<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
F&M BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6711 52-1316473
(State or other jurisdiction (Primary Standard (I.R.S. Employer Identification Number)
of incorporation or organization) Industrial Classification Code Number)
</TABLE>
--------------------------
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(301) 694-4000
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
FAYE E. CANNON, PRESIDENT & CHIEF EXECUTIVE OFFICER
F&M BANCORP
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(301) 694-4000
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
FRANK ED BAYOUTH II
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1600 SMITH, SUITE 4460
HOUSTON, TEXAS 77002
(713) 655-5100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
satisfaction or waiver of all other conditions to the merger described in the
proxy statement-prospectus.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES BEING REGISTERED BE REGISTERED PRICE PER SHARE PRICE (1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Stock, par value $5.00 per share
("Common Stock")........................... 1,675,811 N/A $50,274,330 $3,502.44
</TABLE>
(1) This amount is based upon the number of shares of Common Stock anticipated
to be issued upon consummation of the transaction contemplated in the
Agreement and Plan of Merger, dated as of September 7, 1999 and as amended
on October 19, 1999, by and between F&M Bancorp and Patapsco Valley
Bancshares, Inc.
(2) The registration fee has been computed pursuant to Rule 457(f)(1) under the
Securities Act of 1933, as amended, based on the average of the bid and
asked prices for shares of Common Stock of Patapsco Valley as reported on
the Nasdaq OTC Bulletin Board on October 19, 1999, ($30.00) and the maximum
number of such shares (1,675,811) that may be exchanged for the securities
being registered. Pursuant to Rule 457(b), the registration fee has been
reduced by the $10,473.82 paid on October 12, 1999 upon the filing under the
Securities Exchange Act of 1934, as amended, of Patapsco Valley's proxy
materials included herein relating to the merger. Accordingly, the
registration fee payable upon the filing of this Registration Statement is
$3,502.44.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
8593 BALTIMORE NATIONAL PIKE
ELLICOTT CITY, MARYLAND 21043
NOTICE OF SPECIAL STOCKHOLDERS' MEETING
TO BE HELD ON DECEMBER 14, 1999
TO THE STOCKHOLDERS OF
PATAPSCO VALLEY BANCSHARES, INC.
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Patapsco
Valley Bancshares, Inc. will be held on Tuesday, December 14, 1999 at the Turf
Valley Resort and Conference Center, 2700 Turf Valley Road, Ellicott City,
Maryland, at 11:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal recommended by the board of
directors of Patapsco Valley to approve the merger of Patapsco Valley and
F&M Bancorp. In the merger, each share of Patapsco Valley common stock
outstanding on the effective date of the merger will be converted to 1.18
shares of F&M Bancorp common stock. You can find a copy of the merger
agreement and its first amendment in Appendix A to the accompanying proxy
statement-prospectus.
2. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the special meeting.
Only holders of record of Patapsco Valley common stock at the close of
business on October 26, 1999 are entitled to notice of and to vote at the
special meeting or any adjournments or postponements of the special meeting.
All stockholders are cordially invited to attend the special meeting. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE AND PROMPTLY
MAIL YOUR PROXY IN THE RETURN ENVELOPE ENCLOSED. This will not prevent you from
voting in person, but will help to secure a quorum and avoid added solicitation
costs. Your proxy may be revoked at any time before it is voted. Please review
the proxy statement-prospectus accompanying this notice for more complete
information regarding the merger and the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Edwin B. McKee
------------------------------------------------------------------------------
Edwin B. McKee
SECRETARY
November , 1999
THE BOARD OF DIRECTORS OF PATAPSCO VALLEY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED ENVELOPE. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN
PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
<TABLE>
<S> <C>
[LOGO] [LOGO]
PROSPECTUS OF PROXY STATEMENT OF
F&M BANCORP PATAPSCO VALLEY
</TABLE>
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Your board of directors has approved unanimously a merger transaction in
which Patapsco Valley will merge into F&M Bancorp. This strategic transaction
provides Patapsco Valley with growth and opportunities that would not have been
available on a stand-alone basis.
IN THE MERGER, EACH OF YOUR SHARES OF PATAPSCO VALLEY COMMON STOCK WILL BE
CONVERTED INTO 1.18 SHARES OF F&M BANCORP COMMON STOCK. THIS REPRESENTS A VALUE
OF $ BASED ON THE , 1999 CLOSING PRICE OF F&M BANCORP COMMON
STOCK. IN ADDITION, THE CONVERSION OF YOUR SHARES OF PATAPSCO VALLEY COMMON
STOCK GENERALLY WILL NOT BE TAXABLE.
YOUR VOTE IS IMPORTANT. To complete the merger, Patapsco Valley needs your
approval. This document is being furnished to you in connection with the
solicitation of proxies by Patapsco Valley's board of directors for its use at a
special meeting of stockholders, which is being held to vote upon the merger.
The special meeting will be held at the Turf Valley Resort and Conference
Center, 2700 Turf Valley Road, Ellicott City, Maryland, at 11:00 a.m. on
Tuesday, December 14, 1999. At the special meeting, you will be asked to
consider and vote upon the merger.
Your board of directors believes that the merger is in the best interests of
Patapsco Valley and its stockholders and strongly encourages you to vote "FOR"
the merger. Patapsco Valley's financial advisor, Ferris, Baker Watts,
Incorporated, has issued its opinion to the Patapsco Valley board of directors
that the exchange ratio is fair from a financial point of view to Patapsco
Valley stockholders.
F&M Bancorp common stock is quoted on The Nasdaq National Market System
under the symbol "FMBN."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES THAT F&M BANCORP IS OFFERING THROUGH THIS DOCUMENT ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK
SUBSIDIARY OF F&M BANCORP, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
The date of this proxy statement-prospectus is , 1999, and it is
being mailed or otherwise delivered to Patapsco Valley stockholders on or about
that date.
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business and
financial information about F&M Bancorp from documents that are not included in
or delivered with this document. This information is available to you without
charge upon your written or oral request. You can obtain documents incorporated
by reference in this proxy statement-prospectus, other than certain exhibits to
those documents, by requesting them in writing or by telephone from F&M Bancorp
at the following address:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, MD 21702
Attention: Gordon M. Cooley, Secretary
(301) 694-4171
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY DECEMBER 4, 1999 IN
ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See "Where You Can Find More Information" on page 85 for further
information.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT
THE F&M BANCORP/PATAPSCO VALLEY MERGER.................... 1
SUMMARY..................................................... 2
SELECTED HISTORICAL FINANCIAL INFORMATION (UNAUDITED)....... 7
COMPARATIVE UNAUDITED PER SHARE DATA........................ 11
PATAPSCO VALLEY SPECIAL MEETING............................. 13
Date, Time and Place.................................... 13
Matters to be Considered................................ 13
Record Date............................................. 13
Voting and Effect of Abstentions........................ 13
Vote Required........................................... 13
Solicitation and Revocation of Proxies.................. 14
Recommendation of Board of Directors.................... 14
THE MERGER.................................................. 15
Overview................................................ 15
Background of the Merger................................ 15
Recommendation of the Patapsco Valley Board of Directors
and Reasons for the Merger............................. 18
Opinion of Patapsco Valley's Financial Advisor.......... 19
Effective Time of the Merger............................ 23
Conversion of Patapsco Valley Common Stock.............. 23
Fractional Shares....................................... 24
Exchange of Patapsco Valley Stock Certificates.......... 24
Dividends Paid by Patapsco Valley Prior to the Merger... 24
Material Federal Income Tax Consequences................ 24
Management and Operations after the Merger.............. 26
Interests of Certain Persons in the Merger.............. 26
Treatment of Outstanding Patapsco Valley Stock
Options................................................ 28
Conditions to Completion of the Merger.................. 28
Regulatory Approvals Required for the Merger............ 30
Conduct of Business Pending the Merger.................. 31
Extension, Waiver and Amendment of the Merger
Agreement.............................................. 34
Termination of the Merger Agreement..................... 34
Restrictions on Resales by Affiliates................... 36
Stock Exchange Listing of F&M Bancorp Common Stock...... 37
Anticipated Accounting Treatment........................ 38
Dissenters' Appraisal Rights............................ 38
Stock Option Agreement.................................. 40
Voting Agreement........................................ 44
Expenses................................................ 44
Merger and Restructuring Charges........................ 44
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
DESCRIPTION OF F&M BANCORP CAPITAL STOCK.................... 45
Authorized Stock........................................ 45
Common Stock............................................ 45
Preferred Stock......................................... 45
Business Combinations Involving Interested
Stockholders........................................... 46
COMPARISON OF STOCKHOLDER RIGHTS............................ 46
COMPARATIVE MARKET PRICES AND DIVIDENDS..................... 49
REGULATORY CONSIDERATIONS................................... 51
Holding Company Regulation.............................. 51
Bank Regulation......................................... 52
Capital Adequacy........................................ 53
Enforcement Powers of the Federal Banking Agencies...... 54
Control Acquisitions.................................... 55
Future Legislation...................................... 55
THE COMPANIES............................................... 56
F&M BANCORP............................................. 56
PATAPSCO VALLEY......................................... 57
PATAPSCO VALLEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF PATAPSCO
VALLEY.................................................... 84
LEGAL MATTERS............................................... 85
EXPERTS..................................................... 85
STOCKHOLDER PROPOSALS....................................... 85
OTHER MATTERS............................................... 85
WHERE YOU CAN FIND MORE INFORMATION......................... 85
FORWARD-LOOKING STATEMENTS.................................. 87
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)............................................... 89
RECENT DEVELOPMENTS......................................... 97
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A AGREEMENT AND PLAN OF MERGER..................... A-1
APPENDIX B STOCK OPTION AGREEMENT........................... B-1
APPENDIX C VOTING AGREEMENT................................. C-1
APPENDIX D OPINION OF FERRIS, BAKER WATTS, INCORPORATED..... D-1
APPENDIX E MARYLAND STATUTE GOVERNING DISSENTERS' RIGHTS.... E-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE F&M BANCORP/PATAPSCO VALLEY MERGER
<TABLE>
<S> <C>
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this proxy
statement-prospectus, just indicate on
your proxy card how you want to vote
with respect to the merger. Complete,
sign, date and mail the proxy card in
the enclosed prepaid return envelope as
soon as possible.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED
MY SIGNED PROXY CARD?
A: Yes, you may change your vote:
- by sending a written notice bearing a
later date than the proxy to the
secretary of Patapsco Valley stating
that you would like to revoke your
proxy;
- by completing, signing and submitting
a new proxy card bearing a later date
than the proxy; and
- by attending the special meeting and
voting in person. Simply attending the
special meeting, however, will not
revoke your proxy.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COM-
PLETED?
A: We hope to complete the merger by the
end of 1999. We must first obtain the
approval of the Patapsco Valley
stockholders and the necessary
regulatory clearances. We cannot assure
you when or if the merger will occur.
Q: IF MY SHARES ARE HELD IN "STREET NAME"
BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your Patapsco
Valley shares only if you provide
instructions on how your broker should
vote. You should provide your broker
with instructions on how to vote your
shares.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES
NOW?
A: No. After the merger is completed, F&M
Bancorp will send you written
instructions on how to exchange your
Patapsco Valley common stock for F&M
Bancorp common stock. Please do not send
in your stock certificates with your
proxy.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you would like additional copies of
this proxy statement-prospectus, or if
you have questions about the merger, you
should contact:
</TABLE>
Patapsco Valley Bancshares, Inc.
8593 Baltimore National Pike
Ellicott City, Maryland 21043
Attention: Edwin B. McKee
Phone Number: (410) 465-0900
1
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT-PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE OTHER
DOCUMENTS TO WHICH WE HAVE REFERRED YOU IN ORDER TO FULLY UNDERSTAND THE MERGER.
SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 85 ON HOW TO OBTAIN COPIES OF
THOSE DOCUMENTS. EACH ITEM IN THIS SUMMARY INCLUDES A PAGE REFERENCE THAT
DIRECTS YOU TO A MORE COMPLETE DESCRIPTION IN THIS DOCUMENT OF THE TOPIC
DISCUSSED.
INFORMATION ABOUT F&M BANCORP AND PATAPSCO VALLEY (PAGE 56)
F&M BANCORP
110 Thomas Johnson Drive
Frederick, Maryland 21702
(301) 694-4000
F&M Bancorp is incorporated in Maryland and is a federal bank holding
company. F&M Bancorp provides banking and other financial services. F&M Bancorp
serves its customers primarily in Maryland through its main bank subsidiary,
Farmers & Mechanics National Bank and its savings bank subsidiary, Home Federal
Savings Bank. F&M Bancorp offers commercial and consumer loan and deposit
products and services, trust, brokerage and investment management services and
consumer and commercial insurance products. As of June 30, 1999, F&M Bancorp's
total assets were $1.462 billion, its deposits were $1.160 billion and its
stockholders' equity was $130.0 million.
PATAPSCO VALLEY BANCSHARES, INC.
8593 Baltimore National Pike
Ellicott City, Maryland 21043
(410) 465-0900
Patapsco Valley is incorporated in Maryland and is a federal bank holding
company. Patapsco Valley serves customers primarily in Maryland through its bank
subsidiary, Commercial and Farmers Bank, and its banking-related subsidiaries.
Patapsco Valley engages in the commercial and consumer banking business through
Commercial and Farmers Bank and its mortgage banking subsidiary, Founders
Mortgage Company, Inc. Patapsco Valley also offers a full line of insurance
products through its bank's insurance subsidiary. As of June 30, 1999, Patapsco
Valley's total assets were $173.6 million, its deposits were $149.0 million and
its stockholders' equity was $16.7 million.
THE MERGER (PAGE 15)
We propose a merger of Patapsco Valley with and into F&M Bancorp. The name
of the combined company will be "F&M Bancorp." We expect to complete the merger
by the end of 1999.
WE HAVE ATTACHED THE MERGER AGREEMENT AND ITS FIRST AMENDMENT TO THIS PROXY
STATEMENT-PROSPECTUS AS APPENDIX A. WE ENCOURAGE YOU TO READ THE MERGER
AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
MERGER CONSIDERATION WILL BE 1.18 SHARES OF F&M BANCORP COMMON STOCK FOR EACH
SHARE OF PATAPSCO VALLEY COMMON STOCK (PAGE 23)
You will receive 1.18 shares of F&M Bancorp common stock in exchange for
each share of Patapsco Valley common stock you own, subject to an upward
adjustment in certain circumstances. In the case of fractional shares, you will
receive cash in lieu of a fractional share.
For example, if you hold 101 shares of Patapsco Valley common stock, you
will receive 119 shares of F&M Bancorp common stock (101 X 1.18 = 119.18), plus
a cash payment equal to the value of 0.18 of a share of F&M Bancorp common
stock.
SHARE INFORMATION AND MARKET PRICES (PAGE 49)
Shares of F&M Bancorp are quoted on Nasdaq under the symbol "FMBN."
