash and cash equivalents $ 10,187,926 $ 7,711,995
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 2,221,109 $ 2,062,662
Income taxes $ 141,240 $ 17,150
Net proceeds due from sale of properties
securing impaired loans $ 508,782 $ --
Loans originated on sale of real estate
owned held for sale $ 469,450 $ 550,000
Net transfer to real estate owned held for
sale from loans receivable $ -- $ 1,943,643
Unrealized (gain) on mortgage-backed
securities available for sale, net $ (6,760) $ (633,686)
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
In the opinion of Home Federal Corporation (Home Federal or the
Corporation), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
for a fair presentation of Home Federal's financial condition as of March 31,
1996 and the results of operations for the three months ended March 31, 1996 and
1995 and cash flows for the three months ended March 31, 1996 and 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes included in Home Federal's Annual Report for the year
ended December 31, 1995.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" establishing financial accounting and reporting
standards for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the fair value method. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by the
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Home Federal elected to continue to measure compensation cost
using APB No. 25, therefore, SFAS No. 123 will only require certain disclosures
in Home Federal's consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which eliminates the accounting distinction between rights to
service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. Accordingly, Home
Federal will recognize as assets all rights to service loans for others for
loans originated after January 1, 1996 and will amortize these assets in
proportion to and over the period of estimated net servicing income. These
capitalized servicing rights must also be evaluated for impairment based on the
fair value of those rights. Home Federal adopted SFAS No. 122 as of January 1,
1996. The amount of capitalized originated mortgage servicing rights was
immaterial at March 31, 1996.
NOTE B - Proposed Merger
On April 2, 1996, Home Federal entered into a Plan and Agreement to Merge
("Acquisition Agreement") with F&M Bancorp, Frederick, Maryland, a Maryland
corporation and bank holding company ("F&M"), which provides for the acquisition
of Home Federal by F&M.
Under the terms of the Acquisition Agreement, Home Federal will merge with
and into F&M (the "Merger"), with F&M to be the surviving corporation. Pursuant
to the Acquisition Agreement, upon the effective date of the Merger ("Effective
Date"), each outstanding share of common stock of Home Federal, par value $1.00
per share ("Home Federal Stock"), will be converted into the right to receive
shares of common stock, par value $5.00 per share, of F&M ("F&M Stock"), in an
amount equal to 165% of Home Federal's book value (calculated as specified in
the Acquisition Agreement) as determined as of the end of the month immediately
prior to the Effective Date (the "Calculation Date"). The number of shares of
F&M Stock to be received will be based on the arithmetic average of F&M Stock
closing prices reported for the twenty (20) consecutive days preceding the
Calculation Date (the "Average Market Value"), subject to certain adjustments.
If the Average Market Value of F&M Stock is greater than 1.9 times the book
value per share of F&M as of the Calculation Date, the number of shares of F&M
Stock to be received by Home Federal stockholders shall be based on a F&M Stock
price equal to 1.9 times the book value per share of F&M as of such Calculation
Date.
In connection with the execution of the Acquisition Agreement, Home Federal
entered into a Stock Option Agreement with F&M pursuant to which it granted F&M
an option to acquire, upon the occurrence of certain events defined in the Stock
Option Agreement ("Purchase Events"), up to an aggregate of 501,282 authorized
but unissued shares of Home Federal Stock (the "Option") (or 19.9% of the shares
outstanding) at a price of $8.25 per share. The provisions of the Stock Option
Agreement concerning the Option will terminate upon consummation of the Merger
or upon termination of the Acquisition Agreement; however, if such termination
occurs as a result of a willful breach by Home Federal of the Acquisition
Agreement or failure of Home Federal's stockholders to approve the Acquisition
Agreement, then the Option shall terminate 12 months after termination of the
Acquisition Agreement. The Option is intended to increase the likelihood that
the Merger will be consummated by making it more difficult and expensive for a
third party to acquire control of Home Federal.
