SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-K
(Mark One)
/XX/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number
0-12638
F & M BANCORP
(Exact name of registrant as specified in its charter)
Maryland 52-1316473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Thomas Johnson Drive
Frederick, Maryland 21702
(Address of principal executive offices) (Zip Code)
(301) 694-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /XX/ No / /
(Cover page 1 of 2 pages)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /XX/
State the aggregate market value of the voting stock held by non-
affiliates of the registrant. Indicate the number of shares outstanding of each
of the registrant's classes of common stock, as of the latest practicable date.
Common Stock, par value $5.00 per share:
Market value held by non-affiliates
at February 28, 1997 $138,700,103
Outstanding at February 28, 1997 5,690,757 shares
Documents Incorporated by Reference
(1) Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1996 are incorporated by reference into Parts I and II.
(2) Portions of the Proxy Statement dated March 17, 1997 relating to the 1997
Annual Meeting of Stockholders of the Registrant is incorporated by
reference into Part III.
(Cover page 2 of 2 pages)
<PAGE>
TABLE OF CONTENTS
Part 1 Page
- ------ ----
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Farmers and Mechanics National Bank . . . . . . . . . . . . 1
Home Federal Savings Bank . . . . . . . . . . . . . . . . . 1
Commercial Banking and Related Services . . . . . . . . . 1
Personal Banking Services . . . . . . . . . . . . . . . . 1
Trust Services . . . . . . . . . . . . . . . . . . . . . 2
Competition . . . . . . . . . . . . . . . . . . . . . . . 2
Employees . . . . . . . . . . . . . . . . . . . . . . . . 2
Supervision and Regulation . . . . . . . . . . . . . . . . 2
Banking Regulation . . . . . . . . . . . . . . . . . . . 2
Bank Holding Company Act . . . . . . . . . . . . . . . . 3
Capital Adequacy Guidelines . . . . . . . . . . . . . . . 4
Interstate Banking . . . . . . . . . . . . . . . . . . . 5
Monetary Policy . . . . . . . . . . . . . . . . . . . . . 5
Legislation . . . . . . . . . . . . . . . . . . . . . . . 5
Statistical Information . . . . . . . . . . . . . . . . . . 6
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 7
Item 4 Submission of Matters to a Vote of Security Holders . . . . . 7
Additional
Item Executive Officers of the Registrant . . . . . . . . . . . . 7
Part II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 8
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . 8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 8
Item 8 Financial Statements and Supplementary Data . . . . . . . . . 8
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . 9
Part III
- --------
Item 10 Directors and Executive Officers of the Registrant . . . . . 9
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . 11
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 11
Item 13 Certain Relationships and Related Transactions . . . . . . . 12
Part IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
PART I
ITEM 1. BUSINESS
F&M Bancorp ("Bancorp") is a bank holding company registered under the
Bank Holding Company Act of 1956 that provides banking and bank related
financial services through its wholly-owned subsidiaries, Farmers and Mechanics
National Bank and subsidiaries (the "Bank") and Home Federal Savings Bank and
subsidiaries (the "Savings Bank"). Bancorp is incorporated in Maryland and
commenced operations in 1984. At December 31, 1996, Bancorp was the third
largest independent holding company headquartered in the state.
Farmers and Mechanics National Bank
The Bank was incorporated in 1865 as a national banking association under
the laws of the United States, and is the successor to Maryland State chartered
banking institutions dating from 1817. In 1915, the Bank acquired trust powers.
It conducts a general banking and trust company business through 24 offices
located in Frederick, Carroll, and Montgomery Counties, Maryland. The Bank had
total assets of $776,491,000, total deposits of $632,462,000, and total loans,
net of unearned income, of $515,927,000 at December 31, 1996.
Home Federal Savings Bank
The Savings Bank, a federally chartered savings bank, was acquired by
Bancorp in 1996 through its merger with Home Federal Corporation. The Savings
Bank conducts its business through 7 offices located in Washington and Allegany
Counties and had total assets of $229,203,000, total deposits of $162,315,000,
and total loans, net of unearned income, of $154,342,000 at December 31, 1996.
Commercial Banking and Related Services
The Bank and the Savings Bank provide credit facilities and related
services for the business community. Various types of commercial lending
products, including lines of credit, term loans, agricultural loans, real
estate and construction loans, and other forms of secured financing are
offered. Checking accounts, certificates of deposit, business financial
services including various cash management programs, and night depository
services are also provided.
Personal Banking Services
The Bank and the Savings Bank provide a wide range of personal banking
services to individuals at each of their branch offices and the Bank's mobile
banking unit, Express Bank. Included in the services offered at most locations
are interest-bearing and noninterest-bearing checking accounts, savings
accounts, tiered money market deposit accounts, certificates of deposit,
individual retirement accounts, home mortgage loans, home equity loans, home
improvement loans, installment and other personal loans including automobile
and other consumer financing, VISA credit card services (through an agent bank
relationship), and safe deposit boxes. The Bank and the Savings Bank have an
expanding network of 24-hour automated teller machines ("ATMs") and cash
dispensers throughout their market area offering limited banking services.
Trust Services
The individual trust services offered by the Bank include the
administration of estates, and service as trustee of living, testamentary and
insurance trusts, agency accounts, custodial accounts, employee benefit
accounts, and self-directed IRA's.
Competition
Bancorp operates in a highly competitive environment that has intensified
in the past several years as a result of interstate banking and the entry into
the market of new and diverse financial institutions not subject to the
regulatory restrictions of domestic banks and bank holding companies. Profit
margins in the traditional banking business of lending and deposit gathering
are more difficult to maintain as deregulation has allowed nonbanking
institutions to offer alternative services to many of the Bank's customers.
Competitors include not only other commercial banks, but also savings and loan
associations, credit unions, money market funds, mortgage companies, leasing
companies, insurance companies, and a wide variety of other financial service
companies.
Employees
At December 31, 1996, Bancorp and its subsidiaries had 490 full-time
equivalent employees.
Supervision and Regulation
Banking Regulation
The Bank is subject to supervision and regulation by the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), and the Federal Deposit Insurance Corporation (the
"FDIC") and is subject to examination by the Comptroller of the Currency. The
official having primary supervisory authority over the Bank is the Comptroller
of the Currency. Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfers, responsiveness to community needs, management practices,
compensation policies, and other aspects of operations are subject to
regulation by the appropriate Federal supervisory authorities and the
applicable banking laws of the State of Maryland. The Bank may establish branch
banking offices throughout Maryland with the prior approval of the Comptroller
of the Currency. Mergers of the Bank with any other bank would require approval
of, and involve review by, various governmental agencies.
The Savings Bank is subject to examination and comprehensive regulation by
the Office of Thrift Supervision "(the "OTS'), and by the FDIC. The OTS has
extensive authority over the operations of savings associations. The OTS'
enforcement authority over all savings associations includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to initiate injunctive actions.
The Federal law imposes certain restrictions limiting the ability of the
Bank and the Savings Bank to transfer funds to the parent company in the form
of loans or dividends. (See Note 15 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report to Shareholders on page 41, which is
incorporated herein by reference.)
Bank Holding Company Act
Bancorp is registered with the Federal Reserve Board as a bank holding
company and is subject to supervision and examination by the Federal Reserve
Board under the Bank Holding Company Act of 1956 (the "Act"), as amended. The
Act restricts the business activities and acquisitions that may be engaged in
or made by Bancorp. After prior approval or notice, Bancorp may acquire other
banks and bank holding companies and engage directly or indirectly in certain
activities closely related to banking. Bancorp must give prior notice of
certain purchases or redemptions of its outstanding equity securities. Bancorp
and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease, sale of
property, or furnishing of services.
The Federal Reserve Board may issue cease and desist orders against bank
holding companies and nonbank subsidiaries to stop actions believed to present
a serious threat to a subsidiary bank. The Federal Reserve Board also regulates
certain debt obligations of bank holding companies.
Capital Adequacy Guidelines
The Federal Reserve Board and the Comptroller of the Currency have
historically determined the adequacy of a depository institution's capital
resources by comparison of its capital to its assets. The leverage capital
ratio measures the adequacy of capital in relation to the extent to which the
institution has leveraged its assets. The risk-weighted assets ratio measures
the adequacy of capital after weighting the risk inherent in the assets.
The capital adequacy guidelines require depository institutions to
maintain a minimum leverage capital ratio of 3 percent Tier 1 capital
(primarily shareholders' equity) to total assets, plus, for all but the most
highly rated institutions, an additional cushion of 100 to 200 basis points.
Tier 1 capital for bank holding companies includes common equity, minority
interest in equity accounts of consolidated subsidiaries, and qualifying
perpetual preferred stock. Tier 1 capital excludes goodwill and other
disallowed intangibles, certain deferred tax assets and any net unrealized loss
on marketable equity securities. At December 31, 1996, Bancorp's leverage
capital ratio was 9.18 percent.
Bancorp must also meet a total capital to risk-weighted assets ratio
(risk-based capital ratio) of 8.00 percent, measuring the amount and nature of
the assets and commitments currently at risk. The risk-based capital rules
specify four categories of asset or commitment risk, with each category being
assigned a weight of 0 percent through 100 percent depending upon the risk
involved. Each asset or commitment of Bancorp is categorized and weighted
appropriately, and its capital is then compared to the aggregate value of such
risk-weighted assets or commitments to determine if additional capital is
required. At least 50 percent of the capital must be made up of Tier 1 capital
elements. At December 31, 1996, Bancorp's total risk-based capital ratio was
14.08 percent.
The Comptroller of the Currency and the OTS have capital adequacy ratio
requirements for the Bank and the Savings Bank, respectively, that are
consistent with those for Bancorp.
The FDIC requires "prompt corrective action" when an insured institution's
capital falls to certain levels. This rule restricts or prohibits certain
activities and requires an insured institution to submit a capital restoration
plan when it becomes undercapitalized. The restrictions and prohibitions become
more severe as an institution's capital level declines. The rule defines five
capital ratios which are as follows:
<TABLE>
<CAPTION>
Total Tier-1 Tier-1
Risk-Based Risk-Based Leverage
Capital Category Ratio Ratio Ratio
- ---------------- ---------- ---------- ---------
<S> <C> <C> <C>
Well capitalized greater than greater than greater than
or equal to 10% or equal to 6% or equal to 5%
Adequately capitalized greater than greater than greater than
or equal to 8% or equal to 4% or equal to 4%
Undercapitalized less than 8% less than 4% less than 4%
Significantly undercapitalized less than 6% less than 3% less than 3%
Critically undercapitalized(1)
(1) Ratio of tangible equity to total assets of 2 percent or less.
</TABLE>
On the basis of these criteria, Bancorp is considered "well capitalized."
Risk-based capital standards address concentrations of interest rate risk
("IRR") as qualitative factors to be considered in evaluating overall capital
adequacy. A bank may be required to hold additional capital for IRR if it has
been determined that internal interest risk management processes are inadequate
or a significant exposure to interest rate risk has been identified.
Interstate Banking
Since Bancorp is adequately capitalized, it may participate in interstate
affiliations with banks and bank holding companies located in any state,
although states may limit the eligibility of banks to be acquired to those in
existence for a period of time but no longer than five years. No bank holding
company may acquire more than 10 percent of the nationwide insured deposits or
more than 30 percent of deposits in any state; however, states may waive the 30
percent limit. In addition, beginning June 1, 1997, banks may branch across
state lines either by merging with banks in other states or by establishing new
establishing new branches in other states. The date relating to interstate
branching through mergers may be accelerated by any state, and such mergers may
be prohibited by any state. The provision relating to establishing new branches
in another state requires a state's specific approval. Maryland permits
interstate branching both by mergers and establishing new branches, effective
September 29, 1995; however, until June 1, 1997 this provision is subject to
the reciprocity requirements that banks from another state may branch into
Maryland only if Maryland banks may branch into that state.
Monetary Policy
The earnings and growth of Bancorp and the Bank are affected by general
economic conditions as well as by monetary policies of regulatory authorities,
including the Federal Reserve System, which regulates the national money supply
in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the Federal Reserve System are engaging in open market
transactions in United States Government securities, changing the discount rate
on bank borrowings, and changing reserve requirements against bank deposits.
These techniques are used in varying combinations to influence the overall
growth of bank loans, investments and deposits. Their use may also affect
interest rates charged on loans or paid on deposits. The effect of governmental
monetary policies on the earnings of the Bank or Bancorp cannot be predicted.
Legislation
There is legislation currently pending in Congress centered on reforming
certain provisions of the Glass-Steagall Act which prohibit commercial banks
from underwriting securities or otherwise engaging in investment banking
activities. Passage of this legislation, as currently proposed, is not expected
to have a material effect on Bancorp's consolidated financial statements.
Statistical Information
The following supplementary information required under Guide 3 for the
respective periods and at the indicated respective dates is set forth on the
pages indicated below in the 1996 Annual Report to Shareholders, which is
incorporated herein by reference. The information should be read in
conjunction with the related consolidated financial statements and notes
thereto.
Pages
-----
Selected Financial Information 12
Average Balances, Interest, and Average Rates 14
Analysis of Changes in Net Interest Income 16
Investment Portfolio Distribution 17
Investment Portfolio Analysis 18
Loan Portfolio Mix 19
Loan Maturities and Interest Sensitivity 19
Average Deposits and Rates Paid 19
Maturity of Time Deposits of $100,000 or More 20
Short-Term Borrowings 20
Potential Problem Loans 20
Nonperforming Assets and Contractually Past Due Loans 21
Analysis of Allowance for Credit Losses 21
Allocation of Allowance for Credit Losses 22
ITEM 2. PROPERTIES
The Bank owns a fee simple interest in the land and building located at
110 Thomas Johnson Drive, Frederick, Maryland which is used to house its
principal executive offices and its main banking office. Construction of a
four-story addition to the corporate headquarters building was completed in
1996. The Savings Bank owns a building located at 122-128 West Washington
Street, Hagerstown, Maryland which is used to house its principal executive
offices and its main banking office.
Of the remaining 29 banking offices of the Bank and the Savings Bank at
December 31, 1996, 17 were owned and 12 were leased. Information concerning
Bancorp's lease commitments is included in Note 13, on page 39 of the 1996
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Bancorp, the Bank, and the Savings Bank are subject to various legal
proceedings which are incidental to the ordinary course of business. In the
opinion of the management, there are no material pending legal proceedings to
which Bancorp, the Bank or the Savings Bank are a party or which involve any of
their property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1996.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The text under Item 10(b) "Directors and Executive Officers of the
Registrant" is incorporated in this Part I by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information concerning the price of the registrant's Common Stock and
related stockholder matters is included on the inside bank cover of the 1996
Annual Report to Shareholders under the heading "STOCK PRICE AND DIVIDENDS" and
is incorporated herein by reference. Dividends paid per share, after adjustment
for the pooling with Home Federal Corporation were $.17, $.15, $.16, and $.16
for the first, second, third and fourth quarters of 1996, respectively.
Dividends paid per share, after adjustment for the pooling with Home Federal
Corporation were $.15, $.14, $.17, and $.17 for the first, second, third and
fourth quarters of 1995, respectively. Information concerning restrictions on
the ability of affiliates to transfer funds in the form of dividends to Bancorp
is included in Note 15 on page 41 of the 1996 Annual Report to Shareholders and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Information on page 12 of the 1996 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 13 through 25 of Bancorp's 1996 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, notes to consolidated
financial statements, and report of independent auditors on pages 26 through 43
of Bancorp's 1996 Annual Report to Shareholders are incorporated herein by
reference.
Pages
-----
Report of Independent Public Accountants 43
Consent of Independent Auditors 43
Consolidated Balance Sheets, December 31, 1996 and 1995 26
Consolidated Statements of Income, Three Years Ended 1996 27
Consolidated Statements of Changes In Shareholders' Equity,
Three Years Ended 1996 28
Consolidated Statements of Cash Flows Three Years Ended 1996 29
Notes to Consolidated Financial Statements 30 - 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 9, 1996 Bancorp engaged Arthur Andersen, LLP in place of its
independent public accountant, Keller Bruner & Company, L.L.C., ("KB") on the
recommendation and approval of the Audit Committee which action was ratified by
the full Board, after an extensive review and analysis of proposals submitted
by nine accounting firms, including KB. KB was not dismissed as the result of
any disagreement. The reports of KB on the financial statements of the
Registrant for each of the two fiscal years in the period ended December 31,
1995 did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, auditing scope or accounting
principles. During the two fiscal years in the period ended December 31, 1995
and the subsequent interim periods preceding such dismissal, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The text and table under "Election of Directors-Information
Concerning Nominees" located on pages 4 through 6 of Bancorp's Proxy
Statement dated March 17, 1997 are incorporated herein by reference.
(b) The following is a list of the names and ages of all the executive
officers of Bancorp and the Bank as of December 31, 1996 and all persons
chosen to become executive officers since that date. All executive
officers are elected to serve for a one year period. There are no
arrangements or understandings between such persons and any other person
pursuant to which they were selected an officer.
<TABLE>
<CAPTION>
Position with Bancorp Position with the Bank
and year elected or Savings Bank (SB) and
Name and Age or appointed year elected or appointed
- --------------------- --------------------- -------------------------
<S> <C> <C>
Charles W. Hoff, III Chairman of the Board Chairman of the Board
age 62 (1993) (1993)
Faye E. Cannon President (1993) & Chief President (1993) & Chief
age 47 Executive Officer (1996) Executive Officer (1996)
David R. Stauffer Vice President (1990) Executive Vice President
age 49 (1990)
Richard W. Phoebus Vice President (1996) President and Chief
age 58 Executive Officer (1981)
(SB)
Alice E. Stonebreaker Assistant Secretary & Senior Vice President
age 50 Assistant Treasurer (1983) & Cashier (1985)
Gordon M. Cooley Secretary (1991) Senior Vice President
age 43 and Legal Officer (1987) (1990) & House Counsel
(1987)
Jeffrey V. Erickson Treasurer (1996) Senior Vice President &
age 48 Chief Financial Officer
(1996)
Karen L. McCormick Senior Vice President
age 45 (1996)
Steven G. Hull Executive Vice President
age 39 (1995) (SB)
Celia S. Ausherman Senior Vice President &
age 60 Secretary (1987) (SB)
Salvatore M. Savino Senior Vice President
age 53 & Treasurer, Chief
Financial Officer (1983)
(SB)
Patti A. Stuckey Senior Vice President
age 53 (1989) & Trust Division
Manager (1988)
</TABLE>
(c) Bancorp is not required to furnish information on certain
significant employees pursuant to instructions contained in the form for
this report.
(d) There is no family relationship between any director, executive
officer, or person nominated or chosen by Bancorp to become a director or
executive officer, except that Ms. Cannon and Ms. Stonebreaker are sisters
and Mr. Cooley is the son-in-law of Director H. Deets Warfield, Jr.
(e) Each of the executive officers of Bancorp, the Bank and the Savings
Bank has been an officer for more than five years with the exception of
Mr. Erickson and Ms. McCormick. Mr. Erickson's banking career includes
twenty years of management experience in the area of general accounting,
regulatory reporting, budgeting, cost accounting, strategic planning and
internal reporting. Prior to joining Bancorp, Mr. Erickson served as
Senior Vice President/Finance for NationsBank. Prior to his position at
NationsBank, Mr. Erickson was Chief Financial Officer and Treasurer of
Sovran Bank of D.C. and Maryland. Ms. McCormick previously held the
position of Senior Vice President of Marketing for Capital Bank,
headquartered in Miami, Florida and has previously held managerial
positions at Citibank, Chase Manhattan, and the North Central Bank of
Pennsylvania. Ms. McCormick has over 18 years of banking experience in the
areas of strategic planning, public relations, advertising, promotion,
market research, product management, and community development.
(f) None of the events described in the instructions to the form of this
report have occurred during the past five years to the knowledge of
Bancorp.
(g) Bancorp is not required to furnish this information because of the
absence of the conditions under which it is required.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Compensation Committee Report on Executive
Compensation" located on pages 7 through 11 and "Directors' Fees and Deferred
Compensation Plan" located on page 13 of Bancorp's Proxy Statement dated March
17, 1997 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section under "Security Ownership of
Management" and the notes thereto located on page 2, and the information
contained in the section under "Security Ownership of Certain Beneficial
Owners" located on page 4 of Bancorp's Proxy Statement dated March 17, 1997 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Certain Transactions with Directors and Officers" located
on page 13 of Bancorp's Proxy Statement dated March 17, 1997 is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Filed documents:
(1) Financial Statements:
See listing in Item 8.
(2) Financial Statement Schedules:
Schedules I and II, inclusive, are omitted because of the
absence of the conditions under which they are required.
(3) Exhibits:
2 Plan and Agreement to Merge between F&M Bancorp and Home
Federal Corporation. Filed as Annex A to Registration
Statement on Form S-4 (File No. 333-04967) and incorporated
herein by reference.
3.1 Articles of Incorporation of F&M Bancorp with all Articles
of Amendment. Filed as an exhibit with the quarterly
report on Form 10-Q for the second quarter of 1989 and
incorporated herein by reference.
3.2 By-Laws of F&M Bancorp. Filed as an exhibit to
Registration Statement on Form S-14 (File No. 2-88390) and
incorporated herein by reference.
10.1 1983 Stock Option Plan of F&M Bancorp as amended in April,
1996. Filed as Exhibit 10.1 to Registration Statement on
Form S-8 (File No. 002-88390) and incorporated herein by
reference.
10.2 Unfunded Deferred Compensation Plan for Non-Employee
Directors of F&M Bancorp as amended July, 1996. Filed as
an exhibit hereto and incorporated herein by reference.
10.3 Farmers and Mechanics National Bank Executive Supplemental
Income Plan as amended in March 1990. Filed as Exhibit
10.3 to the Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-12638) and incorporated
herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan. Filed as
Prospectus to Registration Statement on Form S-8 (File No.
33-39941) and incorporated herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock Purchase Plan.
Filed as Prospectus to Registration Statement on Form S-3
(File No. 33-39940) and incorporated herein by reference.
10.6 1995 Stock Option Plan of F&M Bancorp. Filed as Exhibit
10.1 to Registration Statement on Form S-8 (File No. 333-
02433) and incorporated herein by reference.
10.7 Employment Agreement between F&M Bancorp, Home Federal
Savings Bank and Richard W. Phoebus, Sr.
10.8 Employment Agreement between F&M Bancorp, Home Federal
Savings Bank and Steven G. Hull.
10.9 Employment Agreement between F&M Bancorp, Home Federal
Savings Bank and Salvatore M. Savino.
10.10 Employment Agreement between F&M Bancorp, Home Federal
Savings Bank and Celia S. Ausherman.
10.11 Form of F&M Bancorp Stock Options substituted for Home
Federal Corporation Stock Options granted under the Home
Federal Corporation 1988 Stock Option and Stock
Appreciation Right Plan filed as Exhibit 99.3 to
Registration Statement on Form S-8 (File No. 333-16709) and
incorporated herein by reference.
11. Statement re: computation of per share earnings.
13. 1996 Annual Report to Shareholders of F&M Bancorp.
21. Subsidiaries of F&M Bancorp.
23. Consent of Independent Public Accountants
23.1 Consent of Independent Auditors
27. Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K Item 5. Other Event was filed on November 21,
1996 to announce that the merger of Home Federal Corporation with and
into F&M Bancorp became effective as of the close of business on
November 15, 1996. This 8-K was amended on December 2, 1996 to change
the description of this event from Item 5 to Item 2.
A report on Form 8-K Item 5. Other Event was filed on December 20,
1996 to publish 30 days of post-merger combined operations to satisfy
the risk-sharing rules set forth in SEC Accounting Series Release
135.
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.
F&M BANCORP
(Registrant)
Dated: March 28, 1997 By: /s/Faye E. Cannon
--------------------------
Faye E. Cannon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
March 28, 1997 /s/Charles W. Hoff, III
-------------------------------
Charles W. Hoff, III
Chairman of the Board
March 28, 1997 /s/Faye E. Cannon
------------------------------
Faye E. Cannon
President & Chief Executive Officer
Principal Financial & Accounting Officer:
March 28, 1997 /s/Jeffrey V. Erickson
-------------------------------
Jeffrey V. Erickson
Treasurer
A Majority of the Board of Directors
March 28, 1997
-------------------------------
R. Carl Benna
Director
March 28, 1997
------------------------------
Howard B. Bowen
Director
March 28, 1997 /s/John D. Brunk
-------------------------------
John D. Brunk
Director
March 28, 1997
------------------------------
Beverly B. Byron
Director
March 28, 1997 /s/Faye E. Cannon
------------------------------
Faye E. Cannon
Director
March 28, 1997
------------------------------
Martha E. Church
Director
March 28, 1997 /s/Albert H. Cohen
------------------------------
Albert H. Cohen
Director
March 28, 1997
------------------------------
George B. Delaplaine, Jr.
Director
March 28, 1997 /s/Maurice A. Gladhill
------------------------------
Maurice A. Gladhill
Director
March 28, 1997 /s/Charles W. Hoff, III
------------------------------
Charles W. Hoff, III
Director
March 28, 1997 /s/James K. Kluttz
------------------------------
James K. Kluttz
Director
March 28, 1997 /s/Robert K. Moler
------------------------------
Robert K. Moler
Director
March 28, 1997
------------------------------
Charles A. Nicodemus
Director
March 28, 1997 /s/Richard W. Phoebus, Sr.
------------------------------
Richard W. Phoebus, Sr.
Director
March 28, 1997 /s/H. Deets Warfield, Jr.
------------------------------
H. Deets Warfield, Jr.
Director
March 28, 1997
------------------------------
John C. Warfield
Director
March 28, 1997
------------------------------
Thomas R. Winkler
Director
EXHIBIT 10.2
MODIFICATION, RESTATEMENT, AND CONSOLIDATION
OF UNFUNDED DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
This Modification, Restatement, and Consolidation of Unfunded Deferred
Compensation Plan for Non-Employee Directors (hereinafter "Plan") is made as of
the 1st day of July, 1996, by F&M Bancorp (hereinafter the "Company").
WHEREAS, the Company presently has in place an Unfunded Deferred
Compensation Plan for Non-employee Directors; and,
WHEREAS, the Company has determined to make certain amendments to the Plan
and to simplify the administration of the Plan by consolidating all amendments
into one document which restates the Plan;
NOW, THEREFORE, and in consideration of the premises and of other good and
valuable consideration the receipt of which is hereby acknowledged by each of
the parties hereto, the parties hereto do hereby covenant and agree as follows:
I. CONSOLIDATION.
Consolidation of Amendment. From and after the date hereof, the Plan
evidenced by the Unfunded Deferred Compensation Plan for Non-Employee Directors
as amended shall be consolidated into this single Plan document.
II. MODIFIED AND RESTATED TEXT: UNFUNDED DEFERRED COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
THIS PLAN is adopted as of the 1st day of July, 1996, by F&M Bancorp
(hereinafter the "Company").
INTRODUCTION
To encourage Directors to remain a member of the Company's Board of
Directors, the Company is willing to provide to Directors a deferred fee
opportunity. The Company will pay the benefits from its general assets.
Article 1
DEFINITIONS
1.1. Definitions. Whenever used in this Plan, the following words
and phrases shall have the meanings specified:
1.1.1. "Change of Control" means the transfer of 51% or more of the
Company's outstanding voting common stock followed within twelve (12) months by
termination of the Director's status as a member of the Company's Board of
Directors.
1.1.2. "Company" means each of F&M Bancorp, its direct or indirect
wholly-owned subsidiaries, and its other direct or indirect subsidiaries that
adopt this Plan.
1.1.3. "Code" means the Internal Revenue Code of 1986, as amended.
References to a Code section shall be deemed to be to that section as it now
exists and to any successor provisions.
1.1.4. "Disability" means the Director's inability to perform
substantially all normal duties of a Director, as determined by the Company's
Board of Directors in its sole discretion. As a condition to any benefits, the
Company may require the Director to submit to such physical or mental
evaluations and tests as the Board of Directors deems appropriate.
1.1.5. "Election Form" means the Form attached as Exhibit 1.
1.1.6. "Fees" means any and all of the total director's fees payable
to the Director.
1.1.7. "Mandatory Termination Date" means the annual meeting first
occurring following the Director attaining age 70, except for those Directors
serving in that capacity on March 11, 1975, for whom no Mandatory Termination
Date exists.
1.1.8. "Termination of Service" means the Director is ceasing to be
a member of the Company's Board of Directors for any reason whatsoever.
Article 2
Deferral Election
2.1. Initial Election. Current Directors shall have made an initial
deferral election under this Plan by filing with the Company a signed Election
Form prior to July 1, 1996. Directors commencing service after July 1, 1996
will make an initial deferral election by filing with the Company a signed
Election Form within 30 days of commencing service. The Election Form shall, in
all instances, set forth the amount of Fees to be deferred and the form of
benefit payment. The Election Form shall be effective to defer only Fees earned
after the date the Election Form is received by the Company.
2.2. Election Changes
2.2.1. Annual. Directors will be required to make an election
annually in December by filing a signed Election Form with the Company. The
Election Form shall be effective for the following calendar year.
2.2.2. Hardship. If an unforeseeable financial emergency arising
from the death of a family member, divorce, sickness, injury, catastrophe or
similar event outside the control of the Director occurs, the Director, by
written instructions to the Company may reduce future deferrals under this
Plan.
Article 3
Deferral Account
3.1. Establishing and Crediting. The Company shall establish a
deferral account ("Deferral Account") on its books for the Director, and shall
credit to the Deferral Account the following amounts:
3.1.1. Deferrals. The Fees specified to be deferred by the Director
(including fees deferred under earlier versions of this Plan) as of the time
the Fees would have otherwise been paid to the Director.
3.1.2. Interest Rate. For each calendar year, interest shall be
calculated at a rate equal to the "prime rate" as published in the Wall Street
Journal's Money Rates Table, or the highest rate if more than one rate is
published on December 15 of the immediately preceding year, or if the 15th is
not a business day, then the next business day. For example, for calendar year
1997, the interest rate shall be the prime rate as published in the Wall Street
Journal on December 15, 1996. Notwithstanding the foregoing, the interest rate
to be paid on the balance of the Deferral Account from July 1 through December
31, 1996 shall be the prime rate as published in the Wall Street Journal's
Money Rates Table on July 1, 1996.