The following table lists the closing price of shares of F&M Bancorp common
stock and the equivalent value of a share of Patapsco Valley common stock on
September 3, 1999, the last trading day before we announced the merger, and on
November , 1999, the last trading
date before the date of this proxy statement-prospectus. The equivalent per
share value of Patapsco Valley at the specified dates represents
2
<PAGE>
the closing price of a share of F&M Bancorp common stock on that date multiplied
by the exchange ratio of 1.18. Patapsco Valley's common stock priced at $27.50
on September 2, 1999, the last business day that trading occurred before the
execution of the merger agreement was publicly announced, and at $ . on ,
1999, the last business day that trading occurred before the date of this proxy
statement prospectus.
<TABLE>
<CAPTION>
EQUIVALENT PER
SHARE VALUE OF
PATAPSCO
VALLEY
F&M BANCORP COMMON
COMMON STOCK STOCK
-------------- --------------
<S> <C> <C>
September 3, 1999........ $ 28.875 $34.07
November , 1999........ $ $
-------- ------
</TABLE>
Of course, the market price of F&M Bancorp common stock will likely change
prior to the merger, while the exchange ratio is fixed. You should obtain
current stock price quotations for F&M Bancorp common stock and Patapsco Valley
common stock.
THE MERGER IS GENERALLY A TAX-FREE TRANSACTION FOR PATAPSCO VALLEY STOCKHOLDERS
(PAGE 24)
We expect that for United States federal income tax purposes, you will
generally not recognize any gain or loss in the merger, except in connection
with any cash that you receive in lieu of fractional shares of F&M Bancorp
common stock. Neither F&M Bancorp nor Patapsco Valley will be obligated to
complete the merger unless each company receives a legal opinion from its
respective counsel that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986. These types of
transactions are generally tax-free for United States federal income tax
purposes. Even if these legal opinions are delivered to F&M Bancorp and Patapsco
Valley, these opinions are not binding on the Internal Revenue Service or the
courts and, accordingly, there can be no assurance that the Internal Revenue
Service will not challenge the conclusions reflected in the opinions or prevail
in any such challenge.
THIS TAX TREATMENT MAY NOT APPLY TO SOME PATAPSCO VALLEY STOCKHOLDERS,
INCLUDING THE TYPES OF STOCKHOLDERS DISCUSSED ON PAGE 25. YOUR TAX CONSEQUENCES
WILL DEPEND ON YOUR PERSONAL SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
PATAPSCO VALLEY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU APPROVE THE
MERGER (PAGES 14 AND 18)
The Patapsco Valley board of directors believes that the merger is fair to
you and in your best interests, and unanimously recommends that you vote "FOR"
the proposal to approve the merger.
PATAPSCO VALLEY'S FINANCIAL ADVISOR SAYS CONSIDERATION IS FAIR TO PATAPSCO
VALLEY STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW (PAGE 19)
In deciding to approve the merger, Patapsco Valley's board of directors
considered the opinion of its financial advisor, Ferris, Baker Watts,
Incorporated. This opinion concludes that as of the date of the opinion, the
consideration to be received by Patapsco Valley stockholders in the merger was
fair from a financial point of view to Patapsco Valley stockholders.
We have attached this opinion as Appendix D to this document. You should
read it carefully.
STOCKHOLDERS' SPECIAL MEETING TO BE HELD ON DECEMBER 14, 1999 (PAGE 13)
A special meeting of Patapsco Valley stockholders will be held at the Turf
Valley Resort and Conference Center, 2700 Turf Valley Road, Ellicott City,
Maryland, at 11:00 a.m. on Tuesday, December 14, 1999. At this special meeting,
you will be asked to approve the merger.
RECORD DATE SET AT OCTOBER 26, 1999 (PAGE 13)
You can vote at the Patapsco Valley special meeting if you owned Patapsco
Valley common stock as of the close of business on October 26, 1999, the record
date. On the record date, 1,376,303.0590 shares of Patapsco Valley common stock
were outstanding and therefore are allowed to vote at the Patapsco Valley
special meeting. You will be able to cast one
3
<PAGE>
vote for each share of Patapsco Valley common stock you owned on October 26,
1999.
TWO-THIRDS VOTE OF OUTSTANDING SHARES IS REQUIRED TO APPROVE THE MERGER
(PAGES 13 AND 28)
Patapsco Valley stockholders holding two-thirds of the outstanding shares of
common stock on the record date must vote in favor of the merger to approve the
merger. The merger does not have to be approved by F&M Bancorp's stockholders.
All together, the directors and officers of F&M Bancorp and Patapsco Valley
can cast less than 13.1% of the votes entitled to be cast at the Patapsco Valley
special meeting. We expect that they will vote all of their shares in favor of
the merger.
CERTAIN STOCKHOLDERS HAVE AGREED TO VOTE IN FAVOR OF THE MERGER (PAGE 44)
In connection with the merger agreement, the directors and certain executive
officers and stockholders of Patapsco Valley who together hold approximately
21.8% of the outstanding Patapsco Valley common stock have entered into a voting
agreement with F&M Bancorp. Under the voting agreement, these stockholders agree
to vote their shares of Patapsco Valley common stock in favor of approval of the
merger.
These stockholders entered into the voting agreement to induce F&M Bancorp
to enter into the merger agreement. The voting agreement could discourage other
companies from trying or proposing to combine with or acquire Patapsco Valley.
The voting agreement is attached to this document as Appendix C.
DISSENTERS' APPRAISAL RIGHTS (PAGE 38)
Maryland law provides Patapsco Valley stockholders with dissenters'
appraisal rights in the merger. If you desire to exercise your appraisal rights,
you must take a number of steps to perfect your rights and to demand payment of
the fair value of your shares of Patapsco Valley common stock. A copy of the
Maryland statute governing dissenters' appraisal rights is attached to this
document as Appendix E.
WE EXPECT "POOLING OF INTERESTS" ACCOUNTING TREATMENT (PAGE 38)
We expect the merger to qualify as a "pooling of interests." This means
that, for accounting and financial reporting purposes, we will treat our
companies as if they had always been one company. We have conditioned the merger
on our receipt of a letter from F&M Bancorp's independent public accountants
that the merger will qualify as a pooling of interests.
BOARD OF DIRECTORS OF F&M BANCORP FOLLOWING THE MERGER (PAGE 26)
If the merger is completed, Howard E. Harrison, III, current Chairman of the
Patapsco Valley board of directors, will be appointed to F&M Bancorp's board of
directors, and the remaining directors on the Patapsco Valley board of directors
will be appointed to the community advisory council of Farmers & Mechanics
National Bank. In addition, F&M Bancorp has agreed to nominate Mr. Harrison for
election as a director of F&M Bancorp at the next annual meeting of F&M Bancorp
stockholders.
INTERESTS OF OTHER PERSONS IN THE MERGER THAT ARE DIFFERENT FROM YOURS
(PAGE 26)
Some members of Patapsco Valley's management and board of directors have
interests in the merger in addition to their interests as stockholders of
Patapsco Valley generally. Those interests arise from provisions in the merger
agreement regarding
- the indemnification of directors and officers of Patapsco Valley,
- the assumption of stock options granted to employees, executive officers
and directors of Patapsco Valley,
- the eligibility of some executive officers to participate in F&M Bancorp
employee benefit plans, and
- the entitlement of some officers to payments under change in control
arrangements as a result of the merger.
The Patapsco Valley board of directors was aware of the interests of its
directors and executive officers and considered their interests, among other
matters, in approving the merger.
4
<PAGE>
F&M BANCORP COMMON STOCK IS FREELY TRANSFERABLE BY NON-AFFILIATES (PAGE 36)
F&M Bancorp common stock issued in the merger will be freely transferable by
you unless you are deemed to be an "affiliate" of Patapsco Valley under
applicable federal securities laws. Generally, "affiliates" include directors,
certain executive officers and 10% or greater stockholders.
CONDITIONS THAT MUST BE SATISFIED FOR THE MERGER TO OCCUR (PAGE 28)
The completion of the merger depends on a number of conditions being met,
including the following:
- Patapsco Valley stockholders approving the merger;
- Nasdaq having authorized for quotation the shares that F&M Bancorp will
issue to you in the merger;
- receipt of all required regulatory approvals and the expiration of any
regulatory waiting periods;
- the absence of any governmental order blocking completion of the merger,
or of any proceedings by a government body trying to block the merger;
- receipt by each of F&M Bancorp and Patapsco Valley of an opinion of its
respective counsel stating that the merger will be treated as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986;
- receipt of a letter from F&M Bancorp's independent public accountants
stating that the merger will qualify for "pooling of interests" accounting
treatment; and
- the continued accuracy of each party's representations and warranties and
the performance by each party of its obligations under the merger
agreement.
In cases where the law permits, a party to the merger agreement could elect
to waive a condition that has not been satisfied and complete the merger
although it is not required to do so. We cannot be certain whether or when any
of the conditions of the merger will be satisfied (or waived, where
permissible), or that the merger will be completed.
REGULATORY APPROVALS WE MUST OBTAIN FOR THE MERGER (PAGE 30)
We cannot complete the merger unless we obtain the approval of the Office of
the Comptroller of the Currency. Notice of the merger also must be provided to
the Maryland Commissioner of Financial Regulation. We have filed all of the
required applications and notices with these regulatory authorities.
While we do not know of any reason why we would not obtain all required
regulatory approvals in a timely manner, we cannot predict whether we will
obtain all required regulatory approvals, the timing of these approvals, or
whether any approval will include conditions that would be detrimental to us.
TERMINATION OF THE MERGER AGREEMENT (PAGE 34)
We can agree at any time to terminate the merger agreement without
completing the merger, even if the stockholders of Patapsco Valley have already
voted to approve it. Also, F&M Bancorp can terminate the merger agreement if
Patapsco Valley's board of directors withdraws, or modifies in any way adverse
to F&M Bancorp, its recommendation that you approve the merger.
Moreover, either of us can terminate the merger agreement in the following
circumstances:
- after a final decision by a governmental authority to prohibit the merger,
or after the rejection of an application for a governmental approval
required to complete the merger (but in the latter case, only after
waiting 60 days);
- if the merger is not completed by March 31, 2000;
- if the Patapsco Valley stockholders do not approve the merger; or
- if the other party violates, in a significant way, any of its
representations, warranties or obligations under the merger agreement.
5
<PAGE>
Generally, a party can only terminate the merger agreement in one of the
preceding four situations if that party is not in violation of the merger
agreement or if its violations of the merger agreement are not the cause of the
event permitting termination.
In addition, Patapsco Valley could decide to terminate the merger agreement
based on the market price of F&M Bancorp's common stock during a specified
period before the receipt of approval of the merger from the Office of the
Comptroller of the Currency. Specifically, Patapsco Valley may terminate the
merger agreement if both F&M Bancorp's average stock price during the period is
less than $21.375 per share and F&M Bancorp's common stock underperforms a
specified group of bank holding company stocks by an agreed amount during the
period following our entering into the merger agreement. Patapsco Valley,
however, will not be able to terminate the merger agreement in this situation if
F&M Bancorp elects to make a compensating upward adjustment to the exchange
ratio that provides you more shares of F&M Bancorp common stock in exchange for
each share of Patapsco Valley common stock.
F&M BANCORP'S OPTION TO PURCHASE PATAPSCO VALLEY COMMON STOCK (PAGE 40)
As an inducement to F&M Bancorp to enter into the merger agreement, Patapsco
Valley granted a stock option to F&M Bancorp to purchase up to 19.9% of Patapsco
Valley's common stock at $27.50 per share.
F&M Bancorp cannot exercise the option unless specific events take place.
These events are generally related to a competing transaction involving a
merger, business combination or other acquisition of Patapsco Valley or its
stock or assets. As of the date of this proxy statement-prospectus, we do not
believe any event of that kind has occurred. The option could have the effect of
discouraging other companies that might want to combine with or acquire Patapsco
Valley from doing so. The option agreement is attached as Appendix B to this
proxy statement-prospectus.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 87)
We have each made forward-looking statements in this document (and in
documents to which we refer you in this document) that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our operations or the performance of the
combined company after the merger. Also, when we use any of the words
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Many possible events or factors could affect the
future financial results and performance of each of our companies and the
combined company after the merger and could cause those results or our
performance to differ materially from those expressed in our forward-looking
statements. These possible events or factors include the following:
- problems or delays in bringing together our two companies, either before
or after the merger is consummated;
- legal and regulatory risks and uncertainties;
- economic, political and competitive forces affecting our businesses,
markets, constituencies or securities;
- the risk that our analyses of these risks and forces could be incorrect,
or that the strategies that we have developed to deal with them may not
succeed;
- our cost savings from the merger are less than we expect, or we are unable
to realize those cost savings as soon as we expect;
- technological changes and systems integrations are harder to make or more
expensive than we expect; and
- adverse changes occur in the securities markets generally or in the
valuation of financial institutions.
6
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
The following tables show summarized unaudited historical consolidated
financial data for each of our companies and also show similar pro forma
information reflecting the merger of our two companies. The pro forma
information reflects the "pooling of interests" method of accounting for the
merger.
We expect that we will incur restructuring and merger-related expenses as a
result of combining our companies. We also anticipate that the merger will
provide the combined company with financial benefits such as reduced operating
expenses and the opportunity to earn more revenue. However, none of these
anticipated expenses or benefits has been factored into the pro forma income
statement information. For that reason, the pro forma information, while helpful
in illustrating the financial attributes of the combined company under one set
of assumptions, does not attempt to predict or suggest future results. Also, the
information that we have set forth for the six month period ended June 30, 1999
does not indicate what the results will be for the full 1999 fiscal year.
The information in the following tables is based on the historical financial
information of F&M Bancorp that has been presented in its prior filings with the
Securities and Exchange Commission and the historical financial information of
Patapsco Valley that is included elsewhere in this proxy statement-prospectus.
All of the summary financial information provided in the following tables should
be read in connection with this historical financial information and with the
more detailed financial information we have provided in this proxy
statement-prospectus, which you can find beginning at page F-1. The financial
information as of or for the interim periods ended June 30, 1999 and 1998 has
not been audited, and in the respective opinions of management, reflects all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of relevant data.
F&M Bancorp's historical financial information has been incorporated into
this proxy statement-prospectus by reference. F&M Bancorp's audited historical
financial statements for the years ended December 31, 1998, 1997 and 1996 were
audited by Arthur Andersen LLP, its independent certified public accountants.
F&M Bancorp's audited historical financial statements for the year ended
December 31, 1994 and 1995 were audited by Keller Bruner & Company.
Patapsco Valley's audited historical financial statements for the years
ended December 31, 1998, 1997, 1996, and 1995 were audited by Rowles & Company,
LLP, its independent certified public accountants. Patapsco Valley's audited
historical financial statements for the year ended December 31, 1994 were
audited by Stegman & Company, its independent certified public accountants.
Because Patapsco Valley has been the holding company of Commercial and Farmers
Bank since the October 7, 1996 reorganization of Commercial and Farmers Bank,
all historical financial data relating to any period prior to October 1996 is
based solely on Commercial and Farmers Bank.
