SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 15, 1998
F&M BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 0-12638 52-1316473
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
110 Thomas Johnson Drive
Frederick, Maryland 21702
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(Address of principal executive offices) (Zip Code)
(301) 694-4000
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On November 30, 1998, Monocacy Bancshares, Inc., a Maryland
corporation ("Monocacy"), was merged (the "Merger") with and into F&M
Bancorp, a Maryland corporation ("F&M Bancorp"), pursuant to the Agreement
and Plan of Merger, dated as of September 4, 1998, (the "Merger Agreement),
by and between F&M Bancorp and Monocacy.
Pursuant to the Merger Agreement, each share of the common stock,
par value $5.00 per share of Monocacy, outstanding immediately prior to
consummation of the Merger was converted into and became exchangeable for
1.251 shares of the common stock, par value $5.00 per share, of F&M Bancorp
(the "Common Stock"). F&M Bancorp expects to issue approximately 2,267,790
shares of Common Stock in connection with the Merger. Cash in lieu of
fractional shares will be paid at the rate of $33.696 per share.
The foregoing description of the Merger and the Merger Agreement
is qualified in its entirety by reference to the full text of the Merger
Agreement, a copy of which was filed as Exhibit 2.1 to the Current Report
on Form 8-K of F&M Bancorp, filed on September 10, 1998 and is incorporated
herein by reference in its entirety as Exhibit 2.1.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
The following exhibits are filed as part of this report:
23.1 Consent of Stegman & Company.
99.1 (a) Financial Statements of Business Acquired
The following financial statements for Monocacy Bancshares, Inc.
at December 31, 1997 and 1996, and for the years ended December 31, 1997,
1996 and 1995 are set forth in Exhibit 99.1(a) hereto:
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined financial
statements at September 30, 1998, for the periods ended September 30, 1998
and 1997, and for the years ended December 31, 1997, 1996 and 1996 are set
forth in Exhibit 99.1(b) hereto:
Pro Forma Condensed Combined Balance Sheets (Unaudited)
Pro Forma Condensed Combined Statements of Income (Unaudited)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunder duly authorized.
Dated: December 31, 1998
F&M BANCORP
By: /s/ Gordon M. Cooley
--------------------------------
Name: Gordon M. Cooley
Title: General Counsel
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of September 4, 1998, by
and between F&M Bancorp and Monocacy Bancshares, Inc.
(incorporated by reference to Exhibit 2.1 to F&M Bancorp's Form
8-K dated September 10, 1998).
23.1 Consent of Stegman & Company
99.1 (a) Financial Statements of Business Acquired.
The following financial statements for Monocacy Bancshares, Inc.
at December 31, 1997 and 1996, and for the years ended December 31, 1997,
1996 and 1995 are set forth in Exhibit 99.1(a) hereto:
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined financial
statements at September 30, 1998, for the periods ended September 30, 1998
and 1997, and for the years ended December 31, 1997, 1996 and 1996 are set
forth in Exhibit 99.1(b) hereto:
Pro Forma Condensed Combined Balance Sheets (Unaudited)
Pro Forma Condensed Combined Statements of Income (Unaudited)
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Current Report on Form 8-K of our report dated January 23, 1998 on the
consolidated financial statements of Monocacy Bancshares, Inc. as of
December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, which report is incorporated by reference from
Monocacy's Annual Report on Form 10-KSB for the year ended December 31,
1997.
/s/ Stegman & Company
--------------------------------
Stegman & Company
Baltimore, Maryland
December 31, 1998
Exhibit 99.1(a)
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS MONOCACY BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of Monocacy
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Monocacy Bancshares, Inc., and Subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Stegman & Company
---------------------------------
Stegman & Company
Towson, Maryland
January 23, 1998
MONOCACY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ASSETS 1997 1996
Cash and due from banks (note 2).............. $ 7,081 $ 10,374
Federal funds sold............................ 12,614 2,000
Interest-bearing deposits with other banks.... 1,184 108
Loans held for sale........................... 4,940 10,118
Securities available for sale (note 3)........ 95,164 45,918
Investment securities (approximate fair
value of $23,860 at December 31, 1996
(note 4)........ -- 24,042
Loans, net of allowance for loan losses of
$2,539 and $2,100 (note 5).................. 155,716 156,690
Bank premises and equipment, net (note 7)..... 8,171 8,435
Other real estate owned....................... 137 656
Deferred income taxes (note 10)............... 771 899
Accrued interest receivable................... 2,152 1,939
Other assets.................................. 2,310 1,836
TOTAL ASSETS.............................. $ 290,240 $ 263,015
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing......................... $ 25,225 $ 24,002
Interest-bearing:
Savings and checking...................... 80,875 84,160
Certificates of deposit:
Under $100,000.......................... 116,066 109,664
$100,000 and over....................... 6,704 7,213
Total deposits................................ 228,870 225,039
Short-term borrowings (note 8)................ 15,910 7,600
Other long-term borrowings (note 8)........... 19,748 7,739
Accrued expenses payable...................... 1,271 555
Other liabilities............................. 94 287
Dividends payable............................. 179 147
TOTAL LIABILITIES......................... $ 266,072 $ 241,367
Stockholders' equity:
Common Stock, par value $5.00 per share;
authorized 4,000,000 shares; issued and
outstanding 1,628,522 in 1997 and
1,468,324 shares in 1996.................... 8,143 7,342
Common stock dividend to be distributed....... 4,034 3,699
Surplus....................................... 11,863 9,145
Retained earnings............................. 66 2,235
Unrealized holding gain (loss) on
securities, net............................. 62 (773)
Commitments and contingencies (notes 6 and 13)
TOTAL STOCKHOLDERS' EQUITY................ 24,168 21,648
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $ 290,240 $ 263,015
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
MONOCACY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
INTEREST INCOME:
Loans, including fees........................ $ 15,982 $ 14,043 $ 13,535
Securities available for sale - taxable...... 3,244 3,797 712
Securities available for sale - tax exempt... 297 422 268
Investment securities - taxable.............. 1 26 1,892
Investment securities - tax exempt........... 1,059 1,107 472
Interest-bearing deposits with other banks... 46 52 132
Federal funds sold........................... 227 146 68
Total interest income........................ 20,856 19,593 17,079
INTEREST EXPENSE:
Deposits of $100,000 or more................. 401 469 486
Other deposits............................... 9,157 8,782 6,419
Federal funds purchased...................... 28 95 55
Other borrowings............................. 1,101 1,075 892
Total interest expense....................... 10,687 10,421 7,852
NET INTEREST INCOME.......................... 10,169 9,172 9,227
Provision for loan losses...................... 1,110 300 885
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSEs................................ 9,059 8,872 8,342
NON-INTEREST INCOME:
Service charges on deposit accounts.......... 600 438 329
Other service charges........................ 651 660 475
Trust department fees........................ 121 150 151
Gains and fees on sale of loans.............. 1,143 864 167
Gains (losses) on securities................. 87 (220) 55
Other........................................ 248 147 250
Total non-interest income.................... 2,850 2,039 1,427
NON-INTEREST EXPENSE:
Salaries..................................... 4,265 3,956 3,062
Employee benefits (note 9)................... 1,361 1,131 743
Occupancy.................................... 720 628 436
Equipment.................................... 778 712 670
Deposit insurance............................ 60 335 198
Professional fees............................ 676 379 282
Litigation................................... 230 -- --
Other........................................ 1,561 1,621 1,145
Total non-interest expense................... 9,651 8,762 6,536
INCOME BEFORE INCOME TAXES................... 2,258 2,149 3,233
Income tax provision (note 10) 140 538 882
NET INCOME................................... $ 2,118 $ 1,611 $ 2,351
NET INCOME PER COMMONS SHARE--BASIC (NOTE 15).. $ 1.19 $ .91 $ 1.33
NET INCOME PER COMMON SHARE--DILUTED (NOTE 15). $ 1.16 $ .90 $ 1.32
CASH DIVIDENDS PER COMMON SHARE OUTSTANDING.... $ .40 $ .33 $ .30
AVERAGE COMMON SHARES OUTSTANDING
(as adjusted to reflect the February,
1998 stock dividend)........................1,785,754 1,771,177 1,761,694
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
MONOCACY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
COMMON UNREALIZED
STOCK HOLDING
DIVIDEND GAIN (LOSS)
COMMON STOCK TO BE RETAINED ON
SHARES PAR VALUE DISTRIBUTED SURPLUS EARNINGS SECURITIES
------ --------- ----------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ..... 1,314,829 $ 6,574 $ -- $ 6,610 $ 5,932 $ (506)
Net income ................... -- -- -- -- -- --
Issuance of shares of
common stock in
connection with
employee benefit and
dividend reinvestment
plan ....................... 8,726 44 -- 167 -- --
Cash dividend, $0.30 per
share ...................... -- -- -- -- (528) --
10% stock dividend to be
distributed ................ -- -- 2,846 -- (2,846) --
Increase in fair value of
securities available
for sale ................... -- -- -- -- -- 525
BALANCE, DECEMBER 31, 1995 ..... 1,323,555 6,618 2,846 6,777 4,909 19
Net income ................... -- -- -- -- 1,611 --
Issuance of shares of
common stock in
connection with
employee benefit and
dividend reinvestment
plan ....................... 12,688 63 -- 183 -- --
Issuance of 10% stock
dividend ................. 132,081 661 (2,846) 2,185 -- --
Cash dividend, $0.33 per
share .................... -- -- -- -- (586) --
10% stock dividend to be
distributed .............. -- -- 3,699 -- (3,699) --
Decrease in fair value of
securities available
for sale ................. -- -- -- -- -- (792)
BALANCE, DECEMBER 31, 1996 ..... 1,468,324 7,342 3,699 9,145 2,235 (773)
Net income ................... -- -- -- -- 2,118 --
Issuance of shares of
common stock in
connection with
employee benefit and
dividend reinvestment
plan ....................... 13,371 67 -- 222 -- --
Issuance of 10% stock
dividend ................... 146,827 734 (3,699) 2,496 462 --
Cash dividend, $0.40 per
share ...................... -- -- -- -- (715) --
10% stock dividend to be
distributed ................ -- -- 4,034 -- (4,034) --
Increase in fair value of
securities available for
sale ....................... -- -- -- -- -- 835
BALANCE, DECEMBER 31, 1996 ..... 1,628,522 $ 8,143 $ 4,034 $ 11,863 $ 66 $ 62
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MONOCACY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995 (1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 2,118 $ 1,611 $ 2,351
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............ 957 1,131 628
Prevision for loan losses................ 1,110 300 885
Deferred income taxes.................... 143 29 114
(Gains)losses on sales of securities
available for sale..................... (87) 220 (55)
Proceeds from sales of loans originated
for sale............................... 42,477 33,585 17,256
Disbursements for loans originated for
sale................................... (36,156) (43,058) (17,089)
Gains on sale of loans .................. (1,143) (864) (167)
Increase (decrease) in unearned income,
net of origination costs............... (366) 519 (229)
Gain on sale of other real estate owned.. (5) (14) (20)
Write-down of real estate owned.......... 6 14 --
Net change in:
Accrued interest receivable.............. (213) (276) (138)
Accrued expenses payable................. (314) (605) (332)
Other--net................................. (244) (1,786) 58
Net cash provided by (used in)
operating activities................... 8,283 (9,194) 3,262
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with other banks................ (1,076) 696 328
Proceeds from maturities of investment
securities............................... 15 7,003 6,717
Proceeds from sales of securities
available for sale....................... 22,495 34,984 4,974
Proceeds from maturities of securities
available for sale....................... 6,408 2,506 3,065
Purchases of securities available for
sale..................................... (52,769) (29,614) (19,479)
Purchases of investment securities......... -- (15,521) (7,268)
Sales of loan participations............... 704 7,532 945
Purchases of loan participations -- (1,300) --
Loan originations, net of principal
repayments............................... (547) (26,488) (2,044)
Proceeds from sales of other real estate
owned.................................... 591 561 25
Additions to other real estate owned....... -- (68) (38)
Purchases of bank premises and equipment... (508) (2,860) (991)
Net cash used in investing activities.. (24,687) (22,569) (13,766)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits................... 3,831 1,627 51,539
Proceeds from issuance of other borrowings 27,243 23,167 3,000
Repayment of other borrowings.............. (6,923) (27,461) (2,886)
Issuance of common stock................... 289 246 211
Dividends paid on common stock............. (715) (586) (528)
Net cash provided by (used in)
financing activities..................... 23,725 (3,007) 51,336
Net increase (decrease) in cash and cash
equivalents................................. 7,321 (34,770) 40,832
Cash and cash equivalents at beginning of
year........................................ 12,374 47,144 6,312
Cash and cash equivalents at end of year...... $ 19,695 $ 12,374 $ 47,144
Supplemental disclosures of cash flow
information:
Interest paid on deposits and borrowings... $ 10,667 $ 10,368 $ 7,785
Income taxes paid.......................... $ 897 $ 475 $ 755
Transfers of loans to other real estate
owned................................... $ 73 $ 163 $ 999
Transfers of securities from the
investment security portfolio to the
available for sale portfolio............. $ 24,027 $ -- $ 32850
Securitization of residential mortgage
loans.................................... $ -- $ -- $ --
Transfers of loans to held for sale........ $ -- $ 10,118 $ --
(1) The components of the purchase of Royal Oak Savings Bank (purchase
price of $7.8 million) are included in the respective categories in
the cash flows statement.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected in the consolidated
financial statements of Monocacy Bancshares, Inc. and subsidiary (the
"Company") conform to generally accepted accounting principles and
prevailing practices within the banking industry. Certain reclassifications
have been made to 1996 and 1995 amounts to conform with the presentation
for 1997.
ORGANIZATION
The Company was formed on October 1, 1993, and is a Maryland Corporation
chartered as a Bank Holding Company. The Company holds all the issued and
outstanding shares of common stock of Taneytown Bank & Trust Company (the
"Bank"). The Bank is a Maryland trust company, originally established in
1884, which engages in general commercial banking operations. Deposits in
the Bank are insured by the Federal Deposit Insurance Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company,
including Taneytown Bank & Trust Company, its principal subsidiary. All
significant intercompany balances and transactions have been eliminated.
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.
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks and federal funds sold.
FEDERAL FUNDS SOLD/PURCHASED
Federal funds sold and purchased are carried at cost which approximates
fair value and are generally sold and purchased for one day periods.