3.1.3. Interest Accrual. Interest will be compounded daily at the
rate specified in paragraph 3.1.2. and credited to the Deferral Account monthly
and immediately prior to the payment of any benefits.
3.2. Statement of Accounts. The Company shall provide to the
Director, within one hundred twenty (120) days after each calendar year end, a
statement setting forth the Deferral Account balance.
3.3. Accounting Device Only. The Deferral Account is solely a
device for measuring amounts to be paid under this Plan. The Deferral Account
is not a trust fund of any kind. The Director is a general unsecured creditor
of the Company for the payment of benefits. The benefits represent the mere
Company promise to pay such benefits. The Director's rights are not subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by the Director's creditors.
Article 4
Lifetime Benefits
4.1. Normal Termination Benefit. Upon the Director's Termination of
Service at the Director's Mandatory Retirement Date, or for those Directors for
whom no Mandatory Retirement Date exists, when such a Director's Termination of
Service occurs after such Director has attained age 70, the Company shall pay
to
the Director the benefit described in this Section 4.1.
4.1.1. Amount of Benefit. The benefit under this Section 4.1 is the
Deferral Account balance at the Director's Termination of Service.
4.1.2. Payment of Benefit. The Company shall pay the benefit to the
Director in the form elected by the Director on the Election Form. If the ten
(10) year payment is elected, the amount of the accrued benefit payment will be
calculated by using the ten (10) year annuity rate determined using the sum of
the mid-term Applicable Federal Rate (AFR) for the previous month as published
monthly by the Internal Revenue Service, plus 1% rounded to the nearest 1/2 of
1%, on the date that the benefit payments commence.
4.2. Early Termination Benefit. If the Director terminates service
as a Director before the Mandatory Termination Date, the Company shall pay to
the Director the benefit described in this Section 4.2.
4.2.1. Amount of Benefit. The benefit under this Section 4.2 shall
be the Deferral Account balance.
4.2.2. Payment of Benefit. The Company shall pay the benefit to the
Director in the form elected by the Director on the Election Form. If the ten
(10) year payment is elected, the amount of the accrued benefit payment will be
calculated by using the ten (10) year annuity rate determined using the sum of
the mid-term Applicable Federal Rate (AFR) for the previous month as published
monthly by the Internal Revenue Service, plus 1% rounded to the nearest 1/2 of
1%, on the date that the benefit payments commence.
4.3. Disability Benefit. If the Director terminates service as a
Director for Disability prior to the Mandatory Termination Date, the Company
shall pay to the Director the benefit described in this Section 4.3.
4.3.1. Amount of Benefit. The benefit under this Section 4.3 is the
Deferral Account balance.
4.3.2. Payment of Benefit. The Company shall pay the benefit to the
Director in the form elected by the Director on the Election Form. If the ten
(10) year payment is elected, the amount of the accrued benefit payment will be
calculated by using the ten (10) year annuity rate determined using the sum of
the mid-term Applicable Federal Rate (AFR) for the previous month as published
monthly by the Internal Revenue Service, plus 1% rounded to the nearest 1/2 of
1%, on the date that the benefit payments commence.
4.4. Change of Control Benefit. Upon a Change of Control while the
Director is in the active service of the Company, the Company shall pay to the
Director the benefit described in this Section in lieu of any other benefit
under this Plan.
4.4.1. Amount of Benefit. The benefit under this Section 4.4. is
the Deferral Account balance at the date of the Director's Termination of
Service.
4.4.2. Payment of Benefit. The Company shall pay the benefit to the
Director in a lump sum within ninety (90) days after the Director's Termination
of Service.
4.5. Hardship Distribution. Upon the Company's determination
(following petition by the Director) that the Director has suffered an
unforeseeable financial emergency as described in Section 2.2.2., the Company
shall distribute to the Director all or a portion of the Deferral Account
balance as determined by the Director, but in no event shall the distribution
be
greater than is necessary to relieve the financial hardship. The Director
expressly accepts the responsibility for all income tax implications resulting
from Director's exercise of Director's rights under this Section.
Article 5
Death Benefits
5.1. Death During Active Service. If the Director dies while in the
active service of the Company, the Company shall pay to the Director's
beneficiary the benefit described in this Section 5.1.
5.1.1. Amount of Benefit. If Company owned life insurance is in
force on the life of the Director on the date of the Director's death, the
benefit under Section 5.1 is the projected age 70 benefit based on the Deferred
Account balance and projected further deferrals until age 70. If Company owned
life insurance is not in force on the life of the Director on the date of
Director's death, the benefit will be the Deferral Account balance on the date
of death of the Director.
5.1.2. Payment of Benefit. The Company shall pay the benefit to the
beneficiary in one hundred twenty (120) equal monthly installments commencing
on the first day of the month following the Director's death.
5.2. Death During Benefit Period. If the Director dies after
benefit payments have commenced under this Plan but not before receiving all
such payments, the Company shall pay the remaining benefits to the Director's
beneficiary at the same time and in the same amounts they would have paid to
the Director had the director survived.
Article 6
Beneficiaries
6.1. Beneficiary Designations. The Director shall designate a
beneficiary by filing a written designation with the Company. The Director may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Director and
accepted by the Company during the Director's lifetime. The Director's
beneficiary designation shall be deemed automatically revoked if the
beneficiary predeceases the Director, or if the Director names a spouse as
beneficiary and the marriage is subsequently dissolved. If the Director dies
without a valid beneficiary designation, all payments shall be made to the
Director's surviving spouse, if any, and if none, to the Director's surviving
children and the descendants of any deceased child by right of representation,
and if no children or descendants survive, to the Director's estate.
6.2. Facility of Payment. If a benefit is payable to a minor, to a
person declared incompetent, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incompetent person or incapable person. The Company may require proof of
incompetency, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
Article 7
Claims and Review Procedure
7.1. Claims Procedure. The Company shall notify the Director's
beneficiary in writing, within ninety (90) days of his or her written
application for benefits, of his or her eligibility or non-eligibility for
benefits under the Plan . If the Company determines that the beneficiary is not
eligible for benefits or full benefits, the notice shall set forth (1) the
specific reasons for such denial, (2) a specific reference to the provisions of
the Plan on which the denial is based, (3) a description of any additional
information or material necessary for the claimant to perfect his or her claim,
and a description of why it is needed, and (4) an explanation of the Plan's
claims review procedure and other appropriate information as to the steps to be
taken if the beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the beneficiary of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day period.
7.2. Review Procedure. If the beneficiary is determined by the
Company not to be eligible for benefits, or if the beneficiary believes that he
or she is entitled to greater or different benefits, the beneficiary shall have
the opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
beneficiary believes entitles him or her to benefits or to greater or different
benefits. Within sixty (60 days after receipt by the Company of the petition,
the Company shall afford the beneficiary (and counsel, if any) an opportunity
to present his or her position to the Company orally or in writing, and the
beneficiary (or counsel) shall have the right to review the pertinent
documents. The Company shall notify the beneficiary of its decision in writing
within the sixty-day period, stating specifically the basis of its decision,
written in a manner calculated to be understood by the beneficiary and the
specific provisions of the Plan on which the decision is based. If, because of
the need for a hearing, the sixty-day period is not sufficient, the decision
may be deferred for up to another sixty-day period at the election of the
Company, but notice of this deferral shall be given to the beneficiary.
Article 8
Amendments and Termination
The Plan may be amended or terminated at any time by the Company but
no modification or termination shall effect the rights of any Director who is
at the time or had previously elected to defer Fees unless such Director and
the Company shall mutually agree in writing.
Article 9
Miscellaneous
9.1. Binding Effect. This Plan shall bind the Director and the
Company and their beneficiaries, survivors, executors, administrators and
transferees.
9.2. No Guaranty of Employment. This Plan is not a contract for
services. It does not give the Director the right to remain a Director of the
Company, nor does it interfere with any rights to replace the Director. It also
does not require the Director to remain a Director nor interfere with the
Director's right to terminate services at any time.
9.3. Non-Transferability. Benefits under this Plan cannot be sold,
transferred, assigned, pledge, attached or encumbered in any manner.
9.4. Applicable Law. The Plan and all rights hereunder shall be
governed by the Laws of the State of Maryland, except to the extent preempted
by the Laws of the United States of America.
9.5. Unfunded Arrangement. The Director and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this Plan.
The benefits represent the mere promise by the Company to pay such benefits.
The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Director's life is a general
asset of the Company to which the Director and Beneficiary have no preferred or
secured claim.
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of November 15, 1996, between
F&M Bancorp, a Maryland corporation and thrift holding company, Home Federal
Savings Bank (the "Bank"), a federally-chartered savings bank which is the
wholly-owned subsidiary of F&M Bancorp, and Richard W. Phoebus, Sr. (the
"Executive"). In consideration of the mutual covenants herein contained and of
the mutual benefits herein provided, F&M Bancorp, the Bank and the Executive
agree as follows:
1. Employment. (a) F&M Bancorp and the Bank will employ the Executive,
and the Executive accepts employment by F&M Bancorp and the Bank, on the terms
and conditions herein contained.
(b) The period during which F&M Bancorp and the Bank will employ the
Executive (the "Employment Period") shall commence on the Effective Date of the
merger of Home Federal Corporation with and into F&M Bancorp (the "Merger") as
defined in Section 1 of the Plan and Agreement to Merge dated as of April 2,
1996 by and among F&M Bancorp and Home Federal Corporation (the "Plan"). The
effectiveness of this Agreement is conditioned upon the completion of the
Merger pursuant to the Plan.
(c) The Employment Period shall continue until and shall cease and
terminate upon the earlier of (i) the close of business on the day which is
three years after the Effective Date of the Merger or (ii) the death or
substantially total disability of the Executive; provided, however, that the
Executive may terminate this Agreement at any time without liability except
pursuant to paragraphs 4, 12 and 13 hereof, and without relinquishing or
forfeiting executive's rights under paragraphs 7 and 13.
2. Duties and Functions. (a) During the Employment Period, the Executive
shall exercise authority and perform executive duties as a Vice President of
F&M Bancorp and as the President and Chief Executive Officer of the Bank, and
shall perform such additional duties, as may be assigned or delegated to him
from time to time, by the Boards of Directors of F&M Bancorp and the Bank.
(b) During the Employment Period, the Executive will (i) devote his full
time and efforts to the businesses of F&M Bancorp and the Bank and will not
engage in consulting work or any trade or business for his own account or for
or on behalf of any other person, firm or corporation which competes, conflicts
or interferes with the performance of his duties hereunder in any way and (ii)
accept such office or offices to which he may be elected by the Boards of
Directors of F&M Bancorp and the Bank; provided that the performance of the
duties of such office or offices shall be consistent with the scope of the
duties provided for in subparagraph (a) of this paragraph 2.
3. Compensation. (a) As compensation for his services to the Bank
hereunder, the Bank agrees to pay the Executive a salary at the rate of at
least $111,000 per annum, payable in equal monthly installments, or on such
other periodic basis as may be mutually agreed upon, subject to normal policies
of the Bank as to salary payments or suspensions thereof during periods of
disability. Such salary and the Executive's performance shall be subject to
normal periodic review by the Bank's board of directors at least annually for
increases in salary, based on corporate policy and contributions to the
enterprise. Such review shall be documented in the minutes of the board of
directors' meetings. The Executive shall only receive compensation from the
Bank for performance of executive duties as an officer of the Bank. In the
event the Executive performs services for F&M Bancorp, if any, F&M Bancorp will
compensate the Executive consistent with F&M Bancorp's policies.
(b) In addition to his salary provided by the foregoing, the Executive
shall be entitled to receive benefits under any bonus, profit-sharing,
retirement, group life, disability, sickness, accident or health insurance
programs of the Bank (or under any such programs in which employees of the Bank
are eligible to participate) which may now or, if not terminated, shall
hereafter be in effect, or in any other or additional such programs which may
be established by the Bank (or any program in which employees of the Bank are
eligible to participate), as and to the extent any such programs are or may
from time to time be in effect. The Executive shall be entitled to reasonable
vacations and sick leave, as may be established by Bank policy.
(c) The Bank will reimburse the Executive for all authorized expenses
properly incurred by him in the performance of his duties hereunder.
4. Competition; Confidential Information. The Executive, F&M Bancorp and
the Bank recognize that due to the nature of his employment, and his
relationship with F&M Bancorp and the Bank, the Executive has had and will have
access to, and has acquired and will acquire, and has assisted and will assist
in developing, confidential and proprietary information relating to the
business and operations of F&M Bancorp and the Bank and their affiliates,
including, without limiting the generality of the foregoing, information with
respect to their present and prospective services, systems, clients, customers,
agents, and sales and marketing methods. The Executive acknowledges that such
information has been and will be of central importance to F&M Bancorp's and the
Bank's business and that disclosure of it to or its use by others could cause
substantial loss to F&M Bancorp and the Bank. The Executive, F&M Bancorp and
the Bank also recognize that an important part of the Executive's duties will
be to develop good will for F&M Bancorp and the Bank through his personal
contact with clients of F&M Bancorp and the Bank, and that there is a danger
that this good will, a proprietary asset of F&M Bancorp and the Bank, may
follow the Executive if and when his relationship with F&M Bancorp and the Bank
is terminated. The Executive accordingly agrees as follows:
(a) The Executive agrees that, upon termination of his employment hereunder
prior to the expiration of the stated Employment Period provided in paragraphs
1(b) and (c), for any reason other than (i) for termination by F&M Bancorp and
the Bank without cause or (ii) for termination after a Change in Control, as
provided for in paragraph 6:
(i) The Executive will not directly or indirectly accept employment in
Frederick or Washington County, Maryland with any other banking institution or
affiliate thereof for a period of two years from the date of such termination,
or in connection with any subsequent employment outside of Frederick or
Washington County, Maryland solicit any of the banking business of clients or
customers of the Bank or any of its affiliates in Frederick or Washington
County, Maryland, at the time of said termination for a period of two years
from the date of such termination.
(ii) The Executive will not in connection with any subsequent
employment outside of Frederick or Washington County, Maryland directly or
indirectly solicit the banking business of any potential client who had been
identified and discussed as such within the Bank by the time of such
termination for a period of two years from such termination. In the event that
the Executive violates the provisions of this subparagraph without knowledge of
such violation, upon notice from the Bank informing him of the nature of such
violation, the Executive shall immediately terminate any actions which
constitute such violation.
(b) After the end of the Employment Period, the Executive shall not retain
copies of any documents (including without limitation customer lists)
containing any such trade secrets or confidential or proprietary information of
the Bank or its affiliates.
(c) It is understood and agreed by the parties hereto that nothing herein
shall restrict or limit in any way the Executive from any of the following
activities at any time following a termination of Executive's employment
hereunder: (i) the practice of law or accounting, including the representation
of banking institutions and their affiliates, without restriction as to their
location; (ii) provision of professional services relating to real estate
brokerage, real estate consultation or problem asset consultation, including
the representation of banking institutions and their affiliates, without
restriction as to their location; (iii) provision of professional services as a
consultant or adviser for any banking institution or affiliate, including
relating to the development and implementation of policies and procedures
dealing with or related to problem assets, asset classification, asset review,
real estate lending, and legal and accounting matters, without restriction as
to their location.
(d) It is recognized that damages in the event of breach of any provision
of this paragraph 4 by the Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that the Bank, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach; and the Executive hereby waives any and all defenses
he may have on the ground of the lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which the Bank may have.
5. Termination for Cause. Nothing in this Agreement shall be construed to
prevent the Bank from terminating the Executive's employment hereunder and the
Employment Period at any time, for cause. As used in this Agreement: (i) a
termination for cause shall mean a termination for personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease and desist order, after notice and an opportunity to cure the
alleged breach, or a material breach by the Executive of any agreement on his
part made herein; and any such termination shall not be construed a breach of
this Agreement by the Bank; and (ii) a termination by the Bank without cause
shall mean any termination by the Bank prior to the end of the Employment
Period for reasons other than as specified in clause (i). No compensation
shall be paid to the Executive subsequent to the Executive's termination for
cause.
6. Termination upon a Change in Control.
(a) This Agreement shall terminate, and the Bank or any successor
corporation to the Bank shall pay the Executive the amount provided in
paragraph 7(a), if:
(i) After a Change in Control, the Bank or any successor corporation
of the Bank breaches any provision of this Agreement, including without
limitation a reduction in the Executive's total compensation from that provided
in paragraph 3, or a significant reduction in the nature or scope of the duties
and functions of the Executive from those contemplated in paragraph 2; or
(ii) After a Change in Control, the Executive is relocated by the Bank
without his express written consent to perform the services and duties required
by this Agreement at any place outside Washington County, Maryland with the
exception of the principal office of F&M Bancorp in Frederick, Maryland; or
(iii) After a Change in Control, any successor corporation of the Bank
does not agree to assume the obligations of the Bank under this Agreement.
(b) A "Change in Control," as used in this Agreement, shall be deemed to
have occurred when:
(i) Acquisition by a person, or by persons acting in a group, of
securities of the Bank, or of F&M Bancorp, representing 25% or more of the
combined voting power of the then outstanding voting securities of the Bank or
of F&M Bancorp; or
(ii) A change in the membership of the Board of Directors of the Bank,
or of F&M Bancorp, such that during any period of two consecutive years,
individuals who at the beginning of such period constituted such Board of
Directors ceased for any reason to constitute at least a majority thereof
unless the election of each director who was not a director at the beginning of
the period was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
(iii) The consummation of the Merger in accordance with the terms of
the Plan shall not constitute a "Change of Control" for purposes of this
Agreement.
7. Severance Payments.
(a) If the Executive terminates his employment during the Employment Period
within twelve months after a Change of Control pursuant to paragraph 6, or is
terminated by F&M Bancorp or the Bank, during the Employment Period after a
Change in Control pursuant to paragraph 6, the Bank will pay the Executive, in
lieu of any amounts payable under paragraph 3, an amount equal to three times
the sum of (i) the Executive's average annual base salary for the five years
immediately before the Change in Control and (ii) the average of the bonuses
paid to the Executive over the five years immediately before the Change in
Control (including years in which no bonus was awarded). Such payment shall be
made in 36 equal monthly installments, beginning on the first day of the month
following the month during which this Agreement is terminated.
(b) If this Agreement is terminated within one year after the Effective
Date of the Merger by the Executive, or by F&M Bancorp or the Bank for any
reason other than for cause (as defined in paragraph 5) , the Bank will pay the
Executive, in lieu of any amounts payable under paragraph 3, an amount equal to
three times the sum of (i) the Executive's average annual base salary for the
five years immediately before such termination and (ii) the average of the
bonuses paid to the Executive over the five years immediately before such
termination (including years in which no bonus was awarded). Such payment
shall be made in equal monthly installments for the remainder of the Employment
Period, beginning on the first day of the month following the month during
which this Agreement is terminated.
(c) If the Executive is terminated by F&M Bancorp or the Bank for any
reason other than for cause (as defined in paragraph 5) more than one year
after the Effective Date of the Merger but before the expiration of the
Employment Period, the Bank will pay the Executive, in lieu of any amounts
payable under paragraph 3, an amount equal to (i) two times the sum of (x) the
Executive's average annual base salary for the five years immediately before
such termination and (y) the average of the bonuses paid to the Executive over
the five years immediately before such termination (including years in which no
bonus was awarded) multiplied by (ii) a fraction, the numerator of which shall
be the number of months remaining in the Employment Period, rounded down to the
nearest whole month, and the denominator of which shall be 24; provided,
however, that notwithstanding the foregoing, the Executive shall be entitled to
receive 1.5 times the sum of (x) the Executive's average annual base salary for
the five years immediately before such termination and (y) the average of the
bonuses paid to the Executive over the five years immediately before such
termination (including years in which no bonus was awarded). Such payment
shall be made in equal monthly installments for the remainder of the Employment
Period, beginning on the first day of the month following the month during
which this Agreement is terminated.
(d) If the Executive remains employed by F&M Bancorp and the Bank and
exercises authority and performs executive duties as a Vice President of F&M
Bancorp and as the President and Chief Executive Officer of the Bank for the
remainder of the Employment Period and is terminated after the expiration of
the Employment Period, the Bank will pay the Executive an amount equal to 1.5
times the sum of (x) the Executive's average annual base salary for the five
years immediately before such termination and (y) the average of the bonuses
paid to the Executive over the five years immediately before such termination
(including years in which no bonus was awarded). Such payment shall be made in
18 equal monthly installments, beginning on the first day of the month
following the month during which the Executive's employment is terminated.
8. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their heirs, personal representatives,
successors and assigns.
9. Entire Agreement. This Agreement contains the entire understanding of
the Executive, the Bank and any affiliate of the Bank, including Home Federal
Corporation, with respect to employment of the Executive and supersedes any and
all prior understandings, written or oral between the Executive, the Bank and
any affiliate of the Bank, including Home Federal Corporation. This Agreement
may not be amended, waived, discharged or terminated orally, but only by an
instrument in writing; and shall be governed by the laws of Maryland.
10. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed
severable from the remainder of this Agreement, and the remaining provisions
contained in this Agreement shall be construed to preserve to the maximum
permissible extent the intent and purposes of this Agreement. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
11. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement.
(a) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the affairs of F&M Bancorp or the Bank
pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Section 1818(e)(3) and
1818(g)(1)), the obligations of F&M Bancorp and the Bank under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, F&M Bancorp and the
Bank may, in their discretion: (i) pay the Executive all or part of the
compensation withheld while their obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of their obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the affairs of F&M Bancorp or the Bank by
an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C.
Section 1818(e)(4) and (g)(1)), all obligations of F&M Bancorp and the Bank
under this Agreement shall terminate as of the effective date of the order, but
vested rights of the Executive and F&M Bancorp and the Bank as of the date of
termination shall not be affected.
(c) If F&M Bancorp or the Bank is in default, as defined in Section 3(x)(1)
of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but vested rights of the
Executive and F&M Bancorp or the Bank as of the date of termination shall not
be affected.
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
12. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k) and any regulations
promulgated thereunder.
13. Obligation in Event of Regulatory Prohibition. In consideration for the
Executive's execution of this Agreement and the relinquishing of the
Executive's rights under his employment agreements dated March 21, 1996 with
Home Federal Savings Bank and Home Federal Corporation, F&M Bancorp hereby
guarantees the Executive that if any benefit or payment to which the Executive
is otherwise entitled under this Agreement is disallowed or otherwise denied by
any regulatory action or prohibition, F&M Bancorp shall pay the Executive any
sums contemplated by this Agreement that the Bank shall be unable to pay or
shall be prohibited from paying.
14. Governing Law and Submission to Jurisdiction. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Maryland, without giving effect to the principles of conflicts of law
thereof. Each of the parties hereby irrevocably submits to the jurisdiction of
the Circuit Court of Washington County or any Federal court sitting in the
State of Maryland for purposes of any controversy, claim or dispute arising out
of or related to this Agreement and hereby waives any defense of an
inconvenient forum and any right of jurisdiction on account of the place of
residence or domicile. For the purpose of expediting the resolution of any such
claim or dispute, the parties hereby waive trial by jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed and delivered under seal, by its authorized officers or
individually, on the date first above written.
ATTEST/WITNESS: F&M BANCORP
/s/Mary Jo Renn By /s/Faye E. Cannon (SEAL)
Name: Faye E. Cannon
Title: President and Chief Executive
Officer
ATTEST/WITNESS: HOME FEDERAL SAVINGS BANK (the "Bank")
/s/Terry L. Smith By /s/Benjamin F. Kunkleman (SEAL)
Name: Benjamin F. Kunkleman
Title: Chairman
/s/Steven G. Hull /s/Richard W. Phoebus (SEAL)
Richard W. Phoebus, Sr. (the "Executive")
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of November 15, 1996, between
F&M Bancorp, a Maryland corporation and bank holding company, Home Federal
Savings Bank, a federally-chartered savings bank (the "Bank"), and Steven G.
Hull (the "Executive").
In consideration of the mutual covenants herein contained and of the mutual
benefits herein provided, the Bank and the Executive agree as follows:
1. Employment. (a) The Bank will employ the Executive and the Executive
accepts employment by the Bank on the terms and conditions herein contained.
(b) The period during which the Bank will employ the Executive (the
"Employment Period") shall commence on the Effective Date of the merger of Home
Federal Corporation with and into F&M Bancorp (the "Merger") as defined in
Section 1 of the Plan and Agreement to Merge dated as of April 2, 1996 by and
among F&M Bancorp and Home Federal Corporation (the "Plan"). The effectiveness
of this Agreement is conditioned upon the completion of the Merger pursuant to
the Plan.
(c) The Employment Period shall continue until and shall cease and
terminate upon the earlier of (i) the close of business on the day which is
three years after the Effective Date of the Merger or (ii) the death or
substantially total disability of the Executive; provided, however, that the
Executive may terminate this Agreement at any time without liability except
pursuant to paragraphs 4, 12 and 13 hereof, and without relinquishing or
forfeiting executive's rights under paragraphs 7 and 13.
2. Duties and Functions. (a) During the Employment Period, the Executive
shall exercise authority and perform executive duties as the Executive Vice
President of the Bank, and shall perform such additional duties, as may be
assigned or delegated to him from time to time, by the Board of Directors of
the Bank.
(b) During the Employment Period, the Executive will (i) devote his full
time and efforts to the business of the Bank and will not engage in consulting
work or any trade or business for his own account or for or on behalf of any
other person, firm or corporation which competes, conflicts or interferes with
the performance of his duties hereunder in any way and (ii) accept such office
or offices to which he may be elected by the Board of Directors of the Bank;
provided that the performance of the duties of such office or offices shall be
consistent with the scope of the duties provided for in subparagraph (a) of
this paragraph 2.
3. Compensation. (a) As compensation for his services hereunder, the Bank
agrees to pay the Executive a salary at the rate of at least $87,000 per annum,
payable in equal monthly installments, or on such other periodic basis as may
be mutually agreed upon, subject to normal policies of the Bank as to salary
payments or suspensions thereof during periods of disability. Such salary and
the Executive's performance shall be subject to normal periodic review by the
Bank's board of directors at least annually for increases in salary, based on
corporate policy and contributions to the enterprise. Such review shall be
documented in the minutes of the board of directors' meetings.
(b) In addition to his salary provided by the foregoing, the Executive
shall be entitled to receive benefits under any bonus, profit-sharing,
retirement, group life, disability, sickness, accident or health insurance
programs of the Bank (or under any such programs in which employees of the Bank
are eligible to participate) which may now or, if not terminated, shall
hereafter be in effect, or in any other or additional such programs which may
be established by the Bank (or any program in which employees of the Bank are
eligible to participate), as and to the extent any such programs are or may
from time to time be in effect. The Executive shall be entitled to reasonable
vacations and sick leave, as may be established by Bank policy.
(c) The Bank will reimburse the Executive for all authorized expenses
properly incurred by him in the performance of his duties hereunder.
4. Competition; Confidential Information. The Executive and the Bank
recognize that due to the nature of his employment, and his relationship with
the Bank, the Executive has had and will have access to, and has acquired and
will acquire, and has assisted and will assist in developing, confidential and
proprietary information relating to the business and operations of the Bank and
its affiliates, including, without limiting the generality of the foregoing,
information with respect to their present and prospective services, systems,
clients, customers, agents, and sales and marketing methods. The Executive
acknowledges that such information has been and will be of central importance
to the Bank's business and that disclosure of it to or its use by others could
cause substantial loss to the Bank. The Executive and the Bank also recognize
that an important part of the Executive's duties will be to develop good will
for the Bank through his personal contact with the Bank's clients, and that
there is a danger that this good will, a proprietary asset of the Bank, may
follow the Executive if and when his relationship with the Bank is terminated.
The Executive accordingly agrees as follows:
(a) The Executive agrees that, upon termination of his employment hereunder
prior to the expiration of the stated Employment Period provided in paragraphs
1(b) and (c), for any reason other than (i) for termination by the Bank without
cause or (ii) for termination after a Change in Control, as provided for in
paragraph 6:
(i) The Executive will not directly or indirectly accept employment in
Frederick or Washington County, Maryland with any other banking institution or
affiliate thereof for a period of two years from the date of such termination,
or in connection with any subsequent employment outside of Frederick or
Washington County, Maryland solicit any of the banking business of clients or
customers of the Bank or any of its affiliates in Frederick or Washington
County, Maryland, at the time of said termination for a period of two years
from the date of such termination.
(ii) The Executive will not in connection with any subsequent
employment outside of Frederick or Washington County, Maryland directly or
indirectly solicit the banking business of any potential client who had been
identified and discussed as such within the Bank by the time of such
termination for a period of two years from such termination. In the event that
the Executive violates the provisions of this subparagraph without knowledge of
such violation, upon notice from the Bank informing him of the nature of such
violation, the Executive shall immediately terminate any actions which
constitute such violation.
(b) After the end of the Employment Period, the Executive shall not retain
copies of any documents (including without limitation customer lists)
containing any such trade secrets or confidential or proprietary information of
the Bank or its affiliates.
(c) It is understood and agreed by the parties hereto that nothing herein
shall restrict or limit in any way the Executive from any of the following
activities at any time following a termination of Executive's employment
hereunder: (i) the practice of law or accounting, including the representation
of banking institutions and their affiliates, without restriction as to their
location; (ii) provision of professional services relating to real estate
brokerage, real estate consultation or problem asset consultation, including
the representation of banking institutions and their affiliates, without
restriction as to their location; (iii) provision of professional services as a
consultant or adviser for any banking institution or affiliate, including
relating to the development and implementation of policies and procedures
dealing with or related to problem assets, asset classification, asset review,
real estate lending, and legal and accounting matters, without restriction as
to their location.
(d) It is recognized that damages in the event of breach of any provision
of this paragraph 4 by the Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that the Bank, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach; and the Executive hereby waives any and all defenses
he may have on the ground of the lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which the Bank may have.