7
<PAGE>
F&M BANCORP
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS AS OF OR FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income........................ 49,687 49,358 99,218 96,423 90,483 87,215 76,608
Interest expense....................... 23,393 22,938 46,878 44,603 42,378 40,286 31,222
Net interest income.................... 26,294 26,420 52,340 51,820 48,105 46,929 45,386
Provision for credit losses............ 850 1,156 3,056 2,910 1,822 2,536 1,875
Net interest income after provision for
credit losses........................ 25,444 25,264 49,284 48,910 46,283 44,393 43,511
Net gains (losses) on sales of
securities........................... (1) 738 1,104 76 (550) 20 (97)
Other noninterest income............... 10,856 11,511 22,148 21,276 18,026 18,538 14,767
Noninterest expenses................... 24,977 26,080 53,934 50,674 50,199 46,249 42,083
Provision for income taxes............. 3,030 3,174 5,046 5,251 3,196 3,261 4,077
Income from continuing operations
before loss from discontinued
operation and cumulative effect of
accounting change.................... 8,292 8,259 13,556 14,337 10,364 13,441 12,021
Loss from discontinued operation....... -- -- -- -- -- -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- -- --
Net income............................. 8,292 8,259 13,556 14,337 10,364 13,441 12,021
PER SHARE DATA--BASIC:
Income from continuing operations
before loss from discontinued
operation, cumulative effect of
accounting change.................... 0.89 0.89 1.47 1.56 1.13 1.47 1.31
Loss from discontinued operation....... -- -- -- -- -- -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- -- --
Net income............................. 0.89 0.89 1.47 1.56 1.13 1.47 1.31
PER SHARE DATA--DILUTED:
Income from continuing operations
before loss from discontinued
operation, cumulative effect of
accounting change and extraordinary
item................................. 0.88 0.88 1.45 1.55 1.12 1.46 1.31
Loss from discontinued operation....... -- -- -- -- -- -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- -- --
Net income............................. 0.88 0.88 1.45 1.55 1.12 1.46 1.31
Cash dividends paid.................... 0.54 0.56 1.01 0.64 0.47 0.46 0.39
Period end book value.................. 13.97 13.97 14.16 13.64 12.53 11.94 10.39
BALANCE SHEET DATA (AT PERIOD END):
Loans, net of unearned income.......... 897,857 878,573 891,741 882,550 829,229 765,311 769,861
Total assets........................... 1,463,573 1,366,570 1,450,647 1,339,461 1,273,803 1,222,267 1,123,401
Total deposits......................... 1,160,144 1,086,843 1,138,194 1,053,562 1,022,854 1,008,037 925,180
Total shareholders' equity............. 130,661 129,275 131,365 125,861 115,062 109,431 95,050
RATIOS:
Return on average assets............... 1.16% 1.24% 0.99% 1.10% 0.84% 1.17% 1.13%
Return on average shareholders'
equity............................... 12.56 13.05 10.46 12.04 9.31 13.17 12.79
Average shareholders' equity to total
average assets....................... 9.21 9.49 9.46 9.17 9.04 8.90 8.80
Dividend payout ratio.................. 60.67% 62.92% 68.71% 41.03% 41.59% 31.29% 29.77%
OTHER INFORMATION:
Total average assets................... 1,445,021 1,344,799 1,369,052 1,299,263 1,232,596 1,146,270 1,067,635
Total average shareholders' equity..... 133,095 127,625 129,560 119,091 111,377 102,032 93,979
Weighted average shares
outstanding--Basic................... 9,331,642 9,242,353 9,253,113 9,202,878 9,174,628 9,159,634 9,143,857
Weighted average shares
outstanding--Diluted................. 9,391,188 9,356,427 9,361,846 9,275,924 9,233,409 9,221,709 9,201,972
</TABLE>
8
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30, AS OF OR FOR THE YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................ $ 6,069 $ 5,766 $ 11,802 $ 10,588 $ 9,754 $ 9,271 $ 7,918
Interest expense............... 2,004 1,775 3,749 2,996 3,145 2,740 2,093
Net interest income............ 4,065 3,991 8,053 7,592 6,609 6,531 5,825
Provision for credit losses.... -- -- -- -- -- 1,710 229
Net interest income after
provision for credit
losses....................... 4,065 3,991 8,053 7,592 6,609 4,821 5,596
Net gains (losses) on sales of
securities................... -- -- -- -- -- -- --
Other noninterest income....... 1,574 1,534 3,037 1,002 751 781 728
Noninterest expenses........... 5,301 4,363 9,459 6,178 4,997 4,687 4,638
Provision for income taxes..... 107 421 554 868 861 305 628
Income from continuing
operations before loss from
discontinued operation and
cumulative effect of
accounting change............ 231 741 1,077 1,548 1,502 610 1,058
Loss from discontinued
operation.................... -- -- -- -- -- -- --
Cumulative effect of accounting
change....................... -- -- -- -- -- -- --
Net income..................... $ 231 $ 741 $ 1,077 $ 1,548 $ 1,502 $ 610 $ 1,058
PER SHARE DATA--BASIC:
Income from continuing
operations before loss from
discontinued operation and
cumulative effect of
accounting change............ $ 0.17 $ 0.55 $ 0.80 $ 1.16 $ 1.16 $ 0.48 $ 0.84
Loss from discontinued
operation.................... -- -- -- -- -- -- --
Cumulative effect of accounting
change....................... -- -- -- -- -- -- --
Net income..................... $ 0.17 $ 0.55 $ 0.80 $ 1.16 $ 1.16 $ 0.48 $ 0.84
PER SHARE DATA--DILUTED:
Income from continuing
operations before loss from
discontinued operation and
cumulative effect of
accounting change............ $ 0.17 $ 0.55 $ 0.80 $ 1.16 $ 1.15 $ 0.48 $ 0.84
Loss from discontinued
operation.................... -- -- -- -- -- -- --
Cumulative effect of accounting
change....................... -- -- -- -- -- -- --
Net income..................... $ 0.17 $ 0.55 $ 0.80 $ 1.16 $ 1.15 $ 0.48 $ 0.84
Cash dividends................. 0.26 0.26 0.51 0.54 0.48 0.48 0.40
Period end book value.......... 12.20 12.27 12.37 11.91 11.18 10.43 10.21
BALANCE SHEET DATA (AT PERIOD
END):
Loans, net of unearned
income....................... $ 100,459 $ 98,897 $ 100,874 $ 98,411 $ 85,404 $ 78,448 $ 74,991
Total assets................... 173,635 150,479 169,843 140,229 133,900 124,075 115,028
Total deposits................. 149,036 123,187 147,067 119,495 114,588 107,988 99,203
Total shareholders' equity..... 16,670 16,556 16,822 15,894 14,698 13,424 12,829
RATIOS:
Return on average assets....... 0.27% 1.01% 0.71% 1.17% 1.17% 0.52% 0.91%
Return on average shareholders'
equity....................... 2.75% 9.10% 6.54% 9.78% 10.57% 4.39% 8.32%
Average shareholders' equity to
total average assets......... 9.80% 11.14% 10.39% 11.96% 11.03% 11.85% 10.96%
Dividend payout ratio.......... 153.76% 45.45% 63.32% 46.52% 41.37% 83.08% 46.86%
OTHER INFORMATION:
Total average assets........... $ 171,576 $ 146,289 $ 158,383 $ 132,260 $ 128,882 $ 117,148 $ 116,014
Total average shareholders'
equity....................... 16,812 16,303 16,461 15,819 14,217 13,882 12,713
Weighted average shares
outstanding--Basic........... 1,362,475 1,346,721 1,350,717 1,329,010 1,298,140 1,280,318 1,251,922
Weighted average shares
outstanding--Diluted......... 1,369,775 1,346,721 1,353,358 1,329,010 1,301,210 1,283,602 1,256,520
</TABLE>
9
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA FOR F&M BANCORP AND PATAPSCO VALLEY
BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................. 55,756 55,124 111,020 107,011 100,237
Interest expense................ 25,397 24,713 50,627 47,599 45,523
Net interest income............. 30,359 30,411 60,393 59,412 54,714
Provision for credit losses..... 850 1,156 3,056 2,910 1,822
Net interest income after
provision for credit losses... 29,509 29,255 57,337 56,502 52,892
Net gains (losses) on sales of
securities.................... (1) 738 1,104 76 (550)
Other noninterest income........ 12,430 13,045 25,185 22,278 18,777
Noninterest expenses............ 30,278 30,443 63,393 56,852 55,196
Provision for income taxes...... 3,137 3,595 5,600 6,119 4,057
Net income...................... 8,523 9,000 14,633 15,885 11,866
PER SHARE DATA--BASIC:
Net income...................... 0.77 0.82 1.34 1.46 1.09
PER SHARE DATA--DILUTED:
Net income...................... 0.77 0.82 1.33 1.45 1.09
Cash dividends paid............. 0.49 0.51 0.92 0.60 0.45
Period end book value........... 13.44 13.45 13.62 13.13 12.09
BALANCE SHEET DATA (AT PERIOD
END):
Loans, net of unearned income... 998,316 977,470 992,615 980,961 914,633
Total assets.................... 1,637,208 1,517,049 1,620,490 1,479,690 1,407,703
Total deposits.................. 1,309,180 1,210,030 1,285,261 1,173,057 1,137,442
Total shareholders' equity...... 147,331 145,831 148,187 141,755 129,760
RATIOS:
Return on average assets........ 1.06% 1.22% 0.96% 1.11% 0.87%
Return on average shareholders'
equity........................ 11.47% 12.61% 10.02% 11.77% 9.45%
Average shareholders' equity to
total average assets.......... 9.27% 9.65% 9.56% 9.42% 9.22%
Dividend payout ratio........... 63.64% 62.20% 68.66% 41.10% 41.28%
OTHER INFORMATION:
Total average assets............ 1,616,597 1,491,088 1,527,435 1,431,523 1,361,478
Total average shareholders'
equity........................ 149,907 143,928 146,021 134,910 125,594
Weighted average shares
outstanding--Basic............ 11,007,453 10,918,164 10,928,924 10,878,689 10,850,439
Weighted average shares
outstanding--Diluted.......... 11,066,999 11,032,238 11,037,657 10,951,735 10,909,220
</TABLE>
10
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information about our companies' income per share,
dividends per share and book value per share, and similar information reflecting
the merger of our two companies (which is referred to as "pro forma"
information). In presenting the comparative pro forma information for certain
time periods, we assumed that our companies had been merged throughout those
periods.
In presenting the comparative pro forma information, we also assumed that we
will treat our companies as if they had always been combined for accounting and
financial reporting purposes (a method that is referred to as the "pooling of
interests" method of accounting).
The information listed as "equivalent pro forma" was obtained by multiplying
the pro forma amounts by the exchange ratio of 1.18. It is intended to reflect
the fact that you will be receiving more than one share of F&M Bancorp common
stock for each share of Patapsco Valley common stock exchanged in the merger.
We expect that we will incur restructuring and merger-related expenses as a
result of combining our companies. We also anticipate that the merger will
provide the combined company with financial benefits such as reduced operating
expenses and the opportunity to earn more revenue. However, none of these
anticipated expenses or benefits has been factored into the pro forma
information, except for the pro forma combined condensed balance sheet. For that
reason, the pro forma information, while helpful in illustrating the financial
attributes of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. Also, the information that we have
set forth for the six-month period ended June 30, 1999 does not indicate what
the results will be for the full 1999 fiscal year.
The information in the following table is based on the historical financial
information of F&M Bancorp that has been presented in our prior filings with the
SEC and the historical financial information of Patapsco Valley that is included
elsewhere in this proxy statement-prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
F&M BANCORP COMMON STOCK
NET INCOME PER SHARE--BASIC (1):
F&M Bancorp............................................ 0.89 0.89 1.47 1.56 1.13
F&M Bancorp Pro Forma.................................. 0.77 0.82 1.34 1.46 1.09
CASH DIVIDENDS DECLARED PER SHARE (2):
F&M Bancorp............................................ 0.54 0.56 1.01 0.64 0.47
F&M Bancorp Pro Forma.................................. 0.49 0.51 0.92 0.60 0.45
BOOK VALUE PER SHARE AT PERIOD END (3):
Stated:
F&M Bancorp.......................................... 13.97 13.97 14.16 13.64 12.53
F&M Bancorp Pro Forma................................ 13.44 13.45 13.62 13.13 12.09
Tangible:
F&M Bancorp.......................................... 13.21 13.19 13.42 12.84 11.66
F&M Bancorp Pro Forma................................ 12.72 12.75 12.95 12.40 11.34
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PATAPSCO VALLEY COMMON STOCK
NET INCOME PER SHARE--BASIC (1):
Patapsco Valley........................................ 0.17 0.55 0.80 1.16 1.16
Patapsco Valley Pro Forma.............................. 0.91 0.97 1.58 1.72 1.29
CASH DIVIDENDS DECLARED PER SHARE (2):
Patapsco Valley........................................ 0.26 0.26 0.51 0.54 0.48
Patapsco Valley Pro Forma.............................. 0.58 0.60 1.09 0.71 0.53
BOOK VALUE PER SHARE AT PERIOD END (3):
Stated:
Patapsco Valley...................................... 12.20 12.27 12.37 11.91 11.18
Patapsco Valley Pro Forma............................ 15.86 15.87 16.07 15.49 14.27
Tangible:
Patapsco Valley...................................... 11.66 12.00 12.06 11.60 11.12
Patapsco Valley Pro Forma............................ 15.01 15.05 15.28 14.63 13.38
</TABLE>
- ------------------------
(1) F&M Bancorp pro forma net income per share amounts are calculated by
totaling the historical net income for F&M Bancorp and Patapsco Valley and
dividing the resulting amounts by the average pro forma shares of F&M
Bancorp and Patapsco Valley outstanding giving effect to the merger. The
average pro forma shares of F&M Bancorp and Patapsco Valley combined equals
the historical average shares of F&M Bancorp plus the historical average
shares of Patapsco Valley as adjusted by the exchange ratio of 1.18. The
Patapsco Valley pro forma equivalent net income per share amounts are
computed by multiplying the F&M Bancorp pro forma net income per share
amounts by the exchange ratio of 1.18.
(2) F&M Bancorp pro forma cash dividends per share represents the sum of
historical cash dividends declared by F&M Bancorp and Patapsco Valley and
assumes no changes in cash dividends declared per share. Patapsco Valley pro
forma equivalent cash dividends per share represent such amounts multiplied
by the exchange ratio of 1.18.
(3) F&M Bancorp pro forma stated and tangible book value per share amounts are
calculated by totaling the historical stated and tangible stockholders'
equity for F&M Bancorp and Patapsco Valley and dividing the resulting
amounts by the total pro forma common shares of F&M Bancorp and Patapsco
Valley combined. The total pro forma common shares of F&M Bancorp and
Patapsco Valley combined equals the historical common shares of F&M Bancorp
plus the historical common shares of Patapsco Valley multiplied by the
exchange ratio of 1.18. The Patapsco Valley pro forma equivalent stated and
tangible book value per share amounts are computed by multiplying the F&M
Bancorp pro forma stated and tangible book value per share amounts by the
exchange ratio of 1.18.