The consummation of the transaction is subject to, among other things,
receipt of regulatory approval and the receipt of the requisite vote of
stockholders of each of Home Federal and F&M approving the Acquisition
Agreement. In addition, the Acquisition Agreement may be terminated by either
party in the event the Average Market Value of F&M Stock calculated as of the
Calculation Date is less than 1.6 times the book value of F&M Stock as of such
date; provided that if F&M elects and Home Federal agrees, the parties could
agree to proceed with the transactions contemplated by the Acquisition Agreement
using an Average Market Value of F&M Stock equal to 1.6 times its book value per
share as of such date.
NOTE C - Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
Gross Gross
Amortized Unrealized Market
Cost Losses Value
--------- ---------- ------
<S> <C> <C> <C>
Federal Home Loan Bank (FHLB) bond $1,000,000 $ -- $1,000,000
Accrued interest receivable 729 -- 729
---------- ---------- ----------
Total Investment Securities $1,000,729 $ -- $1,000,729
========== ========== ==========
</TABLE>
During 1996, the Savings Bank purchased investment securities in the amount
of $1,000,000.
NOTE D - Mortgage-Backed Securities
A summary of mortgage-backed securities available for sale is as follows:
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
(FHLMC) $ 4,366,707 $ 38,003 $ 25,406 $ 4,379,304
Government National
Mortgage Associaiton
(GNMA) 3,121,500 11,768 86,602 3,046,666
----------- -------- -------- -----------
$ 7,488,207 $ 49,771 $112,008 $ 7,425,970
Accrued Interest
Receivable 97,187 -- -- 97,187
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Available
for Sale $ 7,585,394 $ 49,771 $112,008 $ 7,523,157
=========== ======== ======== ===========
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
FHLMC $14,029,515 $ 85,836 $117,087 $13,998,264
GNMA 3,247,299 16,049 38,433 3,224,915
----------- -------- -------- -----------
$17,276,814 $101,885 $155,520 $17,223,179
Accrued Interest
Receivable 149,856 -- -- 149,856
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Available
for Sale $17,426,670 $101,885 $155,520 $17,373,035
=========== ======== ======== ===========
</TABLE>
Mortgage-backed securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
GNMA $ 9,745,510 $ -- $179,702 $ 9,565,808
Federal National Mortgage
Association (FNMA) 18,869,365 51,470 191,244 18,729,591
Collaterialized Mortgage
Obligations 13,966,308 -- 176,383 13,789,925
----------- -------- -------- -----------
$42,581,183 $ 51,470 $547,329 $42,085,324
Accrued Interest
Receivable 246,125 -- -- 246,125
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Held-to-
Maturity $42,827,308 $ 51,470 $547,329 $42,331,449
=========== ======== ======== ===========
<CAPTION>
December 31, 1995
---------------------------------------
Gross
Amortized Unrealized Market
Cost Gains Value
--------- ---------- ------
<S> <C> <C> <C>
GNMA $ 9,946,527 $ 66,219 $10,012,746
FNMA 19,630,214 165,603 19,795,817
----------- -------- -----------
$29,576,741 $231,822 $29,808,563
Accrued interest receivable 171,290 -- 171,290
----------- -------- -----------
Total Mortgage-Backed
Securities Held-to-Maturity $29,748,031 $231,822 $29,979,853
=========== ======== ===========
</TABLE>
The March 31, 1996 and December 31, 1995 mortgage-backed securities held to
maturity amortized cost includes $212,475 and $232,090, respectively, in gross
unrealized losses resulting from the reclassification to held-to-maturity.
GNMA, FHLMC, and FNMA mortgage-backed securities in the amortized cost
amount of $20,883,769 and $22,061,250 were pledged as collateral for Federal
Home Loan Bank advances at March 31, 1996 and December 31, 1995, respectively.