5. Termination for Cause. Nothing in this Agreement shall be construed to
prevent the Bank from terminating the Executive's employment hereunder and the
Employment Period at any time, for cause. As used in this Agreement: (i) a
termination for cause shall mean a termination for personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease and desist order, after notice and an opportunity to cure the
alleged breach, or a material breach by the Executive of any agreement on his
part made herein; and any such termination shall not be construed a breach of
this Agreement by the Bank; and (ii) a termination by the Bank without cause
shall mean any termination by the Bank prior to the end of the Employment
Period for reasons other than as specified in clause (i). No compensation
shall be paid to the Executive subsequent to the Executive's termination for
cause.
6. Termination upon a Change in Control.
(a) This Agreement shall terminate, and the Bank or any successor
corporation to the Bank shall pay the Executive the amount provided in
paragraph 7(a), if:
(i) After a Change in Control, the Bank or any successor corporation
of the Bank breaches any provision of this Agreement, including, without
limitation, a reduction in the Executive's total compensation from that
provided in paragraph 3, or a significant reduction in the nature or scope of
the duties and functions of the Executive from those contemplated in paragraph
2; or
(ii) After a Change in Control, the Executive is relocated by the Bank
without his express written consent to perform the services and duties required
by this Agreement at any place outside Washington County, Maryland; or
(iii) After a Change in Control, any successor corporation of the Bank
does not agree to assume the obligations of the Bank under this Agreement.
(b) A "Change in Control," as used in this Agreement, shall be deemed to
have occurred when:
(i) Acquisition by a person, or by persons acting in a group, of
securities of the Bank, or of F&M Bancorp, representing 25% or more of the
combined voting power of the then outstanding voting securities of the Bank or
of F&M Bancorp; or
(ii) A change in the membership of the Board of Directors of the Bank,
or of F&M Bancorp, such that during any period of two consecutive years,
individuals who at the beginning of such period constituted such Board of
Directors ceased for any reason to constitute at least a majority thereof
unless the election of each director who was not a director at the beginning of
the period was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
(iii) The consummation of the Merger in accordance with the terms of
the Plan shall not constitute a "Change of Control" for purposes of this
Agreement.
7. Severance Payments.
(a) If the Executive terminates his employment during the Employment Period
within twelve months after a Change of Control pursuant to paragraph 6, or is
terminated by the Bank, during the Employment Period after a Change in Control
pursuant to paragraph 6, the Bank will pay the Executive, in lieu of any
amounts payable under paragraph 3, an amount equal to three times the sum of
(i) the Executive's average annual base salary for the five years immediately
before the Change in Control and (ii) the average of the bonuses paid to the
Executive over the five years immediately before the Change in Control
(including years in which no bonus was awarded). Such payment shall be made in
36 equal monthly installments, beginning on the first day of the month
following the month during which this Agreement is terminated.
(b) If this Agreement is terminated within one year after the Effective
Date of the Merger by the Executive, or by the Bank for any reason other than
for cause (as defined in paragraph 5), the Bank will pay the Executive, in lieu
of any amounts payable under paragraph 3, an amount equal to three times the
sum of (i) the Executive's average annual base salary for the five years
immediately before such termination and (ii) the average of the bonuses paid to
the Executive over the five years immediately before such termination
(including years in which no bonus was awarded). Such payment shall be made in
equal monthly installments for the remainder of the Employment Period,
beginning on the first day of the month following the month during which this
Agreement is terminated.
(c) If the Executive is terminated by the Bank without cause (as defined in
paragraph 5), more than one year after the Effective Date of the Merger but
before the expiration of the Employment Period, the Bank will pay the
Executive, in lieu of any amounts payable under paragraph 3, an amount equal to
(i) two times the sum of (x) the Executive's average annual base salary for the
five years immediately before such termination and (y) the average of the
bonuses paid to the Executive over the five years immediately before such
termination (including years in which no bonus was awarded) multiplied by (ii)
a fraction, the numerator of which shall be the number of months remaining in
the Employment Period, rounded down to the nearest whole month, and the
denominator of which shall be 24. Such payment shall be made in equal monthly
installments for the remainder of the Employment Period, beginning on the first
day of the month following the month during which this Agreement is terminated.
(d) If the Executive remains employed by the Bank and exercises authority
and performs executive duties as its Executive Vice President for the remainder
of the Employment Period and is terminated after the expiration of the
Employment Period, the Executive will be entitled to such severance payments
and post-employment benefits as may be available to the Executive under such
employment policies of the Bank as may then be in effect.
8. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their heirs, personal representatives,
successors and assigns.
9. Entire Agreement. This Agreement contains the entire understanding of
the Executive, the Bank and any affiliate of the Bank, including Home Federal
Corporation, with respect to employment of the Executive and supersedes any and
all prior understandings, written or oral between the Executive, the Bank and
any affiliate of the Bank, including Home Federal Corporation. This Agreement
may not be amended, waived, discharged or terminated orally, but only by an
instrument in writing; and shall be governed by the laws of Maryland.
10. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed
severable from the remainder of this Agreement, and the remaining provisions
contained in this Agreement shall be construed to preserve to the maximum
permissible extent the intent and purposes of this Agreement. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
11. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement.
(a) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs pursuant to notice
served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Section 1818(e)(3) and 1818(g)(1)), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion: (i) pay the Executive all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Section
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
12. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k) and any regulations
promulgated thereunder.
13. Obligation in Event of Regulatory Prohibition. In consideration for
the Executive's execution of this Agreement and the relinquishing of the
Executive's rights under his employment agreements dated March 21, 1996 with
Home Federal Savings Bank and Home Federal Corporation, F&M Bancorp hereby
guarantees the Executive that if any benefit or payment to which the Executive
is otherwise entitled under this Agreement is disallowed or otherwise denied by
any regulatory action or prohibition, F&M Bancorp shall pay the Executive any
sums contemplated by this Agreement that the Bank shall be unable to pay or
shall be prohibited from paying.
14. Governing Law and Submission to Jurisdiction. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Maryland, without giving effect to the principles of conflicts of law
thereof. Each of the parties hereby irrevocably submits to the jurisdiction of
the Circuit Court of Washington County or any Federal court sitting in the
State of Maryland for purposes of any controversy, claim or dispute arising out
of or related to this Agreement and hereby waives any defense of an
inconvenient forum and any right of jurisdiction on account of the place of
residence or domicile. For the purpose of expediting the resolution of any
such claim or dispute, the parties hereby waive trial by jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed and delivered under seal, by its authorized officers or
individually, on the date first above written.
ATTEST/WITNESS: F&M BANCORP
/s/Mary Jo Renn By /s/Faye E. Cannon (SEAL)
Name: Faye E. Cannon
Title: President and Chief Executive
Officer
ATTEST/WITNESS: HOME FEDERAL SAVINGS BANK (the "Bank")
/s/Celia S. Ausherman By /s/Richard W. Phoebus (SEAL)
Name: Richard W. Phoebus, Sr.
Title: President and Chief Executive
Officer
/s/Jeanne M. Wallace /s/Steven G. Hull (SEAL)
Steven G. Hull (the "Executive")
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of November 15, 1996, between
F&M Bancorp, a Maryland corporation and bank holding company, Home Federal
Savings Bank, a federally-chartered savings bank (the "Bank"), and Salvatore M.
Savino (the "Executive").
In consideration of the mutual covenants herein contained and of the mutual
benefits herein provided, the Bank and the Executive agree as follows:
1. Employment. (a) The Bank will employ the Executive and the Executive
accepts employment by the Bank on the terms and conditions herein contained.
(b) The period during which the Bank will employ the Executive (the
"Employment Period") shall commence on the Effective Date of the merger of Home
Federal Corporation with and into F&M Bancorp (the "Merger") as defined in
Section 1 of the Plan and Agreement to Merge dated as of April 2, 1996 by and
among F&M Bancorp and Home Federal Corporation (the "Plan"). The effectiveness
of this Agreement is conditioned upon the completion of the Merger pursuant to
the Plan.
(c) The Employment Period shall continue until and shall cease and
terminate upon the earlier of (i) the close of business on the day which is
three years after the Effective Date of the Merger or (ii) the death or
substantially total disability of the Executive; provided, however, that the
Executive may terminate this Agreement at any time without liability except
pursuant to paragraphs 4, 12 and 13 hereof, and without relinquishing or
forfeiting executive's rights under paragraphs 7 and 13.
2. Duties and Functions. (a) During the Employment Period, the Executive
shall exercise authority and perform executive duties as the Senior Vice
President/Treasurer and Chief Financial Officer of the Bank, and shall perform
such additional duties, as may be assigned or delegated to him from time to
time, by the Board of Directors of the Bank.
(b) During the Employment Period, the Executive will (i) devote his full
time and efforts to the business of the Bank and will not engage in consulting
work or any trade or business for his own account or for or on behalf of any
other person, firm or corporation which competes, conflicts or interferes with
the performance of his duties hereunder in any way and (ii) accept such office
or offices to which he may be elected by the Board of Directors of the Bank;
provided that the performance of the duties of such office or offices shall be
consistent with the scope of the duties provided for in subparagraph (a) of
this paragraph 2.
3. Compensation. (a) As compensation for his services hereunder, the Bank
agrees to pay the Executive a salary at the rate of at least $83,500 per annum,
payable in equal monthly installments, or on such other periodic basis as may
be mutually agreed upon, subject to normal policies of the Bank as to salary
payments or suspensions thereof during periods of disability. Such salary and
the Executive's performance shall be subject to normal periodic review by the
Bank's board of director's at least annually for increases in salary, based on
corporate policy and contributions to the enterprise. Such review shall be
documented in the minutes of the board of directors' meetings.
(b) In addition to his salary provided by the foregoing, the Executive
shall be entitled to receive benefits under any bonus, profit-sharing,
retirement, group life, disability, sickness, accident or health insurance
programs of the Bank (or under any such programs in which employees of the Bank
are eligible to participate) which may now or, if not terminated, shall
hereafter be in effect, or in any other or additional such programs which may
be established by the Bank (or any program in which employees of the Bank are
eligible to participate), as and to the extent any such programs are or may
from time to time be in effect. The Executive shall be entitled to reasonable
vacations and sick leave, as may be established by Bank policy.
(c) The Bank will reimburse the Executive for all authorized expenses
properly incurred by him in the performance of his duties hereunder.
4. Competition; Confidential Information. The Executive and the Bank
recognize that due to the nature of his employment, and his relationship with
the Bank, the Executive has had and will have access to, and has acquired and
will acquire, and has assisted and will assist in developing, confidential and
proprietary information relating to the business and operations of the Bank and
its affiliates, including, without limiting the generality of the foregoing,
information with respect to their present and prospective services, systems,
clients, customers, agents, and sales and marketing methods. The Executive
acknowledges that such information has been and will be of central importance
to the Bank's business and that disclosure of it to or its use by others could
cause substantial loss to the Bank. The Executive and the Bank also recognize
that an important part of the Executive's duties will be to develop good will
for the Bank through his personal contact with the Bank's clients, and that
there is a danger that this good will, a proprietary asset of the Bank, may
follow the Executive if and when his relationship with the Bank is terminated.
The Executive accordingly agrees as follows:
(a) The Executive agrees that, upon termination of his employment hereunder
prior to the expiration of the stated Employment Period provided in paragraphs
1(b) and (c), for any reason other than (i) for termination by the Bank without
cause or (ii) for termination after a Change in Control, as provided for in
paragraph 6:
(i) The Executive will not directly or indirectly accept employment in
Frederick or Washington County, Maryland with any other banking institution or
affiliate thereof for a period of two years from the date of such termination,
or in connection with any subsequent employment outside of Frederick or
Washington County, Maryland solicit any of the banking business of clients or
customers of the Bank or any of its affiliates in Frederick or Washington
County, Maryland, at the time of said termination for a period of two years
from the date of such termination.
(ii) The Executive will not in connection with any subsequent
employment outside of Frederick or Washington County, Maryland directly or
indirectly solicit the banking business of any potential client who had been
identified and discussed as such within the Bank by the time of such
termination for a period of two years from such termination. In the event that
the Executive violates the provisions of this subparagraph without knowledge of
such violation, upon notice from the Bank informing him of the nature of such
violation, the Executive shall immediately terminate any actions which
constitute such violation.
(b) After the end of the Employment Period, the Executive shall not retain
copies of any documents (including without limitation customer lists)
containing any such trade secrets or confidential or proprietary information of
the Bank or its affiliates.
(c) It is understood and agreed by the parties hereto that nothing herein
shall restrict or limit in any way the Executive from any of the following
activities at any time following a termination of Executive's employment
hereunder: (i) the practice of law or accounting, including the representation
of banking institutions and their affiliates, without restriction as to their
location; (ii) provision of professional services relating to real estate
brokerage, real estate consultation or problem asset consultation, including
the representation of banking institutions and their affiliates, without
restriction as to their location; (iii) provision of professional services as a
consultant or adviser for any banking institution or affiliate, including
relating to the development and implementation of policies and procedures
dealing with or related to problem assets, asset classification, asset review,
real estate lending, and legal and accounting matters, without restriction as
to their location.
(d) It is recognized that damages in the event of breach of any provision
of this paragraph 4 by the Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that the Bank, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach; and the Executive hereby waives any and all defenses
he may have on the ground of the lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which the Bank may have.
5. Termination for Cause. Nothing in this Agreement shall be construed to
prevent the Bank from terminating the Executive's employment hereunder and the
Employment Period at any time, for cause. As used in this Agreement: (i) a
termination for cause shall mean a termination for personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease and desist order, after notice and an opportunity to cure the
alleged breach, or a material breach by the Executive of any agreement on his
part made herein; and any such termination shall not be construed a breach of
this Agreement by the Bank; and (ii) a termination by the Bank without cause
shall mean any termination by the Bank prior to the end of the Employment
Period for reasons other than as specified in clause (i).
6. Termination upon a Change in Control.
(a) This Agreement shall terminate, and the Bank or any successor
corporation to the Bank shall pay the Executive the amount provided in
paragraph 7(a), if:
(i) After a Change in Control, the Bank or any successor corporation
of the Bank breaches any provision of this Agreement, including, without
limitation, a reduction in the Executive's total compensation from that
provided in paragraph 3, or a significant reduction in the nature or scope of
the duties and functions of the Executive from those contemplated in paragraph
2; or
(ii) After a Change in Control, the Executive is relocated by the Bank
without his express written consent to perform the services and duties required
by this Agreement at any place outside Washington County, Maryland; or
(iii) After a Change in Control, any successor corporation of the Bank
does not agree to assume the obligations of the Bank under this Agreement.
(b) A "Change in Control," as used in this Agreement, shall be deemed to
have occurred when:
(i) Acquisition by a person, or by persons acting in a group, of
securities of the Bank, or of F&M Bancorp, representing 25% or more of the
combined voting power of the then outstanding voting securities of the Bank or
of F&M Bancorp; or
(ii) A change in the membership of the Board of Directors of the Bank,
or of F&M Bancorp, such that during any period of two consecutive years,
individuals who at the beginning of such period constituted such Board of
Directors ceased for any reason to constitute at least a majority thereof
unless the election of each director who was not a director at the beginning of
the period was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
(iii) The consummation of the Merger in accordance with the terms of
the Plan shall not constitute a "Change of Control" for purposes of this
Agreement.
7. Severance Payments.
(a) If the Executive terminates his employment during the Employment Period
within twelve months after a Change of Control pursuant to paragraph 6, or is
terminated by the Bank, during the Employment Period after a Change in Control
pursuant to paragraph 6, the Bank will pay the Executive, in lieu of any
amounts payable under paragraph 3, an amount equal to three times the sum of
(i) the Executive's average annual base salary for the five years immediately
before the Change in Control and (ii) the average of the bonuses paid to the
Executive over the five years immediately before the Change in Control
(including years in which no bonus was awarded). Such payment shall be made in
36 equal monthly installments, beginning on the first day of the month
following the month during which this Agreement is terminated.
(b) If this Agreement is terminated within one year after the Effective
Date of the Merger by the Executive, or by the Bank for any reason other than
for cause (as defined in paragraph 5), the Bank will pay the Executive, in lieu
of any amounts payable under paragraph 3, an amount equal to three times the
sum of (i) the Executive's average annual base salary for the five years
immediately before such termination and (ii) the average of the bonuses paid to
the Executive over the five years immediately before such termination
(including years in which no bonus was awarded). Such payment shall be made in
equal monthly installments for the remainder of the Employment Period,
beginning on the first day of the month following the month during which this
Agreement is terminated.
(c) If the Executive is terminated by the Bank without cause (as defined in
paragraph 5), more than one year after the Effective Date of the Merger but
before the expiration of the Employment Period, the Bank will pay the
Executive, in lieu of any amounts payable under paragraph 3, an amount equal to
(i) two times the sum of (x) the Executive's average annual base salary for the
five years immediately before such termination and (y) the average of the
bonuses paid to the Executive over the five years immediately before such
termination (including years in which no bonus was awarded) multiplied by (ii)
a fraction, the numerator of which shall be the number of months remaining in
the Employment Period, rounded down to the nearest whole month, and the
denominator of which shall be 24. Such payment shall be made in equal monthly
installments for the remainder of the Employment Period, beginning on the first
day of the month following the month during which this Agreement is terminated.
(d) If the Executive remains employed by the Bank and exercises authority
and performs executive duties as its Senior Vice President/Treasurer and Chief
Financial Officer for the remainder of the Employment Period and is terminated
after the expiration of the Employment Period, the Executive will be entitled
to such severance payments and post-employment benefits as may be available to
the Executive under such employment policies of the Bank as may then be in
effect.
8. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their heirs, personal representatives,
successors and assigns.
9. Entire Agreement. This Agreement contains the entire understanding of
the Executive, the Bank and any affiliate of the Bank, including Home Federal
Corporation, with respect to employment of the Executive and supersedes any and
all prior understandings, written or oral between the Executive, the Bank and
any affiliate of the Bank, including Home Federal Corporation. This Agreement
may not be amended, waived, discharged or terminated orally, but only by an
instrument in writing; and shall be governed by the laws of Maryland.
10. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed
severable from the remainder of this Agreement, and the remaining provisions
contained in this Agreement shall be construed to preserve to the maximum
permissible extent the intent and purposes of this Agreement. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
11. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement.
(a) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs pursuant to notice
served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Section 1818(e)(3) and 1818(g)(1)), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion: (i) pay the Executive all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Section
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
12. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k) and any regulations
promulgated thereunder.
13. Obligation in Event of Regulatory Prohibition. In consideration for
the Executive's execution of this Agreement and the relinquishing of the
Executive's rights under his employment agreements dated March 21, 1996 with
Home Federal Savings Bank and Home Federal Corporation, F&M Bancorp hereby
guarantees the Executive that if any benefit or payment to which the Executive
is otherwise entitled under this Agreement is disallowed or otherwise denied by
any regulatory action or prohibition, F&M Bancorp shall pay the Executive any
sums contemplated by this Agreement that the Bank shall be unable to pay or
shall be prohibited from paying.
14. Governing Law and Submission to Jurisdiction. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Maryland, without giving effect to the principles of conflicts of law
thereof. Each of the parties hereby irrevocably submits to the jurisdiction of
the Circuit Court of Washington County or any Federal court sitting in the
State of Maryland for purposes of any controversy, claim or dispute arising out
of or related to this Agreement and hereby waives any defense of an
inconvenient forum and any right of jurisdiction on account of the place of
residence or domicile. For the purpose of expediting the resolution of any
such claim or dispute, the parties hereby waive trial by jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed and delivered under seal, by its authorized officers or
individually, on the date first above written.
ATTEST/WITNESS: F&M BANCORP
/s/Mary Jo Renn By /s/Faye E. Cannon (SEAL)
Name: Faye E. Cannon
Title: President and Chief Executive
Officer
ATTEST/WITNESS: HOME FEDERAL SAVINGS BANK (the "Bank")
/s/Celia S. Ausherman By /s/Richard W. Phoebus (SEAL)
Name: Richard W. Phoebus, Sr.
Title: President and Chief Executive
Officer
/s/Terry L. Smith /s/Salvatore M. Savino (SEAL)
Salvatore M. Savino (the "Executive")
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of November 15, 1996, between
F&M Bancorp, a Maryland corporation and bank holding company, Home Federal
Savings Bank, a federally-chartered savings bank (the "Bank"), and Celia S.
Ausherman (the "Executive").
In consideration of the mutual covenants herein contained and of the mutual
benefits herein provided, the Bank and the Executive agree as follows:
1. Employment. (a) The Bank will employ the Executive and the Executive
accepts employment by the Bank on the terms and conditions herein contained.
(b) The period during which the Bank will employ the Executive (the
"Employment Period") shall commence on the Effective Date of the merger of Home
Federal Corporation with and into F&M Bancorp (the "Merger") as defined in
Section 1 of the Plan and Agreement to Merge dated as of April 2, 1996 by and
among F&M Bancorp and Home Federal Corporation (the "Plan"). The effectiveness
of this Agreement is conditioned upon the completion of the Merger pursuant to
the Plan.
(c) The Employment Period shall continue until and shall cease and
terminate upon the earlier of (i) the close of business on the day which is
three years after the Effective Date of the Merger or (ii) the death or
substantially total disability of the Executive; provided, however, that the
Executive may terminate this Agreement at any time without liability except
pursuant to paragraphs 4, 12 and 13 hereof, and without relinquishing or
forfeiting executive's rights under paragraphs 7 and 13.
2. Duties and Functions. (a) During the Employment Period, the Executive
shall exercise authority and perform executive duties as the Senior Vice
President and Secretary of the Bank, and shall perform such additional duties,
as may be assigned or delegated to her from time to time, by the Board of
Directors of the Bank.
(b) During the Employment Period, the Executive will (i) devote her full
time and efforts to the business of the Bank and will not engage in consulting
work or any trade or business for her own account or for or on behalf of any
other person, firm or corporation which competes, conflicts or interferes with
the performance of her duties hereunder in any way and (ii) accept such office
or offices to which she may be elected by the Board of Directors of the Bank;
provided that the performance of the duties of such office or offices shall be
consistent with the scope of the duties provided for in subparagraph (a) of
this paragraph 2.
3. Compensation. (a) As compensation for her services hereunder, the Bank
agrees to pay the Executive a salary at the rate of at least $53,000 per annum,
payable in equal monthly installments, or on such other periodic basis as may
be mutually agreed upon, subject to normal policies of the Bank as to salary
payments or suspensions thereof during periods of disability. Such salary and
the Executive's performance shall be subject to normal periodic review by the
Bank's board of directors at least annually for increases in salary, based on
corporate policy and contributions to the enterprise. Such review shall be
documented in the minutes of the board of directors' meetings.
(b) In addition to her salary provided by the foregoing, the Executive
shall be entitled to receive benefits under any bonus, profit-sharing,
retirement, group life, disability, sickness, accident or health insurance
programs of the Bank (or under any such programs in which employees of the Bank
are eligible to participate) which may now or, if not terminated, shall
hereafter be in effect, or in any other or additional such programs which may
be established by the Bank (or any program in which employees of the Bank are
eligible to participate), as and to the extent any such programs are or may
from time to time be in effect. The Executive shall be entitled to reasonable
vacations and sick leave, as may be established by Bank policy.
(c) The Bank will reimburse the Executive for all authorized expenses
properly incurred by her in the performance of her duties hereunder.
4. Competition; Confidential Information. The Executive and the Bank
recognize that due to the nature of her employment, and her relationship with
the Bank, the Executive has had and will have access to, and has acquired and
will acquire, and has assisted and will assist in developing, confidential and
proprietary information relating to the business and operations of the Bank and
its affiliates, including, without limiting the generality of the foregoing,
information with respect to their present and prospective services, systems,
clients, customers, agents, and sales and marketing methods. The Executive
acknowledges that such information has been and will be of central importance
to the Bank's business and that disclosure of it to or its use by others could
cause substantial loss to the Bank. The Executive and the Bank also recognize
that an important part of the Executive's duties will be to develop good will
for the Bank through her personal contact with the Bank's clients, and that
there is a danger that this good will, a proprietary asset of the Bank, may
follow the Executive if and when her relationship with the Bank is terminated.
The Executive accordingly agrees as follows:
(a) The Executive agrees that, upon termination of her employment hereunder
prior to the expiration of the stated Employment Period provided in paragraphs
1(b) and (c), for any reason other than (i) for termination by the Bank without
cause or (ii) for termination after a Change in Control, as provided for in
paragraph 6:
(i) The Executive will not directly or indirectly accept employment in
Frederick or Washington County, Maryland with any other banking institution or
affiliate thereof for a period of two years from the date of such termination,
or in connection with any subsequent employment outside of Frederick or
Washington County, Maryland solicit any of the banking business of clients or
customers of the Bank or any of its affiliates in Frederick or Washington
County, Maryland, at the time of said termination for a period of two years
from the date of such termination.
(ii) The Executive will not in connection with any subsequent
employment outside of Frederick or Washington County, Maryland directly or
indirectly solicit the banking business of any potential client who had been
identified and discussed as such within the Bank by the time of such
termination for a period of two years from such termination. In the event that
the Executive violates the provisions of this subparagraph without knowledge of
such violation, upon notice from the Bank informing her of the nature of such
violation, the Executive shall immediately terminate any actions which
constitute such violation.
(b) After the end of the Employment Period, the Executive shall not retain
copies of any documents (including without limitation customer lists)
containing any such trade secrets or confidential or proprietary information of
the Bank or its affiliates.
(c) It is understood and agreed by the parties hereto that nothing herein
shall restrict or limit in any way the Executive from any of the following
activities at any time following a termination of Executive's employment
hereunder: (i) the practice of law or accounting, including the representation
of banking institutions and their affiliates, without restriction as to their
location; (ii) provision of professional services relating to real estate
brokerage, real estate consultation or problem asset consultation, including
the representation of banking institutions and their affiliates, without
restriction as to their location; (iii) provision of professional services as a
consultant or adviser for any banking institution or affiliate, including
relating to the development and implementation of policies and procedures
dealing with or related to problem assets, asset classification, asset review,
real estate lending, and legal and accounting matters, without restriction as
to their location.
(d) It is recognized that damages in the event of breach of any provision
of this paragraph 4 by the Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that the Bank, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach; and the Executive hereby waives any and all defenses
she may have on the ground of the lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which the Bank may have.
5. Termination for Cause. Nothing in this Agreement shall be construed to
prevent the Bank from terminating the Executive's employment hereunder and the
Employment Period at any time, for cause. As used in this Agreement: (i) a
termination for cause shall mean a termination for personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease and desist order, after notice and an opportunity to cure the
alleged breach, or a material breach by the Executive of any agreement on her
part made herein; and any such termination shall not be construed a breach of
this Agreement by the Bank; and (ii) a termination by the Bank without cause
shall mean any termination by the Bank prior to the end of the Employment
Period for reasons other than as specified in clause (i).
6. Termination upon a Change in Control.
(a) This Agreement shall terminate, and the Bank or any successor
corporation to the Bank shall pay the Executive the amount provided in
paragraph 7(a), if:
(i) After a Change in Control, the Bank or any successor corporation
of the Bank breaches any provision of this Agreement, including, without
limitation, a reduction in the Executive's total compensation from that
provided in paragraph 3, or a significant reduction in the nature or scope of
the duties and functions of the Executive from those contemplated in paragraph
2; or
(ii) After a Change in Control, the Executive is relocated by the Bank
without her express written consent to perform the services and duties required
by this Agreement at any place outside Washington County, Maryland; or
(iii) After a Change in Control, any successor corporation of the Bank
does not agree to assume the obligations of the Bank under this Agreement.
(b) A "Change in Control," as used in this Agreement, shall be deemed to
have occurred when:
(i) Acquisition by a person, or by persons acting in a group, of
securities of the Bank, or of F&M Bancorp, representing 25% or more of the
combined voting power of the then outstanding voting securities of the Bank or
of F&M Bancorp; or
(ii) A change in the membership of the Board of Directors of the Bank,
or of F&M Bancorp, such that during any period of two consecutive years,
individuals who at the beginning of such period constituted such Board of
Directors ceased for any reason to constitute at least a majority thereof
unless the election of each director who was not a director at the beginning of
the period was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
(iii) The consummation of the Merger in accordance with the terms of
the Plan shall not constitute a "Change of Control" for purposes of this
Agreement.
7. Severance Payments.
(a) If the Executive terminates her employment during the Employment Period
within twelve months after a Change of Control pursuant to paragraph 6, or is
terminated by the Bank, during the Employment Period after a Change in Control
pursuant to paragraph 6, the Bank will pay the Executive, in lieu of any
amounts payable under paragraph 3, an amount equal to three times the sum of
(i) the Executive's average annual base salary for the five years immediately
before the Change in Control and (ii) the average of the bonuses paid to the
Executive over the five years immediately before the Change in Control
(including years in which no bonus was awarded). Such payment shall be made in
36 equal monthly installments, beginning on the first day of the month
following the month during which this Agreement is terminated.
(b) If this Agreement is terminated within one year after the Effective
Date of the Merger by the Executive, or by the Bank for any reason other than
for cause (as defined in paragraph 5), the Bank will pay the Executive, in lieu
of any amounts payable under paragraph 3, an amount equal to three times the
sum of (i) the Executive's average annual base salary for the five years
immediately before such termination and (ii) the average of the bonuses paid to
the Executive over the five years immediately before such termination
(including years in which no bonus was awarded). Such payment shall be made in
equal monthly installments for the remainder of the Employment Period,
beginning on the first day of the month following the month during which this
Agreement is terminated.
(c) If the Executive is terminated by the Bank without cause (as defined in
paragraph 5), more than one year after the Effective Date of the Merger but
before the expiration of the Employment Period, the Bank will pay the
Executive, in lieu of any amounts payable under paragraph 3, an amount equal to
(i) two times the sum of (x) the Executive's average annual base salary for the
five years immediately before such termination and (y) the average of the
bonuses paid to the Executive over the five years immediately before such
termination (including years in which no bonus was awarded) multiplied by (ii)
a fraction, the numerator of which shall be the number of months remaining in
the Employment Period, rounded down to the nearest whole month, and the
denominator of which shall be 24. Such payment shall be made in equal monthly
installments for the remainder of the Employment Period, beginning on the first
day of the month following the month during which this Agreement is terminated.