LOANS HELD FOR SALE
Loans held for sale are those loans which management does not intend to
hold until maturity. Loans held for sale are carried at the lower of cost
or market with adjustments recorded as a component of income. Gains or
losses on the disposition of loans held for sale are computed using the
specific identification method.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are those securities which management does
not have the ability and intent to hold until maturity. Securities
available for sale may be sold in response to changes in interest rates,
for liquidity needs or for tax planning purposes and are carried at fair
value with unrealized holding gains or losses, net of the related tax
effect, excluded from earnings and reported as a separate component of
stockholders' equity until realized. Gains or losses on the disposition of
securities available for sale are computed using the specific
identification method.
INVESTMENT SECURITIES
Investment securities are those securities which management has the ability
and intent to hold to maturity. Investment securities are stated at cost
adjusted for amortization of premiums and accretion of discounts. Gains or
losses on the disposition of investment securities are computed using the
specific identification method.
LOANS
Loans are stated at the current amount of unpaid principal, reduced by
unearned income, net deferred origination fees and the allowance for loan
losses. Unearned income consists of commitment and origination fees, net of
origination costs and is generally recognized as income over the commitment
and loan periods using the interest method. Interest on loans is accrued
based upon the principal amount outstanding. Loans are placed on
non-accrual status when management believes, after considering economic and
business conditions and collection efforts and in the absence of adequate
collateral, that collection is questionable. At that time, interest is
recognized on a cash basis only after all principal has been recovered. A
loan is only returned to accrual status when it becomes current as to
payment of both principal and interest and the borrower demonstrates the
ability to pay and remain current.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance when
management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. While management uses available information to recognize losses
on loans, future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgements about
information available to them at the time of their examinations.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed over the estimated useful lives
using the straight-line method.
OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower cost or
estimated fair value on the date acquired and at the lower of cost or
estimated fair value less selling costs thereafter. Losses included at the
time of acquisition of the property are charged to the allowance for loan
losses. Subsequent write-downs are included in other non-interest expense.
Rental income and expenses are included in other operating non-interest
expense.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are valued using the aggregate method of
determining the lower of cost or market value and are amortized over the
remaining life of the loans serviced. Servicing rights are periodically
reviewed for impairment with any required adjustment to market value made
at the time of review.
PER SHARE DATA
The Company adopted Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings Per Share," ("SFAS No. 128") in 1997. Accordingly, Basic
Earnings Per Share are based on the average shares outstanding, giving
retroactive effect to stock dividends and Diluted Earnings Per Share and
dividends per share are based on the average shares outstanding adjusted by
any common stock equivalents, giving retroactive effect to stock dividends.
ORGANIZATION COSTS
Organization costs are capitalized and amortized on a straight-line basis
over five years.
CORE DEPOSIT INTANGIBLE
The core deposit intangible acquired in connection with the Royal Oak
acquisition is being amortized over the estimated remaining life of the
intangible, which has been determined to be 10 years at December 31, 1997.
TRUST ASSETS AND INCOME
Assets (other than cash deposits) held by the Company for others under
fiduciary and agency relationships are not included in the accompanying
balance sheets since they are not assets of the Company. Trust department
fees are accounted for on the cash basis. Amounts recognized under this
method are not significantly different from amounts that would have been
recognized on the actual basis.
On September 22, 1997, the Bank entered into a service agreement with
TrustCorp America (the "Trust Company") for the Trust Company to provide
trust services to the Bank's existing trust customers as successor
fiduciary and to provide ongoing service through operation of a referral
program for future trust business.
INCOME TAXES
The provision for income taxes is based upon the results of operations,
adjusted for tax-exempt income and other differences between items of
income or expenses reported in the financial statements and those reported
for income tax purposes. Deferred income taxes are provided to give effect
to temporary differences between financial statement carrying amounts and
the tax bases of assets and liabilities.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances through cash or
reserves with the Federal Reserve Bank or in other commercial banks. The
amount of these reserves, calculated based on percentages of certain
deposit balances, was $1,004 at December 31, 1997.
3. SECURITIES AVAILABLE FOR SALE
The Available for Sale ("AFS") portfolio is generally comprised of somewhat
shorter term investment securities and other securities the Company feels
it may sell in response to changes in interest rates or liquidity needs.
Securities available for sale are carried at fair value. Net unrealized
holding gains and losses on securities available for sale are reported as a
separate component of stockholders' equity, net of related income taxes. In
1995, the FASB granted a one time exemption from the restrictions on
transferring securities between various portfolios. The Company took
advantage of this opportunity to transfer approximately $33 million in
securities previously held in the Held to Maturity ("HTM") portfolio to the
AFS portfolio. In 1997, due to a change in the Company's business focus,
the Company transferred its remaining HTM portfolio to the AFS portfolio.
Securities available for sale are summarized as follows at December 31:
1997
GROSS UNREALIZED
AMORTIZED HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------------- ----------
U.S. Government agency.......... $31,480 $ 66 $ 91 $31,455
State and municipal bonds....... 33,445 622 8 34,059
Mortgage-backed securities...... 25,809 21 365 25,465
Equity securities............... 4,335 -- 150 4,185
$95,069 $709 $614 $95,164
1996
GROSS UNREALIZED
AMORTIZED HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------------- ----------
U.S. Government agency.......... $21,984 $ -- $ 263 $21,721
State and municipal bonds....... 5,339 18 8 5,349
Mortgage-backed securities...... 17,122 -- 750 16,372
Equity securities............... 2,644 -- 168 2,476
$47,089 $18 $1,189 $45,918
Securities available for sale with a carrying value of $4,973 and $4,630 at
December 31, 1997 and 1996, respectively, were pledged as collateral for
certain liabilities as required by law. In addition, securities available
for sale with a carrying value of $26,482 and $12,847 at December 31, 1997
and 1996, respectively, were pledged as collateral for certain borrowing
arrangements of the Company.
The amortized cost and fair value of securities available for sale by
contractual maturity, at December 31, 1997 and 1996, are shown below.
Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1997 1996
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
Due within one year.............. $ 1,080 $ 1,082 $ 1,000 $ 998
Due after one through five years. 27,014 26,955 15,102 14,996
Due after five through ten years. 30,733 31,233 11,221 11,076
Due after ten years.............. 6,098 6,244 -- --
Mortgage-backed securities....... 25,809 25,465 17,122 16,372
Equity securities................ 4,335 4,185 2,644 2,476
$95,069 $95,164 $47,089 $45,918
Proceeds from sales of securities available for sale were $22,495 in 1997
with gains of $90 and losses of $3. Proceeds from sales of securities
available for sale were $34,984 in 1996 with gains of $31 and losses of
$251.
4. INVESTMENT SECURITIES
Investment securities are summarized as follows at December 31, 1996:
GROSS UNREALIZED
AMORTIZED HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------------- ----------
State and municipal bonds..... $24,042 $ 56 $ 238 $23,860
Investment securities with an amortized cost of $197 at December 31, 1996
were pledged as collateral for certain liabilities as required by law.