During 1996 the Savings Bank purchased mortgage-backed securities in the
amount of $14,035,915. Proceeds from the sale of mortgage-backed securities
during 1996 amounted to $8,009,069. Net losses of $30,369 were realized on sales
of such securities in 1996.
NOTE E - Loans Receivable
<TABLE>
Loans receivable are summarized as follows:
<CAPTION>
March 31, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Real Estate Loans:
Residential $ 86,496,047 $ 85,483,281
Commercial 17,635,875 16,920,576
Construction 18,552,296 21,501,651
------------ ------------
$122,684,218 $123,905,508
Less:
Loans in process (6,334,098) (7,740,530)
Allowances for possible loan losses (3,180,795) (3,132,147)
Deferred fee income and
unearned discounts (519,476) (562,661)
Unrealized loss on loans held for sale (13,000) --
------------ ------------
Total Real Estate Loans $112,636,849 $112,470,170
------------ ------------
Consumer Loans $ 23,488,870 $ 23,052,450
Less:
Allowances for possible loan losses (491,918) (500,157)
Unearned discounts (72,580) (28,860)
------------ ------------
Total Consumer Loans $ 22,924,372 $ 22,523,433
------------ ------------
Commercial Business Loans $ 1,862,898 $ 1,429,015
------------ ------------
Accrued Interest Receivable $ 894,773 $ 840,076
------------ ------------
Total Loans Receivable, net $138,318,892 $137,262,694
============ ============
</TABLE>
Non-Performing loans consist of nonaccrual and impaired loans and loans
which are 90 days or more delinquent. Loans are placed on nonaccrual status or
are considered impaired when, in the judgement of management, the probability of
collection of principal or interest is deemed to be insufficient to warrant
further accrual. A summary of nonaccrual and impaired loans as of March 31, 1996
and 1995 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
March 31,
------------------- December 31,
1996 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Non-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Residential $ 643,033 $ 551,951 $ 601,902
Commercial 37,562 37,946 37,732
Consumer Loans 151,516 84,900 145,948
----------- ----------- ----------
Total Non-Accrual
Loans $ 832,111 $ 674,797 $ 785,582
----------- ----------- ----------
Impaired Loans:
Real Estate Loans:
Residential $ 128,107 $ 2,964,185 $ 561,571
Commercial 306,254 3,192,452 731,330
Construction 3,713,104 9,656,304 3,712,557
Consumer Loan -- 127,300 --
----------- ----------- ----------
Total Impaired Loans $ 4,147,465 $15,940,241 $5,005,458
----------- ----------- ----------
Total Non-Performing
Loans $ 4,979,576 $16,615,038 $5,791,040
=========== =========== ==========
<CAPTION>
An analysis of the allowances for possible loan losses follows:
Real Estate Loans
-------------------------------------------
Three Months Ended March 31, Year Ended
---------------------------- December 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Beginning Balance $3,132,147 $4,879,682 $4,879,682
Additional provision -- -- (349,000)
Recoveries 57,068 -- 407,500
Reallocation of reserves
from consumer and
commercial loan losses -- -- 244,000
Charge-offs:
Construction -- (121,000) (160,000)
Commercial -- (79,000) (808,331)
Single-family (8,420) (102,443) (528,704)
Multi-family -- (100,000) (100,000)
Land -- -- (453,000)
---------- ---------- ----------
Ending Balance $3,180,795 $4,477,239 $3,132,147
========== ========== ==========
<CAPTION>
Consumer and Commercial Loans
-------------------------------------------
Three Months Ended Match 31, Year Ended
---------------------------- December 31,
1996 1995 1995
-------- -------- ------------
<S> <C> <C> <C>
Beginning Balance $500,157 $761,521 $761,521
Additional provision -- -- --
Reallocation of reserves
to real estate loans -- -- (244,000)
Recoveries 18,091 31,414 103,516
Charge-offs (26,330) (38,904) (120,880)
-------- -------- --------
Ending Balance $491,918 $754,031 $500,157
======== ======== ========
</TABLE>
NOTE F - Real Estate Owned Held for Sale
<TABLE>
Real estate owned held for sale is summarized as follows:
<CAPTION>
March 31,
------------------ December 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Real estate owned acquired
by foreclosure $1,395,188 $2,693,785 $2,535,651
Real estate owned acquired by
deed in lieu of foreclosure 3,736,600 7,175,314 4,715,104
Real estate owned in substance 1,440,490 -- 1,440,490