RECENT DEVELOPMENTS
On October 19, 1999, F&M Bancorp announced earnings of $4.209 million, or
$0.45 per share, for the third quarter of 1999 compared to earnings of $4.049
million, or $0.43 per share, for the third quarter of 1998, an increase of 5%.
See "Recent Developments" on page 97 of this proxy statement-prospectus for
additional third quarter financial information with respect to F&M Bankcorp.
12
<PAGE>
PATAPSCO VALLEY SPECIAL MEETING
DATE, TIME AND PLACE.
This proxy statement-prospectus is being furnished to you in connection with
the solicitation of proxies by the board of directors of Patapsco Valley for use
at the special meeting of the stockholders of Patapsco Valley to be held at the
Turf Valley Resort and Conference Center, 2700 Turf Valley Road, Ellicott City,
Maryland, on Tuesday, December 14, 1999, at 11:00 a.m. local time. YOU ARE
REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT
PROMPTLY TO PATAPSCO VALLEY IN THE ENCLOSED POSTAGE-PAID ADDRESSED ENVELOPE.
F&M Bancorp is also providing this proxy statement-prospectus to you as a
prospectus in connection with the offer and sale by F&M Bancorp of its shares of
common stock under the terms of Patapsco Valley's merger with and into F&M
Bancorp.
MATTERS TO BE CONSIDERED.
At the Patapsco Valley meeting, you will be asked to:
(1) approve the merger and
(2) act upon such other matters as may properly be brought before the
Patapsco Valley special meeting.
You may also be asked to vote upon a proposal to adjourn or postpone the
Patapsco Valley special meeting. Patapsco Valley could use any adjournment or
postponement of the Patapsco Valley special meeting for the purpose, among
others, of allowing additional time for soliciting additional votes to approve
the merger.
RECORD DATE
The Patapsco Valley board of directors has fixed the close of business on
October 26, 1999 as the record date for determining the Patapsco Valley
stockholders entitled to receive notice of and to vote at the Patapsco Valley
special meeting. Only holders of record of Patapsco Valley common stock at the
close of business on the record date will be entitled to receive notice of and
to vote at the Patapsco Valley special meeting. As of the record date, there
were 1,376,303.0590 shares of Patapsco Valley common stock outstanding entitled
to vote and held by approximately 375 holders of record.
VOTING AND EFFECT OF ABSTENTIONS
Each holder of record of shares of Patapsco Valley common stock on the
record date is entitled to cast one vote per share on the proposal to approve
the merger and on any other matter properly submitted for your vote at the
Patapsco Valley meeting. The presence, either in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of Patapsco Valley
common stock entitled to vote at the Patapsco Valley special meeting is
necessary to constitute a quorum at the Patapsco Valley special meeting.
Abstentions will be counted as present for purposes of determining the presence
or absence of a quorum at the special meeting.
VOTE REQUIRED
The approval of the merger by Patapsco Valley stockholders will require the
affirmative vote of two-thirds of the outstanding shares of Patapsco Valley
common stock entitled to vote on the merger. As described in "The
Merger--Conditions to Completion of the Merger," stockholder approval is a
condition to completing the merger. In determining whether approval of the
merger has received the requisite number of affirmative votes, abstentions and
broker non-votes will be counted and will have the same effect as a vote against
the proposal to approve the merger.
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As of the record date, Patapsco Valley directors and executive officers and
their affiliates were the direct or indirect owners of 179,064 shares of
Patapsco Valley common stock, or approximately 13.01% of the shares of Patapsco
Valley common stock outstanding as of the record date. The Patapsco Valley
directors and their affiliates have executed a voting agreement pursuant to
which each person agrees to vote or direct the vote of each of their shares of
Patapsco Valley common stock for approval of the merger. See "The Merger--Voting
Agreement." As of the record date, F&M Bancorp directly beneficially owns 240
shares of Patapsco Valley common stock, or approximately 0.02% of the
outstanding shares of Patapsco Valley common stock.
SOLICITATION AND REVOCATION OF PROXIES
Proxies in the form included in the proxy card accompanying this proxy
statement-prospectus are being solicited by the Patapsco Valley board of
directors. In addition to solicitation by mail, proxies may be solicited by
directors, officers and employees of Patapsco Valley in person or by telephone,
telegram or other means of communication. These individuals will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses. Patapsco Valley may retain a proxy solicitation firm to assist in the
solicitation. In addition, Patapsco Valley will make arrangements with brokerage
firms and other custodians, nominees and fiduciaries to send proxy materials to
their principals and will reimburse these parties for their expenses.
Shares represented by properly executed proxies that are received in time
and not revoked will be voted in accordance with the instructions indicated on
the proxies. If no instructions are indicated, those proxies will be voted
(1) "FOR" approval of the merger, and (2) otherwise in the discretion of the
proxy holders as to any other matter that may come before the special meeting,
including a motion to adjourn or postpone the special meeting to another time
and/or place, for the purpose of soliciting additional proxies or otherwise.
However, no proxy with instructions to vote against the proposal to approve the
merger will be voted in favor of any adjournment or postponement of the special
meeting.
Your presence at the Patapsco Valley meeting will not automatically revoke a
stockholder proxy. However, any proxy given pursuant to this solicitation may be
revoked by the person giving it at any time before it is exercised by:
- delivering to the secretary of Patapsco Valley a written notice of
revocation bearing a later date than the proxy being revoked;
- delivering to the secretary of Patapsco Valley a duly executed proxy
bearing a later date than the proxy being revoked; or
- attending the Patapsco Valley meeting and voting in person.
You should address all written notices of revocation or any subsequently
executed proxy to Patapsco Valley Bancshares, Inc., 8593 Baltimore National
Pike, Ellicott City, Maryland 21043, Attention: Edwin B. McKee, Secretary.
Alternatively, hand deliver any written notice of revocation or subsequently
executed proxy to Patapsco Valley's secretary at or before the taking of the
vote at the Patapsco Valley meeting.
RECOMMENDATION OF BOARD OF DIRECTORS
The Patapsco Valley board of directors has unanimously approved the merger.
The Patapsco Valley board of directors believes that the merger is in the best
interests of Patapsco Valley and you, and recommends that you vote "FOR"
approval of the merger. See "The Merger--Recommendation of the Patapsco Valley
Board of Directors and Reasons for the Merger."
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THE MERGER
THE FOLLOWING INFORMATION DESCRIBES THE MATERIAL TERMS OF THE PROPOSED
MERGER, INCLUDING THE MATERIAL TERMS OF THE MERGER AGREEMENT AND THE RELATED
STOCK OPTION AGREEMENT. THIS DESCRIPTION IS NOT COMPLETE AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED APPENDICES TO THIS DOCUMENT, INCLUDING THE
MERGER AGREEMENT AND ITS FIRST AMENDMENT IN APPENDIX A. WE URGE YOU TO READ THE
APPENDICES IN THEIR ENTIRETY.
OVERVIEW
The merger agreement provides for a transaction in which Patapsco Valley
will merge with and into F&M Bancorp. F&M Bancorp will be the surviving
corporation in the merger. At the effective time of the merger, each share of
issued and outstanding Patapsco Valley common stock will cease to be outstanding
and will be converted into 1.18 shares of F&M Bancorp common stock.
Immediately after the closing of the merger, Commercial and Farmers Bank, a
wholly owned subsidiary of Patapsco Valley, will merge with and into Farmers &
Mechanics National Bank, a wholly owned subsidiary of F&M Bancorp.
BACKGROUND OF THE MERGER
From time to time the board of directors of Patapsco Valley has considered
and analyzed Patapsco Valley's strategic alternatives, including the prospects
for Patapsco Valley continuing as an independent entity and the possibility of
strategic combinations with various financial institutions in the mid-Atlantic
region, and the potential effect of such transactions on Patapsco Valley and its
stockholders, employees and customers and the communities it serves. In
addition, other financial institutions have contacted members of senior
management of Patapsco Valley from time to time to express an interest in
exploring a business combination transaction with Patapsco Valley. The board of
directors of Patapsco Valley elected not to pursue these preliminary expressions
of interest, believing it to be in the best interests of Patapsco Valley's
stockholders for Patapsco Valley to focus on independently building a franchise
by expanding Commercial and Farmers Bank's branch system, by expanding the types
of financial services it offers, such as mortgages, leases and insurance, and by
providing greater liquidity for Patapsco Valley's common stock through
registration with the SEC.
In March 1999, Patapsco Valley retained T. E. Hitselberger, an investment
banker, to assist Patapsco Valley in its analysis of various strategic
alternatives available to it. In his role as financial advisor,
Mr. Hitselberger met with the Patapsco Valley board of directors to review
Patapsco Valley's strategic alternatives, including the competitive environment
of the financial services industry, strategic alternatives for enhancing
stockholder value on a stand-alone basis, and the merger and acquisition market
for financial institutions generally. Mr. Hitselberger also reviewed selected
financial data with respect to several bank holding companies believed to be
interested in and financially and otherwise capable of engaging in a strategic
business combination with Patapsco Valley and contacted a number of financial
institutions concerning their interest in engaging in a strategic business
combination with Patapsco Valley. Following Mr. Hitselberger's death in
May 1999, Patapsco Valley engaged Ferris, Baker Watts, Incorporated to assist it
in its strategic review. Ferris, Baker Watts is a nationally recognized
investment banking firm that, in the ordinary course of business, regularly
engages in the valuation of financial services businesses and their securities
in connection with mergers and acquisitions and other corporate transactions.
At the direction of the board of directors of Patapsco Valley, Ferris, Baker
Watts contacted nine financial institutions, including F&M Bancorp, regarding
their interest in engaging in a business combination with Patapsco Valley.
Patapsco Valley and Ferris, Baker Watts jointly selected the original nine
financial institutions based on a number of factors, including a review of
financial institutions with existing franchises having the most logical
complementary fit with Patapsco Valley's existing franchise, an affordability
analysis conducted by Ferris, Baker Watts, and the belief of Patapsco Valley's
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management that certain other financial institutions might be interested in a
potential business combination transaction with Patapsco Valley based on past
informal expressions of interest from such financial institutions. Seven of the
financial institutions requested information about Patapsco Valley. Each of
these seven institutions received a package containing publicly available
financial information on Patapsco Valley and a confidentiality agreement. Each
institution was requested to deliver to Ferris, Baker Watts, on or before
August 18, 1999, a written proposal containing the proposed terms upon which
such party would be willing to enter into a business combination transaction
with Patapsco Valley. Five of these institutions submitted proposals to engage
in a business combination transaction. Each proposal received contemplated an
acquisition of Patapsco Valley in a stock-for-stock merger. F&M Bancorp's
initial proposal contemplated that Patapsco Valley stockholders would receive
shares of F&M Bancorp common stock with an aggregate value of $46.6 million,
with the exchange ratio to be determined based upon the average closing price of
F&M common stock during a specified period prior to completion of the merger.
At a special meeting of the Patapsco Valley board of directors held on
August 20, 1999, representatives of Ferris, Baker Watts reviewed with the board
the terms of the proposals that had been received. Ferris, Baker Watts reviewed
selected financial data regarding each financial institution that had submitted
an indication of interest, explained how a combination with each would affect
the opportunities for the growth and financial stability of Patapsco Valley, and
identified some of the characteristics of a merger partner that Patapsco Valley
might consider in the event the Patapsco Valley board of directors thought an
affiliation was in Patapsco Valley's best interests. These characteristics
included the following:
- strong return on equity capital,
- return on assets,
- diversified revenue sources,
- a diversified balance sheet,
- the ability to efficiently and cleanly consummate a transaction,
- a demonstrated track record of successful acquisitions of companies like
Patapsco Valley, and
- the ability to improve the products offered to Patapsco Valley's
customers.
At the August 20th meeting, the Patapsco Valley board of directors directed
Patapsco Valley management, together with Patapsco Valley's legal and financial
advisors, to continue discussions with F&M Bancorp and with two of the other
financial institutions that had expressed interest in a business combination
with Patapsco Valley. During the remainder of August and until the execution of
the merger agreement on September 7, 1999, representatives of each of Patapsco
Valley and F&M Bancorp conducted a due diligence examination of the other
company. In addition, during this period Patapsco Valley continued to supply
information to two of the other interested financial institutions. On
August 23, 1999, F&M Bancorp revised its proposal to provide that each share of
Patapsco Valley common stock would be exchanged for 1.18 shares of F&M Bancorp
common stock in the merger.
At a special Patapsco Valley board of directors meeting on August 27, 1999,
Patapsco Valley management updated the Patapsco Valley board of directors
regarding the status of discussions with the various parties regarding their
indications of interests. In addition, management provided additional
information to the board of directors regarding each of the potential merger
partners, including the parties' business philosophies, acquisition experience
and results, opportunities for Patapsco Valley's employees and the possible
effects that a merger with the party would have on Patapsco Valley's products
and services, including the effect on the business of Patapsco Valley's
subsidiaries. Representatives of Ferris, Baker Watts discussed in detail F&M
Bancorp's revised proposal to acquire
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Patapsco Valley in a stock for stock transaction at a fixed ratio of 1.18 shares
of common stock for each share of Patapsco Valley common stock.
Patapsco Valley management discussed with the Patapsco Valley board of
directors management's view that F&M Bancorp's offer provided the best
opportunity to Patapsco Valley, in terms of the similarity of management and
business philosophies, the benefit to the community, the benefit to Patapsco
Valley's customers, and the benefit to Patapsco Valley's stockholders. Patapsco
Valley's legal advisors reviewed in detail for the Patapsco Valley board of
directors the then-current drafts of the proposed merger agreement and stock
option agreement, explaining the significance of their terms. The Patapsco
Valley board of directors directed Patapsco Valley management, together with
Patapsco Valley's legal and financial advisors, to continue discussions with F&M
Bancorp.
At a special meeting of the Patapsco Valley board of directors on
August 31, 1999, Patapsco Valley management and financial and legal advisors
delivered a comprehensive analysis of the results of Patapsco Valley's due
diligence of F&M Bancorp. Patapsco's legal advisors discussed with the Patapsco
Valley board of directors the revised drafts of the merger agreement and stock
option agreement.
At a special meeting of the Patapsco Valley board of directors on
September 3, 1999, Ferris, Baker Watts, based on the analysis described in
"-Opinion of Patapsco Valley's Financial Advisor," presented its financial
analysis of the proposed transaction and delivered a draft of its opinion that
the consideration to be received in the proposed transaction was fair, from a
financial point of view, to the Patapsco Valley stockholders. Patapsco Valley's
legal counsel, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC,
presented the terms of the merger agreement and the stock option agreement and
answered questions raised by members of the Patapsco Valley board of directors.