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1996 are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Due after five through ten years............. $11,510 $11,452
Due after ten years.......................... 12,532 12,408
$24,042 $23,860
5. LOANS
Major classifications of loans are as follows at December 31:
1997 1996
---- ----
Real Estate:
Commercial mortgages...................... $ 66,995 $ 69,947
Residential mortgages..................... 24,837 20,477
Construction and land development......... 29,187 28,695
Commercial................................... 18,208 22,582
Consumer..................................... 19,065 17,546
Total loans 158,292 159,247
Less:
Unearned income........................... (37) (457)
Allowance for loan losses................. (2,539) (2,100)
$155,716 $156,690
The Company has placed on non-accrual status loans totaling $1,961 at
December 31, 1997, $793 at December 31, 1996 and $1,258 at December 31,
1995. Gross interest income that would have been recognized had the loans
performed in accordance with original terms was $247 in 1997, $257 in 1996
and $190 in 1995. Interest income on these loans included in the results of
operations was $100 in 1997, $127 in 1995 and none in 1996.
Changes in the allowance for loan losses were as follows for the years
ended December 31:
1997 1996 1995
---- ---- ----
Balance at January 1.................. $2,100 $1,904 $1,902
Provision for loan losses............. 1,110 300 885
Recoveries............................ 32 218 57
Loans charged off..................... (703) (322) (940)
Balance at December 31................ $2,539 $2,100 $1,904
Effective January 1, 1996, the Company adopted FASB Statements No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures ("SFAS 118"). In accordance with SFAS 114, impaired loans
are measured and reported based on the present value of expected cash flows
discounted at the loan's effective interest rate, or at the fair value of
the loan's collateral if the loan is deemed "collateral dependent." A
valuation allowance is required to the extent that the measure of the
impaired loans is less than the recorded investment.
Impaired loans are specifically reviewed loans for which it is probable
that the creditor will be unable to collect all amounts due according to
the terms of the loan agreement. The specific factors that influence
management's judgment in determining when a loan is impaired include
evaluation of the financial strength of the borrower and the fair value of
the collateral. A specifically reviewed loan is not impaired during a
period of "minimum delay" in payment, regardless of the amount of the
shortfall, if the ultimate collectibility of all amounts due is expected.
The Company defines "minimum delay" as past due less than 90 days.
SFAS 114 does not apply to larger groups of homogenous loans such as
consumer installment and real estate mortgage loans, which are collectively
evaluated for impairment. Impaired loans are therefore primarily business
loans which include commercial loans and income property and construction
real estate loans. The Company applies the measurement methods described
above to these loans on a loan-by-loan basis. Smaller balance populations
of business loans, which are not specifically reviewed in accordance with
normal credit review procedures, are also excluded from the applications of
SFAS 114. Most impaired loans are non-accrual loans, as generally loans are
placed on non-accrual status on the earlier of the date that principal or
interest amounts are 90 days or more past due or the date that collection
of such amounts is judged uncertain based on an assessment of
collectibility.
Impaired loans at December 31, 1997 and 1996 amounted to $1,961 and $793,
respectively. There was no valuation allowance for impaired loans at
December 31, 1997 or 1996 as the amount by which the measure of the
impaired loans were less than the recorded investment in the loans was
charged off in 1997 and 1996 for all impaired loans held in 1997 and 1996.
Average impaired loans for 1997 and 1996 amounted to $1,914 and $1,230,
respectively. No interest was recognized during the time period that any
loan was impaired as any cash received on such loans was applied to the
loan as a principal reduction.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of customers.
These financial instruments include commitments to extend credit, available
credit lines and letters of credit. Outstanding loan commitments, unused
lines and letters of credit are summarized as follows at December 31:
1997 1996
---- ----
Loan Commitments:
Commercial mortgage loans......................... $ 8,965 $ 3,075
Residential mortgage loans........................ 3,453 898
Commercial loans.................................. 1,713 9,916
$14,131 $13,889
Unused lines of cr
Construction and land development................. $14,192 $ 9,006
Commercial........................................ 9,916 12,991
Home-equity....................................... 13,776 15,138
Other consumer.................................... 1,621 1,366
$39,505 $38,501
Letters of credit.................................... $ 3,196 $ 3,026
Loan commitments and lines of credit are agreements to lend to a customer
as long as there is no violation of any condition to the contract. Loan
commitments generally have interest rates fixed at current market amounts,
fixed expiration dates and may require payment of a fee. Lines of credit
generally have variable interest rates. Since many of the commitments and
lines of credit are expected to expire without fully drawn, the available
amounts do not necessarily represent future cash requirements. Letters of
credits are commitments issued to guarantee the performance of a customer
to a third party.
Loan commitments, lines and letters of credit are made on the same terms,
including collateral requirements, as outstanding loans. The contractual
amount of these instruments represents the Company's potential exposure to
loss in the event of non-performance by the other party after the
commitment has been fulfilled by the Company.
7. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows at December 31:
1997 1996
---- ----
Land................................................. $ 888 $ 863
Buildings............................................ 5,663 5,585
Equipment............................................ 4,914 4,562
Leasehold improvements............................... 1,117 703
Construction in progress............................. 102 477
12,684 12,190
Accumulated depreciation and amortization............ (4,513) (3,755)
$8,171 $8,435
Depreciation and amortization expense for bank premises and equipment was
$774, $658 and $607 for 1997, 1996 and 1995, respectively. Amortization
expense for intangible assets was $183, $135 and $21 for 1997, 1996 and
1995, respectively.
8. BORROWINGS
Information with respect to borrowings is as follows for the years ended
December 31:
1997 1996 1995
---- ---- ----
Amount outstanding at year-end:
Federal funds purchased................ $ -- $ -- $ --
FHLB advances.......................... 34,571 14,739 16,633
Term note.............................. -- -- 3,000
Treasury tax & loan note............... 1,087 600 --
Weighted average interest rate at year end:
Federal funds purchased................ -- % -- % -- %
FHLB advances.......................... 5.89 % 5.84 % 5.50 %
Term note.............................. -- % -- % 8.50 %
Treasury tax & loan note............... 5.25 % 5.40 % -- %
Maximum outstanding at any month-end:
Federal funds purchased................ $ 2,650 $5,750 $4,500
FHLB advances.......................... 34,660 24,429 18,356
Term note.............................. -- 2,917 3,000
Treasury tax & loan note............... 1,087 745 --
Average outstanding:
Federal funds purchased................ $ 640 $1,727 $1,300
FHLB advances.......................... 17,614 16,756 16,950
Term note.............................. -- 931 3,000
Treasury tax & loan note............... 581 168 --
Weighted average interest rate during the year:
Federal funds purchased................ 4.55 % 5.50 % 4.20 %
FHLB advances.......................... 5.47 % 5.80 % 5.26 %
Term note.............................. -- % 8.50 % 8.50 %
Treasury tax & loan note............... 3.57 % 5.13 % -- %
The Company had borrowings from the Federal Home Loan Bank ("FHLB") of
$34,571 at December 31, 1997 and $14,739 at December 31, 1996. The
borrowings mature in varying amounts through 2007 and have an interest rate
of 5.89% at December 31, 1997. The advances are collateralized by certain
real estate loans with a carrying value of $14,566 and investment
securities available for sale with a book value of $26,482 at December 31,
1997. The Company may borrow up to $45,000,000 under this line of credit at
interest rates set periodically by the lender.
The principal maturities of the FHLB advances at December 31, 1997, were:
1998........................... $14,823
1999........................... --
2000........................... 1,650
2001........................... --
2002........................... 15,000
Thereafter..................... 3,098
$34,571
The Company was required to purchase shares of the capital stock of the
FHLB as additional collateral for the advances as a condition to obtaining
the line of credit. The amount invested in their capital stock was $3,314
at December 31, 1997 and $1,623 at December 31, 1996, and is carried in the
securities available for sale portfolio.