(d) If the Executive remains employed by the Bank and exercises authority
and performs executive duties as its Senior Vice President and Secretary for
the remainder of the Employment Period and is terminated after the expiration
of the Employment Period, the Executive will be entitled to such severance
payments and post-employment benefits as may be available to the Executive
under such employment policies of the Bank as may then be in effect.
8. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their heirs, personal representatives,
successors and assigns.
9. Entire Agreement. This Agreement contains the entire understanding of
the Executive, the Bank and any affiliate of the Bank, including Home Federal
Corporation, with respect to employment of the Executive and supersedes any and
all prior understandings, written or oral between the Executive, the Bank and
any affiliate of the Bank, including Home Federal Corporation. This Agreement
may not be amended, waived, discharged or terminated orally, but only by an
instrument in writing; and shall be governed by the laws of Maryland.
10. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed
severable from the remainder of this Agreement, and the remaining provisions
contained in this Agreement shall be construed to preserve to the maximum
permissible extent the intent and purposes of this Agreement. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
11. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement.
(a) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs pursuant to notice
served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Section 1818(e)(3) and 1818(g)(1)), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion: (i) pay the Executive all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Section
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
12. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k) and any regulations
promulgated thereunder.
13. Obligation in Event of Regulatory Prohibition. In consideration for
the Executive's execution of this Agreement and the relinquishing of the
Executive's rights under her employment agreements dated March 21, 1996 with
Home Federal Savings Bank and Home Federal Corporation, F&M Bancorp hereby
guarantees the Executive that if any benefit or payment to which the Executive
is otherwise entitled under this Agreement is disallowed or otherwise denied by
any regulatory action or prohibition, F&M Bancorp shall pay the Executive any
sums contemplated by this Agreement that the Bank shall be unable to pay or
shall be prohibited from paying.
14. Governing Law and Submission to Jurisdiction. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Maryland, without giving effect to the principles of conflicts of law
thereof. Each of the parties hereby irrevocably submits to the jurisdiction of
the Circuit Court of Washington County or any Federal court sitting in the
State of Maryland for purposes of any controversy, claim or dispute arising out
of or related to this Agreement and hereby waives any defense of an
inconvenient forum and any right of jurisdiction on account of the place of
residence or domicile. For the purpose of expediting the resolution of any
such claim or dispute, the parties hereby waive trial by jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed and delivered under seal, by its authorized officers or
individually, on the date first above written.
ATTEST/WITNESS: F&M BANCORP
/s/Mary Jo Renn By /s/Faye E. Cannon (SEAL)
Name: Faye E. Cannon
Title: President and Chief Executive
Officer
ATTEST/WITNESS: HOME FEDERAL SAVINGS BANK (the "Bank")
/s/Celia S. Ausherman By /s/Richard W. Phoebus (SEAL)
Name: Richard W. Phoebus, Sr.
Title: President and Chief Executive
Officer
/s/Steven G. Hull /s/Celia S. Ausherman (SEAL)
Celia S. Ausherman (the "Executive")
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ending December 31 ,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings per share:
Primary
Net Income 1.51 1.88 1.70
Fully diluted
Net Income 1.51 1.88 1.69
</TABLE>
Primary and fully diluted earnings per share are calculated using the
following number of adjusted weighted average shares outstanding:
<TABLE>
<CAPTION>
Year Ending December 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Primary 5,714,054 5,703,071 5,687,145
Fully diluted 5,713,713 5,710,535 5,696,328
</TABLE>
The weighted average number of shares outstanding is adjusted to recognize
the dilutive effect, if any, of outstanding employee stock options on both a
primary and fully diluted basis.
The calculations of earnings per share above are based on the weighted
average number of shares outstanding including all common stock and common
stock equivalents in conformity with the instructions for Item 601 of
Regulation S-K. The calculation of earnings per share for financial reporting
purposes is based on the weighted average number of shares outstanding at
December 31, 1996, 1995, and 1994, of 5,671,362, 5,656,368, and 5,640,591,
respectively, without giving effect to the common stock equivalents resulting
from the assumed exercise of stock options, which do not dilute earnings per
share by more than 3 percent, in conformity with generally accepted accounting
principles.
F&M BANCORP
"The new paradigm in banking is market segmentation and customer-based
knowledge."
MANAGING for VALUE
It is the model by which we are creating value for customers and building value
for our shareholders.
1996 ANNUAL REPORT
<PAGE>
1 Financial Highlights
2 To Our Shareholders
4 Marketing Direction
7 Tools of Technology
8 Delivery Alternatives
11 Lifecycle Banking
12 Selected Financial Information
13 Management's Discussion and Analysis
26 Consolidated Financial Statements
30 Notes to Consolidated Financial Statements
43 Report of Independent Auditors
44 Directors and Officers
With more than $1 billion in assets, F&M Bancorp is the largest community bank
in central Maryland, and the third largest independent bank holding company
headquarterd in the state. Bancorp offers a full range of personal banking,
commercial banking, trust, and investment management services through its
regional subsidiaries' network of 31 community offices and 49 ATMs located in
Frederick, Washington, Montgomery, Carroll and Allegany Counties.
Bancorp is responding to the changing business environment as a "market needs-
driven" organization where customers dictate the scope of product and service
offerings and the manner in which they are delivered. Life style market
segmentation analysis has identified opportunities for profitable , potentially
lifelong customer relationships and sales opportunities.
Bancorp's strategies for growth are manifested in its contiguous market
expansion and strategic investments in information technology systems allowing
the company to fulfill its vision of the contemporary financial services
business entering the 21st Century.
THE MARKETPLACE
[Map of Maryland with Allegany, Washington, Frederick, Carroll and Montgomery
Counties highlighted. The following towns are called-out on the map: Frostburg,
Allegany County, Hagerstown, Washington County, Frederick City, Frederick
County, Union Bridge, Carroll County, and Germantown, Montgomery County.]
<PAGE>
FINANCIAL HIGHLIGHTS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
F&M Bancorp and Subsidiaries
Three month period Year ended
(Dollars in thousands, ended December 31, % December 31, %
except per share amounts) 1996(1) 1995(1) Change 1996(1) 1995(1)
Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Interest income $18,186 $17,960 1.3% $70,866 $70,108 1.1
%
Interest expense 8,307 8,289 0.2 32,218 32,336 (0.4)
------- ------- ------- -------
Net Interest income 9,879 9,671 2.2 38,648 37,772 2.3
Provisions for credit losses 622 701 (11.3) 1,522 1,651 (7.8)
------- ------- ------- -------
Net interest income after
provision for credit losses 9,257 8,970 3.2 37,126 36,121 2.8
Noninterest income 2,677 5,234 (48.9) 10,770 12,162 (11.4)
Noninterest expenses 9,879 10,226 (3.4) 36,512 35,176 3.8
------- ------- ------- -------
Income before provision for
income taxes 2,055 3,978 (48.3) 11,384 13,107 (13.1)
Provision for income taxes 434 1,225 (64.6) 2,773 2,300 16.5
------- ------- ------- -------
Net income 1,621 2,753 (41.1) 8,611 10,727 (19.7)
======= ======= ======= =======
Per Share Data(3)
Net income $0.29 $0.49 (40.8)% $1.52 $1.90(20.0)%
Cash dividends paid 0.16 0.17 (5.9) 0.64 0.63 1.6
Book value 16.46 15.61 5.4
Market value, NASDAQ/NMS:FMBN 24.00 29.75 (19.3)
Key Ratios
Return on average assets(2) 0.65% 1.16% 0.89% 1.16%
Return on average equity(2) 6.95% 12.61% 9.48% 13.04%
Net interest margin 4.53% 4.65% 4.56% 4.63%
Average Balances Selected
Securities $238,856 $216,533 10.3% $237,885 $215,245 10.5%
Loans, net of
unearned income 666,052 638,728 4.3 640,672 636,831 0.6
Earning assets 910,048 869,379 4.7 890,825 859,519 3.6
Assets 988,340 940,188 5.1 964,865 925,815 4.2
Deposits 787,295 774,171 1.7 784,994 759,983 3.3
Shareholders' equity 92,854 86,609 7.2 90,858 82,287 10.4
At Period End
Securities $245,811 $225,434 9.0%
Loans, net of unearned income 670,269 626,005 7.1
Earning assets 921,332 878,388 4.9
Assets 1,005,851 954,469 5.4
Deposits 794,750 784,625 1.3
Shareholders' equity 93,460 88,401 5.7
Asset Quality
Nonperforming loans/loans 1.09% 1.11%
Nonperforming assets/loans - OREO 2.17 2.58
Allowance times nonperforming loans 1.32x 1.41x
(1) Restated to reflect the acquisition of Home Federal Savings Bank
consummated on November 15, 1996 and accounted for as a pooling of
interests.
(2) Calculations reflect the effects of adopting Financial Accounting
Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," on December 31, 1993.
(3) Each year restated for the stock dividend declared in 1995.
</TABLE>
"The GOAL of BUSINESS is to create a satisfied customer. PROFIT is the REWARD
for having done so." Peter F. Drucker
<TABLE>
<CAPTION>
TOTAL ASSETS
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
$1200
1000
800
600
400
200
0 1992 1993 1994 1995 1996
</TABLE>
<TABLE>
<CAPTION>
TOTAL DEPOSITS
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
$800
700
600
500
400
300
200
100
0 1992 1993 1994 1995 1996
</TABLE>
<TABLE>
<CAPTION>
TOTAL EQUITY
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
$100
80
60
40
20
0 1992 1993 1994 1995 1996
</TABLE>
<PAGE>
MARKETING has never been as IMPORTANT and taken such a PROMINENT place in
BANKING as it does today."
From an interview with Faye E. Cannon, President Bank Marketing Association
1996-1997
[Photo of Faye E. Cannon]
Faye E. Cannon
President and Chief Executive Officer
TO OUR SHAREHOLDERS
Today, F&M Bancorp stands at the threshold of a bright new future in
progressive community banking - a future rooted in the systematic execution of
key strategic initiatives and built on the added value they are creating for
our shareholders.
From the fundamental reconfiguration of our community office network to
strategic investments in advanced product technology, your company has
responded to the changing business environment as a market-needs driven
enterprise where customers are placed at the center of our business.
1996 Financial Summary
Our financial results for 1996 reflect a year of expansion, integration and
growth. Earnings before special and one-time charges reached a record high
$10.9 million, or $1.92 per share, 25% above 1995's earnings of $8.7 million,
or $1.54 per share. Total assets reached $1.006 billion at year-end. Now the
largest community bank in the region, Bancorp also ranks as the third largest
independent bank holding company headquartered in Maryland following our merger
with Home Federal Corporation last November.
Home Federal's financial results are reported as part of Bancorp's results for
all periods presented in this report under the pooling of interests method of
accounting.
Earnings before special and one-time items boosted our 1996 returns on assets
and equity to 1.13% and 12.01%, respectively, advancing significantly from
0.94% and 10.56%, respectively, for 1995 as restated.
The quality of earnings also improved in 1996 as noninterest income, largely
service charges on deposit accounts and trust and investment management fees,
increased by 17% from 1995 before special and one-time items. Increases in
total expenses were contained at just 1%, also before special and one-time
charges, as we continue to realize greater operating efficiencies from our
investments in technologically advanced service and delivery systems.
Significantly, trust assets under management reached $306.0 million in 1996, an
increase of 26% from year-end 1995, over half of which was attributed to new
business development. We have recently enhanced our competitive advantages in
trust and investment management services with Key Alliance, our new free
financial planning program available to all F&M customers.
Growth Through Acquisition - Home Federal Savings Bank
We have long held to a strategy for growth through acquisition where the
transaction enhances the value of F&M's franchise. That was the case in 1995
when we acquired The Bank of Brunswick, and again in 1996 through the
acquisition of Home Federal Corporation and its subsidiary, Home Federal
Savings Bank. The transaction added $229 million in assets, $162 million in
deposits represented by approximately 41,000 accounts, and $18 million in
equity capital.
Our entry into the contiguous Hagerstown, MD marketplace represents a 30-mile
extension of our regional franchise into adjacent Washington County where Home
Federal has build a 10% share of market through its network of seven community
offices and 17 ATMs.
Consistent with a well-established strategy, we expect to produce incremental
earnings benefits through operating synergies and the introduction of financial
planning, investment management, trust, and commercial banking services
throughout Home Federal's market. Furthermore, we expect Home Federal's
operations to be accretive to earnings starting in the fourth quarter of 1997.
1996 Milestones
Under a master plan for growth developed in 1987, we completed a 45,000 square
foot addition to our headquarters adding 65% more space for bankwide
administrative and operating functions. The expansion was timed to coincide
with two critical components of our technology blueprint: the conversion of our
core processing system to Kirchman D3000, and the implementation of our PC-
based office automation plan.
The Regulatory Environment
While were pleased to have closure regarding the Savings Association Insurance
Fund ("SAIF"), Bancorp's share of the one-time industry assessment was $1.2
million, or approximately $0.13 per share in 1996.
A related issue of special interest to us, and one we support, is the proposed
merger of the Bank Insurance Fund and SAIF scheduled for January 1, 1999. As
presently legislated, the merger of these two Funds is predicated on combining
both thrift and commercial bank charters. We expect the Clinton administration
to push Congress to take action on this issue this year. The outcome could
result in favorable economic and positive marketing implication for Bancorp and
its subsidiaries.
Board of Directors
Sadly, we report the passing of Herbert R. Staley, director emeritus and former
president , 1976-1981, and career banker with Farmers and Mechanics National
Bank.
We were very pleased to welcome three new directors to our organization this
year. Mr. James K. Kluttz, President and Chief Executive Officer of Frederick
Memorial Hospital was named director of Bancorp and Farmers and Mechanics
National Bank; and Richard W. Phoebus, Sr., President and Chief Executive
Officer of Home Federal Savings Bank, and Howard B. Bowen, President of Ewing
Oil Company, Inc. were elected to the Board of Bancorp in conjunction with our
acquisition of Home Federal Corporation.
Advisory Council
We note with sadness the passing of council members William U. Gladhill,
Glenwood D. King and Irving H. Kolker. Their dedicated service and stewardship
were exemplary.
Our Prospects
Much has been written about the evolution of the financial services industry as
we prepare to enter the new millennium. You should know that the management
teams of Bancorp and its subsidiaries are not waiting for the start of the 21st
Century. In fact, we are positioning our organizations to stay well in step
with the new dynamics of an intensely competitive marketplace.
In the pages that follow, we discuss the strategic significance of our
investments in franchise expansion, information technology and delivery
systems, and market segmentation initiatives. We present our response to
rapidly shifting demographics in our geographic market. And we describe our
commitment to satisfying the financial needs of our customers over their entire
banking life cycle. Of special interest to shareholders, we outline the
investment returns we anticipate from stronger and more profitable customer
relationships and our growing reputation as the `bank of choice" in our primary
market.
Our vision is simple...to reinforce our standing as a leading financial
services institution in the region by empowering our associates to focus on the
customer, the true source of Bancorp's growth and profitability.
/s/ Faye E. Cannon
Faye E. Cannon
President and Chief Executive Officer
/s/ Charles W. Hoff, III
Charles W. Hoff, III
Chairman of the Board
Charles W. Hoff, III
Chairman of the Board
[PHOTO]
"By passionately creating VALUE for CUSTOMERS, we are building SUPERIOR value
for SHAREHOLDERS."
<PAGE>
"Creating VALUE for CUSTOMERS with MARKET INTELLIGENCE."
[PHOTO]
Karen L. McCormick
Senior Vice President
MARKETING DIRECTION
"The new paradigm in banking is market segmentation and customer-based
knowledge"
Karen L. McCormick
Senior Vice President
Broadly defined, marketing is the process of identifying the needs of customers
and satisfying these in a way that enhances shareholder value. Studies have
shown that marketing-driven growth, expressed in terms of new revenue produced,
can support 10-20% of a typical retail bank's stock price.
"That's not only a compelling statistic," said Karen McCormick, head of
marketing and chair of the strategic planning committee for Farmers and
Mechanics National Bank, "it's also a powerful motivator. In our bank, the
principles of effective marketing are embraced way beyond the walls of the
marketing department because we all understand the connection between the
bottom line and decisions based on facts about the behavior, characteristics
and profitability of our customers."
Effective marketing, as more narrowly defined, is the ability to identify
material opportunities to add value to target customers at a profit, and the
ability to communicate a value proposition effectively and efficiently.
For example, most banks offer a package of products and services targeted to
seniors. The challenge rests in finding a way to add value for the customer and
the bank. How? By listening to the customer!
The bank's recently introduced Prestige Banking package for seniors includes
all the expected features such as interest checking, free safe deposit box, a
no-fee gold credit card, and more; but focus group research revealed that
seniors wanted more value. They wanted discounts on their purchases from local
merchants. So the marketing team signed up optometrists, restaurants, movie
theaters, travel agencies, and other merchants willing to offer 10-20%
discounts to card-carrying Prestige Banking customers in exchange for the
bank's promotion of the merchant's business. Among the benefits of this value
added service - the average deposit balance of a Prestige Banking customer is
nearly 70% higher than the national average for depositors age 50 and over.
Faye Cannon, President and CEO of Bancorp and Farmers and Mechanics National
Bank, is also the current president of the national Bank Marketing Association
and the industry's leading organization of bank marketing professionals. In a
related interview, she had this to say about the role of marketing in today's
financial services environment: "Marketing has never been as important, and
taken such a prominent place in banking as it does today. Marketers have been
handed the opportunity to drive the bank and influence the bank's decisions.
CEOs are recognizing that the marketing process can drive the bottom line."
Last year, the bank hired one of the country's leading pollsters to conduct a
consumer awareness survey in and around its primary market. Among a host of
useful findings, the survey confirmed that the bank is recognized as "central
Maryland's bank," an opinion supported by top scores for time and place
convenience, service quality, technology, scope of products and services,
knowledgeable and professional employees, and community support, to name just a
few of the many characteristics surveyed.
"That benchmark research has led us to the next level in marketing planning,:
said Karen McCormick. "With that information, we now know how to redirect
marketing dollars to strengthen our weaknesses and replicate our strengths
beyond our primary market."
The key to developing profitable economic value propositions, such as Prestige
Banking, is to ensure that the right combination of product functionality,
pricing and service delivery is sold to the right household. To ensure that
marketing efforts are aligned with corporate profit objectives, the bank is
integrating segmentation analysis with its PC-based customer information file
to evaluate profitability at the account, customer, household and product line
levels.
Effective marketing makes use of effective technology, but in a way, that
supports the bank's associates, enabling them to provide more efficient service
and develop stronger customer relationships for long term retention.
<TABLE>
<CAPTION>
POINT OF SALE TRANSACTION ACTIVITY
Visa Check Card
MOST/MAC
<S> <C> <C>
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0 1995 1996
</TABLE>
<TABLE>
<CAPTION>
COMMERCIAL AND INDUSTRIAL LOANS
<S> <C> <C> <C> <C> <C>
$80
70
60
50
40
30
20
10
0 1992 1993 1994 1995 1996
</TABLE>
Customers demand access to information through both traditional and
nontraditional delivery channels. One segment of customers wants to bank in
cyberspace, others want traditional brick and mortar branch facilities, others
want both.
Market research makes it clear that delivery alternatives are a must for
community banks to compete efficiently with larger financial institutions.
Bancorp's subsidiaries offer nine separate delivery channels including mobile
banking, PC banking and an interactive Internet Web site at
http://www.fmbancorp.com.
Capturing even more customer value through relationship banking is the key to
future growth and profitability. Bancorp is strengthening its competitive
advantages by developing and reinforcing deep customer relationships with
laser-like focus on the financial ingredients for lifecycle banking.
With the largest trust and investment management business based in the affluent
central Maryland market, Bancorp is well positioned to generate substantial
additional fee income by capturing a significant share of enormous transfers of
wealth expected in the years ahead.
<TABLE>
<CAPTION>
MARKET POPULATION BY AGE
<S> <C>
Under Age 30 40%
Ages 30-59 45%
Age 60+ 15%
For Allegany, Carroll, Frederick, Montgomery and Washington Counties
</TABLE>
[PHOTO] - From left to right: Jose Salaverri, Owner, Mealey's Restaurant, New
Market, Maryland; Veronica M. Cleveland, Vice President, Commercial Banking and
Michael O. Brown, Credit Administration.
"Since the explosion that destroyed his business in 1991, business has been
good for Jose Salaverri. Whether it's a loan to rebuild a restaurant or
technology to help build a relationship, the bank's attention to personal
service is unrelenting"
Creating VALUE for CUSTOMERS with the TOOLS of TECHNOLOGY.
The Customer presents the NEED. Convenience and service quality are the main
reasons customers maintain primary banking relationships. F&M Bancorp provides
the best SOLUTION. Advanced computer capabilities assist F&M in educating
consumers, facilitating delivery of services, and freeing associates to spend
more time attending to the needs of customers.
Over the past two years, the bank has been blending technology and innovation
to produce new and better ways of delivering to customers. The first phase of
this technology blueprint was completed last spring with the upgrade of the
bank's mainframe processing system, enabling the company to greatly expand its
technical functions.
"Implementing effective, user-friendly technology systems is among our highest
priorities," said Alice Stonebreaker, the bank's head of support services and
technology. "But it isn't hard drives or software programs that define a
financial institution. It's a quick response from a customer service
representative. It's accuracy and reliability of information. It's out use of
technology and the competence and enthusiasm of our associates that are
defining our success as a progressive community bank."
All of the bank's sales and support associates are fully trained in the use of
Windows 95 TM and supporting software which provide immediate electronic links
to the bank's databases and ancillary systems.
"Whether customers are selecting checking accounts, trust services, or loans,
they will have the benefit of computer-generated models illustrating the
financial products and services that will best meet their planning criteria,"
added Ms. Stonebreaker.
[PHOTO] - Alice Stonebreaker, Senior Vice President
Bank-On-It (c), a business PC banking product, was introduced late last year,
and personal banking will be introduced in the first half of 1997. The consumer
home banking service will combine the convenience of electronic banking with
the budgeting and accounting functions found in many popular personal money
management software packages.
The second phase of the bank's technology blueprint includes platform and
teller automation which is scheduled for rollout in the second quarter of 1997.
Initially, this technology will provide associates with customer relationship
profiles and one-to-one sales opportunities and , ultimately, with detailed
customer profitability data.
Associates are being provided with valuable new tools of technology to help
them understand customer behaviors that yield profitable performance levels,
and to help them focus our retention strategies on various customer segments.
[Photo] - David R. Stauffer, Executive Vice President
The electronic revolution continues at a rapid pace, but Bancorp's PC and
Internet banking options won't be replacing its 31 branches or 49 ATMs any time
soon. Most younger customers move too fast to visit a branch; other customers
prefer the pace and assurance of face-to-face banking. But it's the myriad
combinations of delivery alternatives in between that have shaped the inventory
of multiple distribution channels.
The interest in alternative delivery is not confined to retail consumers,
either. To satisfy the growing demand from commercial business customers for
more efficient service, the bank launched its commercial PC banking service,
Bank-On-It (c), last Fall. Whether through a portable notebook or a mainframe
computer, business customers are able to initiate balance and transaction
reporting, receive statements electronically, reconcile accounts, originate ACH
transactions, pay taxes, and initiate wire transfers.
"Each channel provides the response our customers want, while rapidly changing
preferences are lowering the cost of delivery." David R. Stauffer, Executive
Vice President
"Technology is changing the way commercial business is conducted, and Bank-On-
It (c) adds significant value for our business customers, commented Dave
Stauffer, the bank's senior lending officer and head of commercial banking.
In yet another venue, almost two years ago, F&M turned the ignition key and
drove off into Frederick County's neighborhoods in the mid-Atlantic region's
first full-service mobile bank, Express Bank. This motorized office on wheels
is achieving its goal of developing new business opportunities not otherwise
available. Express Bank makes over 40 separate calls each month to senior
centers, business establishments and special community events, and is a rolling
symbol of innovative service and exceptional convenience.
Even the concept of traditional branches has evolved from the free-standing, to
shopping center, to supermarket. Bancorp's Hagerstown affiliate, Home Federal
Savings Bank, operates two highly successful in-store locations.
ExpressLine, F&M's 24-hour telephone banking service, provides total time and
place convenience by touch-tone phone. Call volume increased by 55% in 1996
demonstrating ExpressLine's growing acceptance and popularity.
And one of the hottest products in the bank, the VISA (c) Check Card, has
emerged as the new delivery of checking account services. Transaction activity
soared 180% in 1996 driving a sharp increase in interchange fee income.
Creating VALUE for CUSTOMERS through DELIVERY ALTERNATIVES.
The customer presents the NEED. The principles of retailing are evolving
quickly. Consumers want products and services at any time and almost any place.
F&M Bancorp provides the best SOLUTION. F&M aligns nine alternative delivery
channels with the needs of specific customer segments.
[PHOTO] - From left to right: Kirk E. Isenhart, Controller; Richard A.
Thompson, President and CEO; Steven R. Delmar, Executive Vice President;
Microlog Corporation
"Microlog Corporation designs, assembles, markets, and supports a complete line
of Interactive Information Response (IIR) systems and applications solutions
for customers worldwide. What would a high-tech company like Microlog expect
from its bank? Bank-On-It!
[PHOTO] - The Shafer Family (from left to right); Colby A. Fields, Oscar L.
Shafer, Colby's great-grandfather; Leigh S. Fields, Colby's mother; and Ronald
W. Shafer, Colby's grandfather.
"It might be a trust account for little Colby; a mortgage loan for his mother,
Leigh; investment management for granddad, Ron; or an estate plan for great-
granddad, Oscar. The best banking relationship is one that lasts a lifetime."
Creating VALUE for CUSTOMERS through LIFECYCLE BANKING.
The customer presents the NEED. The demographics of wealth accumulation
ownership and use are changing. Early financial planning is imperative.
F&M Bancorp provide the best SOLUTION . From "cradle to grace" - from checking
and savings to estate planning and settlement- Bancorps products are services
and for life.
"We've combined the principles of retail merchandising with our trust and
investment management capabilities to develop profitable customer relationships
for a lifetime." Patti A. Stuckey, Senior Vice President
Transcending the expected, the bank tore down the traditional walls of the
trust department last year to effectively reach target customer segments with a
valuable new service ... free, customized, professional financial and estate
planning for a lifetime. Marketed in collaboration with both retail and
commercial business banking units under the name, Key Alliance, the service is
targeted largely at the 33- to 51-year old "baby boomers" preparing to inherit
enormous collective wealth in the years ahead. Within the next two decades, 77
million "boomers" will inherit $10 trillion.
The bank's principal goal for Key Alliance is straightforward ... develop new,
and deepen existing customer relationships through the preemptive capture of
investable assets. By providing the financial equivalent of "one-stop shopping"
for a lifetime, the bank expects to strengthen customer loyalty, improve
corporate profits and enhance shareholder value.
Key Alliance is a dynamic, documented, results-oriented process which
demonstrates prospective financial and tax results based on the customer's
objectives, preferences and decisions. Plans can be revised quickly as
circumstances change and conditions warrant.
"We're simply making sure we have the financial products and services our
customers need every time their needs change," said Patti Stuckey, the bank's
head of trust and investment management. "And there's no better way to
understand their needs than by leading them through a comprehensive financial
planning process."
[PHOTO] - Patti A. Stuckey, Senior Vice President
As consumer demand has shifted from credit products to savings and investments.
F&M's reputation for service and performance has led to exceptional growth in
managed assets and fee income. Reaching $306 million in nearly 600 accounts at
year-end, assets under management increased by 26% in 1996, and related fee
income increased by 16%. Growth and customer satisfaction are attributed to
personalized sales and service from credentialed and experienced bank
professionals, custom-tailored investment using individual securities, and a
track record of success in meeting the customer's investment performance
objectives.
Ms. Stuckey added, "We've assembled a full range of products and services
across all business lines to attract customers at a younger age and keep them
longer. Financial planning leads to wealth accumulation, and estate planning
inevitably leads to estate settlement. We expect to be the bank of choice at
the state of the next life cycle."
<PAGE>
SELECTED FINANCIAL INFORMATION
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in thousands, ----------------------------------------------------
except per share amounts) 1996 1995(1) 1994(1) 1993(1) 1992(1)
------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data
Interest income $70,866 $ 70,108 $61,592 $60,788 $66,881
Interest expense 32,218 32,336 24,841 25,087 32,609
Net interest income 38,648 37,772 36,751 35,701 34,272
Provision for credit
losses 1,522 1,651 1,188 3,217 3,381
Net interest income
after provision for
credit losses 37,126 36,121 35,563 32,484 30,891
Net gains (losses) on
sales of securities (330) (256) 19 201 1,105
Other noninterest income 11,100 12,418 8,964 8,838 9,941
Noninterest expenses 36,512 35,176 31,601 29,937 31,450
Income before provision
for income taxes, loss
from discontinued
operation, cumulative
effect of an accounting
accounting change and
extraordinary item 11,384 13,107 12,945 11,586 10,487
Provision for
income taxes 2,773 2,380 3,297 3,049 3,231
Income before loss from
discontinued operation,
cumulative effect of an
accounting change, and
extraordinary item 8,611 10,727 9,648 8,537 7,256
Loss from discontinued
operation -- -- -- (72) (33)
Cumulative effect of an
accounting change -- -- -- 245 --
Extraordinary item - tax
benefit of net operating
loss carryforward -- -- -- -- 407
Net income 8,611 10,727 9,648 8,710 7,630
Per Share Data
Income before loss from
discontinued operation,
cumulative effect of an
accounting change, and
extraordinary item $1.52 $1.90 $1.71 $1.60 $1.44
Loss from discontinued
operation -- -- -- (0.02) (0.01)
Cumulative effect of an
accounting change -- -- -- 0.05 --
Extraordinary item - tax
benefit of net operating
loss carryforward -- -- -- -- 0.08
Net income 1.52 1.90 1.71 1.63 1.51
Cash dividends paid 0.64 0.63 0.56 0.56 0.56
Book value 16.46 15.61 13.55 13.44 13.09
Key Ratios(2)
Return on assets 0.89% 1.16% 1.12% 1.05% 0.92%
Return on equity 9.48 13.04 12.72 12.43 12.07
Shareholders' equity to
total assets 9.42 8.89 8.81 8.47 7.59
Selected Average Balances(2)
Total average assets $964,865 $925,815 $860,336 $827,431 $833,051
Total average equity 90,858 82,287 75,827 70,098 63,238
At Period End
Loans, net of
unearned income $670,269 $626,005 $622,194 $546,447 $556,172
Total assets 1,005,851 954,469 910,376 841,452 822,713
Total deposits 794,750 784,675 753,307 696,945 674,550
Total shareholders'
equity 93,460 88,401 76,582 75,744 65,947
Dividend Payout Ratio(3) 42.11% 33.16% 32.75% 34.36% 37.09%
Asset Quality
Nonperforming loans/loans 1.09% 1.11% 2.93% 4.03% 5.21%
Nonperforming
assets/loans + OREO 2.17 2.58 4.47 5.93 7.21
Allowance times
nonperforming loans 1.32x 1.41x 0.63x 0.55x 0.41x
(1) Restated to reflect the acquisition of Home Federal Corporation
consummated on November 15, 1996, and accounted for as a pooling of
interests.