The Patapsco Valley board of directors also considered the financial
performance, stock performance, growth prospects and other matters concerning
F&M Bancorp. The Patapsco Valley board of directors specifically evaluated
whether the proposal was in the best interests of Patapsco Valley and its
subsidiaries by considering the best interests of the stockholders and other
factors, including the social, legal and economic effects on employees,
customers, depositors, and communities served by Patapsco Valley, and evaluated
the consideration being offered in relation to the then current market value of
the stock of Patapsco Valley in a freely negotiated transaction, and the
Patapsco Valley board of directors' estimate of the future value of the stock of
Patapsco Valley as an independent entity. The Patapsco Valley board of directors
determined that the transaction was fair to Patapsco Valley stockholders from a
financial standpoint, relying on the advice of Ferris, Baker Watts and
considering:
- the premium over market value of common stock of Patapsco Valley of $6.50;
- that the offer equated to 2.9 times tangible book value;
- the increase of dividends to Patapsco Valley's stockholders of 145%;
- the fact that the consideration to be paid is at a premium to the values
determined by Ferris, Baker Watts, through the discounted cash flow
analysis and the comparable company analysis and compares favorably to
premiums paid in other transactions; and
- the fact that, based on then-current market prices, the calculated value
of F&M Bancorp's proposal exceeded the calculated value of the other
proposals received.
The Patapsco Valley board of directors also took action at this meeting to
exempt F&M Bancorp from the Maryland business combination and control share
statutes.
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On September 7, 1999, the Patapsco Valley board of directors held a special
meeting to consider the proposed merger. At this meeting, Patapsco Valley
management, together with Patapsco Valley's financial and legal advisors,
reviewed for the Patapsco Valley board of directors the results of the due
diligence Patapsco Valley had conducted, previous discussions relating to the
proposed merger by the Patapsco Valley board of directors and other terms and
conditions of the merger agreement, the stock option agreement and related
agreements. Patapsco Valley's financial advisor, based on the analysis described
in "--Opinion of Patapsco Valley's Financial Advisor," rendered its opinion to
the Patapsco Valley board of directors that, as of the date of the meeting, the
consideration to be received by stockholders of Patapsco Valley in the merger
was fair, from a financial point of view, to the stockholders of Patapsco
Valley. Patapsco Valley's legal advisors also answered questions from members of
the Patapsco Valley board of directors. Following discussion and questions, the
Patapsco Valley board of directors voted unanimously to approve the merger
agreement and the transactions contemplated thereby, including the stock option
agreement and related agreements, and recommended that the proposed merger be
submitted for consideration by the stockholders of Patapsco Valley at a special
meeting.
RECOMMENDATION OF THE PATAPSCO VALLEY BOARD OF DIRECTORS AND REASONS FOR THE
MERGER
BASED ON THE FOLLOWING, THE PATAPSCO VALLEY BOARD OF DIRECTORS APPROVED THE
MERGER AGREEMENT AND THE STOCK OPTION AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
THE HOLDERS OF PATAPSCO VALLEY COMMON STOCK VOTE "FOR" THE MERGER.
In reaching its determination that the terms of the merger are fair to, and
in the best interests of, Patapsco Valley and its stockholders, the Patapsco
Valley board of directors consulted with its legal and financial advisors, as
well as with Patapsco Valley senior management, and considered a number of
factors, including, without limitation, the following:
- the Patapsco Valley board of directors' review, based in part on the
presentation by Patapsco Valley's management regarding its due diligence
of F&M Bancorp, of the business, operations, earnings, financial condition
and credit ratings of F&M Bancorp on both an historical and prospective
basis, the enhanced opportunities for operating efficiencies (particularly
in terms of integration of operations, data processing and support
functions) that could result from the merger, the enhanced opportunities
for growth that the merger would make possible and the respective
contributions the parties would bring to a combined institution;
- the Patapsco Valley board of directors' belief, based upon an analysis of
the anticipated financial effects of the merger, that upon consummation of
the merger, F&M Bancorp and its banking subsidiaries would continue to be
well capitalized institutions, the equity positions of which would be in
excess of all applicable regulatory capital requirements;
- the fact that previous inquiries and indications of interest by other
financial institutions regarding a potential business combination did not
result in a more favorable proposal for Patapsco Valley than the F&M
Bancorp proposal;
- the Patapsco Valley board of directors' belief that, in light of the
reasons discussed above, F&M Bancorp was the most attractive choice as a
long-term affiliation partner of Patapsco Valley;
- the expectation that the merger will generally be a tax-free transaction
to Patapsco Valley and its stockholders to the extent such stockholders
receive shares of F&M Bancorp common stock;
- the current and prospective economic and regulatory environment and
competitive constraints facing the banking and financial institutions in
Patapsco Valley's market area; and
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- the recent business combinations involving financial institutions, either
announced or completed, during the past year in the United States, the
State of Maryland and contiguous states and the effect of such
combinations on competitive conditions in Patapsco Valley's market area.
The Patapsco Valley board of directors considered as potentially negative
(1) the fact that Patapsco Valley would no longer be an independent
community-based bank owned primarily by local residents, (2) the fact that the
stock option agreement can be expected to deter third parties from submitting an
acquisition proposal for Patapsco Valley during the pendency of the merger and
(3) the Patapsco Valley board of directors' belief that the exercise or
repurchase of the option is likely to prohibit any other acquirer from
accounting for an acquisition by using the "pooling of interests" accounting
method for a period of two years.
The Patapsco Valley board of directors did not assign any specific or
relative weight to each of the foregoing factors in their considerations. It
should be noted that there is no guarantee that any of the positive results
listed above will be achieved.
OPINION OF PATAPSCO VALLEY'S FINANCIAL ADVISOR
Patapsco Valley engaged Ferris, Baker Watts, Incorporated to act as its
financial advisor with respect to its analysis of its future financial prospects
as an independent company or in connection with a business combination with
another party. Ferris, Baker Watts's engagement included negotiating financial
terms of the merger with F&M Bancorp and rendering its opinion with respect to
the fairness of the merger consideration from a financial point of view to
Patapsco Valley stockholders in the event Patapsco Valley entered into an
agreement providing for a business combination. Patapsco Valley selected Ferris,
Baker Watts to act as its financial advisor because of Ferris, Baker Watts's
expertise in the valuation of businesses and their securities, including its
expertise in the banking industry as well as with mergers and acquisitions of
commercial banks and thrift institutions.
Ferris, Baker Watts has delivered to Patapsco Valley its written opinion,
dated September 7, 1999, and its updated opinion as of the date of this proxy
statement-prospectus, to the effect that, based upon and subject to the matters
set forth therein, as of the date thereof, the merger consideration is fair to
the holders of Patapsco Valley common stock from a financial point of view.
You should consider the following when reading the discussion of the Ferris,
Baker Watts opinion in this document:
- A copy of the Ferris, Baker Watts opinion is set forth as Appendix D to
this proxy statement-prospectus and should be read in its entirety.
- In its analyses, Ferris, Baker Watts took into account its assessment of
general business, market, monetary, financial and economic conditions,
industry performance and other matters, many of which are beyond the
control of Patapsco Valley and F&M Bancorp, as well as Ferris, Baker
Watts's experience in securities valuation, its knowledge of financial
institutions and its experience in similar transactions.
- The analyses were prepared solely for purposes of Ferris, Baker Watts
providing its opinion as to the fairness of the merger consideration and
do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Any estimates contained in
Ferris, Baker Watts's analyses are not necessarily indicative of future
results or values, which may be significantly more or less favorable than
such estimates.
- Ferris, Baker Watts's opinion is just one of the many factors taken into
consideration by the Patapsco Valley board of directors in determining to
approve the merger. See "--Recommendation of the Patapsco Valley Board of
Directors and Reasons for the Merger." Ferris, Baker Watts's opinion does
not address the relative merits of the merger as compared to
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any alternative business strategies that might exist for Patapsco Valley,
nor does it address the effect of any other business combination in which
Patapsco Valley might engage.
- The opinion of Ferris, Baker Watts does not constitute a recommendation to
any Patapsco Valley stockholder to vote in favor of approval of the
merger.
In arriving at its opinion, Ferris, Baker Watts, among other things:
- reviewed the merger agreement,
- reviewed Amendment No. 1 to the merger agreement,
- reviewed Annual Reports to stockholders on Form 10-K of F&M Bancorp,
- reviewed the Annual Report on Form 10-K of Patapsco Valley for fiscal year
1998,
- reviewed selected public and internal information from Patapsco Valley,
- held discussions with management of Patapsco Valley regarding past and
current business operations as well as future prospects, and
- reviewed industry specific data regarding the valuation of publicly traded
companies in the banking industry as well as such other information as
Ferris, Baker Watts considered appropriate.
In rendering its opinion, Ferris, Baker Watts relied, without independent
verification, on the accuracy and completeness of the information concerning
Patapsco Valley and F&M Bancorp furnished by them to Ferris, Baker Watts for
review, as well as publicly-available information regarding other financial
institutions and other third party data and information referenced above.
Patapsco Valley and F&M Bancorp did not restrict Ferris, Baker Watts as to the
material it was permitted to review. Ferris, Baker Watts did not perform or
obtain any independent appraisals or evaluations of the assets and liabilities
and potential or contingent liabilities of Patapsco Valley or F&M Bancorp.
Ferris, Baker Watts expresses no opinion on matters of a legal, regulatory, tax
or accounting nature or the ability of the merger as set forth in the merger
agreement to be completed. In rendering its opinion, Ferris, Baker Watts assumed
that, in the course of obtaining the necessary regulatory and governmental
approvals for the proposed merger, no restriction will be imposed on F&M Bancorp
that would have a material adverse effect on the ability of the merger to be
consummated as set forth in the merger agreement.
Patapsco Valley has agreed to pay Ferris, Baker Watts total professional
fees of approximately $470,000 in connection with this engagement. In addition,
Patapsco Valley has agreed to indemnify Ferris, Baker Watts against claims and
liabilities arising from the engagement, including certain liabilities under the
securities laws, except if a court determines that the liabilities result from
Ferris, Baker Watts's bad faith, gross negligence or willful misconduct.
The following is a summary of the material financial analyses Ferris, Baker
Watts used in connection with providing its opinion to the board of directors of
Patapsco Valley. You should understand that no public company used as a
comparison in the comparable transactions analysis is identical to Patapsco
Valley. The financial analyses necessarily involve complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect acquisition values.
FREE CASH FLOW ANALYSIS. This analysis assumes that a buyer purchases a
time series of free cash flows that are generated by the assets of a business.
This analysis separates and ascribes value only to the cash flows that can
ultimately be taken out of the business. Cash that is generated but used to
sustain the business, such as increases in working capital and capital
expenditures, creates no incremental value to the buyer. These free cash flows
are then discounted to the present at the firm's
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weighted average cost of capital. The weighted average cost of capital can be
described as the average price a company must pay to attract both debt and
equity to properly capitalize the firm's growth. This series of free cash flows,
when discounted to the present, and after subtracting claims by debt holders and
others, represents the economic value of a firm to its stockholders on a free
cash flow basis.
The accuracy of this method of valuation depends largely on the integrity of
the projections. The projections were derived from assumptions provided by
Patapsco Valley management and included loan growth of 5% per year and deposit
growth of 9% per year. These assumptions resulted in return on average assets
growing to 1.72% and return on average equity growing to 18.72% by fiscal 2003,
which management classified as optimistic. The resulting per share value was
$20.34 per share.
PUBLICLY TRADED COMPARABLE COMPANIES. Ferris, Baker Watts compared the
acquisition price and resulting valuation multiples to multiples of publicly
traded banks. The comparable banks are based in Maryland, Virginia and the
District of Columbia and have total assets between $100 million and
$300 million. Some pertinent performance measures are as follows:
- The price to earnings ("P/E") ratio is a commonly utilized valuation
ratio. It is also known as the earnings multiple and provides investors an
indication of how much investors are paying for a company's earnings power
and the accounting income available to the common equity holder. However,
net income is often a poor approximation of actual cash flows ultimately
available to common stockholders for reinvestment or for the payment of
dividends. Accounting differences may make net income numbers less
comparable.
- The price to book ratio compares what the market is actually willing to
pay for the assets of a company to what the value of the company's
securities would be worth relative to the historical cost of their assets
and earnings history.
- The price to tangible book ratio is similar to the price to book ratio,
the difference being that goodwill is subtracted from the book value of
the equity.
The merger compares favorably to the implied value of Patapsco Valley based
upon all the valuation multiples used.
COMPARABLE TRANSACTIONS ANALYSIS. Ferris, Baker Watts compared the merger
on the basis of acquisition pricing multiples or ratios of reported earnings,
book value, and tangible book value of Patapsco Valley implied by the merger
consideration to be paid to the holders of Patapsco Valley common stock with the
same ratios in pending and completed acquisitions of MidAtlantic Region
publicly-traded commercial banks and bank holding companies. The MidAtlantic
Regional acquisitions announced from June 1998 to September 3, 1999 included 43
banks and bank holding companies with target assets between $100 and
$300 million. The mean acquisition pricing multiples or ratios at
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announcement for the MidAtlantic group are set forth below. The acquisition
pricing ratios presented in the table below reflect pricing ratios at the time
such deals were announced.
<TABLE>
<CAPTION>
MID ATLANTIC REGION COMMERCIAL BANKS
AND BANK HOLDING
COMPANY ACQUISITIONS
ANNOUNCED JUNE 1998 TO PRESENT
------------------------------------
<S> <C>
Price/Book.................................................. 272.30%
Price/Tangible Book......................................... 276.30%
Price/Earnings (1).......................................... 23.70x
</TABLE>
<TABLE>
<CAPTION>
RATIOS AND MULTIPLE FOR
PATAPSCO VALLEY AT $34 SHARE PRICE
----------------------------------
<S> <C>
Price/Book.................................................. 278.69%
Price/Tangible Book......................................... 291.84%
Price/Earnings (1).......................................... 79.07x
</TABLE>
- ------------------------
(1) Based on trailing twelve-month earnings prior to announcement.
The merger consideration of $34.00, based on F&M Bancorp's closing price as
of September 2, 1999, indicated the following pricing ratios for shares of
Patapsco Valley common stock, based on financial statements as of June 30, 1999:
278.69 percent of reported book value; 291.84 percent of reported tangible book
value; and 79.07 times earnings, based on earnings for the trailing twelve month
period.
No company or transaction used in this composite is identical to Patapsco
Valley or the merger. Accordingly, an analysis of the results of the foregoing
is not mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies involved and other factors that could affect the public trading values
of the securities of the company or companies to which they are being compared.
CONTROL PREMIUM. Ferris, Baker Watts also compared the premium to
pre-announcement market price implied by the merger consideration to be paid to
the holders of Patapsco Valley common stock with the premium to pre-announcement
market prices implied in transactions involving banking and credit agencies that
were closed during the second quarter of 1999, based on market data published by
another firm which is not affiliated with Ferris, Baker Watts. The transaction
value implied in the merger represents a 23.6% premium to the closing bid price
of Patapsco Valley's common stock as of September 2, 1999, which is within the
range of these transactions.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analyses or summary description. Ferris,
Baker Watts believes its analyses must be considered as a whole and that
selecting portions of such analyses and factors considered by Ferris, Baker
Watts without considering all such analyses and factors could create an
incomplete view of the process underlying Ferris, Baker Watts's opinion. Ferris,
Baker Watts's opinion was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of September 3,
1999 and as of the date of this proxy statement-prospectus. Events occurring
after the most recent of those dates could materially affect the assumptions
used in preparing the opinion.