In anticipation of the cash outlay required for the acquisition of Royal
Oak, in December 1995, the Company borrowed $3,000,000 from another
commercial bank. The loan was repaid in April of 1996.
9. PENSION AND PROFIT SHARING PLANS
The Company has a contributory thrift plan qualifying under Section 401(k)
of the Internal Revenue Code. Employees with six months of service of
eligible for participation in the plan. The Company matches the employee's
contribution up to 50% of the first 6% of employee contributions. The
Company's contributions to this plan, included in employee benefits
expenses, were $75 for 1997, $61 for 1996 and $60 for 1995.
The Company has agreements with certain of its executive officers to
provide certain supplemental retirement benefits upon retirement. The
benefits to be paid by the Company upon retirement are being accrued over
the number of years remaining to retirement date and in accordance with the
plan vesting arrangements. The amounts included in operating expenses were
$52 for 1997, $74 for 1996 and $79 for 1995.
10. INCOME TAXES
The provision for income taxes is composed of the following for the years
ended December 31:
1997 1996 1995
------ ------- ------
Current......................................
Federal................................... $ 364 $ 597 $ 716
State..................................... (81) (88) 52
Deferred..................................... (143) 29 114
------ ------- ------
Provision for income taxes................... $ 140 $ 538 $ 882
------ ------- ------
The deferred tax effects of timing differences between financial and
taxable income are as follows for the years ended December 31:
1997 1996 1995
------ ------- ------
Provision for loan losses.................... $ (169) $ (75) $ (10)
Depreciation................................. 42 60 12
Deferred compensation plans.................. 5 (7) (13)
Loan fees and costs.......................... 118 (64) 89
Mortgage servicing rights.................... 91 87 30
Other........................................ 56 28 6
------ ------- ------
$ 143 $ 29 $ 114
------ ------- ------
Net deferred tax assets consisted of the following at December 31:
1997 1996
-------- -------
Deferred tax assets:
Provision for loan losses....................... $ 838 $ 668
Deferred compensation plans..................... 145 150
Loan fees and costs............................. 35 153
Intangible assets............................... 114 55
Deferred losses on securities available for sale -- 398
Other........................................... 244 99
-------- -------
Total deferred tax assets.................... $ 1,376 $ 1,523
-------- -------
Deferred tax liabilities:
Depreciation.................................... 346 304
Mortgage servicing rights....................... 208 117
Deferred gains on securities available for sale. 24 --
Other........................................... 27 203
-------- -------
Total deferred tax liabilities............... 605 624
-------- -------
Net deferred tax asset....................... $ 771 $ 899
-------- -------
The provisions for taxes on income are at effective rates of 6.2%, 25.0%
and 27.3% as follows:
1997 1996 1995
------ ------- ------
Statutory federal income tax rate............ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income......................... (22.5) (7.5) (8.9)
State income taxes, net of federal income (3.4) (2.7) 1.4
taxes........................................
Other..................................... (1.9) 1.2 .8
------ ------- ------
6.2% 25.0% 27.3%
------ ------- ------
11. RELATED PARTY TRANSACTIONS
Certain members of the Board of Directors and senior officers had loan
transactions with the Bank. Such loans were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with unrelated customers. Loans outstanding, both direct and indirect, to
directors and senior officers totaled $2,415 and $2,287 at December 31,
1997 and 1996, respectively. During 1997, $838 of new loan advances were
made and repayments totaled $710.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Fair values for securities available
for sale and investment securities are based on quoted market prices. For
loans, interest-bearing deposits and long-term borrowings, where quoted
market prices are not available, fair values are based on estimates using
present value techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. The
Company does not normally charge fees for commitments to extend credit.
Interest rates on commitments to extend credit are normally committed for
periods of less than one month. Fees charged on standby letters of credit
and other financial guarantees are deemed to be immaterial and these
guarantees are expected to be settled at face amount or expire unused. It
is impracticable to assign any fair value to these commitments. The
estimated fair values of the Company's financial instruments are as follows
at December 31, 1997:
Carrying Fair
Value Value
-------- ---------
Assets:
Cash and due from banks......................... $ 7,081 $ 7,081
Federal funds sold.............................. 12,614 12,614
Interest-bearing deposits with other banks...... 1,184 1,184
Loans held for sale............................. 4,940 4,940
Securities available for sale................... 95,164 95,164
Loans, net...................................... 155,716 172,718
Accrued interest receivable..................... 2,152 2,152
Liabilities:
Non-interest bearing deposits................... 25,225 25,225
Interest-bearing deposits....................... 203,645 205,167
Other borrowings................................ 35,658 41,670
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently leasing five branch offices and one storage
facility under operating leases expiring from 1998 through 2007. The leases
generally provide for payment of property taxes, insurance, maintenance and
common area costs by the Company. Total rent and common area expenses for
the three years ended December 31, 1997, 1996 and 1995 were $203, $185 and
$113, respectively.
Lease obligations will require rent and common area payments as follows:
Minimum
Year Rentals
------ ----------
1998........................ $ 191
1999........................ 175
2000........................ 175
2001........................ 132
2002........................ 132
Remaining years............. 541
-----------
$ 1,346
-----------
The Bank was named as a defendant in a legal proceeding in the Circuit
Court for Baltimore City, wherein it was alleged that the Bank permitted
the improper withdrawal or transfer of funds from a deposit account
containing escrow monies at the Bank. The Bank was also alleged to have
misapplied certain sums of money by depositing them in an unrelated account
holder's deposit account. The complaint initially sought recovery against
the Bank in the amount of $482 and was later amended to seek an amount in
excess of $1 million. In January, 1998, the Bank, with the approval of the
Court, orally agreed to execute a Settlement Agreement and Mutual Release.
Under the terms, the Bank will pay $230 and release any claims against
other parties. In return, the Bank will receive a General Release from all
parties to the litigation. The Bank expects to execute the Settlement
Agreement and Mutual Release in the near future.
14. STOCK OPTIONS
The company maintains a stock option incentive plan which provides for the
granting of common stock options to certain officers of the Company. These
stock option awards contain a serial feature whereby 20% of the options are
awarded or vested each year for the next five years at the Board's
discretion. Option prices are equal to or greater than the estimated fair
market value of the common stock at the date of the grant. Options are
exercisable beginning six months from the date of grant and expire 10 years
after the date of grant.
In 1997, the Company adopted a stock option plan for the granting of common
stock options to Directors. Option prices are equal to or greater than the
estimated market value of the common stock at the date of the grant.
Options vest at 25% immediately at time of grant and then 25% per year for
the next three years. Options are exercisable beginning six months from the
date of grant and expire 10 years after the date of grant.
Information with respect to options is as follows for the year ended
December 31:
1997 1996
------------------------ -----------------------
Option Option
Price Price
Shares Range Shares Range
---------- ----------- ---------- ----------
Outstanding at beginning 26,983 $17.28-18.60 19,734 $17.28
of year..................
Granted............ 49,038 18.18-20.68 8,899 17.48-18.60
Exercised.......... -- -- (220) 20.91
Expired/canceled... (484) 19.23-20.00 (1,430) 19.01
Outstanding at end of 75,537 17.28-20.68 26,983 17.28-18.60
year.....................