(2) Calculations and amounts for 1996, 1995, 1994, and 1993 reflect the
effects of adopting Financial Accounting Standards Board Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
on December 31, 1993.
(3) Reflects the per share percentage relationship of cash dividends paid to
net income.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
F&M Bancorp and Subsidiaries
The following discussion provides an overview of the financial condition and
results of operations of F&M Bancorp and its subsidiaries ("Bancorp"), for each
year from 1994 through 1996. This discussion is intended to assist readers in
their analysis of the accompanying consolidated financial statements and notes
thereto. During 1996, Bancorp completed its merger with Home Federal
Corporation and subsidiaries ("Home Federal"), Hagerstown, Maryland including
its primary subsidiary, Home Federal Savings Bank and subsidiaries (the
"Savings Bank") in a tax-free exchange of stock. At the date of acquisition,
The Savings Bank had seven branch offices, total assets of $230.1 million,
including loans of $154.0 million, and deposits of $162.7 million. The merger
was accounted for as a pooling of interests. Accordingly, the consolidated
financial statements and related financial data have been restated to include
the accounts of Home Federal for all periods presented. With the completion of
this merger, Bancorp now has two principal subsidiaries, Farmers and Mechanics
National Bank (the "Bank") and the Savings Bank. Refer to Note 2 to the
consolidated financial statements for further information on Bancorp's other
acquisition activities.
Overview
Net income for 1996 was $8,611,000 compared with $10,727,000 for 1995. On a per
share basis, net income for 1996 were $1.52 compared with $1.90 in 1995. The
decline in net income between 1995 and 1996 is associated with special items in
both years.
Exclusive of these special items, net income for 1996 would have been
$10,914,000 compared with $8,691,000 for 1995, a 25.6 percent increase. On a
per share basis, 1996 net income, exclusive of these special items, would have
been $1.92 compared with $1.54 in 1995. Return on average assets and return on
average equity would have been 1.13 percent and 12.01 percent, respectively,
for 1996, compared with 0.94 percent and 10.56 percent, respectively, for 1995.
Since earnings performance in both years has been materially affected by
special items, these have been itemized in Table 1 on an after-tax basis and
are disclosed below on a pretax basis:
* A portion of the intangible asset associated with branch acquisition
was written down $803,000 in 1995 based on a periodic analysis of deposit
retention which reflected deposit declines in excess of original projections.
* A special provision for credit losses of $600,000 was made in 1995
by the Bank to recognize the potential impact of unfavorable nationwide trends
in consumer delinquencies, compared with by the Savings Bank's increased credit
loss and real estate provisions in the fourth quarter of 1996 of $744,000 to
align the Savings Bank's loan and real estate owned portfolios within
established centralized credit policy. The Savings Bank provisions are included
in other merger-related expenses in Table 1. Other merger-related expenses also
includes professional services expense of $602,000 and $320,000 in 1996 and
1995, respectively.
* In 1995, the Bank sold its credit card portfolio and recognized a
gain of $2,890,000.
* The Savings Bank recognized a $1,476,000 reduction in income tax
expense in 1995 as a result of the reduction in the valuation allowance on
deferred tax assets in accordance with the provisions of Financial Accounting
Standards Board ("FASB") Statement 109, "Accounting for Income Taxes."
* Bancorp and its subsidiaries incurred restructuring charges totaling
$771,000 in 1996 in connection with the acquisition of Home Federal.
* The FDIC imposed a one-time insurance premium assessment on deposits
insured by the Savings Association Insurance Fund ("SAIF") to bring that fund
into compliance with minimums established by Congress. The total cost to
Bancorp's subsidiaries was $1,179,000 in 1996.
* The Savings Bank restructured its investment portfolio in the fourth
quarter of 1996 to more closely align its portfolio with that of the Bank. Net
securities losses totaling $278,000 were taken as a result of this
restructuring. Total securities losses were $330,000 for 1996 on a consolidated
basis compared with $256,000 for 1995.
<TABLE>
TABLE 1. NET INCOME EXCLUDING SPECIAL ITEMS
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 EPS(1) 1995 EPS(1)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income as reported $8,611 $1.52 $10,727 $1.90
Adjustments (net of income taxes):
Core deposit intangible write-off -- -- 493 0.09
Special provision for credit losses -- -- 368 0.06
Gain on sale of credit card portfolio -- -- (1,774) (0.31)
Reduction of valuation allowance -
FASB 109 -- -- (1,476) (0.26)
Restructuring Charges 545 0.10 -- --
SAIF Assessment 724 0.13 -- --
Securities losses 203 0.03 157 0.03
Other merger-related expenses 831 0.14 196 0.03
------- ----- ------ -----
Net income excluding special items $10,914 $1.92 $8,691 $1.54
======= ===== ====== =====
(1) Earnings per share
</TABLE>
TABLE 2. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
1996
--------------------------------
Average Average
(Dollars in thousands) Balances Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-earning Assets
Federal funds sold $ 8,154 $ 453 5.56%
-------- -------
Interest-bearing deposits with banks 4,114 226 5.49
-------- -------
Investment securities(1)
Taxable 166,009 10,216 6.15
Tax-exempt(2) 71,876 5,475 7.62
-------- -------
Total investment securities(2) 237,885 15,691 6.60
-------- -------
Loans, net, including loans held for sale(2) 640,672 56,516 8.82
-------- -------
Total interest-earning assets and
average yield(2) 890,825 72,886 8.18
-------- -------
Total noninterest-earning assets 74,040
--------
Total assets $964,865
========
Liabilities and Shareholders' Equity
Interest-bearing Liabilities
Interest-bearing deposits
Checking $ 95,483 $ 1,965 2.06%
Savings 119,595 3,111 2.61
Money market accounts 114,067 3,471 3.04
Certificates of deposit 352,318 19,405 5.51
-------- -------
Total interest-bearing deposits 681,463 27,952 4.10
-------- -------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 36,838 1,813 4.92
Other short-term borrowings 30,402 1,832 6.03
-------- -------
Total short-term borrowings 67,240 3,645 5.42
-------- -------
Total long-term borrowings 11,282 621 5.50
-------- -------
Total interest-bearing liabilities
and average rate incurred 759,985 32,218 4.24
-------- -------
Noninterest-bearing Liabilities
Demand deposits 103,531
Other liabilities 10,491
--------
Total noninterest-bearing liabilities 114,022
--------
Total liabilities 874,007
Shareholders' equity 90,858
--------
Total liabilities and shareholders' equity $964,865
========
Net interest earnings $40,668
=======
Net interest spread(3) 3.94%
====
Net interest margin(4) 4.57%
====
<CAPTION>
1995
--------------------------------
Average Average
(Dollars in thousands) Balances Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-earning Assets
Federal funds sold $ 6,173 $ 381 6.17%
-------- -------
Interest-bearing deposits with banks 1,270 165 12.99
-------- -------
Investment securities(1)
Taxable 146,409 8,501 5.81
Tax-exempt(2) 68,836 5,408 7.86
-------- -------
Total investment securities(2) 215,245 13,909 6.46
-------- -------
Loans, net, including loans held for sale(2) 636,831 57,674 9.06
-------- -------
Total interest-earning assets and
average yield(2) 859,519 72,129 8.39
--------
Total noninterest-earning assets 66,296
--------
Total assets $925,815
========
Liabilities and Shareholders' Equity
Interest-bearing Liabilities
Interest-bearing deposits
Checking $ 92,117 $ 2,118 2.30%
Savings 121,894 3,481 2.86
Money market accounts 116,460 3,881 3.33
Certificates of deposit 332,828 18,390 5.53
-------- -------
Total interest-bearing deposits 663,299 27,870 4.20
-------- -------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 38,500 2,215 5.75
Other short-term borrowings 30,234 1,872 6.19
-------- -------
Total short-term borrowings 68,734 4,087 5.94
-------- -------
Total long-term borrowings 5,406 379 7.01
-------- -------
Total interest-bearing liabilities
and average rate incurred 737,439 32,336 4.38
-------- -------
Noninterest-bearing Liabilities
Demand deposits 96,684
Other liabilities 9,405
--------
Total noninterest-bearing liabilities 106,089
--------
Total liabilities 843,528
Shareholders' equity 82,287
--------
Total liabilities and shareholders' equity $925,815
========
Net interest earnings $39,793
=======
Net interest spread(3) 4.01%
====
Net interest margin(4) 4.63%
====
<CAPTION>
1994
--------------------------------
Average Average
(Dollars in thousands) Balances Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-earning Assets
Federal funds sold $ 8,760 $ 350 4.00%
-------- -------
Interest-bearing deposits with banks 4,185 211 5.04
-------- -------
Investment securities(1)
Taxable 151,241 8,188 5.41
Tax-exempt(2) 68,317 5,459 7.99
-------- -------
Total investment securities(2) 219,558 13,647 6.22
-------- -------
Loans, net, including loans held for sale(2) 572,317 49,412 8.63
-------- -------
Total interest-earning assets and
average yield(2) 804,820 63,620 7.90
-------- -------
Total noninterest-earning assets 55,516
--------
Total assets $860,336
========
Liabilities and Shareholders' Equity
Interest-bearing Liabilities
Interest-bearing deposits
Checking $ 90,556 $ 2,170 2.40%
Savings 128,038 3,589 2.80
Money market accounts 125,572 3,774 3.01
Certificates of deposit 280,651 12,238 4.36
-------- --------
Total interest-bearing deposits 624,817 21,771 3.48
-------- --------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 29,539 1,208 4.09
Other short-term borrowings 24,515 1,379 5.63
-------- --------
Total short-term borrowings 54,054 2,587 4.79
-------- --------
Total long-term borrowings 8,462 483 5.71
-------- --------
Total interest-bearing liabilities
and average rate incurred 687,333 24,841 3.61
Noninterest-bearing Liabilities
Demand deposits 88,091
Other liabilities 9,085
--------
Total noninterest-bearing liabilities 97,176
--------
Total liabilities 784,509
Shareholders' equity 75,827
--------
Total liabilities and shareholders' equity $860,336
========
Net interest earnings $38,779
=======
Net interest spread(3) 4.29%
====
Net interest margin(4) 4.82%
====
(1) Average Balances and the related average rate are based on amortized cost.
(2) Interest and yields on obligations of states and political subdivisions
and tax-exempt loans are computed on a taxable equivalent basis using the
U.S. statutory tax rate of 34 percent. In addition, loan fee income is
included in the interest income calculations, and nonaccrual loans are
included in the average loan base upon which the interest rate earned on
loans is calculated.
(3) Net interest spread is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and
of interest expense to interest-bearing liabilities.
(4) Net interest margin is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and
of interest expense to earning assets.
</TABLE>
RESULTS OF OPERATIONS
Net Interest Income.
The principal source of Bancorp's earnings is net interest income, which is the
sum of interest and certain fees generated by earning assets minus interest
paid on deposits and other funding sources. Earning assets consist primarily
of loans and investment securities. Deposits are the primary funding source.
Other funding sources include repurchase agreements, federal funds purchased,
Federal Home Loan Bank ("FHLB") advances, and other borrowed funds. Net
interest income is impacted by changes in the volume and mix of earning assets
and funding sources, market interest rates, the demand for loans, and the
availability of deposits. Other factors such as management policies,
competition, fiscal and debt management policies of the federal government,
monetary policy of the Federal Reserve Board, and other regulatory requirements
may also have a significant impact on changes in net interest income from one
period to the next.
Average balances and rates for major categories of interest-earning assets
and interest-bearing liabilities during the past three years appear in Table 2.
Net interest income on a taxable-equivalent basis was $40,668,000 in 1996
compared with $39,793,000 in 1995, an increase of $875,000 or 2.2 percent.
Total average earning assets increased 3.6 percent during 1996 compared with
1995. The increase was reflected principally in investment securities and other
short-term financial instruments. The shift in asset mix to lower yielding
assets coupled with loan growth which was most heavily concentrated in the
consumer portfolio resulted in a 21 basis point decline in earning asset yield
during 1996. Total average interest-bearing liability balances were 3.1 percent
higher in 1996 compared with 1995, while average noninterest-bearing deposit
balances were 7.1 percent higher. Average total deposits increased 3.3 percent
in 1996 compared with 1995.
The average rate paid on interest-bearing liabilities decreased 14 basis
points during 1996. Continuing a trend which began in 1995, growth in interest-
bearing deposits was concentrated in higher yielding fixed-rate certificates of
deposit as customers preferred to lock-in higher yields and rates paid were
maintained at levels deemed necessary to retain the retail funding base. The
impact of this shift in interest-bearing deposit composition was mitigated by a
pricing strategy which permitted a general decline in rates paid on core
checking, savings, and money market accounts as well as an 83 basis point
decline in rates paid on federal funds purchased and securities sold under
agreements to repurchase.
The net interest spread (the difference between the average taxable-
equivalent yield on earning assets and the average rate paid on interest-
bearing liabilities) declined 7 basis points to 3.94 percent while the net
interest margin (the ratio of taxable-equivalent net interest income to earning
assets) declined 6 basis points as the rate of growth in earning assets (3.6
percent) exceeded the rate of growth in net interest income (2.2 percent). The
net interest margin considers the contribution of assets funded by interest-
free sources. The excess of the interest-earning assets over interest-bearing
liabilities represents the amount of funds contributed by noninterest-bearing
funding sources in the form of demand deposits and capital. In order to more
fully understand changes in net interest income and its effect on the net
interest margin, these changes must be analyzed in terms of changes in average
balances and changes in yields and rates.
The effect on net interest income of changes in average balances
("volume") and yields and rates ("rates") are quantified in Table 3. As shown,
net interest income improved in 1996 due to volume related variances netting
$821,000, and rate related variances netting $54,000. Management monitors
Bancorp's balance sheet to insulate net interest income from significant swings
caused by interest rate volatility. If market rates were to either increase or
decrease in 1997, compensating changes in asset mix and funding sources and
rates would be considered to avoid a negative impact on net interest income.
Bancorp's policies concerning asset/liability management are further discussed
in the section titled "Interest Rate Risk."
Noninterest Income.
Noninterest income, exclusive of securities losses, property gains, and a gain
of $2,890,000 recognized from the sale of the cardholder credit card portfolio
in 1995, increased $1,456,000 or 15.3 percent in 1996 compared with 1995.
Significant increases were realized in several components of noninterest
income: Trust income increased $246,000 or 15.8 percent; service charges on
deposit accounts increased $587,000 or 14.3 percent; and other operating income
increased $471,000 or 12.8 percent. During 1996, assets under management by the
Trust and Investment Management Group increased 26.4 percent to $306 million
with over half of the asset growth attributable to new business development.
The increase in service charges on deposit accounts was principally reflected
in overdraft/nonsufficient fund charges which increased due to higher volumes
coupled with enhanced collection efforts. The increase in other operating
income was primarily due to increases in stockbrokerage and insurance
commissions and cash value life insurance. Gains from the sale of loans,
exclusive of the gain from the credit card sale, increased $152,000 in 1996
compared with 1995, due in part to the adoption of FASB Statement No. 122,
effective January 1, 1996.
Management continues to monitor areas where noninterest income can be
enhanced whether from existing products and services or through the development
of additional fee-based products and services.
Noninterest Expenses.
Noninterest expense consists primarily of costs associated with personnel, bank
premises and equipment, and regulatory fees. Bancorp's noninterest expense
increased $1,336,000 or 3.8 percent in 1996 compared with 1995. As reported in
Table 1, noninterest expenses in both 1996 and 1995 included several special
items. During 1996, legislation was passed which imposed a one-time charge of
approximately $0.657 for every $100 of assessable deposits at March 31, 1995 to
recapitalize the SAIF to a ratio of 1.25 percent of insured reserve deposits.
The special assessment totaled $1,179,000. During 1995, a portion of the
intangible asset associated with the branch acquisitions consummated in 1994
was written down $803,000 based on a periodic analysis of deposit retention
which reflected deposit declines in excess of original projections. Merger
related expenses of $1,193,000 in 1996 related to the Home Federal acquisition
and $320,000 in 1995 related to the Bank of Brunswick acquisition were also
incurred. Exclusive of these special items, total noninterest expenses in 1996
increased only $87,000 compared with 1995.
Salaries and benefits, the largest component of noninterest expense,
increased $1,203,000 or 7.3 percent compared with the prior year. Included in
the increase are merger related expenses of $394,000, increased health
insurance costs of $117,000 and an increase of $141,000 in incentive
compensation. The increase is also reflective of normal promotional and merit
increases and an increase in the average number of full-time equivalent
employees. Occupancy and equipment expense increased $779,000 or 16.0 percent
in 1996 compared with 1995 due to increased overhead associated with
renovations and expansion of the retail delivery system, significant
investments in technological upgrades, and the completion of a 45,000 square-
foot addition to the corporate headquarters facility.
Other operating expenses declined $646,000 in 1996 compared with 1995.
Exclusive of merger related expenses, the SAIF assessment and the $803,000
intangible write-off in 1995, other operating expenses declined $1,301,000 or
10.2 percent. The decline was primarily due to a $570,000 decrease in other
real estate owned ("OREO") expenses, a $329,000 decrease in contribution
expenses, and a $228,000 decrease in advertising costs.
Income taxes.
Income tax expense amounted to $2,773,000 in 1996 compared with $2,380,000 in
1995. Tax expense varies from one year to the next with changes in the level of
income before taxes, changes in the amount of tax-exempt interest income, and
the relationship of these changes to each other.
Bancorp's effective tax rate was 24.4 percent in 1996 and 18.2 percent in
1995. Bancorp's income tax expense differs from the amount computed at
statutory rates primarily due to tax-exempt interest from certain loans and
investment securities. Income tax expense for 1995 was also impacted by a
$1,476,000 reduction in the valuation allowance on deferred tax assets due to
management's determination that a significant portion of such deferred tax
assets were realizable, which resulted in a tax benefit.
Beginning January 1, 1996, the Maryland state financial institution
franchise tax began to be phased out over a two-year period to result in
Maryland banks being taxed like all other non-bank corporations. The changes
effect principally how investment income is taxed. Given the existing
composition of the investment portfolio and its distribution between taxing
jurisdictions, the effect on state income tax expense will not be material.
TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1996 over 1995 1995 over 1994
----------------------------- ----------------------------
Due to Change in(1) Due to Change in(1)
Increase ------------------- Increase-------------------
(In thousands) (Decrease) Volume Rates (Decrease) Volume Rates
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees
on loans(2)(3) $(1,158) $ 351 $(1,509) $8,262 $5,760 $ 2,502
Interest and dividends on
investment securities:
Taxable 1,715 1,197 518 313 (261) 574
Tax-exempt(4) 67 235 (168) (51) 41 (92)
Interest on federal
funds sold 72 113 (41) 31 (122) 153
Interest-bearing
deposits with banks 61 200 (139) (46) (218) 172
------- ------ ------- ------ ------ -------
Total 757 2,096 (1,339) 8,509 5,200 3,309
------- ------ ------- ------ ------ -------
Interest expense
Interest on deposits 82 1,021 (939) 6,099 2,088 4,011
Interest on federal
funds purchased and
securities sold
under agreements
to repurchase (402) (93) (309) 1,007 431 576
Interest on other
short-term borrowings (40) 10 (48) 493 346 147
Interest on long-term
borrowings 242 339 (97) (104) (198) 94
------- ------ ------- ------ ------ -------
Total (118) 1,275 (1,393) 7,495 2,667 4,828
------- ------ ------- ------ ------ -------
Net interest income $ 875 $ 821 $ 54 $1,014 $2,533 $(1,519)
======= ====== ======= ====== ====== =======
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Included in the change in interest income are decreased fees on loans of
$245,000 for the year ended December 31, 1996 over 1995 and increased fees
on loans of $69,000 for the year ended December 31, 1995 over 1994.
(3) Tax-equivalent adjustments of $159,000 for 1996, $183,000 for 1995, and
$172,000 for 1994 are included in the calculation of rate changes for
interest and fees on loans.
(4) Tax-equivalent adjustments of $1,861,000 for 1996, $1,838,000 for 1995,
and $1,856,000 for 1994 are included in the calculation of rate changes
for tax-exempt investment securities.
</TABLE>
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Bancorp's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 4
indicates how Bancorp has managed these elements. Average funding uses
increased $31,306,000 or 3.6 percent in 1996 compared with a $54,699,000 or 6.8
percent increase in 1995.
Investments.
Investment securities consist of two categories: available-for-sale and held-
to-maturity. Securities classified as held-to-maturity are those securities
that Bancorp has both the positive intent and ability to hold to maturity and
are carried at amortized cost. Securities classified as available-for-sale are
those securities which Bancorp intends to hold for an indefinite period of time
but not necessarily to maturity. These securities may be sold as part of
asset/liability management strategy, or in response to significant movements in
interest rates, liquidity needs, regulatory capital considerations, and other
similar factors. These securities are carried at fair value in the accompanying
consolidated balance sheets. The year-end investment portfolio balance
increased by 9.0 percent compared with last year-end. The percentage of the
investment portfolio allocated to the held-to-maturity and available-for-sale
categories was 40.5 percent and 59.5 percent, respectively at December 31,
1996, compared with 39.8 percent and 60.2 percent, respectively at year-end
1995.
Table 5 presents the amortized cost of the investment portfolio at
December 31, 1996. The composition of the investment portfolio reflects
management's objectives of providing a liquid portfolio of both U.S. government
obligations and other investments with minimum levels of credit and interest
rate risk combined with an acceptable level of earnings. The average balance of
investment securities increased 10.5 percent in 1996 compared with 1995
averages. Several factors contributed to this increase: Loan demand which was
strongest in the second half of 1996, increased liquidity resulting from the
December, 1995 sale of the cardholder credit card portfolio, and to a lesser
degree, the effects of a balance sheet leveraging strategy at the Savings Bank.
Average investment yield in 1996 compared with 1995 increased 14 basis points
to 6.60 percent reflective of a slight lengthening of the portfolio. The
Savings Bank's investment portfolio was also realigned to conform to Bancorp
investment policy and to provide call protection to ease reinvestment rate
risk. Investment purchases in 1996 were primarily concentrated in U.S. Treasury
and government agency securities and mortgage-backed securities. Table 6
presents the approximate weighted average taxable-equivalent yield and the
maturity information for the portfolio at December 31, 1996. It is management's
opinion that none of the obligations in the investment portfolio present any
material risk characteristics at December 31, 1996 which should be disclosed.
All of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard and Poor's
Corporation and approximately 76.1 percent are rated AAA.
TABLE 4. SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- --------------------------- -------
(Dollars in Average Increase Average Increase Average
thousands) Balance (Decrease) % Balance (Decrease) % Balance
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING USES
Federal funds
sold $ 8,154 $ 1,981 32.1% $ 6,173 $(2,587) (29.5)% $ 8,760
Interest-
bearing
deposits
with banks 4,114 2,844 223.9 1,270 (2,915) (69.7) 4,185
Taxable
investment
securities 166,009 19,600 13.4 146,409 (4,832) (3.2) 151,241
Tax-exempt
investment
securities 71,876 3,040 4.4 68,836 519 0.8 68,317
Loans, net 640,672 3,841 0.6 636,831 64,514 11.3 572,317
-------- ------- ----- -------- ------- ----- --------
Total uses $890,825 $31,306 3.6% $859,519 $54,699 6.8 % $804,820
======== ======= ===== ======== ======= ===== ========
FUNDING SOURCES
Interest-
bearing
checking $ 95,483 $ 3,366 3.7% $ 92,117 $ 1,561 1.7 % $ 90,556
Savings 119,595 (2,299) (1.9) 121,894 (6,144) (4.8) 128,038
Money market
accounts 114,067 (2,393) (2.1) 116,460 (9,112) (7.3) 125,572
Certificates
of deposit 352,318 19,490 5.9 332,828 52,177 18.6 280,651
Short-term
borrowings 67,240 (1,494) (2.2) 68,734 14,680 27.2 54,054
Long-term
borrowings 11,282 5,876 108.7 5,406 (3,056) (36.1) 8,462
Noninterest-
bearing funds
(net)(1) 130,840 8,760 7.2 122,080 4,593 3.9 117,487
-------- ------- ----- -------- ------- ----- --------
Total
sources $890,825 $31,306 3.6% $859,519 $54,699 6.8% $804,820
======== ======= ===== ======== ======= ===== ========
(1) Noninterest-bearing liabilities and shareholders' equity less noninterest-
earning assets.
</TABLE>
TABLE 5. INVESTMENT PORTFOLIO DISTRIBUTION - AMORTIZED COST (1)
<TABLE>
<CAPTION>
December 31,
----------------------------------
(In Thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 81,832 $ 64,836 $ 61,866
Obligations of states and
political subdivisions 70,881 72,185 70,975
Mortgage-backed securities 87,260 80,895 80,569
Other securities 6,036 7,212 4,326
-------- -------- --------
Total $246,009 $225,128 $217,736
======== ======== ========
(1) Reflects the cost of securities purchased, adjusted for amortization of
premiums and accretion of discounts, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments
made in accordance with Financial Accounting Standards Board Statement No.
115.
</TABLE>
TABLE 6. INVESTMENT PORTFOLIO ANALYSIS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
Maturing in:
------------------------------------------------
After one After five
One Year through through
or less five years ten years
(Dollars in thousands) Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------
- -
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale(1)
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies $44,106 5.79% $16,771 5.75% $ 9,006 6.49%
Obligations of states and
political subdivisions(2) 7,521 8.98 1,024 7.99 -- --
Mortgage-backed securities(3) 7,869 6.15 44,361 6.64 8,812 6.45
Equity securities -- -- -- -- -- --
------- ---- ------- ---- ------- ----
Total available-for-sale 59,496 6.24 62,156 6.42 17,818 6.47
------- ---- ------- ---- ------- ----
Held-to-maturity
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies -- -- 5,949 6.68 6,000 7.38
Obligations of states and
political subdivisions(3) -- -- 29,426 7.53 32,802 7.18
Mortgage-backed securities -- -- -- -- 25,218 7.47
------- ---- ------- ---- ------- ----
Total held-to-maturity -- -- 35,375 7.39 64,020 7.31
------- ---- ------- ---- ------- ----
Total investment securities $59,496 6.24% $97,531 6.77% $81,838 7.13%
======= ==== ======= ==== ======= ====
<CAPTION>
Maturing in:
------------------------------------
After 10 Years Total
--------------- -----------------
(Dollars in thousands) Amount Yield Amount Yield
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale(1)
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies $ -- --% $ 69,883 5.87%
Obligations of states and
political subdivisions(2) -- -- 8,545 8.86
Mortgage-backed securities(3) 1,000 6.50 62,42 6.55
Equity securities -- -- 6,036 6.62
------ ---- ------- ----
Total available-for-sale 1,000 6.50 146,506 6.36
------ ---- ------- ----
Held-to-maturity
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies -- -- 11,949 7.03
Obligations of states and
political subdivisions(3) 108 6.50 62,336 7.34
Mortgage-backed securities -- -- 25,218 7.47
------ ---- ------- ----
Total held-to-maturity 108 6.50 99,503 7.34
------ ---- ------- ----
Total investment securities $1,108 6.50% $246,009 6.76%
====== ==== ======== ====
(1) Reflects the cost of securities purchased, adjusted for amortization of
premiums and accretion of discounts, which differs from the amounts
reflected in the 1995 consolidated balance sheet due to fair value
adjustments made in accordance with Financial Accounting Standards Board
Statement No. 115.
(2) Yields are presented on a fully taxable equivalent basis using the federal
statutory rate of 34%.
(3) Estimated prepayment assumptions have been incorporated into the
maturities for mortgage-backed securities based upon historical trends.
</TABLE>
Loans.
Average loans in 1996 were about even compared with 1995; however, as reflected
in Table 7, year-end total gross loans increased $44.2 million or 7.0 percent
compared with the prior year. As was the case in 1995, loan growth in 1996 was
primarily concentrated in consumer loans, commercial real estate, and
commercial and industrial loans.
Bancorp strives to maintain its loan portfolio in accordance with what
management believes are conservative underwriting guidelines. Although most of
Bancorp's loans are made within a limited geographic area, the loan portfolio
is reasonably well diversified. The overall composition of the portfolio
remained fairly stable in 1996. Bancorp has no concentration of loans where the
aggregate of such a group of similar loans exceeds 10 percent of total loans at
December 31, 1996 which are not otherwise disclosed as a category of loans in
Table 7.
Deposits.
Deposits represent Bancorp's largest and most important funding source. Total
deposits increased $10.1 million or 1.3 percent to $794.8 million at December
31, 1996 from $784.6 million at December 31, 1995.
The growth in deposits is attributable to appropriate pricing strategies,
the further expansion of our network of ATMs, and Bancorp's strong reputation
for safety and soundness. Bancorp will continue its emphasis on core deposit
accumulation and retention as a basis for sound growth and profitability.