As described above, Ferris, Baker Watts's opinion and presentation to the
Patapsco Valley board of directors was one of many factors taken into
consideration by the Patapsco Valley board of directors in making its
determination to approve the merger agreement. Although the foregoing summary
describes the material components of the analyses provided by Ferris, Baker
Watts as of September 3, 1999 (which analyses were updated as of the date of
this proxy statement-prospectus), in connection with its opinion as of those
dates, it does not purport to be a complete description of all the analyses
performed by Ferris, Baker Watts and is qualified by reference to the written
opinion of Ferris, Baker
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Watts set forth as Appendix D this document, which Patapsco Valley's
stockholders are urged to read in its entirety.
THE OPINION OF FERRIS, BAKER WATTS RELATES ONLY TO WHETHER THE CONSIDERATION
TO BE RECEIVED BY YOU IS FAIR FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO YOU OR ANY STOCKHOLDER OF PATAPSCO VALLEY AS TO
HOW YOU SHOULD VOTE AT THE PATAPSCO VALLEY SPECIAL MEETING TO CONSIDER THE
MERGER.
EFFECTIVE TIME OF THE MERGER
The effective time of the merger will be the time and date set forth in the
articles of merger that will be filed with the State Department of Assessments
and Taxation of Maryland. The closing date of the merger will be the last
business day of a month that is at least two business days after the
satisfaction or waiver of the latest to occur of the conditions to the merger
specified in the merger agreement, unless F&M Bancorp and Patapsco Valley agree
otherwise. We anticipate the merger will be completed by the end of 1999, but in
no event will the merger close prior to December 19, 1999. See "--Conditions to
Completion of the Merger," "--Regulatory Approvals Required for the Merger,"
"--Extension, Waiver and Amendment of the Merger Agreement" and "--Termination
of the Merger Agreement" below.
CONVERSION OF PATAPSCO VALLEY COMMON STOCK
At the effective time of the merger, each share of Patapsco Valley common
stock outstanding, other than the shares described in the following sentence,
will be converted into the right to receive 1.18 shares of F&M Bancorp common
stock. Shares of Patapsco Valley common stock will not be converted into the
right to receive F&M Bancorp common stock if the shares are (1) held by F&M
Bancorp or Patapsco Valley or any subsidiary of either company, except, in both
cases, for shares held in a fiduciary capacity for the benefit of third parties
and shares held in respect of a debt previously contracted, or (2) held by
Patapsco Valley stockholders exercising their dissenters' appraisal rights (see
"--Dissenters' Appraisal Rights").
BECAUSE THE EXCHANGE RATIO IS FIXED AND BECAUSE THE MARKET PRICE OF F&M
BANCORP COMMON STOCK MAY FLUCTUATE PRIOR TO THE EFFECTIVE TIME, THE VALUE OF THE
SHARES OF F&M BANCORP COMMON STOCK THAT YOU WILL RECEIVE IN THE MERGER MAY
INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE MERGER.
If the average of the closing prices of F&M Bancorp common stock reported on
Nasdaq for the 20 trading days ending on the fifth day prior to the OCC's
approval of the merger
(1) is less than $21.375 and
(2) represents a decline, on a percentage basis, in the price of F&M
Bancorp's stock from its closing price of $28.50 on September 7, 1999
that is more than 15 percentage points greater than the percentage
decline in a selected index of bank and thrift stocks over the same
period,
then Patapsco Valley will have the right to terminate the merger agreement,
subject to F&M Bancorp's right to nullify the termination by increasing the
exchange ratio as described under "--Termination of the Merger Agreement."
Each share of F&M Bancorp common stock issued and outstanding immediately
prior to the effective time will remain issued and outstanding as one share of
common stock of the combined company immediately after completion of the merger.
For a description of F&M Bancorp common stock and a description of the
differences between the rights of the holders of Patapsco Valley common stock,
on the one hand, and holders of F&M Bancorp common stock, on the other hand, see
"Description of F&M Bancorp Capital Stock" and "Comparison of Stockholder
Rights."
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FRACTIONAL SHARES
F&M Bancorp will not issue any fractional shares of F&M Bancorp common
stock. Instead, you will receive cash without interest for any fractional share
of F&M Bancorp common stock to which you would otherwise be entitled. The amount
of cash received will be determined by multiplying that fraction by the average
of the closing price of F&M Bancorp common stock reported on Nasdaq for the five
consecutive trading days immediately preceding the effective date of the merger.
You will not be entitled to dividends, voting rights or any other stockholder
rights with respect to any fractional shares.
EXCHANGE OF PATAPSCO VALLEY STOCK CERTIFICATES
At or prior to the completion of the merger, F&M Bancorp will deposit with a
bank or trust company certificates representing the shares of F&M Bancorp common
stock and the cash in lieu of any fractional shares to be issued in the merger
in exchange for outstanding shares of Patapsco Valley common stock. The bank or
trust company will act as the exchange agent for the benefit of the holders of
certificates of Patapsco Valley common stock.
As soon as practicable after the completion of the merger, but in no event
later than five business days thereafter, a form of transmittal letter will be
mailed by the exchange agent to you. This transmittal letter will contain
instructions for the surrender of certificates representing Patapsco Valley
common stock in exchange for the merger consideration.
YOU SHOULD NOT RETURN YOUR PATAPSCO VALLEY COMMON STOCK CERTIFICATES WITH
THE ENCLOSED PROXY AND YOU SHOULD NOT FORWARD THEM TO THE EXCHANGE AGENT UNTIL
YOU RECEIVE A LETTER OF TRANSMITTAL AFTER COMPLETION OF THE MERGER.
Until you surrender your Patapsco Valley stock certificates for exchange
after completion of the merger, you will accrue but will not be paid any
dividends or other distributions declared after the effective time with respect
to F&M Bancorp common stock into which your shares have been converted. When you
surrender your certificates, F&M Bancorp will pay any unpaid dividends or other
distributions, without interest. After the effective time, there will be no
transfers on the stock transfer books of Patapsco Valley of any shares of
Patapsco Valley common stock. If certificates representing shares of Patapsco
Valley common stock are presented for transfer after the completion of the
merger, they will be canceled and exchanged for a certificate representing the
applicable number of shares of F&M Bancorp common stock.
If a certificate for Patapsco Valley common stock has been lost, stolen or
destroyed, the exchange agent will issue the consideration properly payable
under the merger agreement upon receipt of appropriate evidence as to that loss,
theft or destruction, appropriate evidence as to the ownership of that
certificate by the claimant, and appropriate and customary indemnification.
DIVIDENDS PAID BY PATAPSCO VALLEY PRIOR TO THE MERGER
The merger agreement provides that, prior to the merger, Patapsco Valley may
declare and pay its regular quarterly cash dividends not in excess of $0.13 per
share of Patapsco Valley common stock and can issue its common stock according
to the terms of the Patapsco Valley dividend reinvestment plan with respect to
the quarterly dividend payments. However, Patapsco Valley has suspended the
dividend reinvestment plan, effective October 19, 1999.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain federal income tax consequences of
the merger to F&M Bancorp, Patapsco Valley and holders of Patapsco Valley common
stock. The discussion is based upon the Internal Revenue Code of 1986,
regulations of the United States Treasury Department, Internal Revenue Service
rulings, and judicial and administrative decisions in effect as of the date of
this proxy
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statement-prospectus. These authorities may change at any time, possibly with
retroactive effect, and any change could affect the continuing validity of this
discussion.
This discussion assumes that the holders of Patapsco Valley common stock
hold their shares as capital assets (I.E., property generally held for
investment) and does not address the tax consequences that may be relevant to a
particular stockholder receiving special treatment under some United States
federal income tax laws. Stockholders receiving this special treatment include:
- foreign persons;
- financial institutions;
- tax-exempt organizations;
- insurance companies;
- traders in securities that elect mark-to-market;
- dealers in securities or foreign currencies;
- persons who received their Patapsco Valley common stock through the
exercise of employee stock options or otherwise as compensation; and
- persons who hold shares of Patapsco Valley common stock as part of a
hedge, straddle or conversion transaction.
In addition, this discussion does not address any state, local or foreign tax
consequences of the merger.
Neither F&M Bancorp nor Patapsco Valley will be obligated to complete the
merger unless, in the case of F&M Bancorp, it has received an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to F&M Bancorp, and, in the
case of Patapsco Valley, it has received an opinion of Gordon, Feinblatt,
Rothman, Hoffberger & Hollander, LLC, counsel to Patapsco Valley, each to the
effect that, on the basis of facts, representations and assumptions set forth in
such opinion which are consistent with the state of facts at the time of the
merger, the merger will be treated for United States federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. In rendering its opinion, each counsel will require and rely upon
representations and covenants, including those contained in certificates of
officers of F&M Bancorp, Patapsco Valley and others reasonably satisfactory in
form and substance to such counsel. If the merger qualifies for United States
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, the material United States federal
income tax consequences of the merger are as follows:
(1) no gain or loss will be recognized by Patapsco Valley as a result of the
merger;
(2) no gain or loss will be recognized by the holders of Patapsco Valley
common stock who exchange all of their Patapsco Valley common stock
solely for F&M Bancorp common stock pursuant to the merger, except with
respect to cash received in lieu of a fractional share interest in F&M
Bancorp common stock; and
(3) the aggregate tax basis of the F&M Bancorp common stock received by
holders of Patapsco Valley common stock who exchange all of their
Patapsco Valley common stock solely for F&M Bancorp common stock pursuant
to the merger will be the same as the aggregate tax basis of Patapsco
Valley common stock surrendered in exchange therefor, reduced by any
amount allocable to a fractional share interest for which cash is
received.
Opinions of counsel are not binding on the Internal Revenue Service or the
courts, and neither F&M Bancorp nor Patapsco Valley intends to request a ruling
from the Internal Revenue Service as to the tax consequences of the merger.
Accordingly, there can be no assurance that the Internal Revenue Service will
not challenge the conclusions reflected in such opinions or that a court will
not sustain such a challenge.
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Based upon the current rulings of the Internal Revenue Service, cash
received by a holder of Patapsco Valley common stock in lieu of a fractional
share interest in F&M Bancorp common stock will be treated as received in
exchange for such fractional share interest, and gain or loss will be recognized
for federal income tax purposes measured by the difference between the amount of
cash received and the portion of the basis of the share of Patapsco Valley
common stock allocable to such fractional share interest. Such gain or loss
should be long-term capital gain or loss if such share of Patapsco Valley common
stock has been held for more than one year at the effective time of the merger.
CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON YOUR PARTICULAR
CIRCUMSTANCES. YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
F&M Bancorp will be the surviving corporation resulting from the merger. It
will continue to be governed by the laws of the State of Maryland and will
operate in accordance with its articles of incorporation and bylaws as in effect
immediately prior to the effective time of the merger.
The directors and executive officers of F&M Bancorp will continue to be the
directors and executive officers of F&M Bancorp after the merger, until such
time as their successors are elected or appointed. Howard E. Harrison, III will
be appointed a director of F&M Bancorp at the effective time of the merger,
until such time as his successor is elected or appointed. In addition, F&M
Bancorp has agreed to nominate Mr. Harrison for election as a director of F&M
Bancorp at the next annual meeting of F&M Bancorp stockholders. Mr. Harrison has
served as director and Chairman of the board of directors of Patapsco Valley
since its formation, in October 1996, and as director of Commercial and Farmers
Bank since June 1991. He has been the Chairman of the board of directors of
Marina Development Corp. since December 1986.
F&M Bancorp will also appoint the remaining members of the current Patapsco
Valley board of directors to Farmers & Mechanics National Bank's community
advisory council.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL. In connection with its approval of the merger, the Patapsco Valley
board of directors considered the interests of its members and certain executive
officers of Patapsco Valley in the merger that differed from those interests of
stockholders generally, including interests relating to provisions in the merger
agreement with respect to indemnification and insurance, employee benefits and
the election of one member of the Patapsco Valley board of directors as a
director of F&M Bancorp at the effective time. In addition, the Patapsco Valley
board of directors also considered employment and severance arrangements with
its officers.
INDEMNIFICATION; INSURANCE. The merger agreement provides that, after the
closing of the merger, F&M Bancorp will indemnify, to the extent provided by
Maryland law, the former directors and officers of Patapsco Valley and its
subsidiaries against liabilities incurred in connection with any claim or
proceeding arising out of actions or omissions occurring at or prior to the
completion of the merger, including as a result of the transactions contemplated
by the merger agreement. In addition, F&M Bancorp has agreed to maintain in
effect for a period of six years after the effective time of the merger
directors and officers liability insurance coverage with respect to wrongful
acts or omissions committed or allegedly committed prior to the effective time
of the merger by officers or directors of Patapsco Valley and its subsidiaries.
STOCK OPTIONS. As of September 6, 1999, the date immediately prior to the
date on which the merger agreement was signed, approximately 44,076 options to
purchase shares of Patapsco Valley common stock were outstanding under the
Patapsco Valley Incentive Stock Option Plan, Director's Stock Option Plan, and
Employee Stock Purchase Plan, of which 22,000 were fully vested and
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exercisable. An additional 4,000 options were granted to an employee of a bank
subsidiary by separate agreement. Options under the Director's Stock Option Plan
are fully vested. It is anticipated that options under the Incentive Stock
Option Plan will not become vested by the time of the merger, but that all
options currently outstanding under the Employee Stock Purchase Plan will become
fully vested by the time of the merger. All Patapsco Valley options outstanding
prior to the effective time of the merger are expected to be assumed by F&M
Bancorp and converted to the right to receive F&M Bancorp common stock under the
terms contained in the merger agreement. See "--Treatment of Outstanding
Patapsco Valley Options."
EMPLOYEE BENEFITS. The merger agreement provides that, after the
consummation of the merger, the employees of Patapsco Valley and its
subsidiaries will be entitled to participate in F&M Bancorp's employee benefit
plans in which similarly situated employees of F&M Bancorp or its subsidiaries
participate, to the same extent as comparable employees of F&M Bancorp or its
subsidiaries. With respect to each employee benefit plan of F&M Bancorp, for
purposes of determining eligibility to participate, vesting and entitlement to
benefits, F&M Bancorp will give each of the employees of Patapsco Valley and its
subsidiaries full credit for each employee's service with Patapsco Valley to the
same extent recognized by Patapsco Valley or its subsidiaries prior to the
closing of the merger, except to the extent giving credit would result in the
duplication of benefits and except for benefit accruals under defined benefit
pension plans. F&M Bancorp has agreed to waive all limitations as to preexisting
conditions, exclusions and waiting periods with respect to participation and
coverage requirements applicable to Patapsco Valley employees, except to the
extent that the limitations are already in effect and have not been met for
employees under existing Patapsco Valley benefit plans prior to the effective
time of the merger. Patapsco Valley employees will be given credit for amounts
paid under a corresponding benefit plan during the same period for purposes of
applying deductibles, co-payments and out-of-pocket requirements as if those
amounts had been paid in accordance with the terms and conditions of the F&M
Bancorp employee benefit plans.