----------- ----------- ----------
$6,572,278 $9,869,099 $8,691,245
Less:
Allowance for losses 1,255,804 2,087,945 1,492,012
Accumulated depreciation -- 201,000 124,000
----------- ----------- ----------
Total Real Estate Owned
held for sale, net $5,316,474 $7,580,154 $7,075,233
=========== =========== ==========
<CAPTION>
An analysis of the allowance for losses on real estate owned held for
sale follows:
Three Months Ended March 31, Year Ended
---------------------------- December 31,
1996 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Beginning Balance $1,492,012 $2,336,945 $2,336,945
Additional provision -- 130,000 479,000
Recoveries 7,798 -- 1,643
Charge-offs (244,006) (379,000) (1,325,576)
---------- ---------- ----------
Ending Balance $1,255,804 $2,087,945 $1,492,012
========== ========== ==========
</TABLE>
NOTE G - Advances from the Federal Home Loan Bank of Atlanta
Advances from the Federal Home Loan Bank of Atlanta (FHLB) totaling
$27,131,569 at March 31, 1996 are at a 6.2% weighted average interest rate per
annum with $11,728,000 maturing in 1996, $8,728,000 maturing in 1997, $728,000
maturing in 1998, $1,728,000 maturing in 1999, $728,000 maturing in 2000,
$1,728,000 maturing in 2001, $732,000 maturing in 2002 and $300,000 maturing in
2003, 2004 and 2005, respectively. Such advances are secured by assets amounting
to $38,818,259 at March 31, 1996. Such amount is composed of capital stock in
the FHLB, certain of the Savings Bank's mortgage loans and mortgage-backed
securities, and certain other assets. Accrued interest payable on advances from
the FHLB totaled $131,569 at March 31, 1996.
NOTE H - Provision for (Benefit from) Income Taxes
Federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended
--------------------------- December 31,
1996 1995 1995
----------- -------- ------------
<S> <C> <C> <C>
State income tax current expense $ 31,300 $ 27,500 $ 49,300
Federal income tax current expense 208,200 122,700 180,000
Deferred income tax expense 33,500 96,000 693,000
Change in valuation allowance -- (250,000) (1,476,000)
----------- -------- ----------
$ 273,000 $ (3,800) $ (553,700)
=========== ======== ==========
Home Federal's income tax differs from the tax determined by applying the
statutory Federal income tax rate to income before taxes for the following
reasons:
<CAPTION>
Three Months Ended March 31, Year Ended
--------------------------- December 31,
1996 1995 1995
----------- -------- ------------
<S> <C> <C> <C>
Tax at Federal income tax rate $ 223,694 $128,257 $ 671,221
Bad debt deduction (28,900) (30,600) 177,704
State income tax 31,300 27,500 49,300
Change in valuation allowance -- (250,000) (1,476,000)
Other - net 46,906 121,043 24,075
----------- -------- -----------
$ 273,000 $ (3,800) $ (553,700)
=========== ======== ===========
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in net
deferred tax assets at March 31, 1996 and 1995 and December 31, 1995 relate to
the following:
<CAPTION>
March 31,
------------------------- December 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowances for losses $1,581,000 $2,308,000 $1,723,000
Unrealized loss on securities
available for sale 116,000 565,000 110,000
Intangible asset 358,000 312,000 343,000
Deferred fees on loans 121,000 174,000 133,000
Deferred directors' fees 151,000 167,000 150,000
Other, net 134,000 41,000 45,000
---------- ---------- ----------
Total deferred tax assets $2,461,000 $3,567,000 $2,504,000
Less valuation allowances 474,000 1,700,000 474,000
---------- ---------- ----------
Total Deferred Tax Assets
less Valuation Allowances $1,987,000 $1,867,000 $2,030,000
Deferred Tax Liabilities -
Depreciation and amortization 314,000 331,000 320,000
---------- ---------- ----------
Net Deferred Tax Assets $1,673,000 $1,536,000 $1,710,000
========== ========== ==========
Federal and state current income taxes payable is as follows:
<CAPTION>
March 31,
-------------------- December 31,
1996 1995 1995
-------- ------- ------------
<S> <C> <C> <C>
Current (refundable) payable:
State $ (65,000) $ -- $ (65,000)
Federal (285,000) (70,000) (290,000)
</TABLE>
NOTE I - Common Stock and Earnings Per Share
Earnings per share have been computed based on 2,519,010 average shares
outstanding in 1995 and 1994. On March 29, 1996, Home Federal paid a $100,760 or
$0.04 per share dividend to stockholders of record on March 15, 1996.