Exercisable.............. 37,037 17.28-20.68 26,983 17.28-18.60
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1997:
1997 1996
-------------- ------------
Dividend yield............................ -- --
Expected volatility....................... 15% 15%
Risk-free interest rate................... 5.909% 5.106%
Expected lives............................ 10 years 10 years
The company has adopted the disclosure-only provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plans. No compensation expense
related to the Plans was recorded during the two years ended December 31,
1997. If the Company had elected to recognize compensation cost based on
the fair value at the grant dates for awards under the Plans consistent
with the method prescribed by SFAS 123, net income and earnings per share
would have been changed to the pro forma amounts as follows for the years
ended December 31:
1997 1996
-------------- ------------
Net income................................ $1,478 $1,564
Earnings per share-basic.................. $ .82 $ .87
Earnings per share-diluted................ $ .81 $ .86
15. NET INCOME PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, which became effective for
the Company for reporting periods ending after December 15, 1997. Under the
provisions of SFAS No. 128, primary and fully-diluted earnings per share
were replaced with basic and diluted earnings per share in an effort to
simplify the computation of these measures and align them more closely with
the methodology used internationally. Basic earnings per share is arrived
at by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding and does not include
the impact of any potentially dilutive common stock equivalents. The
diluted earnings per share calculation method is arrived at by dividing net
income by the weighted-average number of shares outstanding, adjusted for
the dilutive effect of outstanding stock options and warrants. For purposes
of comparability, all prior-period earnings per share data have been
restated. All per share data and share amounts below have been adjusted to
give retroactive effect to the 10% stock dividends issued in 1996, 1997 and
1998.
The calculation of net income per common share follows for the years
ended December 31,
1997 1996 1995
-------- -------- --------
Basic:
Net income (applicable to common
stock).................................. $2,118 $1,611 $2,351
Average common shares outstanding..... 1,786 1,771 1,762
Basic net income per share............ $ 1.19 $ 0.91 $ 1.33
Diluted:
Net income (applicable to common $2,118 $1,611 $2,351
stock)..................................
Average common shares outstanding..... 1,786 1,771 1,762
Stock option adjustment............... 33 22 14
Average common shares outstanding - 1,819 1,793 1,776
diluted.................................
Diluted net income per share.......... $ 1.16 $ 0.90 $ 1.32
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
present in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provisions
------------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk
weighted assets):
Consolidated............ $22,597 12.35% $14,634 8.00% $18,293 10.00%
Taneytown Bank & Trust 22,510 12.31% 14,631 8.00% 18,289 10.00%
Company....................
Tier I capital (to risk weighted assets):
Consolidated............ 20,308 11.10% 7,317 4.00% 10,976 6.00%
Taneytown Bank & Trust 20,221 11.06% 7,315 4.00% 10,973 6.00%
Company....................
Tier I capital (to average assets):
Consolidated............ 20,308 7.00% 11,603 4.00% 14,504 5.00%
Taneytown Bank & Trust 20,221 6.97% 11,601 4.00% 14,501 5.00%
Company....................
As of December 31, 1996:
Total capital (to risk
weighted assets):
Consolidated............ 20,509 11.49% 14,285 8.00% 17,857 10.00%
Taneytown Bank & Trust 20,528 11.50% 14,284 8.00% 17,855 10.00%
Company....................
Tier I capital (to risk weighted assets):
Consolidated............ 18,409 10.31% 7,143 4.00% 10,714 6.00%
Taneytown Bank & Trust 18,428 10.32% 7,142 4.00% 10,713 6.00%
Company....................
Tier I capital (to average assets):
Consolidated............ 18,409 7.03% 10,467 4.00% 13,084 5.00%
Taneytown Bank & Trust 18,428 7.04% 10,465 4.00% 13,082 5.00%
Company....................
</TABLE>
17. ACQUISITION
On December 31, 1995, the Company purchased Royal Oak Savings Bank as a
subsidiary of Monocacy Bancshares, Inc. The transaction was accounted for
as a purchase and the results of operations for the year 1995 properly do
not include any income from Royal Oak. Royal Oak's condensed balance sheet
as of the date of the acquisition as valued under purchase accounting was
as follows:
Cash and investments............ $ 45,398
Loans, net...................... 451
Property, plant and equipment... 510
Other, assets................... 646
$ 47,005
Deposits........................ $ 38,733
Other Liabilities............... 517
Capital......................... 7,755
$ 47,005
The purchase price of $7.8 million included a deposit premium paid of $3.6
million and a mortgage servicing premium paid of $281. The purchase price
of the assets and costs associated were approximately equal to the
liabilities assumed and no goodwill was recorded in the transaction.
18. SUBSEQUENT EVENT
On February 17, 1998, the company distributed a 10% stock dividend which
increased shares outstanding by approximately 163,000.
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Monocacy Bancshares, Inc. (parent
company only) is as follows as of and for the years ended December 31:
CONDENSED BALANCE SHEETS 1997 1996
---------- ------------
Assets
Cash and due from Bank Subsidiary.......... $ 224 $ 205
Securities available for sale.............. 20 20
Investment in subsidiary................... 24,064 21,637
Other assets............................... 39 30
Total assets $24,347 $21,892
Liabilities and Stockholders' Equity
Liabilities:
Other Liabilities....................... $ 179 $ 244
Total Liabilities...................... 179 244
Stockholders' equity:
Common stock............................ 8,143 7,342
Common stock dividend to be distributed. 4,034 3,699
Surplus................................. 11,863 9,145
Retained earnings....................... 128 1,462
Total stockholders' equity............. 24,168 21,648
Total liabilities and stockholders' equity... $ 24,347 $ 21,892
CONDENSED STATEMENTS OF INCOME 1997 1996 1995
Interest on investments securities........... $ 1 $ 1 $ 12
Interest expense on borrowings............... -- 101 --
Net interest income........................ 1 (100) 12
Cash dividends from subsidiaries............. 600 1,759 2,393
Operating expenses........................... 107 82 64
Income before income tax expense and
equity in undistributed net
income of subsidiaries.................. 494 1,577 2,341
Income tax benefit............................ (34) (34) (10)
Income before equity in undistributed
net income of subsidiaries............. 528 1,611 2,351
Equity in undistributed net income of
subsidiaries................................ 1,590 -- --
Net income................................. $2,118 $1,611 $2,351
CONDENSED STATEMENTS OF CASH FLOWS 1997 1996 1995
Cash flows from operating activities:
Net income................................. $ 2,118 $1,611 $2,351
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries............................. (1,590) -- --
(Increase) decrease in other assets........ (10) 142 (134)
Decrease in accrued interest receivable.... -- -- 4
Increase (decrease) in other liabilities... (73) (39) 6
Net cash provided by operating
activities............................ 445 1,714 2,227
Cash flows from investing activities:
Purchases of securities available for sale.. -- (4) (16)
Maturities of investment securities......... -- 200
Distribution of undivided profits of Bank
subsidiary............................... -- 868 3,468
Investment in Savings Bank subsidiary....... -- -- (7,755)
Net cash provided by (used in)
investing activities................... -- 864 (4,103)
Cash flows from financing activities:
Issuance of common stock.................... 289 246 211
Dividends paid.............................. (715) (586) (528)
Proceeds from issuance of debt.............. -- -- 3,000
Repayments of debt.......................... -- (3000) --
Net cash provided by (used in)
financing activities................... (426) (3,340) 2,683
Net increase (decrease) in cash and cash
equivalents............................... 19 (762) 807
Cash and cash equivalents at beginning of
year...................................... 205 967 160
Cash and Cash equivalents at end of year..... $ 224 $ 205 $ 967
Under certain state and federal banking regulations, the Bank may
declare cash dividends to Monocacy Bancshares, Inc., from undivided
profits, or with prior approval of the Maryland Bank Commissioner, out of
surplus in excess of 100% of its capital stock, after providing for certain
expenses.