F&M Bancorp and its subsidiaries have agreed to honor, in accordance with
their terms, all employment, severance and other compensation agreements and
arrangements that were disclosed to F&M Bancorp at the time of the execution of
the merger agreement that are between Patapsco Valley or its subsidiaries and
any director, officer or employee of Patapsco Valley or its subsidiaries. An
employment agreement between Commercial and Farmers Bank and John S. Whiteside,
President and CEO of Patapsco Valley and Commercial and Farmers Bank, and an
employment agreement between Commercial and Farmers Bank and Bernard G.
Malinowski, Senior Vice President of Patapsco Valley and Commercial and Farmers
Bank, become effective on the date on which a "change in control," as defined in
the employment agreement, of Commercial and Farmers Bank occurs. For a term of
either five years from a change in control or the date of his 65th birthday,
whichever occurs first, Mr. Whiteside and Mr. Malinowski will receive an annual
salary that is at least equal to the annual salary received immediately prior to
the effective date of the employment agreement. However, if Mr. Whiteside or
Mr. Malinowski are instead terminated, for a reason other than for cause or
because of death, disability, or physical or mental incapacity, or if
Mr. Whiteside or Mr. Malinowski resigns due to a breach of the employment
agreement, he will, for the remainder of the contract term, receive (1) his
benefits and be paid, monthly, his then-current salary, including estimated
bonuses or incentives to which he would have been entitled had no termination or
resignation occurred or, (2) at Mr. Whiteside's or Mr. Malinowski's election, a
severance of two years' salary, including a pro rata amount of any estimated
bonus, and the value of benefits and stock options that would have been payable
for the next two years. Each of Mr. Whiteside and Mr. Malinowski may resign and
receive such termination or severance payments upon his reasonable belief that
the change in control, coupled with a material change in circumstances,
significantly affects their capacity to perform his duties.
In addition, a retention bonus equal to one year's salary will be paid to
each of Kevin P. Huffman, Executive Vice President and Chief Operations Officer,
Edwin B. McKee, Senior Vice President, Dennis W. Miller, Senior Vice President,
and Barbara M. Broczkowski, Vice President and Chief
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Financial Officer, if such person chooses to remain employed with F&M Bancorp or
Farmers & Mechanics National Bank for at least 90 days after the merger. These
retention payments could, under particular circumstances, be in an aggregate
amount equal to $291,683, based on current salaries.
TREATMENT OF OUTSTANDING PATAPSCO VALLEY STOCK OPTIONS
At the effective time of the merger, each outstanding and unexercised option
to purchase shares of Patapsco Valley common stock will be assumed by F&M
Bancorp. Each Patapsco Valley option will be converted automatically into an
option to acquire F&M Bancorp common stock on the same terms and conditions. The
number of shares of F&M common stock to be subject to any Patapsco option will
be equal to the number of shares of Patapsco Valley common stock subject to that
option multiplied by 1.18 and rounded down to the nearest whole share. The
exercise price per share of F&M Bancorp common stock under any converted
Patapsco option will be equal to the exercise price per share of Patapsco Valley
common stock subject to such option divided by 1.18 and rounded up to the
nearest cent. The terms and conditions for the purchase of such options are
otherwise identical to those applicable under the Patapsco Valley stock option
plans. As of the date of this proxy statement-prospectus, there were 44,076
Patapsco Valley options outstanding, 27,876 of which are expected to be fully
exercisable at the completion of the merger.
CONDITIONS TO COMPLETION OF THE MERGER
Completion of the merger is subject to various conditions. While it is
anticipated that all such conditions will be satisfied, there can be no
assurance as to whether or when all of such conditions will be satisfied or,
where permissible, waived.
The respective obligations of F&M Bancorp and Patapsco Valley to effect the
merger are subject to the satisfaction or waiver of each of the following
conditions:
- approval of the merger by holders of two-thirds of the outstanding shares
of Patapsco Valley common stock;
- approval for quotation on Nasdaq of the shares of F&M Bancorp common stock
to be issued in the merger, subject to official notice of issuance;
- receipt of all regulatory approvals and consents and expiration of all
applicable waiting periods;
- effectiveness of the registration statement for the shares of F&M Bancorp
common stock to be issued in the merger;
- absence of any order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition that
prohibits the completion of the merger;
- absence of any statute, rule, regulation, order, injunction or decree that
prohibits, restricts or makes illegal completion of the merger or the
merger of the bank subsidiaries;
- receipt by F&M Bancorp of a letter from Arthur Andersen LLP stating that
the merger will qualify for "pooling of interests" accounting treatment, a
copy of which will be provided to Patapsco Valley;
- the performance by the other party of its obligations contained in the
merger agreement in all material respects; and
- receipt by each party of an opinion of its counsel dated as of the
effective time of the merger substantially to the effect that on the basis
of the facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the effective
time of the merger, the merger will be treated for United States federal
income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code.
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The obligations of F&M Bancorp to effect the merger are further subject to
the satisfaction, or waiver by F&M Bancorp, of each of the following conditions:
- the representations and warranties of Patapsco Valley contained in the
merger agreement relating to:
-- the capitalization of Patapsco Valley,
-- the authority of Patapsco Valley to enter into the merger and stock
option agreements and of Commercial and Farmers Bank to enter into the
subsidiary merger agreement, and the enforceability of those agreements
against each of them,
-- the financial statements of Patapsco Valley,
-- the employment agreements to which Patapsco Valley and its subsidiaries
are a party,
-- Patapsco Valley's reports and materials filed with the SEC or provided
to its stockholders, and
-- the accuracy of the information provided by Patapsco Valley for
inclusion in this proxy statement-prospectus,
must be true and correct in all material respects as of the date of the
merger agreement and, except to the extent these representations and
warranties speak as of an earlier date, as of the closing date of the
merger as though made on and as of the closing date; and
- all other representations and warranties of Patapsco Valley contained in
the merger agreement must be true and correct as of the date of the merger
agreement and, except to the extent the representations and warranties
speak as of an earlier date, as of the closing date of the merger as
though made on and as of the closing date, except that the representations
and warranties shall be deemed to be true and correct unless the failure
or failures of the representations and warranties to be so true and
correct, individually or in the aggregate, has had or is reasonably likely
to have a material adverse effect (as defined below) on Patapsco Valley.
The merger agreement defines a "material adverse effect," when applied to a
party to the merger agreement, as a material adverse effect on
- the business, results of operations or financial condition of such party
and its subsidiaries taken as a whole, other than any such effect
attributable to or resulting from
-- any change in banking or similar laws, rules or regulations of general
applicability or interpretations thereof by courts or governmental
authorities,
-- any change in GAAP or regulatory accounting principles applicable to
banks or their holding companies generally,
-- any change in general economic or business conditions affecting banks,
thrifts or holding companies generally, provided that the change does
not affect the effected party to a materially greater extent than
banks, thrifts or holding companies generally and that the change does
not have a materially adverse effect on the results of operations or
financial condition of the effected party, or
-- any action or omission of Patapsco Valley or F&M Bancorp or any
subsidiary of either of them taken with the prior written consent of
the other party; or
- the ability of such party and its subsidiaries to consummate the
transactions contemplated by the merger agreement and the stock option
agreement.
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The obligations of Patapsco Valley to effect the merger are further subject
to the satisfaction, or waiver by Patapsco Valley, of each of the following
conditions:
- the representations and warranties of F&M Bancorp contained in the merger
agreement relating to:
-- the capitalization of F&M Bancorp,
-- the authority of F&M Bancorp to enter into the merger and stock option
agreements and of Farmers & Mechanics National Bank to enter into the
subsidiary merger agreement, and the enforceability of those agreements
against each of them,
-- the financial statements of F&M Bancorp,
-- F&M Bancorp's reports and materials filed with the SEC or provided to
its stockholders, and
-- the accuracy of the information provided by F&M Bancorp for inclusion
in this proxy statement-prospectus,
must be true and correct in all material respects as of the date of the
merger agreement and, except to the extent the representations and
warranties speak as of an earlier date, as of the closing date of the
merger as though made on and as of the closing date; and
- all other representations and warranties of F&M Bancorp contained in the
merger agreement must be true and correct as of the date of the merger
agreement and, except to the extent the representations and warranties
speak as of an earlier date, as of the closing date of the merger as
though made on and as of the closing date, except that the representations
and warranties shall be deemed to be true and correct unless the failure
or failures of the representations and warranties to be so true and
correct, individually or in the aggregate, has had or is reasonably likely
to have a material adverse effect on F&M Bancorp.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Under the merger agreement, the respective obligations of F&M Bancorp and
Patapsco Valley to effect the merger are conditioned upon, among other things,
the receipt of all requisite regulatory approvals. The requisite regulatory
approvals include the approval of the OCC of the merger of the bank subsidiaries
under the Bank Merger Act. In view of the OCC's consideration under the Bank
Merger Act of the merger of the bank subsidiaries, which will occur
contemporaneously with the merger, the Federal Reserve Board, or the appropriate
Federal Reserve Bank, acting under delegated authority, may waive applicable
requirements for prior approval of the merger under the Bank Holding Company Act
and the Federal Reserve Board's Regulation Y. F&M Bancorp has received a waiver
from the Federal Reserve Bank of Richmond. Notice of the merger and the merger
of the bank subsidiaries also has been provided to the Maryland Commissioner of
Financial Regulation, and the Commissioner will be notified when the merger and
the merger of the bank subsidiaries are consummated.
Under the Bank Merger Act, the OCC must consider, among other factors, the
financial and managerial resources and future prospects of the existing and
proposed organizations and the convenience and needs of the communities to be
served. In considering financial and managerial factors, the OCC will evaluate,
among other things, the adequacy of the capital of the parties to the
transaction. In addition, the OCC will assess the degree to which the parties
are taking appropriate steps to assure that their electronic data processing
systems and those of their vendors are Year 2000 compliant and their plans for
ensuring Year 2000 readiness of the resulting organization.
The OCC is prohibited from approving any transaction if it would result in a
monopoly or would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States or if its effect in any section of the United States would be
substantially to lessen competition, or to tend to create a monopoly, or result
in a restraint of trade, unless the OCC finds that the anti-competitive effects
of the transaction are clearly outweighed in the public interest by the probable
effect of the transaction in meeting the convenience and needs of the
communities to be served.
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In addition, under the Community Reinvestment Act of 1977, the OCC must take
into account the record of performance of each of the depository institution
subsidiaries of F&M Bancorp and Patapsco Valley in meeting the credit needs of
its assessment area, including low- and moderate-income neighborhoods. OCC
regulations require publication of notice of, and the opportunity for public
comment on, the proposed transaction, and the OCC may hold a public hearing, if
deemed appropriate. Any hearing or comments provided by third parties could
prolong the period during which the application is subject to review by the OCC.
Assuming OCC approval, the merger may not be consummated until 30 days after
the approval, during which time the Department of Justice may challenge the
merger on antitrust grounds and seek the divestiture of certain assets and
operations, except that, with the approval of the OCC and the Department of
Justice, the waiting period may be reduced to no less than 15 days. The
commencement of an antitrust action by the Department of Justice would stay the
effectiveness of the OCC approval of the merger unless a court specifically
orders otherwise.
Applications or notices for the foregoing regulatory approvals have been
filed with the applicable regulatory authorities. The merger and the merger of
the bank subsidiaries will not proceed in the absence of all approvals, and we
can give no assurance that all approvals will be obtained. Further, if approved,
we can give no assurance as to the date of the approvals, or that the approvals
will not be conditioned upon matters that would be detrimental to F&M Bancorp.
CONDUCT OF BUSINESS PENDING THE MERGER
Under the merger agreement, Patapsco Valley has agreed that, until the
effective time and except as provided in the merger agreement or the stock
option agreement, Patapsco Valley and its subsidiaries will carry on their
respective businesses in the ordinary course consistent with past practice and
consistent with prudent banking practice. Patapsco Valley has agreed to use its
reasonable best efforts to
- maintain its business organization and that of its subsidiaries intact,
- keep available to itself and F&M Bancorp the present services of its and
its subsidiaries' employees, and
- preserve for itself and F&M Bancorp the goodwill of its and its
subsidiaries' customers and others with whom business relationships exist.
The merger agreement also contains additional restrictions on the conduct of
Patapsco Valley's business pending completion of the merger. In particular, the
merger agreement provides that, except as provided in the merger agreement or
with the prior written consent of F&M Bancorp, Patapsco Valley and its
subsidiaries may not, among other things:
- solely in the case of Patapsco Valley, declare or pay any dividends on, or
make other distributions in respect of, any of its capital stock, other
than normal quarterly dividends in an amount of no more than $0.13 per
share of Patapsco Valley common stock,
- split, combine or reclassify any shares of its capital stock,
- repurchase, redeem or otherwise acquire, except for the acquisition of
shares by Patapsco Valley in a fiduciary capacity or in respect of a debt
previously contracted, any shares of the capital stock of Patapsco Valley
or any of its subsidiaries or securities convertible into or exercisable
therefor,
- issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or securities convertible into or
exchangeable therefor, except pursuant to (1) Patapsco Valley stock
options outstanding prior to the date of the merger agreement,
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(2) restricted stock awards granted prior to the date of the merger
agreement, (3) Patapsco Valley's dividend reinvestment plan consistent
with past practice, if Patapsco Valley has not suspended it, and (4) the
stock option agreement between F&M Bancorp and Patapsco Valley,
- amend its articles of incorporation, bylaws or other similar governing
documents,
- make any capital expenditures other than those that are in the ordinary
course of business or as necessary to maintain existing assets in good
repair, and in any event are in an amount of no more than $100,000 in the
aggregate,
- enter into any new line of business,
- acquire or agree to acquire any business or entity or otherwise acquire
any assets that would be material to Patapsco Valley,
- take any action that is intended or may reasonably be expected to result
in any of its representations and warranties set forth in the merger
agreement being or becoming untrue in any material respect, or in any of
the conditions to the merger not being satisfied,
- change its methods of accounting in effect at June 30, 1999,
- adopt, amend or terminate, except as may be required by law, any employee
benefit plan or agreement, arrangement, plan or policy between Patapsco
Valley or any of its subsidiaries and any of its current or former
directors, officers and employees,
- except for normal increases in the ordinary course of business consistent
with past practice or except as required by applicable law, increase in
any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan or agreement as in
effect as of the date of the merger agreement, including, without
limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares,
- take or cause to be taken any action that would cause the merger to fail
to qualify (1) for pooling of interests accounting treatment or (2) as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code,
PROVIDED, HOWEVER, that nothing contained in the merger agreement limits
the ability of F&M Bancorp to exercise its rights under the stock option
agreement,
- other than in the ordinary course of business consistent with past
practice,
-- dispose of or encumber or agree to dispose of or encumber its material
assets, properties or other rights or agreements,
-- incur any indebtedness for borrowed money, or
-- assume, guarantee, endorse or otherwise become responsible for the
obligations of any other entity,
- file any application to relocate or terminate the operations of any of its
banking offices,
- invest or commit to invest in real estate or any real estate development
project,
- create, renew, amend or terminate or give notice to do the same with
respect to any material contract, agreement or lease for goods, services
or office space to which Patapsco Valley or any of its subsidiaries is a
party or by which Patapsco Valley or any of its subsidiaries or their
respective properties is bound,
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- without prior consultation with F&M Bancorp, restructure or materially
change its investment securities portfolio or its gap position, through
purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported, or
- without at least 24-hours prior written notice to F&M Bancorp, make,
purchase, or commit to make or purchase, any loan or loans, or extend any
line of credit, to any borrower and its affiliates in an aggregate
principal amount greater than $1,000,000 or in an amount that, when
aggregated with other indebtedness of such borrower to Patapsco Valley or
its subsidiaries, would exceed $1,000,000.