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended March 31, 1996
GENERAL
Home Federal Corporation (Corporation) is the unitary savings and loan
holding company of Home Federal Savings Bank (Savings Bank) and its
subsidiaries. The Corporation and its subsidiaries are sometimes collectively
referred to herein as "Home Federal." The Corporation currently owns 100% of the
issued and outstanding common stock of the Savings Bank, which is the principal
asset of the Corporation.
On April 2, 1996, Home Federal entered into a Plan and Agreement to Merge
("Acquisition Agreement") with F&M Bancorp, Frederick, Maryland, a Maryland
corporation and bank holding company ("F&M"), which provides for the acquisition
of Home Federal by F&M. See Note B of the unaudited notes to consolidated
financial statements.
Financial Condition
The Corporation's total assets increased $2.1 million or 1.0% to $216.7
million from December 31, 1995 to March 31, 1996, due primarily to a $1.1
million increase in net loans, a $3.2 million increase in mortgage-backed
securities and a $1.0 million increase in investment securities, which increases
were partially offset by a $2.3 million decrease in cash and cash equivalents
and a $1.8 million decrease in real estate owned, net. The Corporation's total
liabilities increased by $1.8 million or 0.9% to $198.0 million from December
31, 1995 to March 31, 1996, primarily due to a $4.3 million increase in savings
accounts, which was offset to some extent by a $3.0 million decrease in
borrowings. Stockholders' equity increased $291,000 to $18.7 million at March
31, 1996 due primarily to a $284,000 increase in retained earnings.
Nonperforming Assets
The Corporation's nonperforming assets decreased by $2.6 million or 20.0%
from $12.9 million or 6.0% of total assets at December 31, 1995 to $10.3 million
or 4.8% of total assets at March 31, 1996. At March 31, 1996, the allowances for
possible loan losses amounted to $3.7 million or 2.7% of loans, net, and 73.8%
of total nonperforming loans. At March 31, 1996, the allowance for losses on
real estate owned held for sale (REO) amounted to $1.3 million or 23.6% of REO,
net. While management presently believes that its allowances for possible loan
losses and REO losses are adequate, no assurance can be given that future
provisions for possible loan or REO losses may not be necessary. See Notes E and
F of the unaudited notes to consolidated financial statements.
RESULTS OF OPERATIONS
Net Income
Net income for the three months ended March 31, 1996 amounted to $385,000,
essentially the same as net income of $381,000 during the comparable period in
1995.
Net Interest Income
Net interest income for the three months ended March 31, 1996 increased by
$61,000, or 3.4%, over the same period in 1995 due to increased interest income
which more than offset increased interest expense. Interest income for the three
months ended March 31, 1996 increased by $195,000 or 5.1% compared to the same
period in 1995, while interest expense increased by $134,000 or 6.6% during the
three months ended March 31, 1996 as compared to the same period in the prior
year.