Exhibit 99.1(b)
PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)
The following statements set forth certain selected condensed
financial information for Monocacy and F&M Bancorp on an unaudited pro
forma combined basis giving effect to the Merger as if the Merger had
become effective on September 30, 1998, in the case of the balance sheet
information presented, and as if the Merger had become effective on January
1, 1995, in the case of the income statement information presented. The pro
forma information in the statements assumes that the Merger is accounted
for using the pooling of interests method of accounting. Financial
information for the nine months ended September 30, 1998 and 1997 combine
Monocacy and F&M Bancorp with F&M Bancorp's interim results presented to
coincide with the reporting period of Monocacy. These statements should be
read in conjunction with, and are qualified in their entirety by, the
historical financial statements.
The pro forma condensed combined financial statements do not give
effect to the anticipated cost savings and revenue enhancement
opportunities that could result from the Merger, and do not purport to be
indicative of the combined financial position or results of operations of
future periods.
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from Banks 52,511 11,982 64,493
Federal funds sold - 20,732 20,732
---------- ---------- ---------- ----------
Total cash and cash equivalents 52,511 32,714 - 85,225
Loans held for sale 466 2,680 3,146
Investment securities
Held-to-maturity 100,351 - 100,351
Available-for-sale, at fair value 195,016 87,205 282,221
---------- ---------- ---------- ----------
Total investment securities 295,367 87,205 - 382,572
Loans, net of unearned income 714,373 169,407 883,780
Less: Allowance for credit losses (9,865) (2,615) (12,480)
---------- ---------- ---------- ----------
Net loans 704,508 166,792 - 871,300
Bank premises and equipment, net 23,595 8,067 31,662
Other assets 30,124 5,747 35,871
---------- ---------- ---------- ----------
Total assets 1,106,571 303,205 - 1,409,776
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Deposits
Noninterest bearing 109,674 29,347 139,021
Interest-bearing 739,511 207,790 947,301
---------- ---------- ---------- ----------
Total deposits 849,185 237,137 - 1,086,322
Federal funds purchased & securities
sold under agreement to repurchase 56,820 - 56,820
Other short-term borrowings 1,866 287 2,153
Advance from the Federal Home Loan
Bank of Atlanta 82,150 33,317 115,867
Accrued interest and other liabilities 10,415 5,946 16,361
---------- ---------- ---------- ----------
Total liabilities 1,000,436 277,087 - 1,277,523
Shareholders' Equity
Common Stock 31,993 8,995 2,345 43,333
Surplus 48,648 15,359 (2,345) 61,662
Retained earnings 24,973 1,570 26,543
Net unrealized loss on securities
available for sale 521 194 715
---------- ---------- ---------- ----------
Total shareholders' equity 106,135 26,118 - 132,253
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity 1,106,571 303,205 - 1,409,776
========== ========== ========== ==========
</TABLE>
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOMES
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 46,565 $ 11,476 $ 58,041
Interest and dividends on investment
securities:
Taxable 7,975 3,688 11,663
Tax-exempt 2,609 706 3,315
Interest on deposits with banks 482 43 525
Interest on federal funds sold 343 287 630
---------- ---------- ---------- ----------
Total interest income 57,974 16,200 - 74,174
Interest expense:
Interest on deposits 21,904 7,198 29,102
Interest on federal funds purchased
and securities sold under
agreements to repurchase 1,723 27 1,750
Interest on advances from the FHLB
of Atlanta 2,528 1,458 3,986
Interest on other borrowings 110 15 125
---------- ---------- ---------- ----------
Total interest expense 26,265 8,698 - 34,963
---------- ---------- ---------- ----------
Net interest income 31,709 7,502 - 39,211
Provision for credit losses 1,575 206 1,781
---------- ---------- ---------- ----------
Net interest income after provision
for credit loses 30,134 7,296 37,430
Noninterest income:
Trust income 1,999 74 2,073
Service charges on deposit account 3,938 496 4,434
Net gains on sales of loans 570 991 1,561
Net gains on sales of property 422 -- 422
Other operating income 4,978 1,530 6,508
---------- ---------- ---------- ----------
Total Noninterest income 11,907 3,091 - 14,998
Noninterest expense:
Salaries and employee benefits 15,414 4,355 19,769
Occupancy and equipment expense 4,794 1,176 5,970
Other operating expense 8,109 1,760 9,869
---------- ---------- ---------- ----------
Total noninterest expense 28,317 7,291 - 35,608
---------- ---------- ---------- ----------
Income before provision for income
taxes 13,724 3,096 - 16,820
Provision for income taxes 4,033 753 4,786
---------- ---------- ---------- ----------
Net income $ 9,691 $ 2,343 $ - $ 12,034
========== ========== ========== ==========
Earnings per Common Share - Basic:
Net Income $ 1.52 $ 1.30 $ 1.39
Weighted average number of shares 6,383,489 1,797,769 470,021 8,651,279
Earnings per Common Share - Diluted:
Net income $ 1.50 $ 1.27 $ 1.38
Weighted average number of shares 6,458,834 1,846,923 420,867 8,726,624
</TABLE>
<TABLE>
<CAPTION>
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOMES
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except per share amounts)
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 45,007 $ 11,907 $ 56,914
Interest and dividends on investment
securities:
Taxable 8,263 2,256 10,519
Tax-exempt 2,555 1,022 3,577
Interest on deposits with banks 193 15 208
Interest on federal funds sold 37 70 107
---------- ---------- ---------- ----------
Total interest income 56,055 15,270 - 71,325
Interest expense:
Interest on deposits 20,819 7,136 27,955
Interest on federal funds purchased
and securities sold under
agreements to repurchase 1,656 26 1,682
Interest on advances from the FHLB
of Atlanta 2,784 562 3,346
Interest on other borrowings 112 16 128
---------- ---------- ---------- ----------
Total interest expense 25,371 7,740 - 33,111
---------- ---------- ---------- ----------
Net interest income 30,684 7,530 - 38,214
Provision for credit losses 1,350 1,060 2,410
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 29,334 6,470 35,804
Noninterest income:
Trust income 1,834 118 1,952
Service charges on deposit account 3,890 430 4,320
Net gains on sales of loans 185 877 1,062
Net gains on sales of property 18 - 18
Other operating income 5,879 710 6,589
---------- ---------- ---------- ----------
Total Noninterest income 11,806 2,135 - 13,941
Noninterest expense:
Salaries and employee benefits 15,044 4,161 19,205
Occupancy and equipment expense 4,695 1,124 5,819
Other operating expense 8,403 1,620 10,023
---------- ---------- ---------- ----------
Total noninterest expense 28,142 6,905 - 35,047
---------- ---------- ---------- ----------
Income before provision for income
taxes 12,998 1,700 - 14,698
Provision for income taxes 3,959 63 4,022