TABLE 7. LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------
(Dollars in thousands) Amount % Amount % Amount %
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Construction and
land development $ 29,571 4.4% $ 33,427 5.3% $ 40,222 6.5%
Secured by farmland 6,864 1.0 6,212 1.0 6,132 1.0
Residential mortgage 183,566 27.4 182,344 29.1 176,550 28.3
Other mortgage 129,307 19.3 118,289 18.9 123,988 19.9
Agricultural 977 0.1 1,493 0.2 1,815 0.3
Commercial and
industrial 62,288 9.3 57,051 9.1 46,177 7.4
Consumer 253,529 37.8 223,077 35.6 222,344 35.7
Other loans 4,772 0.7 4,821 0.8 5,738 0.9
-------- ----- -------- ----- -------- -----
Total loans $670,874 100.0% $626,714 100.0% $622,966 100.0%
-------- ----- -------- ----- -------- -----
<CAPTION>
December 31,
-------------------------------------
1993 1992
--------------- ----------------
(Dollars in thousands) Amount % Amount %
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate
Construction and
land development $ 42,550 7.8% $ 41,157 7.4%
Secured by farmland 5,832 1.1 5,773 1.0
Residential mortgage 160,960 29.4 180,098 32.3
Other mortgage 112,629 20.5 124,708 22.4
Agricultural 1,810 0.3 1,124 0.2
Commercial and
industrial 34,836 6.4 33,824 6.1
Consumer 183,769 33.5 164,717 29.5
Other loans 5,545 1.0 6,121 1.1
-------- ----- -------- -----
Total loans $547,931 100.0% $557,522 100.0%
-------- ----- -------- -----
Loans are classified according to security, borrower or purpose.
</TABLE>
TABLE 8. LOAN MATURITIES AND INTEREST SENSITIVITY(1)
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Maturing in:
----------------------------------------
In 1 year After 1 After 5
(In thousands) or less(2) through 5 years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate
Construction and land development $20,997 $ 8,351 $ 223 $ 29,571
Secured by farmland 1,345 4,886 633 6,864
Agricultural 174 666 137 977
Commercial and industrial 31,967 28,065 2,256 62,288
Other loans 3,662 641 469 4,772
------- ------- ------- --------
Total $58,145 $42,609 $ 3,718 $104,472
======= ======= ======= ========
Rate Sensitivity
Predetermined rate $27,415 $ 2,796
Floating rate 15,194 922
------- -------
Total $42,609 $ 3,718
======= =======
(1) Excludes real estate mortgage loans and consumer loans.
(2) Includes demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts.
</TABLE>
TABLE 9. AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $103,531 --% $ 96,684 --% $ 88,091 --
%
-------- ---- -------- ---- -------- ----
Interest-bearing deposits
Demand 95,483 2.06 92,117 2.29 90,556 2.40
Money market 114,067 3.04 116,460 3.33 125,572 3.01
Savings 119,595 2.61 121,894 2.86 128,038 2.80
Time 352,318 5.51 332,828 5.53 280,651 4.36
-------- ---- -------- ---- -------- ----
Total interest-
bearing deposits 681,463 4.10 663,299 4.20 624,817 3.48
-------- ---- -------- ---- -------- ----
Total average deposits $784,994 3.56% $759,983 3.67% $712,908 3.05%
======== ==== ======== ==== ======== ====
</TABLE>
TABLE 10. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31,
-------------------------------
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Maturing in
3 months or less $15,090 $ 8,926 $11,583
Over 3 months through 6 months 12,580 9,046 8,217
Over 6 months through 12 months 6,409 11,642 7,757
Over 12 months 9,137 5,370 5,721
------- ------- -------
$43,216 $34,984 $33,278
======= ======= =======
</TABLE>
Table 11. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Year ended December 31,
-------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
End of period outstanding $41,876 $40,158 $31,959
Highest month-end balance 43,011 46,478 33,984
Average balance 36,838 38,500 29,539
Average rate of interest
At end of year 5.03% 5.20% 5.28%
During year 4.92 5.75 4.09
<CAPTION>
Short-term Advances from Federal Home Loan Bank
Year ended December 31,
-------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
End of period outstanding $55,728 $17,728 $33,000
Highest month-end balance 55,728 34,000 33,000
Average balance 29,692 28,207 23,297
Average rate of interest
At end of year 5.91% 6.49% 6.06%
During year 5.92 6.32 5.66
</TABLE>
RISK ELEMENTS
Nonperforming Assets.
Table 12 summarizes Bancorp's nonperforming assets and contractually past due
loans for the past five years. Nonperforming assets at December 31, 1996,
totaled $14.738,000 or 2.17 percent of the total of year-end loans and OREO.
The year-earlier total was $16,380,000 or 2.58 percent. Nonperforming loans
were $7,281,000 or 1.09 percent of year-end loans versus $6,954,000 or 1.11
percent at December 31, 1995. The amount of loans past due 90 days or more that
were not classified as nonperforming loans totaled $2,220,000 at December 31,
1996, compared with $947,000 at December 31, 1995. There is no direct
correlation between loans past due 90 days or more, nonperforming loans, and
ultimate loan losses Management believes that the amounts of its nonperforming
loans are modest in relation to the size of the loan portfolio.
OREO comprises the single largest segment of nonperforming assets. At
December 31, 1996, OREO, net of the valuation allowance, was $7,457,000 or 1.10
percent of the total of year-end loans and OREO compared with $9,426,000 or
1.48 percent a year earlier. The decline in OREO of $1,969,000 compared with
the prior year was attributable in a large measure to Bancorp's successful
efforts in disposing of several OREO properties. The balance at December 31,
1996, includes minority interests totaling $838,000.
Potential Problem Loans.
At December 31, 1996, Bancorp had $20,579,000 in loans to borrowers who were
currently experiencing financial difficulties such that management had concerns
that such loans might, in the future, become classified as nonaccrual or
delinquent. Potential problem loans totaled $32,617,000 at December 31, 1995.
The decrease of $12,038,000 in the amount of these loans in 1996 is a
reflection of a continued improvement in credit quality. These loans are
subject to significant management attention and their classification is
reviewed periodically. When evaluating the quality of the loan portfolio,
management uses a classification system that categorizes potential problem
loans into three groups: other loans especially mentioned, substandard, or
doubtful/loss. All loans categorized according to this system are included in
potential problem loans or in Table 12.
TABLE 12. NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual loans(1) $ 7,281 $ 6,954 $18,246 $22,047 $29,018
Restructured loans(2) -- -- -- -- --
Other real estate owned
net of valuation
allowance(3) 7,457 9,426 10,009 11,059 11,973
------- ------- ------- ------- ------
Total nonperforming assets $14,738 $16,380 $28,255 $33,106 $40,991
======= ======= ======= ======= =======
Loans past due 90 or more
days as to interest or
principal(4) $ 2,220 $ 947 $ 443 $ 3,166 $ 3,946
======= ======= ======= ======= =======
Nonperforming loans to
year-end loans 1.09% 1.11% 2.93% 4.03% 5.21%
Nonperforming assets to
year-end loans and other
real estate owned 2.17% 2.58% 4.47% 5.93% 7.21%
Year-end allowance for
credit losses times
nonperforming loans 1.32x 1.41x 0.63x 0.55x 0.41x
Year-end allowance for
credit losses times
nonperforming assets 0.65x 0.60x 0.40x 0.37x 0.29x
(1) Loans are placed on nonaccrual status when, in the opinion of management,
reasonable doubt exists as to the full, timely collection of interest or
principal or a specific loan meets the criteria for nonaccrual status
established by regulatory authorities. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed
against current period interest income. No interest is taken into income
on nonaccrual loans unless received in cash or until such time the
borrower demonstrates sustained performance over a period of time in
accordance with contractual terms.
(2) Restructured loans are "troubled debt restructurings" as defined in
Financial Accounting Standards Board Statement No. 15. Nonaccrual loans
and past due loans are not included in this category. There were no
material troubled debt restructurings in any period presented.
(3) Other real estate owned includes: banking premises no longer used for
business purposes, real estate acquired by foreclosure (in partial or
complete satisfaction of debt) or otherwise surrendered by the borrower to
Bancorp's possession. Other real estate owned is recorded at the lower of
cost or fair value on the date of acquisition or transfer from loans.
Write-downs to fair value at the date of acquisition are charged to the
allowance for credit losses. Subsequent to transfer, these assets are
adjusted through a valuation allowance to the lower of the net carrying
value or the fair value (net of estimated selling expenses) based on
periodic appraisals.
(4) Nonaccrual loans are not included.
</TABLE>
Allowance for Credit Losses.
Effective January 1, 1995, Bancorp adopted Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans
within its scope be measured based on the present value of expected cash flows
discounted at the loan's observable market price or the fair value of the
collateral for a collateral dependent loan. The effects of adoption were not
material to the consolidated financial statements.
Annual provisions are made to maintain the allowance for credit losses at
levels determined by management to be necessary to adequately absorb possible
losses in the loan portfolio. Principal factors in management's analysis of the
adequacy of the allowance are the historical relationships among loans
outstanding, loss experience, delinquency levels, individual loan reviews, the
current level of the allowance, a continuing evaluation of the present and
future local and national economic environment and the various trade sectors in
Bancorp's trading area, and regular and frequent reviews of portfolio quality
by federal bank supervisory authorities and internal examination staff. Table
13 shows certain information related to the allowance and the credit losses of
Bancorp for the last five years. The provision for credit losses charged to
earnings was $1,522,000 in 1996, a decrease of $129,000 compared with last
year's provision. Net charge-offs for 1996 were $1,679,000 or 0.26 percent of
average loans compared with $3,289,000 or 0.52 percent, in 1995. The decrease
in net charge-offs was primarily concentrated in the real estate portfolio.
Management believes its allowance for credit losses is adequate to cover
anticipated credit losses at December 31, 1996. Management's estimate of credit
losses inherent in the credit extension process and the related allowance may
change in the near term due to uncertainties inherent in the estimation
process.
At December 31, 1996, Bancorp had loans amounting to approximately
$6,144,000 that were specifically classified as impaired and included in non-
accrual loans in Table 12. At December 31, 1996, the specific allowance for
credit losses related to impaired loans was $964,000.
Table 14 presents an allocation of the allowance to various loan
categories. This allocation does not limit the amount of the allowance
available to absorb losses from any type of loan and should not be viewed as an
indicator of the specific amount or specific loan categories in which future
charge-offs may ultimately occur.
Environmental Liability.
Bancorp runs a risk in its lending activities that a particular borrower might
sustain adverse financial circumstances as a result of the cost of compliance
or remediation following failure to comply with environmental laws. Borrowers
could, as a result, be unable to repay loans previously extended. Additionally,
collateral values may decline. Bancorp seeks to avoid both circumstances by
understanding the business of the borrower. An environmental risk assessment is
completed for each commercial real estate borrower to evaluate the potential
for environmental risk and to assist with quantifying the risk, if any. Bancorp
periodically monitors existing credits for environmental liability.
TABLE 13. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans
outstanding less
average unearned
income(1) $640,148 $636,425 $570,029 $554,466 $595,398
======== ======== ======== ======== ========
Allowance for
credit losses at
beginning of year $ 9,796 $ 11,434 $ 12,196 $ 11,766 $ 12,018
-------- -------- -------- -------- --------
Charge-offs
Real estate 303 2,478 1,000 2,015 2,972
Commercial and
industrial 10 70 35 162 408
Consumer 3,609 2,879 2,199 1,847 1,217
-------- -------- -------- -------- --------
Total loans
charged-off 3,922 5,427 3,234 4,024 4,597
-------- -------- -------- -------- --------
Recoveries
Real estate 247 429 68 335 463
Commercial and
industrial 2 22 18 10 50
Consumer 1,994 1,687 1,198 892 451
-------- -------- -------- -------- --------
Total recoveries 2,243 2,138 1,284 1,237 964
-------- -------- -------- -------- --------
Net charge-offs 1,679 3,289 1,950 2,787 3,633
-------- -------- -------- -------- --------
Additions charged to
operating expense 1,522 1,651 1,188 3,217 3,381
-------- -------- -------- -------- --------
Allowance for
credit losses
at end of year $ 9,639 $ 9,796 $ 11,434 $ 12,196 $ 11,766
======== ======== ======== ======== ========
Ratio of net
charge-offs to
average loans
outstanding 0.26% 0.52% 0.34% 0.50% 0.61%
==== ==== ==== ==== ====
(1) Excludes loans held for sale.
</TABLE>
TABLE 14. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
% Gross % Gross % Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1) Amount Loans(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Construction and
land development $1,821 4.4% $2,328 5.3% $ 2,652 6.5%
Residential mortgage 510 27.4 508 29.1 996 28.3
Other mortgage 1,765 19.3 2,028 18.9 3,170 19.9
Commercial and
industrial 830 9.3 1,015 9.1 1,379 7.4
Consumer 2,757 37.8 2,385 35.6 2,612 35.7
Unallocated 1,956 1.8 1,532 2.0 625 2.2
------ ----- ------ ----- ------- -----
Total allowance
for credit losses $9,639 100.0% $9,796 100.0% $11,434 100.0%
====== ===== ====== ===== ======= =====
<CAPTION>
December 31,
------------------------------------------
1993 1992
------------------- -------------------
% Gross % Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1)
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate
Construction and
land development $ 3,797 7.7% $ 1,833 7.4%
Residential mortgage 2,282 29.7 5,321 32.5
Other mortgage 2,503 20.4 306 22.3
Commercial and industrial 908 6.3 1,533 6.0
Consumer 1,984 33.4 2,007 29.4
Unallocated 722 2.5 766 2.4
------- ----- ------- -----
Total allowance
for credit losses $12,196 100.0% $11,766 100.0%
======= ===== ======= =====
(1) Reflects the percentage of loans in each category to total loans.
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The primary objective of our asset/liability management program is to identify
opportunities for maximizing net interest margins while ensuring adequate
liquidity and carefully managing interest rate risk. The Asset/Liability
Committees ("ALCO") manage these objectives through the establishment of
policies regarding balance sheet structure, funding practices, and interest
rate sensitivity.
Liquidity.
Liquidity management involves the ability to meet the borrowing needs and
deposit withdrawal requirements of customers and to provide adequate funds to
support asset growth. Liquidity is provided by strategies to attract and retain
deposits, principal and interest payments on loans, fee income, interest
payments on and maturities of investment securities, and other cash flows from
operations. Providing liquidity in a profitable manner is especially important
in today's environment of deregulation and volatile money markets. Bancorp
maintains a substantial base of core demand, savings, and money market account
deposits supplemented by other deposits of varying maturities and rates.
Interest-bearing deposit products comprised 76.5 percent of average funding
sources and 89.7 percent of average interest-bearing liabilities in 1996
compared with 77.2 percent and 89.9 percent, respectively in 1995. Core
deposits are supplemented by a stable base of customers who utilize repurchase
agreements as a money management vehicle. The loan to deposit ratio is being
maintained within the ALCO guideline target averaging 81.6 percent in 1996
compared with 83.8 percent in the prior year. Table 6 reflects the maturity
distribution of the investment portfolio at December 31, 1996, of which 24.2
percent will mature within one year and an additional 39.6 percent between one
and five years. Correspondent relationships are maintained with several larger
banks to access purchases of federal funds when needed. Also available as a
liquidity source are secured advances from the Federal Home Loan Bank ("FHLB")
of Atlanta. In the loan portfolio, emphasis is directed to granting loans with
short maturities and floating rates where possible.
Interest Rate Risk.
Interest rate risk management refers to the vulnerability of earnings to
changes in the levels of interest rates and seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income
through periods of changing interest rates. Bancorp uses the concept of natural
hedges to manage its interest rate risk: a process of adjusting balance sheet
positions having individual interest rate risks to control the net interest
rate risk as a whole. Derivative financial instruments, such as futures,
forwards, swaps, option contracts, or other financial instruments with similar
characteristics are not currently utilized. By managing the maturity and
repricing characteristics of its interest-earning assets and funding sources,
Bancorp can effectively control its net interest margins, liquidity position,
asset growth, and capital requirements.
Rates on different assets and liabilities within the same maturity
category adjust differently to changes in interest rates at varying degrees
over different periods of time. Although certain assets and liabilities have
the capacity to move in reaction to a change in rates, they may not always do
so. Bancorp attempts to measure the interest rate sensitivity of its assets and
liabilities on the basis of when they will reprice as opposed to when they can
reprice. Table 15 summarizes Bancorp's interest rate sensitivity at December
31, 1996. The cumulative gap position represents the net amount of assets and
liabilities that will most likely reprice through the period indicated, given
no changes in the balance sheet mix. The effect on income depends upon the
level and direction of any change in rates. In periods of rising interest
rates, net asset sensitive positions generally have the effect of increasing
earnings. In periods of declining interest rates, this cumulative position has
the opposite effect.
Since it is difficult to predict the movement of interest rates,
management tries to maintain a relatively balanced sensitivity position, while
not forgoing any opportunity to benefit from current rate conditions. As
indicated in Table 15, Bancorp had a cumulative net liability sensitive
position of $55,450,000 within the one year time frame. This position would
indicate that Bancorp has the potential for decreased earnings if market
interest rates were to rise in the next twelve months. If market rates were to
rise, however, ALCO would consider compensating changes in asset mix, funding
sources and rates to avoid a negative impact on net interest income.
Due to inherent limitations in this traditional gap analysis technique for
measuring interest sensitivity, management also employs more sophisticated
interest sensitivity measurement tools to analyze the volatility of net
interest income as a result of changes in interest rates. Simulation models are
used to subject the current repricing gap positions to rising and falling
incremental changes in interest rates of 100, 200, and 300 basis points, and to
forecast how net interest income varies under alternative interest rate and
business activity scenarios. Management also measures the effects of changes in
interest rates on the market value of assets, liabilities, and off-balance-
sheet contracts. At December 31, 1996, the changes in net interest income
and/or market value calculated under these alternative methods were within
limits established by the Board of Directors.
TABLE 15. INTEREST RATE SENSITIVITY ANALYSIS (1)
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
(In 1-90 91-180 181-365 1-3 3-5 Beyond
thousands) days days days years years 5 years Total
- ---------- ---- ------ ------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Interest-
bearing
deposits
with
banks $ 4,943 $ -- $ -- $ -- $ -- $ -- $ 4,943
Investment
securities
(2) 16,504 15,397 43,732 86,370 39,322 39,453 240,778
Loans, net 129,154 86,366 136,205 208,768 45,906 48,481 654,880
-------- -------- -------- -------- -------- ------- -------
- -
Total $150,601 $101,763 $179,937 $295,138 $ 85,228 $87,934 $900,601
======== ======== ======== ======== ======== ======= ========
Interest-bearing Liabilities:
Deposits $160,499 $ 87,285 $138,224 $187,028 $102,828 $10,785 $686,649
Short-term
borrowings 83,559 -- 15,728 -- -- -- 99,287
Long-term
borrowings -- -- 2,456 -- 4,088 142 6,686
-------- -------- -------- -------- -------- ------- --------
Total $244,058 $ 87,285 $156,408 $187,028 $106,916 $10,927 $792,622
======== ======== ======== ======== ======== ======= ========
Interest Sensitivity Gap:
Period $(93,457) $ 14,478 $ 23,529 $108,110 $(21,688) $77,007 $107,979
Cumulative (93,457) (78,979) (55,450) 52,660 30,972 107,979 107,979
(1) Excludes nonaccrual loans and other nonrate-sensitive assets.
(2) Reflects fair value adjustments for securities available for sale.
</TABLE>
Capital Resources
The Federal Reserve Board and the Comptroller have adopted capital adequacy
guidelines requiring Bancorp to maintain specific minimum amounts of tangible
shareholders' equity and additional amounts based upon the amount and nature of
their assets and commitments currently at risk. The risk rules specify four
categories of asset or commitment risk. Each asset and commitment of Bancorp is
categorized and weighted appropriately, and capital is then compared to the
aggregate value of such risk-weighted assets and commitments to determine if
additional capital is required. At December 31, 1996, Bancorp's ratio of total
capital to risk-weighted assets was 14.08 percent as compared to the regulatory
guideline for 1996 of 8.00 percent.
The Bank and the Savings Bank are also required to maintain specified
minimum amounts of capital in accordance with regulatory guidelines. The
regulatory capital at December 31, 1996 for these entities is reflected in
Table 16.
Fair value adjustments to shareholders' equity for changes in the fair
value of securities classified as available-for-sale are excluded from the
calculation of these capital ratios in accordance with regulatory guidelines.
TABLE 16. REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
Bancorp The Bank The Savings Bank
----------------- ----------------- ----------------
% of % of % of
Regulatory Regulatory Regulatory
Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $87,289 8.87% $69,090 9.15% $18,199 7.97%
Requirements 3.00 3.00 1.50
Excess 5.87% 6.15% 6.47%
<CAPTION>
Bancorp The Bank The Savings Bank
----------------- ----------------- ----------------
% of Risk % of Risk % of
Weighted Weighted Regulatory
Amount Assets Amount Assets Amount Assets
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Core Capital (Tier 1) $87,289 12.25% $69,090 12.08% $18,199 7.97%
Requirements 4.00 4.00 3.00
Excess 8.25% 8.08% 4.97%
<CAPTION>
Bancorp The Bank The Savings Bank
----------------- ----------------- ----------------
% of Risk % of Risk % of
Weighted Weighted Regulatory
Amount Assets Amount Assets Amount Assets
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Core & Supplemental
Capital (Total) $94,698 13.29% $74,719 13.07% $19,979 14.23%
Requirements 8.00 8.00 8.00
Excess 5.29% 5.07% 6.23%
</TABLE>
EFFECTS OF CHANGING PRICES
A bank's asset and liability structure is substantially different from that of
an industrial company, in that virtually all assets and liabilities of a bank
are monetary in nature. Accordingly, changes in interest rates may have a
significant impact on a bank's performance. Interest rates, though affected by
inflation, do not necessarily move in the same direction, or in the same
magnitude as the prices of other goods and services. Movement in interest rates
is a result of the perceived changes in inflation and the effects of monetary
and fiscal policies. Reference to the various supplemental information shown
elsewhere in this annual report will assist in an understanding of how well
Bancorp is positioned to react to changing interest rates.
Many categories of noninterest expense are more directly affected by the
effects of inflation. This is especially true of personnel costs and other
operating expenses. Management is constantly searching for ways to increase the
efficiency of Bancorp's operation to minimize inflation's impact. In the
future, as was the case in 1996, the growth of Bancorp's noninterest expenses
may be determined to a greater extent by the rate of growth in bank operations
rather than the rate of inflation. As in the past, management will continually
monitor noninterest expenses.
YEAR ENDED DECEMBER 31, 1995
COMPARED WITH 1994
Bancorp earned $10,727,000 or $1.90 per share in 1995 compared with $9,648,000
or $1.71 per share in 1994. Return on average total assets was 1.16 percent
for 1995 and 1.12 percent for 1994. Return on average equity was 13.04 percent
in 1995 and 12.72 percent in 1994.
Net interest income on a taxable-equivalent basis was $39,793,000 in 1995
compared with $38,779,000 in 1994, an increase of $1,014,000 or 2.6 percent.
This increase resulted from increases totaling $2,533,000 due to changes in
volume which were offset by decreases totaling $1,519,000 caused by changes in
rates.
Total average earning assets increased $54,699,000 or 6.8 percent from
1994 to 1995. Earnings power was enhanced in 1995 as the percentage of average
loans to average earning assets was 74.1 percent in 1995 compared with 71.1
percent in 1994. Average interest-bearing liabilities remained relatively flat
as a percentage of earning assets during 1995, increasing only 0.4 percent.
Average yields on most categories of earning assets increased during the year.
The average rates on interest-bearing liabilities increased at a faster rate,
however, as customers increased their holdings of certificates of deposit,
which bear higher rates than shorter-term savings and money market deposits.
The average yield on earning assets increased 49 basis points while average
rates paid on funding sources increased 77 basis points from 1994 to 1995.
Therefore, the net interest spread declined 28 basis points to 4.01 percent in
1995. The net interest margin declined 19 basis points to 4.63 percent as the
rate of growth in earning assets exceeded the rate of growth in net interest
income.
Noninterest income increased $1,269,000 or 15.4 percent in 1995 compared
with 1994, exclusive of nonrecurring gains from the sale of the credit card
portfolio in 1995, gains from sales of property in both years, securities
losses in 1995, and securities gains in 1994. Significant increases were noted
in several components of noninterest income. Deposit and other service fees
increased $774,000 or 23.3 percent, and trust income increased $416,000 or 36.4
percent. The 1995 increases reflect a full year's impact of revised fee
schedules and new products introduced during 1994, the full integration of
three branch offices acquired in late 1994, a larger customer base due to the
further expansion of our retail delivery system in 1995, and a 23.0 percent
increase in assets under management by the Trust and Investment Management
Group.
Noninterest expenses increased $3,575,000 or 11.3 percent in 1995 compared
with 1994. Salaries and benefits increased $1,047,000 or 6.8 percent. This
increase is due in a large measure to higher staffing levels as a result of
acquisitions and new branch activities and to a lesser degree, to normal
promotional and merit increases. Occupancy and equipment expenses increased
$651,000 or 15.4 percent due primarily to acquisition, renovation, and new
branch activities. Other operating expenses increased $1,877,000 or 15.7
percent primarily due to the $803,000 write-down of the intangible asset
associated with branch acquisitions. Exclusive of this write-down, other
operating expenses increased $1,074,000 or 9.0 percent.
Income tax expense totaled $2,380,000 in 1995 compared with $3,297,000 in
1994. Bancorp's effective tax rate for 1995 was 18.2 percent compared with 25.5
percent in 1994. The decline in the effective tax rate in 1995 was primarily
attributable to a reduction in the valuation allowance on deferred tax assets
and was assisted by the realization of tax benefits from tax planning
strategies implemented in the second quarter of 1994. The effective tax rates
also reflect the benefit of tax-exempt loans and investment securities.
Bancorp had total assets of $954,469,000 as of December 31, 1995, up
$44,093,000 or 4.8 percent over a year earlier. Growth was assisted by the
acquisition of two branch offices in the second quarter of 1995. On average,
total assets increased $65,479,000 or 7.6 percent and loans grew $64,514,000 or
11.3 percent. Loan growth was strong during the fourth quarter of 1994. This
demand was not sustained in 1995 as evidenced by a smaller increase in year-end
balances relative to the average loan balance increase. In addition, the Bank
sold its cardholder credit card portfolio in December 1995, which reduced year-
end balances in the loan portfolio by approximately $10,700,000. Average
earning assets increased 6.8 percent in 1995 compared with 1994. The
composition of the average earning asset mix changed to reflect a higher
concentration of loans.
Total average interest-bearing deposits were 6.2 percent higher in 1995
compared with 1994. Customers increased their holdings of certificates of
deposit and decreased their holdings of the more liquid savings and money
market accounts as rates on term accounts increased and rates on the more
liquid accounts remained relatively stable. Average borrowings increased 18.6
percent to comprise 10.1 percent of average interest-bearing liabilities during
1995 compared with 9.1 percent of average interest-bearing liabilities during
1994. Average noninterest-bearing deposits in 1995 increased a significant 9.8
percent compared with 1994 averages.
Total shareholders' equity was $88,401,000 at December 31, 1995, a 15.4
percent increase over the 1994 year-end total of $76,582,000. A significant
decrease in unrealized losses, net of taxes, on the available-for-sale
investment portfolio had a positive effect on shareholders' equity from year-
end 1994 to year-end 1995 as a result of the declining interest rate
environment.