During the three month period, the increase in interest income was due
primarily to an increase in the average balances of loans receivable,
mortgage-backed and short-term interest bearing deposits and an increase in the
average rate earned on loans receivable and mortgage-backed securities. Such
increases were offset by decreases in the average balances of investment
securities and federal funds. The primary reason for the increase in the average
balance of short-term interest bearing deposits was the Savings Bank's
investment of funds in short-term investments prior to purchasing mortgage-
backed securities. The increase in the average balance of mortgage-backed
securities in 1996 was due to the Savings Bank's purchasing $14.0 million in
mortgage-backed securities, which was funded by the sale of $8.0 million in
mortgage-backed securities and funds from increased savings accounts, loan
repayments and loan sales. The increase in interest expense was primarily the
result of increases in the average balances of savings accounts and the average
rates paid thereon which were partially offset by a decrease in the average
balance of advances from the Federal Home Loan Bank of Atlanta ("FHLB"). The
increase in the average balance of savings accounts was due to competitive
pricing, as the Savings Bank sought funds in order to originate loans, purchase
mortgage-backed and investment securities and repay advances. The average
balance of advances from the FHLB of Atlanta decreased primarily due to the
Savings Bank utilizing excess funds to repay advances.
The Savings Bank's interest rate spread was 3.9% during the three months
ended March 31, 1996 and 1995 and the ratio of interest earning assets to
interest-bearing liabilities increased from 99.0% during the three months ended
March 31, 1995 to 99.9% during the three months ended March 31, 1996.
Other Income
Other income totaled $666,000 and $421,000 for the three months ended March
31, 1996 and 1995, respectively. The $245,000 or 58.4% increase during the three
months ended March 31, 1996 was primarily due to increases in income related to
loan originations, loan sales, stockbrokerage commissions, fees on checking and
savings accounts and gain on sales of real estate owned, which was partially
offset by losses on sales of mortgage-backed securities and decreased insurance
commissions.
Operating Expenses Operating expenses amounted to $1.9 million and $1.8
million for the three months ended March 31, 1996 and 1995, respectively. During
the three months ended March 31, 1996, the Corporation experienced increases in
employee compensation and benefits, office occupancy and equipment expenses and
other expenses, which were substantially offset by deceases in provision for
losses on REO. Employee compensation and benefits increased due to increased
profit sharing expenses, merit increases and incentive compensation expenses.
Office occupancy and equipment expenses increased due to increased depreciation
on office properties and equipment due to computer technology upgrades during
1995 and 1996. Other operating expenses increased due to increases in
professional fees which was offset by decreases in insurance expense, ATM
expenses and expenses associated with REO operations, net and impaired loan
expenses.
Provision for losses on real estate owned amounted to $130,000 for the
three months ended March 31 1995. The decrease in 1996 reflects managements
evaluation of the fair value less disposition costs or the net realizable value
of such real estate. See Note F of the unaudited notes to consolidated financial
statements.
Income Taxes
Home Federal's income tax expense totaled $273,000 for the three months
ended March 31, 1996 as compared to income tax benefit of $4,000 during the same
period in the prior year. The significant increase in income tax expense for the
three months ended March 31, 1996 as compared to the prior year was attributable
to increased taxable income, and Home Federal's reduction in the valuation
allowance on deferred tax assets which reduced income tax expense in 1995.