---------- ---------- ---------- ----------
Net income $ 9,039 $ 1,637 $ - $ 10,676
========== ========== ========== ==========
Earnings per Common Share - Basic:
Net Income $ 1.43 $ 0.92 $ 1.24
Weighted average number of shares 6,332,750 1,784,166 483,624 8,600,540
Earnings per Common Share - Diluted:
Net income $ 1.42 $ 0.90 $ 1.23
Weighted average number of shares 6,381,899 1,813,125 454,665 8,649,689
</TABLE>
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOMES
(UNAUDITED)
FOR THE YEAR DECEMBER 31, 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 60,782 $ 15,982 $ 76,764
Interest and dividends on investment
securities:
Taxable 11,028 3,245 14,273
Tax-exempt 3,385 1,356 4,741
Interest on deposits with banks 293 46 339
Interest on federal funds sold 53 227 280
---------- ---------- ---------- ----------
Total interest income 75,541 20,856 - 96,397
Interest expense:
Interest on deposits 28,025 9,558 37,583
Interest on federal funds purchased
and securities sold under
agreements to repurchase 2,236 28 2,264
Interest on advances from the FHLB
of Atlanta 3,827 1,080 4,907
Interest on other borrowings 169 21 190
---------- ---------- ---------- ----------
Total interest expense 34,257 10,687 - 44,944
---------- ---------- ---------- ----------
Net interest income 41,284 10,169 - 51,453
Provision for credit losses 1,800 1,110 2,910
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 39,484 9,059 - 48,543
Noninterest income:
Trust income 2,594 121 2,715
Service charges on deposit account 5,255 600 5,855
Net gains on sales of loans 278 1,143 1,421
Net gains on sales of property 17 -- 17
Other operating income 7,302 986 8,288
---------- ---------- ---------- ----------
Total Noninterest income 15,446 2,850 - 18,296
Noninterest expense:
Salaries and employee benefits 19,214 5,626 24,840
Occupancy and equipment expense 6,051 1,498 7,549
Other operating expense 12,446 2,527 14,973
---------- ---------- ---------- ----------
Total noninterest expense 37,711 9,651 - 47,362
---------- ---------- ---------- ----------
Income before provision for income
taxes 17,219 2,258 - 19,477
Provision for income taxes 5,111 140 5,251
---------- ---------- ---------- ----------
Net income $ 12,108 $ 2,118 $ - $ 14,226
========== ========== ========== ==========
Earnings per Common Share - Basic:
Net Income $ 1.91 $ 1.19 $ 1.65
Weighted average number of shares 6,337,870 1,785,754 482,036 8,605,660
Earnings per Common Share - Diluted:
Net income $ 1.89 $ 1.16 $ 1.64
Weighted average number of shares 6,393,849 1,818,854 448,936 8,661,639
</TABLE>
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOMES
(UNAUDITED)
FOR THE YEAR DECEMBER 31, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 56,357 $ 14,043 $ 70,400
Interest and dividends on investment
securities:
Taxable 10,216 3,823 14,039
Tax-exempt 3,614 1,529 5,143
Interest on deposits with banks 240 52 292
Interest on federal funds sold 453 146 599
---------- ---------- ---------- ----------
Total interest income 70,880 19,593 - 90,473
Interest expense:
Interest on deposits 27,952 9,251 37,203
Interest on federal funds purchased
and securities sold under
agreements to repurchase 1,813 95 1,908
Interest on advances from the FHLB
of Atlanta 2,381 1,072 3,453
Interest on other borrowings 150 3 153
---------- ---------- ---------- ----------
Total interest expense 32,296 10,421 - 42,717
---------- ---------- ---------- ----------
Net interest income 38,584 9,172 - 47,756
Provision for credit losses 1,522 300 1,822
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 37,062 8,872 - 45,934
Noninterest income:
Trust income 1,806 150 1,956
Service charges on deposit account 4,684 438 5,122
Net gains on sales of loans 323 864 1,187
Net gains on sales of property 140 -- 140
Other operating income 5,991 587 6,578
---------- ---------- ---------- ----------
Total Noninterest income 12,944 2,039 - 14,983
Noninterest expense:
Salaries and employee benefits 17,647 5,087 22,734
Occupancy and equipment expense 5,646 1,340 6,986
Other operating expense 15,265 2,335 17,600
---------- ---------- ---------- ----------
Total noninterest expense 38,558 8,762 - 47,320
---------- ---------- ---------- ----------
Income before provision for income
taxes 11,448 2,149 - 13,597
Provision for income taxes 2,658 538 3,196
---------- ---------- ---------- ----------
Net income $ 8,790 $ 1,611 $ - $ 10,401
========== ========== ========== ==========
Earnings per Common Share - Basic:
Net Income $ 1.39 $ 0.91 $ 1.21
Weighted average number of shares 6,309,620 1,771,177 496,613 8,577,410
Earnings per Common Share - Diluted:
Net income $ 1.38 $ 0.90 $ 1.21
Weighted average number of shares 6,358,497 1,792,563 475,227 8,626,287
</TABLE>
F&M BANCORP - MONOCACY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOMES
(UNAUDITED)
FOR THE YEAR DECEMBER 31, 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M MONOCACY ADJUSTMENTS PRO-FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 57,491 $ 13,535 -- $ 71,026
Interest and dividends on investment
securities:
Taxable 8,501 2,604 -- 11,105
Tax-exempt 3,570 740 -- 4,310
Interest on deposits with banks 181 132 -- 313
Interest on federal funds sold 381 68 -- 449
---------- ---------- ---------- ----------
Total interest income 70,124 17,079 -- 87,203
Interest expense:
Interest on deposits 27,870 6,905 -- 34,775
Interest on federal funds purchased
and securities sold under
agreements to repurchase 2,215 55 -- 2,270
Interest on advances from the FHLB
of Atlanta 2,162 892 -- 3,054
Interest on other borrowings 187 -- -- 187
---------- ---------- ---------- ----------
Total interest expense 32,434 7,852 -- 40,286
---------- ---------- ---------- ----------
Net interest income 37,690 9,227 -- 46,917
Provision for credit losses 1,651 885 -- 2,536
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 36,039 8,342 -- 44,381
Noninterest income:
Trust income 1,560 151 -- 1,711
Service charges on deposit account 4,097 329 -- 4,426
Net gains on sales of loans 3,061 167 -- 3,228
Net gains on sales of property 20 -- -- 20
Other operating income 5,565 780 -- 6,345
---------- ---------- ---------- ----------
Total Noninterest income 14,303 1,427 -- 15,730
Noninterest expense:
Salaries and employee benefits 16,444 3,805 -- 20,249
Occupancy and equipment expense 4,867 1,106 -- 5,973
Other operating expense 15,989 1,625 -- 17,614
---------- ---------- ---------- ----------
Total noninterest expense 37,300 6,536 -- 43,836
---------- ---------- ---------- ----------
Income before provision for income
taxes 13,042 3,233 -- 16,275
Provision for income taxes 2,379 882 -- 3,261
---------- ---------- ---------- ----------
Net income $ 10,663 $ 2,351 $ - $ 13,014
========== ========== ========== ==========
Earnings per Common Share - Basic:
Net Income $ 1.69 $ 1.33 -- $ 1.52
Weighted average number of shares 6,294,626 1,761,694 506,096 8,562,416
Earnings per Common Share - Diluted:
Net income $ 1.68 $ 1.32 -- $ 1.51
Weighted average number of shares 6,347,986 1,776,246 491,544 8,615,776
</TABLE>