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
December 31,
-------------------------
(Dollars in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 33,762 $ 31,894
Federal funds sold -- 18,524
Interest-bearing deposits with banks 4,943 7,338
---------- --------
Total cash and cash equivalents 38,705 57,756
---------- --------
Loans held for sale 309 1,087
---------- --------
Investment securities
Held-to-maturity, fair value of $100,201 in 1996
and $91,108 in 1995 99,503 89,723
Available-for-sale, at fair value 146,308 135,711
---------- --------
Total investment securities 245,811 225,434
---------- --------
Loans, net of unearned income of $606 in 1996
and $709 in 1995 670,269 626,005
Less: Allowance for credit losses (9,639) (9,796)
---------- --------
Net loans 660,630 616,209
---------- --------
Bank premises and equipment, net 25,231 20,498
Other real estate owned 7,457 9,426
Interest receivable 6,701 6,529
Intangible assets 3,945 4,737
Other assets 17,062 12,793
---------- --------
60,396 53,983
---------- --------
Total assets $1,005,851 $954,469
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 108,101 $105,957
Interest-bearing 686,649 678,668
---------- --------
Total deposits 794,750 784,625
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 41,876 40,158
Other short-term borrowings 57,411 19,120
Long-term borrowings 6,686 12,272
Accrued interest and other liabilities 11,668 9,893
---------- --------
Total liabilities 912,391 866,068
---------- --------
Commitments and contingencies (Note 13)
Shareholders' equity
Common stock, par value $5 per share; authorized
10,000,000 shares; issued and outstanding
5,678,564 in 1996 and 5,660,879 in 1995 28,393 28,304
Surplus 29,148 28,811
Retained earnings 36,113 31,304
Net unrealized loss on securities available for sale (194) (18)
---------- --------
Total shareholders' equity 93,460 88,401
---------- --------
Total liabilities and shareholders' equity $1,005,851 $954,469
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(Dollars in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $56,357 $57,491 $49,240
Interest and dividends on investment securities
Taxable 10,216 8,502 8,188
Tax-exempt 3,614 3,569 3,603
Interest on deposits with banks 226 165 193
Interest on federal funds sold 453 381 368
------- ------- -------
Total interest income 70,866 70,108 61,592
------- ------- -------
INTEREST EXPENSE
Interest on deposits
Checking 1,965 2,118 2,170
Savings 3,111 3,481 3,589
Money market accounts 3,471 3,881 3,774
Certificates of deposit 19,405 18,390 12,238
Interest on federal funds purchased and
securities sold under agreements to repurchase 1,813 2,215 1,208
Interest on Federal Home Loan Bank borrowings 2,381 2,162 1,802
Interest on other short-term borrowings 72 89 60
------- ------- -------
Total interest expense 32,218 32,336 24,841
------- ------- -------
Net interest income 38,648 37,772 36,751
Provision for credit losses 1,522 1,651 1,188
------- ------- -------
Net interest income after provision for
credit losses 37,126 36,121 35,563
------- ------- -------
NONINTEREST INCOME
Trust income 1,806 1,560 1,144
Service charges on deposit accounts 4,684 4,097 3,323
Gains on sales of loans 323 3,061 135
Net losses on sales of securities (330) (256) --
Net gains on sales of property 136 20 725
Other operating income 4,151 3,680 3,656
------- ------ -------
Total noninterest income 10,770 12,162 8,983
------- ------ -------
NONINTEREST EXPENSES
Salaries 14,224 13,459 12,381
Pension and other employee benefits 3,423 2,985 3,016
Occupancy and equipment expense 5,646 4,867 4,216
Other operating expense 13,219 13,865 11,988
------- ------ -------
Total noninterest expenses 36,512 35,176 31,601
------- ------ -------
Income before provision for income taxes 11,384 13,107 12,945
Provision for income taxes 2,773 2,380 3,297
------- ------ -------
NET INCOME $ 8,611 $10,727 $ 9,648
======= ======= =======
EARNINGS PER COMMON SHARE
Based on weighted average shares outstanding
of 5,671,362 in 1996, 5,656,368 in 1995,
and 5,640,591 in 1994 $1.52 $1.90 $1.71
===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Three years ended December 31, 1996
-----------------------------------------------
Net Unrealized
Gain (loss) on
Securities
(Dollars in thousands, Common Retained Available
except per share amounts) Stock Surplus Earnings for Sale Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $26,252 $20,509 $27,592 $ 1,391 $75,744
Net income -- -- 9,648 -- 9,648
Dividend reinvestment plan -- -- (46) -- (46)
Cash dividends paid
($.56 per share) -- -- (3,132) -- (3,132)
Stock consideration for options
exercised (7,688 shares) (39) (38) (141) -- (218)
Stock options exercised
(22,521 shares) 113 368 -- -- 481
Stock dividend (186,500 shares) 933 3,473 (4,406) -- --
Fair value adjustment for
securities available for
sale, net -- -- -- (5,895) (5,895)
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 1994 $27,259 $24,312 $29,515 $(4,504) $76,582
Net income -- -- 10,727 -- 10,727
Dividend reinvestment plan -- -- (46) -- (46)
Cash dividends paid
($.63 per share) -- -- (3,570) -- (3,570)
Stock consideration for options
exercised (4,108 shares) (21) (20) (81) -- (122)
Stock options exercised
(16,217 shares) 82 262 -- -- 344
Stock dividend (196,865 shares) 984 4,257 (5,241) -- --
Fair value adjustment for
securities available for
sale, net -- -- -- 4,486 4,486
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 1995 $28,304 $28,811 $31,304 $ (18) $88,401
Net income -- -- 8,611 -- 8,611
Dividend reinvestment plan -- -- (25) -- (25)
Cash dividends paid
($.64 per share) -- -- (3,640) -- (3,640)
Stock consideration for options
exercised (7,448 shares) (37) (40) (137) -- (214)
Stock options exercised
(25,133 shares) 126 377 -- -- 503
Fair value adjustment for
securities available for
sale, net -- -- -- (176) (176)
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 1996 $28,393 $29,148 $36,113 $ (194) $93,460
======= ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,611 $10,727 $ 9,648
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for credit losses 1,522 1,651 1,188
Provision for other real estate owned 422 905 609
Depreciation and amortization 2,272 1,958 1,724
Amortization of intangibles 792 1,464 252
Net premium amortization on
investment securities 615 467 625
Increase in interest receivable (172) (607) (738)
Increase in interest payable 143 190 495
Deferred income tax benefits (222) (1,371) (426)
Amortization (accretion of net loan
origination costs (fees) 67 (42) (309)
Gain (loss) on sales of property (136) (20) (725)
Gain (loss) on sales/calls of securities 330 256 (19)
Decrease (increase) in loans held for sale 778 (946) 11,416
Decrease (increase) in other assets (4,057) (3,140) 289
Increase (decrease) in other liabilities 1,668 1,137 (1,406)
Other 91 104 70
------- ------- -------
Net cash provided by operating activities 12,724 12,733 22,693
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be
held to maturity (47,424) (19,685) (32,067)
Purchases of investment securities
available for sale (64,090) (54,932) (45,675)
Proceeds from sales/calls of securities
held to maturity 10,728 2,655 --
Proceeds from sales/calls of securities
available for sale 28,213 22,704 2,230
Proceeds from maturing securities
available for sale 44,964 31,217 44,591
Proceeds from maturing securities
held to maturity 6,020 16,107 9,629
Net increase in loans (45,790) (10,838) (78,571)
Purchases of premises and equipment (7,116) (5,138) (3,278)
Proceeds from sales of property 175 1,358 949
Intangible assets, net -- (1,296) (4,002)
Other investing activities 1,408 1,949 2,724
------- ------- -------
Net cash used in investing activities (72,912) (15,899) (103,470)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing
deposits, interest-bearing checking, savings
and money market accounts 901 (17,938) 40,028
Net increase in certificates of deposit 9,224 49,257 16,395
Net increase in securities sold under
agreements to repurchase 1,718 8,199 1,582
Net increase (decrease) in other
short-term borrowings 38,291 (15,813) (173)
Net increase (decrease) in other
long-term borrowings (5,586) 7,272 10,500
Cash dividends paid (3,640) (3,570) (3,132)
Net decrease in advances for taxes and insurance (35) (30) (18)
Dividend reinvestment plan (25) (46) (46)
Proceeds from issuance of common stock 289 222 263
------- ------- -------
Net cash provided by financing activities 41,137 27,553 65,399
------- ------- -------
Net increase (decrease) in cash and
cash equivalents (19,051) 24,387 (15,378)
Cash and cash equivalents at beginning of year 57,756 33,369 48,747
------- ------- -------
Cash and cash equivalents at end of year $38,705 $57,756 $33,369
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $32,078 $32,146 $24,346
Cash payments for income tax 4,257 3,050 3,906
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities
available for sale, net of income taxes (176) 4,486 (5,895)
Loans originated on sale of real estate
owned held for sale 636 595 62
Net transfer to real estate owned held for
sale from loans receivable 553 3,821 1,904
Net proceeds due from foreclosure sale of
properties securing impaired loans -- 603 --
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F&M Bancorp and Subsidiaries
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
F&M Bancorp (the "Parent Company") is a bank holding company that provides its
customers with banking and bank related financial services through its wholly-
owned subsidiaries, Farmers and Mechanics National Bank and subsidiaries (the
"Bank") and Home Federal Savings Bank and subsidiaries (the "Savings Bank").
The Bank and the Savings Bank offer various loan, deposit, and other financial
service products to their customers. Their customers include individuals and
commercial enterprises located primarily within the State of Maryland. The
principal market area encompasses Frederick, Washington, Carroll, Montgomery,
and Allegany counties, and portions of the adjacent counties within the state
and to a lesser extent, south central Pennsylvania, northern Virginia and the
eastern panhandle of West Virginia. The Bank and the Savings Bank maintain
correspondent banking relationships and execute daily federal funds
transactions on an unsecured basis with their correspondents.
The accounting and reporting policies and practices of F&M Bancorp and its
subsidiaries ("Bancorp") conform with generally accepted accounting principles
and with prevailing practice in the banking industry. The following is a
summary of Bancorp's significant accounting policies:
Principles of Consolidation.
The consolidated financial statements include the accounts of the Parent
Company and its wholly-owned subsidiaries. All material intercompany accounts
and transactions are eliminated in consolidation. In the Parent Company
financial statements, the investment in subsidiary is accounted for using the
equity method of accounting.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Presentation of Cash Flows.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, cash items in the process of clearing, federal
funds sold, and interest-bearing deposits with banks. Generally, federal funds
are sold for one-day periods.
Loans Held for Sale.
Loans held for sale are carried at the lower of aggregate cost or fair value.
Fair value is estimated to equal the carrying amount due to the anticipated
short holding period of these loans.
Investment Securities.
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires the use of fair value accounting for certain investment
categories.
Securities classified as held-to-maturity are those debt securities that
Bancorp has both the positive intent and ability to hold to maturity. These
securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized as adjustments to interest income
using the interest method.
Securities classified as available-for-sale are equity securities with
readily determinable fair values and those debt securities that Bancorp intends
to hold for an indefinite period of time but not necessarily to maturity. These
securities may be sold as part of its asset/liability management strategy, or
in response to significant movements in interest rates, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value, with any unrealized gains and losses reported as a
separate component of shareholders' equity, net of the related deferred tax
effect.
Securities classified as trading, if any, are those securities bought and
held principally for the purpose of selling them in the near term. These
securities are carried at fair value, with any unrealized holding gains and
losses included in earnings.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
included in interest income in the consolidated statements of income. Realized
gains and losses, if any, determined based on the adjusted cost of the specific
securities sold, are reported as a separate line item in noninterest income in
the consolidated statements of income.
Interest and Fees on Loans.
Interest on loans is accrued at the contractual rate on the principal amount
outstanding. However, the accrual of interest is discontinued when reasonable
doubt exists as to the full, timely collection of interest or principal. Loans
on which the accrual of interest has been discontinued, which includes impaired
loans, are designated as nonaccrual loans. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal
is probable. Interest accruals are resumed on such loans only when they are
brought current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to
both principal and interest.
Loan fees and related direct costs of loan origination are deferred and
recognized over the life of the loan as a component of interest income.
On January 1, 1996, Bancorp adopted FASB Statement No. 122, "Accounting
for Mortgage Servicing Rights." This statement requires that a mortgage
banking enterprise recognize as separate assets the rights to service mortgage
loans for others, however those rights are acquired, and to 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. The amount of capitalized originated
mortgage servicing rights was immaterial at December 31, 1996. FASB Statement
No. 122 will be superseded by FASB Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" -See Note
18.
Allowance for Credit Losses.
Effective January 1, 1995, Bancorp adopted FASB Statement No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." It requires that impaired loans within its scope be measured
based on the present value of expected cash flows discounted at the loan's
original effective interest rate, or by reference to the loans observable
market price or the fair value of the collateral for a collateral dependent
loan. The effect of adoption was not material to the consolidated financial
statements.
The allowance for credit losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the credit
extension process. The entire allowance is available to absorb losses related
to the loan portfolio.
The adequacy of the allowance for credit losses is reviewed regularly by
management. Additions to the allowance are made by charges to the provision for
credit losses. On a quarterly basis, a comprehensive review of the adequacy of
the allowance is performed considering factors such as historical relationships
among loans outstanding, loss experience, delinquency levels, individual loan
reviews, and evaluation of the present and future local and national economic
environment. Management's estimate of credit losses inherent in the credit
extension process and the related allowance is subject to change because of
uncertainties inherent in the estimation process.
Bank Premises and Equipment.
Bank premises, furniture and equipment, and leasehold improvements are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed principally by the straight-line method for bank
premises and leasehold improvements and by accelerated methods for equipment.
The estimated useful lives for computing depreciation and amortization are as
follows:
Years
- -------------------------------------
Bank premises 15 to 50
Furniture and equipment 3 to 10
Leasehold improvements 10 to 25
Leasehold improvements are amortized over the shorter of the terms of the
leases or their estimated useful lives. Major alterations and improvements to
bank premises are capitalized and depreciated over the remaining useful life of
the asset. Gains and losses on dispositions are reflected in the consolidated
statements of income in the year of disposition. Maintenance and repairs are
charged to expense as incurred.
Other Real Estate Owned.
Other real estate owned includes: banking premises no longer used for business
operations, real estate acquired by foreclosure (in partial or complete
satisfaction of debt), or otherwise surrendered by the borrower to Bancorp's
possession.
Other real estate owned is recorded at the lower of cost or fair value on
the date of acquisition. Write-downs to fair value at the date of acquisition
are charged to the allowance for credit losses. Subsequently, these assets are
adjusted through a valuation allowance to the lower of net carrying value or
fair value (net of estimated selling expenses) based upon periodic appraisals.
Adjustments arising from changes in the valuation allowance and operating
expenses are reflected in noninterest expenses. Gains or losses realized on
disposition are reflected in noninterest income.
Intangible Assets.
Intangible assets represent the excess of the fair value of liabilities assumed
over the fair value of tangible assets acquired in branch acquisitions. These
intangible assets are initially amortized using the straight-line method over
the estimated periods benefited of ten years. However, the amortization is
subject to periodic review and is accelerated if later events and circumstances
indicate revisions are necessary.
Income Taxes.
Effective January 1, 1993, Bancorp changed from the deferral method of
accounting for income taxes to an asset and liability method in accordance with
FASB Statement No. 109, "Accounting for Income Taxes." As prescribed in FASB
Statement No. 109, provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable income such as
interest on state and municipal securities) and deferred taxes on temporary
differences between the amount of taxable income and pre-tax financial income
and between the tax bases of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Per Share Data.
Earnings per share is based on the weighted average number of shares
outstanding during each year after giving retroactive effect to stock dividends
and stock splits. No material dilution results from the assumed exercise of
stock options.
Trust Assets and Income.
Assets held in an agency or fiduciary capacity are not assets of Bancorp and,
accordingly, are not included in the accompanying consolidated financial
statements. Trust income is recorded on a cash basis and would not be
materially different using the accrual method.
Deferred Compensation.
Bancorp accrues the cost of supplemental retirement benefits (deferred
compensation) payable to certain key employees over their service periods to
the date those employees, or their beneficiaries, are fully eligible for
benefits.
Stock Compensation.
In October 1995, FASB Statement No. 123, "Accounting for Stock-Based
Compensation," was issued. This Statement defines a fair value based method of
accounting for employee stock options or similar equity transactions. The
Statement allows the recording of such fair value based accounting in the
financial statements or the disclosure of the fair value impact to net income
and earnings per share on a pro forma basis in the notes to the consolidated
financial statements effective for fiscal years beginning after December 15,
1995. Bancorp will continue to account for these plans under the intrinsic
value based method prescribed by Accounting Principles Board ("APB") No. 25 and
has provided the fair value disclosures required by Statement No. 123 in Note
10, "Employee Benefits".
2. ACQUISITIONS
On November 15, 1996, Bancorp consummated its merger with Home Federal
Corporation and subsidiaries, ("Home Federal"), Hagerstown, Maryland, in a tax-
free exchange of stock. Shareholders of Home Federal received .49535 shares of
Bancorp stock for each of the 2,519,010 shares of Home Federal Common Stock and
cash in lieu of each fractional share at the rate of $23.90. The merger was
accounted for as a pooling of interests. Accordingly, the consolidated
financial statements have been restated to include the accounts of Home Federal
for all periods presented. At the date of acquisition, the Savings Bank, the
principal subsidiary of Home Federal, had total assets of $230.1 million, loans
of $154.0 million and deposits of $162.7 million.
The combined and separate results of operations for Home Federal and
Bancorp preceding the merger are as follows:
<TABLE>
<CAPTION>
(In thousands, except Home Pre merger
per share amounts) Federal Bancorp Combined
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1995 Total income $17,967 $64,303 $82,270
Net income 2,528 8,199 10,727
Net income per share 1.86 1.90
1994 Total income 16,480 54,095 70,575
Net income 1,497 8,151 9,648
Net income per share 1.86 1.71
</TABLE>
Total income and net income of Home Federal for the period during 1996
prior to affiliation totaled $16,816,000 and $854,000, respectively.
On May 31, 1995, Bancorp consummated its merger with the Bank of
Brunswick, Brunswick, Maryland, in a tax-free exchange of stock. Shareholders
of the Bank of Brunswick received 10.74 shares of Bancorp stock for each of the
24,000 shares of the Bank of Brunswick capital stock and cash in lieu of each
fractional share at the rate of $26.51. The merger was accounted for as a
pooling of interests. At the date of acquisition, the Bank of Brunswick had
earning assets of $26.7 million, including loans of $21.6 million. Deposits
totaled $26.6 million.
On June 16, 1995, Bancorp acquired certain assets and assumed $16.1
million in deposit liabilities of two offices located in Bancorp's principal
market area. The transaction was accounted for using the purchase method of
accounting.
3. Investment Securities
The amortized cost and estimated fair value of investments at December 31, 1996
and 1995, summarized by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Within 1 year $ 44,106 $ 20 $ 30 $ 44,096
After 1 but within 5 years 16,771 82 53 16,800
After 5 but within 10 years 9,006 10 63 8,953
-------- ------ ---- --------
69,883 112 146 69,849
-------- ------ ---- --------
Obligations of states and
political subdivisions
Within 1 year 7,521 99 -- 7,620
After 1 but within 5 years 1,024 17 -- 1,041
-------- ------ ---- --------
8,545 116 -- 8,661
-------- ------ ---- --------
Mortgage-backed securities 62,042 155 435 61,762
-------- ------ ---- --------
Total debt securities 140,470 383 581 140,272
Equity securities 6,036 -- -- 6,036
-------- ------ ---- --------
Total securities available for sale $146,506 $ 383 $581 $146,308
======== ====== ==== ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
After 1 but within 5 years $ 5,949 $ 44 $ 13 $ 5,980
After 5 but within 10 years 6,000 14 -- 6,014
-------- ------ ---- --------
11,949 58 13 11,994
Obligations of states and
political subdivisions
After 1 but within 5 years 29,426 585 26 29,985
After 5 but within 10 years 32,802 453 188 33,067
After 10 years 108 -- -- 108
-------- ------ ---- --------
62,336 1,038 214 63,160
-------- ------ ---- --------
Mortgage-backed securities 25,218 71 242 25,047
-------- ------ ---- --------
Total securities to be held
to maturity $ 99,503 $1,167 $469 $100,201
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Within 1 year $ 31,228 $ 127 $ 48 $ 31,307
After 1 but within 5 years 22,673 73 70 22,676
After 5 but within 10 years 5,995 45 -- 6,040
-------- ------ ---- --------
59,896 245 118 60,023
-------- ------ ---- --------
Obligations of states and
political subdivisions
Within 1 year 8,296 99 -- 8,395
After 1 but within 5 years 8,683 286 1 8,968
-------- ------ ---- --------
16,979 385 1 17,363
-------- ------ ---- --------
Mortgage-backed securities 51,318 165 370 51,113
-------- ------ ---- --------
Total debt securities 128,193 795 489 128,499
Equity securities 7,212 -- -- 7,212
Total securities available for sale $135,405 $ 795 $489 $135,711
======== ====== ==== ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
After 1 but within 5 years $ 4,940 $ 57 $ -- $ 4,997
-------- ------ ---- --------
$ 4,940 $ 57 $ -- $ 4,997
-------- ------ ---- --------
Obligations of states and
political subdivisions
After 1 but within 5 years 21,948 581 16 22,513
After 5 but within 10 years 33,148 604 73 33,679
After 10 years 110 -- -- 110
-------- ------ ---- --------
55,206 1,185 89 56,302
Mortgage-backed securities 29,577 232 -- 29,809
-------- ------ ---- --------
Total securities to be held
to maturity $ 89,723 $1,474 $ 89 $ 91,108
======== ====== ==== ========
</TABLE>
In December 1995, pursuant to the Special Report issued by the FASB
titled, "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities," Bancorp transferred
investment securities to be held to maturity having an amortized cost of
$34,936,000 and a fair value of $35,016,000 to the available-for-sale category.
The unrealized holding gain at the date of transfer is included in a separate
component of shareholders' equity, net of the related tax effects. In addition,
investment securities available for sale having an amortized cost of
$12,744,000 and a fair value of $12,506,000 were transferred to the held-to-
maturity category.
Fair value was estimated using various pricing methods. Fair value for
obligations of states and political subdivisions was estimated by an
independent pricing service using a pricing matrix. Fair value for all other
debt securities was based on quoted market prices or dealer quotes.
Proceeds from sales/calls of investment securities available for sale
during 1996 were $28,213,000. Gross gains of $58,000 and gross losses of
$129,000 were realized on those sales. Proceeds from sales/calls of investment
securities held to maturity during 1996 were $10,728,000. Gross losses of
$259,000 were realized on those sales/calls. Proceeds from sales/calls of
investment securities available for sale during 1995 were $22,704,000. Gross
gains of $21,000 and gross losses of $287,000 were realized on those sales.
Proceeds from calls of investment securities held to maturity during 1995 were
$2,655,000. Gross gains of $10,000 were realized on those calls. Proceeds from
sales/calls of investment securities available for sale during 1994 were
$2,230,000. No gross gains or losses were recognized on these sales/calls.
Proceeds from calls of investment securities held to maturity during 1994 were
$5,019,000. Gross gains of $19,000 were realized on those calls.
The amortized cost of investment securities pledged to secure public
deposits, securities sold under repurchase agreements, Federal Home Loan Bank
(the "FHLB") advances, and for other purposes as required and permitted by law,
totaled $129,519,000 at December 31, 1996, and $105,634,000 at December 31,
1995.
Interest earned on obligations of states and political subdivisions is
exempt from federal income taxes. However, the federal interest expense
deduction is limited for interest deemed to be incurred to purchase or carry
these tax-exempt obligations. These tax-exempt securities comprised 28.9
percent and 32.2 percent of the total carrying value of the investment
portfolio at December 31, 1996 and 1995, respectively.
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans
Construction and land development $ 29,571 $ 33,427
Secured by farmland 6,864 6,212
Secured by 1 to 4 family residential properties 183,566 182,344
Other mortgage 129,307 118,289
Agricultural 977 1,493
Commercial and industrial loans 62,288 57,051
Consumer 253,529 223,077
All other loans 4,772 4,821
-------- --------
Total loans $670,874 $626,714
======== ========
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds
are included in other loans and in total loans in the consolidated balance
sheets. Interest income from these loans is included in interest and fees on
loans in the consolidated statements of income.
The fair value of the loan portfolio at December 31, 1996 and 1995 was
estimated to be $671,212,000 and $621,777,000, respectively, compared with the
net loan carrying amounts of $660,630,000 and $616,209,000, respectively. The
fair value was estimated by segregating the portfolio into categories having
similar financial characteristics. Each loan category was then further
segmented into fixed-rate and variable-rate interest terms and by performing
and nonperforming loans.
The fair value of performing loans was estimated by either (1) discounting
estimated future cash flows using discount rates equal to the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturity except that, in the absence of increased credit
risk, the carrying amount was generally deemed to approximate fair value for
variable-rate loans due to the frequent repricing of these instruments at
market rates 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 then discounting such cash flows by interest rates associated
with the cash flows plus an option-adjusted spread.
Fair value for nonperforming loans was based predominantly on recent
external appraisals. If appraisals were not available, estimated cash flows
were discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates were judgmentally determined using available market information
and specific borrower information.
Management has no basis to determine whether the fair values presented
would be indicative of the values negotiated in an actual sale.
Transactions in the allowance for credit losses are:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $9,796 $11,434 $12,196
Provision for credit losses 1,522 1,651 1,188
Recoveries of loans previously charged-off 2,243 2,138 1,284
Loans charged-off (3,922) (5,427)
(3,234)
------ ------- -------
Balance at end of year $9,639 $ 9,796 $11,434
====== ======= =======
</TABLE>
In the ordinary course of business, directors and officers of the Bank,
the Savings Bank, and their affiliates, were customers of, and had other
transactions with the Bank and/or the Savings Bank. Loan transactions with
directors and officers were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons and neither
involved more than normal risk of collectibility nor presented other
unfavorable features. The aggregate dollar amount of all loans to all officers,
directors, and their affiliates was $14,746,000 and $31,550,000 at December 31,
1996 and 1995, respectively. During 1996, $43,935,000 of new loans were made or
became reportable, and repayments and other decreases totaled $60,739,000.
The loan portfolio includes loans that are not currently accruing interest
income. The total outstanding principal of these loans at December 31, 1996,
1995, and 1994, and the effect on income for the years then ended are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal balance $7,281 $6,954 $18,246
====== ====== =======
Gross amount of interest which would have
been recorded under original terms $ 497 $ 592 $ 2,195
====== ====== =======
Recorded interest income on these loans $ 188 $ 172 $ 536
====== ====== =======
</TABLE>
The net reduction in interest income on renegotiated loans was not
material in 1996, 1995, and 1994. At December 31, 1996, there were no material
commitments to lend additional funds to borrowers whose loans had been modified
in troubled debt restructurings or were in a nonaccrual status.
As of December 31, 1996, Bancorp had loans amounting to approximately
$6,144,000 that were specifically classified as impaired and included in the
nonaccrual loans referenced above. The average balance of impaired loans
amounted to $5,367,000 for the year ended December 31, 1996. During 1996, cash
receipts totaling $219,000 were applied to reduce the principal balance of
those impaired loans and no interest income was recognized. The specific
allowance for credit losses related to these impaired loans was $964,000 and
$742,000 in 1996 and 1995, respectively.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Bank premises and land $ 22,786 $ 19,599
Furniture and equipment 17,280 16,666
Leasehold improvements 1,696 1,134
-------- --------
41,762 37,399
Less accumulated depreciation and amortization (16,531) (16,901)
-------- --------
Bank premises and equipment, net $ 25,231 $ 20,498
======== ========
</TABLE>
Depreciation and amortization related to premises and equipment in the
consolidated statement of income amounted to $2,270,000 in 1996, $1,914,000 in
1995, and $1,630,000 in 1994.
Construction period interest capitalized amounted to $86,000 in 1996 and
$17,000 in 1995.
6. INVESTMENT IN REAL ESTATE PARTNERSHIP
In 1994, the Bank entered into a limited partnership agreement for the sole
purpose of developing into finished lots a property carried in other real
estate owned. Pursuant to the formation of this partnership, certain minority
interest contributions, totaling $684,000, were received. The Bank has included
the financial results of the partnership's operations in the accompanying
consolidated financial statements since the Bank controls the major operating
and financial policies of the partnership.
7. DEPOSITS
The carrying amounts of deposits are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(In thousands) 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Noninterest-bearing $108,101 $105,957
Interest-bearing
Checking 100,768 96,192
Savings 114,916 119,465
Money market accounts 112,093 113,363
Certificates of deposit
Under $100,000 315,656 314,664
$100,000 and over 43,216 34,984
-------- --------
Total deposits $794,750 $784,625
======== ========
</TABLE>
The fair value of deposits at December 31, 1996 and 1995 was estimated to
be $797,024,000 and $787,831,000, respectively. The fair value of deposits with
no stated maturity, such as noninterest-bearing deposits, interest-bearing
checking, savings, and money market accounts, is equal to the carrying amount.
Carrying amount approximates fair value for variable-rate certificates of
deposit, and fixed-rate certificates with original maturities of 12 months or
less, due to the frequent repricing of these instruments at market rates. Fair
value for all other fixed-rate certificates of deposit was estimated by
discounting contractual cash flows using discount rates equal to the rates
currently offered for deposits of similar remaining maturities.
8. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of securities sold under agreements to
repurchase which are secured transactions with customers and generally mature
the day following the date sold. Bancorp has also maintained an outstanding
balance in its treasury tax and loan account throughout the years. Short-term
borrowings may also include federal funds purchased, which are unsecured
overnight borrowings from other financial institutions, and advances from the
FHLB of Atlanta, which are secured either by a blanket floating lien on all
real estate mortgage loans secured by 1 to 4 family residential properties,
FHLB stock, or other mortgage-related assets.
Bancorp has unused lines of credit for short-term borrowings totaling
approximately $77,000,000 at December 31, 1996.
The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Maximum balance at any month end during the year $99,287 $80,774
Average balance for the year 67,826 68,249
Weighted average rate for the year 5.65% 5.99%
Weighted average rate on borrowings at year end 5.44% 5.59%
Estimated fair value $99,287 $59,278
</TABLE>>
The weighted average rates shown for borrowings at year end were
calculated by multiplying the effective rate for each transaction by the
principal amount and dividing the aggregate product by the total principal
outstanding.
Due to the short maturities of these financial instruments, the carrying
amounts for both repurchase agreements and other short-term borrowings were
deemed to approximate fair values at December 31, 1996 and 1995.
9. INCOME TAXES
Significant components of Bancorp's deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for credit and real estate owned losses $4,230 $4,351
Unrealized losses on securities available for sale 113 20
Deferred compensation 1,361 1,262
Intangibles 872 714
Other 589 467
------ ------
Total deferred tax assets 7,165 6,814
Valuation allowance for deferred tax assets 474 474
------ ------
Total deferred tax assets after valuation allowance 6,691 6,340
------ ------
Deferred tax liabilities
Depreciation and amortization 686 622
Other 40 68
------ ------
Total deferred tax liabilities 726 690
------ ------
Net deferred tax assets $5,965 $5,650
====== ======
</TABLE>
A reconciliation of the statutory income tax to the provision for income
taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax $11,384 $13,107 $12,945
Tax rate 35% 35% 35%
------- ------- -------
Income tax at statutory rate 3,984 4,587 4,531
Increases (decreases) in tax resulting from
Tax-exempt interest income (1,201) (1,205) (1,242)
State income taxes, net of
Federal income tax benefit 207 425 498
Other (217) 49 (36)
Change in valuation allowance -- (1,476) (454)
------- ------- -------
Actual tax expense $ 2,773 $ 2,380 $ 3,297
======= ======= =======
Effective tax rate 24.4% 18.2% 25.5%
==== ==== ====
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
Currently payable
Federal $ 2,616 $ 3,097 $ 2,957
State 379 654 766
------- ------- -------
Total currently payable 2,995 3,751 3,723
------- ------- -------
Deferred tax expense (benefits)
Federal (161) (59) (73)
State (61) 164 101
------- ------- -------
Total deferred tax expense (benefits) (222) 105 28
------- ------- -------
Change in valuation allowance -- (1,476) (454)
------- ------- -------
Provision for income taxes $ 2,773 $ 2,380 $ 3,297
======= ======= =======
</TABLE>
Within the provision for income taxes are the tax effects of investment
securities transactions. During 1996 and 1995, a decrease in tax expense of
$127,000 and $99,000, respectively, resulted from net security losses.
The components of the provision for deferred tax expenses (benefits) are
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $ 121 $ 527 $ 102
Amortization of intangibles (158) (413) (46)
Other (185) (9) (28)
----- ----- ------
Deferred tax expenses (benefits) $(222) $ 105 $ 28
===== ===== ======
</TABLE>
10. EMPLOYEE BENEFITS
Profit Sharing Plan.