ASSET AND LIABILITY MANAGEMENT
Home Federal has undertaken a variety of strategies to better match the
interest-rate sensitivity of its assets and liabilities. Home Federal's present
policy is to emphasize the origination for portfolio of 10-15 year fixed rate
residential mortgage loan products and loan products such as adjustable-rate
residential mortgage loans, short-term residential construction loans to
individuals and a variety of consumer loans. With respect to Home Federal's
single-family residential loan originations, the Savings Bank originates both
fixed-rate and adjustable-rate loans. Single-family, fixed-rate loans originated
with terms greater that 20 years are primarily for resale in the secondary
market, thereby reducing Home Federal's interest rate risk. Home Federal
generally retains single-family adjustable-rate loans in portfolio. During the
three months ended March 31, 1996 and 1995, Home Federal originated $8.2 million
and $6.8 million, respectively, of single-family residential loans. Of such
amounts, $3.8 million and $5.1 million provided for periodic adjustment of
interest rates, or 46.1% and 75.0% of single-family residential loans originated
by Home Federal during the respective periods. During 1996, Home Federal
originated $1.0 million of fixed-rate loans with 10 or 15 year maturities.
Home Federal also has continued to originate both commercial business
(primarily automobile floor plan loans) and consumer loans, which generally have
shorter terms and/or rates that vary with interest rate indices and higher
yields than residential mortgage loans. Consumer and commercial business loan
originations amounted to $4.3 million during the three months ended March 31,
1996 as compared to $3.5 million during the comparable period in 1995.
During 1996, Home Federal purchased investment and mortgage-backed
securities to maintain its asset mix. The Savings Bank purchased $1.0 million
and $14.0 million of investment and mortgage-backed securities, respectively
which was funded by savings deposits, loan sales and repayments, and the
proceeds of $8.0 million from the sale of mortgage-backed securities available
for sale.
Rates of interest paid on deposits at Home Federal are priced to be
sufficiently competitive in its primary market area in order to meet its
asset/liability management objectives and requirements for funds, but are
typically not the highest rates available. This policy helps Home Federal
control its cost of funds. Home Federal maintains a tiered pricing program for
some of its certificate accounts, pursuant to which higher rates of interest are
paid for longer-term certificate accounts. Home Federal relies on savings
deposits, loan and mortgage-backed securities repayments and advances from the
FHLB of Atlanta to fund loan originations and commitments.
REGULATORY CAPITAL REQUIREMENTS
The Savings Bank is subject to regulations of the Office of Thrift
Supervision ("OTS") that impose certain minimum regulatory capital requirements.
At March 31, 1996 the Savings Bank's tangible, core and risk-based capital
exceeded regulatory requirements. The following table summarizes, as of March
31, 1996, the Savings Bank's regulatory capital requirements, the amount of its
actual capital and the amount of its excess capital on a dollar and percentage
basis.
<TABLE>
<CAPTION>
March 31, 1996
---------------------------------
Capital Capital
Capital Requirement Excess
------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Dollar basis:
Tangible $18,281 $ 3,236 $15,045
Core 18,281 6,472 11,809
Risk-based 19,987 10,781 9,206
Percentage basis:
Tangible 8.5% 1.5% 7.0%
Core 8.5 3.0 5.5
Risk-based 14.8 8.0 6.8
</TABLE>
There can be no assurance that the Savings Bank will not be subject to
additional capital requirements in the future, either as a result of
regulations, guidelines and policies of general applicability or individual
regulatory capital requirements which may be applied to the Savings Bank.
Liquidity
Home Federal is required under applicable Federal regulations to maintain
specified levels of "liquid" investments including United States government and
Federal agency securities and other investments. Regulations currently in effect
require Home Federal to maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which short-term liquid
assets must consist of not less than 1%. These levels are changed from time to
time by the OTS to reflect economic conditions. Liquidity is influenced by
general economic conditions, financial market conditions and fluctuations in the
interest rates and products offered by competing entities. Home Federal's
regulatory liquidity ratio averaged 9.3% for the month ended March 31, 1996. At
March 31, 1996, Home Federal was required to maintain liquid investments
amounting to $9.2 million, none of which were pledged to secure advances from
the FHLB of Atlanta.
The principal sources of funds to Home Federal are savings accounts,
amortization and prepayments of outstanding loans and mortgage-backed
securities, sales of loans, FHLB advances and other borrowings. During the past
several years, Home Federal has used such funds primarily to meet its ongoing
commitments to fund maturing savings certificates and savings withdrawals, fund
existing and continuing loan commitments, purchase mortgage-backed securities
and maintain its liquidity.