The Bank
Retirement benefits are provided through a Section 401(k) profit sharing plan
("the Plan") to employees meeting certain age and service eligibility
requirements. The annual profit sharing contribution to the Plan is
discretionary, based primarily on earnings and amounted to $430,000 for 1996,
$330,000 for 1995, and $364,000 for 1994. Effective for the 1993 Plan year,
the Plan was amended to provide for employer matching contributions of up to
two percent of compensation for eligible participants. Effective for the 1996
Plan year, the Plan was amended to provide for additional employer matching
contributions of one-half of the next two percent of compensation for eligible
participants. Additional matching contributions totaled $234,000 in 1996,
$154,000 in 1995, and $162,000 in 1994.
The Bank of Brunswick had a defined contribution profit sharing plan which
was terminated as of the close of business on May 31, 1995, at which time all
assets were distributed to the participants. No contributions to this plan were
made in 1995. Contributions to this plan were $10,000 in 1994.
The Savings Bank
The Savings Bank provides a retirement savings plan and trust which is a
deferred compensation plan (401(k)) and a profit sharing plan ("the Savings
Plan") for all employees who meet certain age and eligibility requirements. The
Savings Plan permits eligible participants to defer up to 15 percent of their
annual salary and the Savings Bank to contribute to the 401(k) part of the plan
on a matching basis. The Savings Bank may also elect to contribute a portion of
its profits to the profit sharing portion of the plan.
In 1996, 1995, and 1994, contributions were made based on matching 50
cents, 30 cents, and 20 cents, respectively, on every dollar up to 5 percent of
the employees salary. The Savings Bank's additional matching contribution
amounted to $52,000 in 1996, $23,000 in 1995, and $18,000 in 1994. In addition,
the Savings Bank made profit sharing contributions of $127,000, $185,000, and
$117,000 in 1996, 1995, and 1994, respectively.
Executive Supplemental Income Plan.
Supplemental retirement benefits (deferred compensation) for certain key
employees are provided under an Executive Supplemental Income Plan (the
"ESIP"). Benefits payable under the ESIP are integrated with other retirement
benefits expected to be received by ESIP participants, including those under
the 401(k) profit sharing plan. Amounts paid under the ESIP will be partially
or fully recovered through life insurance policies purchased on the lives of
the participants.
Deferred compensation costs charged to expense for the years ended
December 31, 1996, 1995, and 1994 were $292,000, $93,000, and $274,000,
respectively.
Other Benefits.
Both the Savings Bank and Bancorp maintain a director's deferred compensation
program pursuant to which directors may elect to defer their fees for attending
meetings in order to provide retirement benefits. The expense for these
benefits was $242,000, $29,000, and $89,000, respectively, for 1996, 1995, and
1994.
Employee Stock Purchase Plan.
Bancorp has an Employee Stock Purchase Plan (the "ESPP") whereby eligible
employees may authorize payroll deductions ranging from $120 to $2,400 per year
for the purpose of acquiring shares of common stock in Bancorp at current
market prices. To encourage employee participation in the ESPP, Bancorp
contributes an additional amount equal to 20 percent of each participating
employee's voluntary payroll deduction. Contributions to the ESPP are used by a
designated agent to acquire common shares of Bancorp, either in the open market
or from Bancorp at current market prices. Bancorp has reserved 55,125 shares of
its common stock for the ESPP. Bancorp reserves the right to amend, modify,
suspend, or terminate the ESPP at any time at its discretion. Bancorp pays all
costs of administration of the ESPP.
Stock Option Plan.
Bancorp has a 1983 Stock Option Plan and a 1995 Stock Option Plan (the "Plans")
which are coordinated in their administration and similar in their terms and
conditions for key employees. The Plans permit the granting of both incentive
stock options and non-qualified stock options to purchase common stock of
Bancorp. The exercise price per share for incentive stock options and non-
qualified stock options shall be not less than 100 percent and 85 percent,
respectively, of the fair market value of a share of common stock on the date
of grant and may be exercised in increments commencing after one year from the
date of grant. Options are fully exercisable after four years from the date of
grant and expire after 10 years.
<TABLE>
<CAPTION>
Options issued
and outstanding Price
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1993 177,987 $ 5.62 to $23.81
Exercised (23,937) 5.62 to 21.21
Granted 38,508 21.31
Terminated (4,408) 6.07 to 21.31
------- ----------------
Balance, December 31, 1994 188,150 $ 6.61 to $23.81
Exercised (16,692) $ 6.61 to $21.31
Granted 60,679 15.15 28.21
Terminated (7,039) 11.75 to 28.21
------- ----------------
Balance, December 31, 1995 225,098 $11.75 to $28.21
Exercised (25,133) $11.75 to $28.21
Granted 30,600 29.13
Terminated (11,606) 11.75 to 29.13
------- ----------------
Balance, December 31, 1996 218,959 $11.75 to $29.13
======= ================
</TABLE>
At December 31, 1996 there were 143,723 options exercisable at prices
ranging from $11.75 to $29.13. Shares reserved for future grants totaled
113,783 at December 31, 1996.
Bancorp accounts for the Plans under APB Opinion No. 25. Had compensation
cost for the Plans been determined in accordance with the provisions of FASB
Statement No. 123 (see Note 1), Bancorp's net income and earnings per share
would have been reduced to the following pro forma amounts:
1996 1995
------ -------
Net Income: As Reported $8,611 $10,727
Pro Forma 8,524 10,674
EPS: As Reported $1.52 $1.90
Pro Forma 1.50 1.89
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1996 pro forma amounts include a de minimus amount related to
the purchase discount offered under the Employee Stock Purchase Plan.
Bancorp may grant options for up to 599,017 shares under the Plans.
Bancorp has granted options on 485,234 shares through December 31, 1996.
A summary of the status of the Plans at December 31, 1995 and 1996 and
changes during the years then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
1995 1996
------------------- ------------------
Wtd. Ave. Wtd. Ave.
Shares Ex. Price Shares Ex. Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 225,098 18.52 188,150 16.93
Granted 30,600 29.13 60,679 22.92
Exercised (25,133) 15.69 (16,692) 16.62
Forfeited (9,972) 21.46 (7,039) 18.64
Expired (1,634) 23.81 -- --
Outstanding at end of year 218,959 20.15 225,098 18.52
Exercisable at end of year 143,723 17.01 121,715 16.45
Weighted average fair value of
options granted during the year 5.03 3.75
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1996
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- ---------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices 12/31/96 Life Price 12/31/96 Price
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.75 - $15.00 31,722 4.70 $12.39 31,722 $12.39
$15.01 - $20.00 79,712 5.51 $16.07 72,991 $16.05
$20.01 - $25.00 45,514 5.06 $21.12 30,747 $21.03
$25.01 - $29.12 62,011 8.63 $28.64 8,263 $28.21
------- ---- ------ ------- ------
$11.75 - $29.12 218,959 6.18 $20.14 143,723 $17.01
</TABLE>
The fair value of each option is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.2 and 6.1 percent; expected dividend yields of 3.1 and 3.1 percent;
expected lives of 3.24 and 3.40 years; expected volatility of 12 and 12
percent.
11. OTHER OPERATING INCOME AND EXPENSE
Other operating income in the consolidated statements of income include the
following for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Bank card income $ 1,714 $ 1,828 $ 1,790
Miscellaneous 2,437 1,852 1,847
------- ------- -------
Total other operating income $ 4,151 $ 3,680 $ 3,637
======= ======= =======
<CAPTION>
Other operating expense in the consolidated statements of income include the
following for the years ended December 31:
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Insurance (including FDIC) $ 1,946 $ 1,505 $ 2,020
Stationery and supplies 1,006 1,012 946
Advertising 653 881 747
Professional services 1,745 1,425 1,160
Credit card processing 1,465 1,528 1,474
Postage 761 702 603
Directors fees 174 194 219
Telephone 534 499 380
Computer software and maintenance 445 454 415
Other real estate owned expenses 485 1,055 849
Amortization of intangibles 792 1,464 252
Miscellaneous 3,213 3,146 2,923
------- ------- -------
Total other operating expense $13,219 $13,865 $11,988
======= ======= =======
<CAPTION>
Transactions in the allowances for other real estate owned are summarized as
follows for the years ended December 31:
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,218 $ 3,189 $ 2,890
Provision for decline in value
and selling expenses 422 905 609
Losses charged to the allowances (624) (1,876) (310)
------- ------- -------
Ending balance $ 2,016 $ 2,218 $ 3,189
======= ======= =======
</TABLE>
12. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
<TABLE>
<CAPTION>
F&M Bancorp Balance Sheets (Parent Company)
Year ended December 31,
-----------------------
(In thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,743 $ 2,915
Investment in subsidiary 90,426 85,357
Other assets 314 173
------- -------
Total assets $93,483 $88,445
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 23 $ 44
------- -------
Common stock 28,393 28,304
Surplus 29,148 28,811
Retained earnings 36,113 31,304
Net unrealized gain (loss) on securities
available for sale (194) (18)
------- -------
Total shareholder's equity 93,460 88,401
------- -------
Total liabilities and shareholders' equity $93,483 $88,445
======= =======
<CAPTION>
F&M Bancorp Statements of Income (Parent Company)
Year ended December 31,
------------------------------
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $ 3,728 $ 3,197 $ 3,070
Other income 122 146 140
------- ------- -------
Total income 3,850 3,343 3,210
EXPENSES 614 177 375
------- ------- -------
Income before income tax expense (benefits)
and equity in undistributed earnings
of subsidiary 3,236 3,166 2,835
------- ------- -------
Income tax expense (benefits) (130) (1) (67)
------- ------- -------
Income before equity in undistributed
earnings of subsidiary 3,366 3,167 2,902
Equity in undistributed earnings
of subsidiary 5,245 7,560 6,746
------- ------- -------
Net income $ 8,611 $10,727 $ 9,648
======= ======= =======
<CAPTION>
F&M Bancorp Statements of Cash Flows (Parent Company)
Year ended December 31,
------------------------------
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,611 $10,727 $ 9,648
Adjustments to reconcile net income to net
cash provided by operating activities
Decrease (increase) in other assets (141) 20 (67)
Increase (decrease) in other
expenses payable (21) 25 (32)
Equity in undistributed earnings of
subsidiary (5,245) (7,560) (6,746)
------- ------- -------
Net cash provided by operating activities 3,204 3,212 2,803
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (3,640) (3,570) (3,132)
Stock transactions 264 176 217
------- ------- -------
Net cash used in financing activities (3,376) (3,394) (2,915)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents (172) (182) (112)
Cash and cash equivalents at beginning of year 2,915 3,097 3,209
------- ------- -------
Cash and cash equivalents at end of year $ 2,743 $ 2,915 $ 3,097
======= ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities
available for sale, net of income taxes $ (176) $ 4,486 $(5,895)
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Leases.
The Bank conducts part of its branch banking operations from leased facilities.
The initial terms of the leases range from a period of one to 25 years. Most of
the existing leases contain options which enable the Bank to renew the lease at
the fair rental value for periods of up to 20 years. In addition to minimum
rentals, certain leases have escalation clauses based upon various price
indexes and include provisions for additional payments for taxes, insurance,
and maintenance.
Total rental expense was as follows for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Bank premises $793 $659 $402
Equipment 84 110 90
---- ---- ----
Total rental expense $877 $769 $492
==== ==== ====
</TABLE>
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1996 are:
Year ending December 31, (In thousands)
- ----------------------------------------------
1997 $ 719
1998 653
1999 640
2000 629
2001 623
Later years 3,474
------
Total minimum payments required $6,738
======
Contingencies.
Bancorp is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of management, there were no legal
matters pending as of December 31, 1996, which would have a material effect on
its consolidated financial statements.
Credit Extension Commitments.
Bancorp is a party to financial instruments 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, which involve to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated financial statements.
Bancorp's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. Bancorp uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of Bancorp's exposure under these
financial instruments is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
(In thousands) 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contractual
amounts represent credit risk
Commitments to extend credit $104,922 $91,519
Standby letters of credit 13,807 13,369
</TABLE>
Carrying amounts for these off-balance sheet financial instruments
represent the deferred income arising from these unrecognized financial
instruments. The majority of commitments to extend credit and standby letters
of credit are at variable rates and/or have relatively short terms to maturity,
therefore the carrying amounts of these financial instruments is deemed to
closely approximate fair value. Carrying amounts for these off-balance sheet
financial instruments are immaterial.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Certain
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Many of the commitments are expected to expire
without being drawn upon. Accordingly, the total commitment amounts do not
necessarily represent future cash requirements. Bancorp evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
or other security obtained, if deemed necessary by Bancorp upon extension of
credit, is based on management's credit evaluation. Collateral held varies but
may include deposits held in financial institutions, U.S. Treasury securities,
other marketable securities, accounts receivable, inventory, property and
equipment, personal residences, income-producing commercial properties, and
land under development. Personal guarantees are also obtained to provide added
security for certain commitments.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a contract to a third party. Those guarantees are
primarily issued to guarantee the installation of real property infrastructure
and similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. Bancorp holds collateral and obtains personal guarantees supporting
those commitments for which collateral or other security is deemed necessary.
14. Fair Value of Financial Instruments
The following table summarizes the estimated fair values of financial
instruments and their related carrying amounts. The methods and assumptions
used in estimating the fair values are disclosed in Note 1 and the additional
Notes referenced below.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amounts Value Amounts Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents (1) $ 38,705 $ 38,705 $ 57,756 $ 57,756
Loans held for sale (Note 1) 309 309 1,087 1,087
Investment securities to be
held to maturity (Note 3) 99,503 100,201 89,723 91,108
Investment securities
available for sale (Note 3) 146,308 146,308 135,711 135,711
Net loans (Note 4) 660,630 671,212 616,209 621,777
Interest receivable (1) 6,701 6,701 6,529 6,529
Financial liabilities:
Deposits (Note 7) 794,750 794,024 784,625 787,831
Short-term borrowings (Note 8) 99,287 99,287 59,278 59,278
Long-term borrowings 6,686 6,527 12,272 12,564
Interest payable (1) 1,719 1,719 1,575 1,575
(1) Due to the short-term nature of these financial instruments, carrying
amount was deemed to approximate fair value.
</TABLE>
All fair value estimates are made at a specific point in time and are
based on existing on- and off-balance sheet financial instruments without
consideration of the value of anticipated future business or the value of
assets and liabilities that are not considered financial instruments. These
estimates do not reflect any premium or discount that could result from a block
sale of a particular financial instrument. Due to the absence of a genuine
market for a significant portion of Bancorp's financial instruments, fair value
estimates are based on judgments regarding risk characteristics, current
economic conditions, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions or
estimation methodologies could significantly affect the estimates.
15. Regulatory Restrictions
Restrictions on Dividends.
Approval of the Comptroller of the Currency is required to pay dividends which
exceed the Bank's net profits for the current year plus its retained net
profits for the preceding two years. Amounts available for the payment of
dividends during 1996 aggregated $19,159,000. The Savings Bank's ability to pay
dividends is somewhat restricted based on Office of Thrift Supervision ("OTS")
rules and regulations. Prenotification of dividend payments is required. Also,
no payments can be made beyond prescribed formulas without OTS approval. Also,
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.
Restrictions on Lending from Affiliates to Parent.
Federal law imposes certain restrictions limiting the ability of affiliates to
transfer funds to the Parent Company in the form of loans or advances. Section
23A of the Federal Reserve Act prohibits affiliates from making loans or
advances to the Parent Company in excess of 10 percent of its capital stock and
surplus, as defined therein. In addition, all loans or advances to non-bank
affiliates must be secured by specific collateral. Based on this limitation,
there was approximately $10,126,000 available for loans or advances to the
Parent Company as of December 31, 1996. There were no material loans or
advances outstanding at December 31, 1996.
Restrictions on Cash and Due from Banks.
The Bank was required to maintain average daily reserve balances with the
Federal Reserve Bank. The average amount of these required reserves during 1996
and 1995 was $11,267,000 and $10,000,000, respectively.
16. SHAREHOLDERS' EQUITY
Capital Requirements.
Bancorp, the Bank, and the Savings Bank are required to maintain specified
minimum amounts of capital in accordance with regulatory requirements. The
regulatory capital at December 31, 1996 for these entities was as follows:
<TABLE>
<CAPTION>
Bancorp
---------------------------------
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
<S> <C> <C> <C>
Tangible capital $87,289 8.87% 3.00%
Core capital 87,289 12.25 4.00
Core and supplementary capital 94,698 13.29 8.00
<CAPTION>
The Bank
---------------------------------
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
<S> <C> <C> <C>
Tangible capital $69,090 9.15% 3.00%
Core capital 69,090 12.08 4.00
Core and supplementary capital 74,719 13.07 8.00
<CAPTION>
The Savings Bank
---------------------------------
<S> <C> <C> <C>
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
Tangible capital $18,199 7.97% 3.00%
Core capital 18,199 7.97 4.00
Core and supplementary capital 19,979 14.23 8.00
</TABLE>
The entities are considered well-capitalized under the regulatory framework for
prompt corrective action.
Dividend Reinvestment Plan.
Bancorp offers a Dividend Reinvestment and Stock Purchase Plan (the "Plan") to
all Bancorp shareholders. The terms of this Plan allow participating
shareholders to purchase additional shares of common stock in Bancorp by
reinvesting the dividends paid on shares registered in their name, by making
optional cash payments, or both. Shares purchased under the Plan directly from
Bancorp with reinvested dividends can be acquired at 95 percent of current
market prices. Shares purchased under the Plan that were acquired in the open
market can be purchased at 95 percent of their acquisition cost. Optional cash
payments to this Plan are limited and may not exceed $3,000 in any calendar
quarter.
Contributions to the Plan will be used by a designated agent to acquire
common shares of Bancorp, either in the open market or from Bancorp at current
market prices. Bancorp has reserved 55,125 shares of its common stock for this
Plan. Bancorp reserves the right to amend, modify, suspend, or terminate this
Plan at any time at its discretion.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of Bancorp's unaudited quarterly results of
operations.
<TABLE>
<CAPTION>
1996(1) Dec. 31 September 30
------- -------------------------------
(Dollars in thousands, Pre Merger Home
except per share amounts) Bancorp Bancorp Federal Combined
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $18,186 $13,634 $4,198 $17,832
Net interest income 9,879 7,768 2,007 9,775
Provision for credit losses 622 300 -- 300
Gains (losses) on sales of
securities (275) -- -- --
Income before income taxes 2,055 2,846 (357) 2,489
Net income 1,621 2,108 (206) 1,902
Earnings per common share
Net income 0.29 0.48 0.33
<CAPTION>
1996(1) June 30 March 31
------------------------- -------------------------
(Dollars in thousands, Pre Merger Home Pre Merger Home
except per share amounts) Bancorp Federal Combined Bancorp Federal Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $13,332 $4,179 $17,511 $13,284 $4,053 $17,337
Net interest income 7,577 2,057 9,634 7,494 1,866 9,360
Provision for credit losses 300 -- 300 300 -- 300
Gains (losses) on sales
of securities (27) -- (27) 2 (30) (28)
Income before income taxes 2,744 622 3,366 2,816 658 3,474
Net income 2,079 535 2,614 2,089 385 2,474
Earnings per common share
Net income 0.47 0.46 0.47 0.44
<CAPTION>
1995(1) Dec. 31 September 30
------------------------- -------------------------
(Dollars in thousands, Pre Merger Home Pre Merger Home
except per share amounts) Bancorp Federal Combined Bancorp Federal Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $13,765 $4,195 $17,960 $13,706 $4,001 $17,707
Net interest income 7,719 1,952 9,671 7,656 1,753 9,409
Provision for credit losses 1,050 (349) 701 350 -- 350
Gains (losses) on sales of
securities (264) -- (264) 8 -- 8
Income before income taxes 3,414 564 3,978 2,784 560 3,344
Net income 2,444 309 2,753 2,047 342 2,389
Earnings per common share
Net income 0.55 -- 0.49 0.47 -- 0.42
<CAPTION>
1995(1) June 30 March 31
------------------------- -------------------------
(Dollars in thousands, Pre Merger Home Pre Merger Home
except per share amounts) Bancorp Federal Combined Bancorp Federal Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $13,529 $3,934 $17,463 $13,120 $3,858 $16,978
Net interest income 7,510 1,759 9,269 7,617 1,806 9,423
Provision for credit losses 300 -- 300 300 -- 300
Gains (losses) on sales of
securities -- -- -- -- -- --
Income before income taxes 2,341 474 2,815 2,593 377 2,970
Net income 1,767 1,496 3,263 1,941 381 2,322
Earnings per common share
Net income 0.40 0.58 0.44 0.41
(1) As discussed in Note 2 to the consolidated financial statements, on
November 15, 1996, Bancorp consummated its merger with Home Federal Corporation
in a tax-free exchange of stock, accounted for as a pooling of interests.
Accordingly, the unaudited quarterly results of operations for the first three
interim periods of 1996 and 1995 have been restated to reflect the combined
results of operations of Bancorp and the pooled entity, Home Federal
Corporation.
</TABLE>
18. FUTURE CHANGE IN ACCOUNTING PRINCIPLE
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control, and the appropriate measurement and allocation of the financial
components at fair value, if practical.
In addition, the Statement requires that a liability be derecognized if
and only if either (a) the debtor pays the creditor and is relieved of its
obligation for the liability or (b) the debtor is legally released from being
the primary obligor under the liability either judicially or by the creditor.
Therefore, a liability is not considered extinguished by an in-substance
defeasance.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996,
except for certain provisions related to secured borrowings and repurchase
agreements, dollar-rolls, securities lending and similar transactions, which
were deferred until after December 31, 1997 pursuant to FASB Statement No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," and is to be applied prospectively. Adoption of Statement No. 125 in 1997
and certain provisions of the Statement pursuant to Statement No. 127 in 1998
is not expected to materially affect Bancorp's consolidated financial
statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of F&M Bancorp:
We have audited the accompanying consolidated balance sheets of F&M
Bancorp (a Maryland bank holding company) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
Bancorps' management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Home Federal Corporation, a thrift holding company
acquired during 1996 in a transaction accounted for as a pooling-of-interests
as discussed as discussed in Note 2, as of December 31, 1995 and for each of
the two years then ended. Such statements are included in the consolidated
financial statements of F&M Bancorp and represent 23 percent of consolidated
total assets at December 31, 1995, and 22 percent and 23 percent of
consolidated total income for 1995 and 1994, respectively. These statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to amounts included for Home Federal
Corporation, is based solely on the report of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosure in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of F&M Bancorp and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted principles.
/s/ Arthur Anderson LLP
Washington, DC
January 21, 1997
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
the related consolidated statements of changes in stockholders' equity, income
and cash flows for the years ended December 31, 1995 and 1994 (not separately
presented herein). 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, the results of
their operations and cash flows for the years ended December 31, 1995 and 1994
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.
/s/Smith Elliott Kearns & Company, LLC
Hagerstown, Maryland
February 16, 1996
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
(301) 694-4000
http://www.fmbn.com
Mailing Address:
110 Thomas Johnson Drive
P.O. Box 518
Frederick, Maryland 21705
CUSTOMERS
Customers seeking assistance with their accounts and services may call Farmers
and Mechanics National Bank, (800) 445-3626, or Home Federal Savings Bank,
(800) 669-6695.
FINANCIAL and OTHER INFORMATION
Contact Investor Relations at (888) 694-4170, or visit our Web site at the
address above regarding the following:
Analysts, portfolio managers, shareholders and other investors seeking
additional information.
News media representatives seeking information.
Requests for copies of the Corporation's Forms 10-K, 10-Q and Proxy Statement
filed with the Securities and Exchange Commission and prior annual and
quarterly reports to shareholders.
INDEPENDENT ACCOUNTANTS
Arthur Anderson LLP
Tycon Tower
Vienna, Virginia 22182
SECURITIES MARKETS
F&M Bancorp common stock is publicly traded and quoted on the NASDAQ National
Market System under the symbol "FMBN". Principal market makers are:
Ferris, Baker Watts, Inc.
Baltimore, MD
(410) 659-4613
Legg Mason Wood Walker, Inc.
Baltimore, MD
(410) 539-0000
Herzog, Heine, Geduld, Inc.
Philadelphia, PA
(215) 972-0860
Preferred Technology, Inc.
Philadelphia, PA
(800) 784-7459
Ryan, Beck & Co.
West Orange, NJ
(800) 325-7926
Instinet Corporation
New York, NY
(212) 310-9564
SHAREHOLDER INFORMATION - TRANSFER AGENT
Norwest Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716
Contact our transfer agent regarding the following:
Shareholders seeking information regarding participation in the F&M Bancorp
Dividend Reinvestment and Stock Purchase Plan. The Plan is offered to
registered shareholders as an economical way of increasing their ownership in
F&M Bancorp. Shareowners may elect to have cash dividends automatically
reinvested in F&M Bancorp stock on the dividend payment date at a 5% discount
to the market price, and may also make optional cash payments, from $25 to
$3,000 per quarter, towards the purchase of F&M shares with no brokers fees or
commissions.
Shareholders who have questions about their accounts or who wish to change
ownership or address of stock, to report lost, stolen or destroyed
certificates, or to consolidate accounts.
ANNUAL MEETING
The F&M Bancorp Annual Meeting of Shareholders will be held at 10:00 a.m. on
Tuesday, April 15, 1997 at Corporate Headquarters.
STOCK PRICE and DIVIDENDS (1)
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
High Low Close Dividend High Low Close Dividend
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Q 30 28 1/4 28 1/4 $.20 28.81 27.14 27.38 $.19
Second Q 29 5/8 22 1/2 22 1/2 .20 27.62 25 3/4 25 3/4 .19
Third Q 24 5/8 21 24 5/8 .20 27 25 1/2 26 3/4 .20
Fourth Q 24 3/4 22 1/4 24 .20 30 25 1/2 29 3/4 .20
(1)Data have been restated for 5% stock dividend paid in May 1995.
</TABLE>
The most recent quarterly dividend was $0.22 per share paid February 1, 1997 to
holders of record January 24, 1997. Quarterly dividends are customarily paid on
February 1, May 1, August 1 and November 1.
A total of 5,680,978 shares of F&M Bancorp common stock held by approximately
6,290 registered and beneficial owners at January 24, 1997 are entitled to
notice of and to vote at the annual meeting.
Cover and Design: Alpert and Alpert, Inc., McLean, VA
Photography by Rick McCleary
F&M BANCORP
110 Thomas Johnson Drive
Frederick, MD 21702
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following list sets forth the name of the Registrant and each of its
subsidiaries, the states or other jurisdictions under which they are organized,
and the percentage ownership of the voting securities of each corporation by
its immediate parent.
<TABLE>
<CAPTION>
Name of Corporation and State Percentage of voting securities
under which organized owned by immediate parent
- ------------------------------ -------------------------------
<S> <C>
F&M Bancorp (MD) --
Farmers and Mechanics National Bank (U.S.) 100%
Key Holdings, Inc. (MD) 100%
Monocacy Center Associates L.P. (VA) 60%
Key Management, Inc. (DE) 100%
Maryland General Insurance Agency (MD) 100%
Home Federal Savings Bank (U.S.) 100%
Family Home Insurance Agency, Inc., (MD) 100%
Home Appraisals, Inc. (MD) 100%
TJW Associates, Inc. (MD) 100%
RLC Associates, Inc. (MD) 100%
CLC Associates, Inc. (MD) 100%
Keystone General Partnership (MD) 80%
Ronald Harris Parker & Associates, Inc. (MD) 100%
Galloway Holdings, LLC (NJ) 30.79%
DMP, Inc. (MD) 100%
</TABLE>
EXHIBIT 23
Report of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 21, 1997, relating to the consolidated
balance sheets of F&M Bancorp and its subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1996 which report appears on page 43 of the 1996 F&M
Bancorp Annual Report and Form 10-K, into the following previously filed
Registration Statements of F&M Bancorp; Numbers 33-39941, 002-88390, 333-02433
and 333-16709 on Form S-8, and 33-39940 on Form S-3.
/s/Arthur Anderson, LLP
Washington, DC
March 27, 1997
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated
February 16, 1996 relating to the consolidated statements of financial
condition of Home Federal Corporation and Subsidiaries as of December 31, 1995
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years ended December 31, 1995 and 1994 which
report appears on page 43 of the 1996 F&M Bancorp Annual Report and Form 10-K,
into the following previously filed Registration Statements of F&M Bancorp:
Numbers 33-39941, 002-88390, 333-02433 and 333-16709 on Form S-8, and 33-39940
on Form S-3.
/s/Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's Annual Report to Shareholders for the year ended December 31,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,762
<INT-BEARING-DEPOSITS> 4,943
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,308
<INVESTMENTS-CARRYING> 99,503
<INVESTMENTS-MARKET> 100,201
<LOANS> 670,269
<ALLOWANCE> 9,639
<TOTAL-ASSETS> 1,005,851
<DEPOSITS> 794,750
<SHORT-TERM> 99,287
<LIABILITIES-OTHER> 11,668
<LONG-TERM> 6,686
0
0
<COMMON> 28,393
<OTHER-SE> 65,067
<TOTAL-LIABILITIES-AND-EQUITY> 1,005,851
<INTEREST-LOAN> 56,357
<INTEREST-INVEST> 13,830
<INTEREST-OTHER> 679
<INTEREST-TOTAL> 70,866
<INTEREST-DEPOSIT> 27,952
<INTEREST-EXPENSE> 32,218
<INTEREST-INCOME-NET> 38,648
<LOAN-LOSSES> 1,522
<SECURITIES-GAINS> (330)
<EXPENSE-OTHER> 36,512
<INCOME-PRETAX> 11,384
<INCOME-PRE-EXTRAORDINARY> 11,384
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,611
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 8.18
<LOANS-NON> 7,281
<LOANS-PAST> 2,220
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 20,579
<ALLOWANCE-OPEN> 9,796
<CHARGE-OFFS> 3,922
<RECOVERIES> 2,243
<ALLOWANCE-CLOSE> 9,639
<ALLOWANCE-DOMESTIC> 7,683
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,956
</TABLE>