At March 31, 1996, the total of approved loan origination commitments
amounted to $3.0 million, exclusive of loans in process. The amount of savings
certificates which are scheduled to mature during the twelve months ended March
31, 1997 is $56.8 million. Management believes that, by evaluating competitive
instruments and prices in its market area, it can, in most circumstances, manage
and control maturing deposits so that a portion of such maturing deposits will
be redeposited in the Savings Bank. During the three months ended March 31,
1996, the Savings Bank experienced a $4.3 million increase in savings accounts.
The Savings Bank utilized these funds to repay FHLB advances and purchase
investment and mortgage-backed securities during the three months ended March
31, 1996.
IMPACT OF INFLATION ON CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial corporations, virtually all of the assets and
liabilities of Home Federal are monetary in nature. As a result, interest rates
have a more significant impact on Home Federal's performance than the effects of
general levels of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
RECAPITALIZATION OF SAIF AND RELATED LEGISLATIVE PROPOSALS
The deposits of the Savings Bank are currently insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC). Both the SAIF and the Bank Insurance Fund (BIF), the federal deposit
insurance fund that covers commercial bank deposits, are required by law to
attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The
BIF has achieved a fully funded status in contrast to the SAIF and, therefore,
as discussed below, the FDIC recently substantially reduced the average deposit
insurance premium paid by BIF-insured commercial banks to a level substantially
below the average premium paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as the Savings Bank will be
competitively disadvantaged as compared to commercial banks by the resulting
premium differential. It is anticipated that, under present conditions, it will
be at least several years before the SAIF reaches a reserve ratio of 1.25% of
insured deposits.
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between SAIF
- -insured institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The proposed legislation would have provided
that all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate would have been sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on the
current level of reserves maintained by the SAIF, it was anticipated that the
amount of the special assessment required to recapitalize the SAIF would have
been approximately 80 to 85 basis points of the SAIF-assessable deposits. It was
anticipated that after the recapitalization of the SAIF, premiums paid by SAIF-
insured institutions would be reduced to match those currently being assessed
BIF-insured commercial banks. The legislation also provided for the merger of
the BIF and the SAIF, with such merger being conditioned upon the prior
elimination of the thrift charter.
The legislation discussed above had been, for some time, included as part
of a fiscal 1996 federal budget bill, but was eliminated prior to the bill being
enacted on April 26, 1996. In light of the legislation's elimination and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Savings Bank.
If legislation were to be enacted in the future which would assess a one
- -time special assessment of 85 basis points, the Savings Bank would (based upon
the Savings Bank's SAIF deposits as of March 31, 1996) pay approximately
$876,000, net of related tax benefits. In addition, the enactment of such
legislation might have the effect of immediately reducing the Savings Bank's
capital by such an amount. Nevertheless, management does not believe, based upon
the foregoing assumptions, that a one-time assessment of this nature would have
a material adverse effect on Home Federal's consolidated financial condition.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its subsidiaries are involved in various legal
proceedings occurring in the ordinary course of business. There are no
material legal proceedings to which the Corporation or any of its
subsidiaries is a part, or to which any of their property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Filed on April 9, 1996 and included:
Press release dated April 2, 1996, announcing Home Federal and the
Savings Bank signing a Plan and Agreement to Merge with F&M Bancorp.
Also, a copy of the Plan and Agreement to Merge with F&M Bancorp and
a Stock Option Agreement with F&M Bancorp.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HOME FEDERAL CORPORATION
BY: /s/ Richard W. Phoebus
Date Richard W. Phoebus
President and
Chief Executive Officer
BY: /s/ Salvatore M. Savino
Date Salvatore M. Savino
Vice President and Treasurer,
Chief Financial Officer
(principal financial and
accounting officer)