Patapsco Valley also has agreed in the merger agreement that neither it nor
any of its subsidiaries will authorize or permit any of its officers, directors,
employees or any representative retained by it to directly or indirectly:
- solicit, initiate, encourage or facilitate any inquiries relating to, or
the making of any proposal that constitutes, a "takeover proposal" (as
defined below),
- recommend or endorse any takeover proposal, or
- enter into, encourage or facilitate any discussions or negotiations
regarding, furnish to any person any information with respect to, or
facilitate any attempt to make or implement any proposal that constitutes
or may reasonably be expected to lead to, any proposal relating to or
involving a takeover proposal; provided that Patapsco Valley may
communicate information about any takeover proposal to you if, in the good
faith judgment of the Patapsco Valley board of directors, based upon the
advice of outside counsel, such recommendation is required under
applicable law. The merger agreement permits the Patapsco Valley board of
directors to (1) to the extent applicable, publish or give notice of
position, or inability to take position on and recommendation with respect
to a proposed tender offer or (2) furnish information to, or enter into
discussions or negotiations with, any person or entity that makes an
unsolicited, written bona fide proposal regarding a takeover proposal if,
and only to the extent that
-- the Patapsco Valley stockholders special meeting has not occurred,
-- the Patapsco Valley board of directors concludes in good faith, after
consulting its outside counsel, that it is legally required to furnish
such information or enter into such discussions or negotiations in
order to comply with its fiduciary duties to stockholders,
-- prior to taking such action, Patapsco Valley receives from the person
or entity making the takeover proposal an executed confidentiality
agreement and an executed standstill agreement, similar to any such
agreement between F&M Bancorp and Patapsco Valley, and
-- the Patapsco Valley board of directors, after consulting its financial
advisor, concludes in good faith that the proposal regarding the
takeover proposal contains an offer of consideration that is greater
than the consideration in the merger agreement.
Patapsco Valley agreed to immediately cease any activities, discussions or
negotiations previously conducted with any parties other than F&M Bancorp with
respect to any of the above actions. Patapsco Valley also agreed that it will
notify F&M Bancorp immediately if any takeover inquiries or proposals are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, Patapsco Valley, and
will promptly inform F&M Bancorp in writing of the relevant details with respect
to the foregoing.
As used in the merger agreement, "takeover proposal" means any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving Patapsco Valley or any subsidiary of Patapsco Valley or
any proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the assets of, Patapsco Valley or any subsidiary of
Patapsco Valley
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other than the transactions contemplated or permitted by the merger agreement
and the stock option agreement.
Under the merger agreement, F&M Bancorp has agreed that, subject to certain
exceptions, it and its subsidiaries will carry on their respective businesses in
the ordinary course consistent with prudent banking practice. F&M Bancorp has
also agreed that until the effective time, except as provided in the merger
agreement or with the prior written consent of Patapsco Valley, neither F&M
Bancorp nor any of its subsidiaries will
- solely in the case of F&M Bancorp, declare or pay any extraordinary or
special dividends on or make any extraordinary or special distributions in
respect of its capital stock, except that F&M Bancorp can increase the
quarterly cash dividend on the F&M Bancorp common stock,
- take any action that is intended or may reasonably be expected to result
in any of the conditions to the merger not being satisfied,
- change its method of accounting in effect at June 30, 1999,
- knowingly take any action that would result in a failure to maintain the
authorization for quotation of F&M Bancorp common stock on Nasdaq, or
- take or cause to be taken any action that would cause the merger to fail
to qualify (1) for pooling of interests accounting treatment or (2) as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code,
except that nothing contained in the merger agreement limits the ability
of F&M Bancorp to exercise its rights under the stock option agreement.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
EXTENSION AND WAIVER. At any time prior to the completion of the merger,
F&M Bancorp and Patapsco Valley may, to the extent legally allowed:
- extend the time for the performance of any of the obligations of the other
party;
- waive any inaccuracies in the representations and warranties contained in
the merger agreement or in any document delivered pursuant to the merger
agreement; and
- waive compliance with any of the agreements or conditions contained in the
merger agreement.
AMENDMENT. Subject to compliance with applicable law, F&M Bancorp and
Patapsco Valley may amend the merger agreement at any time before or after
approval of the matters presented in connection with the merger by Patapsco
Valley stockholders. However, after any approval by Patapsco Valley stockholders
of the merger, there may not be, without further approval of those stockholders,
any amendment of the merger agreement that changes the amount or the form of the
consideration to be delivered to Patapsco Valley stockholders, other than as
contemplated by the merger agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after its approval by the stockholders of
Patapsco Valley, in any of the following ways:
- by the mutual consent of F&M Bancorp and Patapsco Valley;
- by F&M Bancorp if the Patapsco Valley board of directors withdraws,
modifies or amends its recommendation to its stockholders that they
approve the merger; or
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- by either F&M Bancorp or Patapsco Valley
-- upon written notice to the other within 60 days after the date on which
any request or application for an approval described in "--Requisite
Regulatory Approvals" is denied or withdrawn at the request of the
governmental entity that must grant such approval, unless within the
60-day period a petition for rehearing or an amended application has
been filed with the applicable governmental entity, or unless the
failure to obtain the necessary regulatory approval is due to the
failure of the party seeking to terminate the merger agreement to
perform or observe its covenants and agreements set forth in the merger
agreement;
-- if any governmental entity of competent jurisdiction issues a final
nonappealable order enjoining or otherwise prohibiting the consummation
of any of the transactions contemplated by the merger agreement;
-- in the event that the merger has not been completed by March 31, 2000,
unless the failure to complete the merger is due to a breach of the
merger agreement by the party seeking to terminate the merger
agreement;
-- if the approval of the Patapsco Valley stockholders required for
completion of the merger agreement is not obtained, provided that if
Patapsco Valley is the terminating party, it shall not be in breach of
its obligations in the merger agreement with respect to the special
meeting of its stockholders; or
-- in the event of (1) a material breach by the other of any of its
representations or warranties contained in the merger agreement that is
not cured within 30 days after written notice of such breach is given
to the breaching party or which breach, by its nature, cannot be cured
prior to the closing or (2) a material breach of any of the covenants
or agreements contained in the merger agreement by the other that is
not cured within 30 days after written notice of such breach is given
to the breaching party, provided that the terminating party is not then
in material breach of any representation, warranty, covenant or other
agreement contained in the merger agreement.
Patapsco Valley may terminate the merger agreement if the price of F&M
Bancorp's common stock, as compared to its peer group, experiences a substantial
decline. Specifically, Patapsco Valley may terminate the merger agreement during
the ten day period that commences two days after the "determination date" (as
defined below) if both of the following events occur:
(1) the average of the closing sale prices of F&M Bancorp's common stock, as
reported on Nasdaq for the 20 consecutive trading days ending on the
fifth business day (the "determination date") prior to the OCC's approval
of the merger (the "average closing price") is less than $21.375, and
(2) the number obtained by dividing the average closing price by $21.375
(such number being referred to herein as the "buyer ratio") represents a
decline from F&M Bancorp's closing stock price of $28.50 on September 7,
1999 that is more than 15 percentage points greater than the number
obtained by dividing the index price (as defined below) on the
determination date by the index price on September 7, 1999 (such number
being referred to herein as the "index ratio").
Patapsco Valley must give prompt written notice to F&M Bancorp of its
election to exercise its termination right. During the five-day period
commencing with its receipt of such notice, F&M Bancorp may elect to adjust the
exchange ratio to equal the lesser of
(1) the number equal to $25.2225 divided by the average closing price, and
(2) the quotient obtained by (A) dividing the index ratio multiplied by 1.18
by (B) the buyer ratio.
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If F&M Bancorp gives prompt written notice to Patapsco Valley of its
election and the revised exchange ratio, no termination will occur and the
merger agreement will remain in full force and effect in accordance with its
terms, except that the exchange ratio will be so modified.
The term "index group" means the group of 17 bank holding companies listed
below, the common stock of all of which is publicly traded and as to which there
shall not have been, since September 7, 1999 and before the determination date,
an announcement of a proposal for such company to be acquired or for such
company to acquire another company or companies in transactions with a value
exceeding 25% of the acquiror's market capitalization as of September 7, 1999.
In the event that the common stock of any one of the 17 companies ceases to be
publicly traded or any such announcement is made with respect to any company,
that company will be removed from the index group, and the weights attributed to
the remaining companies will be adjusted proportionately for purposes of
determining the index price. The 17 bank holding companies and the weights
attributed to them are as follows:
<TABLE>
<CAPTION>
BANK HOLDING COMPANY WEIGHTING
- -------------------- ----------
<S> <C>
BT Financial Corporation.................................... 5.2%
F&M National Corporation.................................... 7.4
F.N.B. Corporation.......................................... 6.7
FCNB Corp................................................... 3.8
First Commonwealth Financial Corp........................... 10.2
Harleysville National Corporation........................... 2.5
National Penn Bancshares, Inc............................... 5.6
Omega Financial Corporation................................. 2.9
Provident Bankshares Corporation............................ 8.4
S&T Bancorp, Inc............................................ 8.9
Sandy Spring Bancorp, Inc................................... 3.2
Sun Bancorp, Inc............................................ 2.5
Susquehanna Bancshares, Inc................................. 12.2
Trust Company of New Jersey (The)........................... 6.3
Union Bankshares Corporation................................ 2.5
United National Bancorp..................................... 5.0
WesBanco, Inc............................................... 6.7
-----
100.0%
</TABLE>
The term "index price" means, on a given date, the weighted average,
weighted in accordance with the factors listed above, of the closing prices of
the companies comprising the index group.
In the event of the termination of the merger agreement by either F&M
Bancorp or Patapsco Valley, neither F&M Bancorp nor Patapsco Valley will have
any further obligations under the merger agreement except:
(1) for certain specified provisions of the merger agreement relating to
confidentiality and expenses and
(2) that no party will be relieved or released from any liabilities or
damages arising out of its willful breach of any provisions of the merger
agreement.
RESTRICTIONS ON RESALES BY AFFILIATES
Shares of F&M Bancorp common stock to be issued to you in the merger have
been registered under the Securities Act. Shares of F&M Bancorp common stock
issued in the merger may be traded freely and without restriction by those
stockholders not deemed to be affiliates (as that term is defined
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under the Securities Act) of Patapsco Valley. Any subsequent transfer of shares,
however, by any person who is an affiliate of Patapsco Valley at the time the
merger is submitted for vote of the holders of Patapsco Valley common stock
will, under existing law, require either:
- the further registration under the Securities Act of the F&M Bancorp
common stock to be transferred,
- compliance with Rule 145 promulgated under the Securities Act, which
permits limited sales under certain circumstances, or
- the availability of another exemption from registration.
An affiliate of Patapsco Valley is a person who directly, or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, Patapsco Valley. These restrictions are expected to apply
to the directors and executive officers of Patapsco Valley and the holders of
10% or more of the Patapsco Valley common stock. The same restrictions apply to
certain relatives or the spouse of those persons and any trusts, estates,
corporations or other entities in which those persons have a 10% or greater
beneficial or equity interest. F&M Bancorp will give stop transfer instructions
to the transfer agent with respect to the shares of F&M Bancorp common stock to
be received by persons subject to these restrictions, and the appropriate legend
will be placed on the certificates for their shares.
SEC guidelines regarding qualifying for the pooling of interests method of
accounting also limit sales of shares of the acquiring and acquired company by
affiliates of either company in a business combination. SEC guidelines indicate
that the pooling of interests method of accounting will generally not be
challenged on the basis of sales by affiliates of the acquiring or acquired
company if those affiliates do not dispose of any of the shares of the
corporation they own or shares of a corporation they receive in connection with
a merger during the period beginning 30 days before the effective date of the
merger and ending when financial results covering at least 30 days of
post-merger operations of the combined entity have been published.
Each of Patapsco Valley and F&M Bancorp has agreed in the merger agreement
to use their reasonable best efforts to cause each person who is an affiliate of
that party for purposes of Rule 145 under the Securities Act, and for purposes
of qualifying the merger for pooling of interests accounting treatment, to
deliver to the other party a written agreement intended to ensure compliance
with the Securities Act and to preserve the ability to treat the merger as a
pooling of interests.
F&M Bancorp has agreed in the merger agreement to use all reasonable efforts
to publish no later than 21 days after the end of the first full calendar month
in which there are at least 30 days after the effective time of the merger,
financial results covering at least 30 days of post-merger combined operations;
PROVIDED, HOWEVER, that if the foregoing would require publication of the
financial results in April 2000, F&M Bancorp will not be required to publish the
financial results prior to the time it has released summary quarterly earnings
information with respect to the first quarter of 2000 in the ordinary course.
STOCK EXCHANGE LISTING OF F&M BANCORP COMMON STOCK
The F&M Bancorp common stock is authorized for quotation on Nasdaq. F&M
Bancorp has agreed to use all commercially reasonable efforts to cause the
shares of F&M Bancorp common stock to be issued in the merger to be authorized
for quotation on Nasdaq, subject to official notice of issuance, as of the
effective time of the merger.
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ANTICIPATED ACCOUNTING TREATMENT
The merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
amount of assets and liabilities of F&M Bancorp and Patapsco Valley will be
combined at the effective time of the merger and carried forward at their
previously recorded amounts and the stockholders' equity accounts of F&M Bancorp
and Patapsco Valley will be combined on F&M Bancorp's consolidated balance
sheet. Income and other financial statements of F&M Bancorp issued after the
effective time of the merger will be restated retroactively to reflect the
consolidated operations of F&M Bancorp and Patapsco Valley as if F&M Bancorp and
Patapsco Valley had always been combined.
The parties have prepared the unaudited pro forma financial information
contained in this proxy statement-prospectus using the pooling of interests
accounting method to account for the merger. See "Summary--Comparative Unaudited
Per Share Data" and "Pro Forma Condensed Combined Financial Information
(Unaudited)."
The merger agreement provides that a condition to each of F&M Bancorp's and
Patapsco Valley's obligation to complete the merger is the receipt of a letter
from F&M Bancorp's independent accountants to the effect that the merger
qualifies for pooling of interests accounting treatment. See "--Conditions to
Completion of the Merger" above.
For information concerning certain restrictions to be imposed on the
transferability of F&M Bancorp common stock to be received by affiliates in
order, among other things, to ensure the availability of pooling of interests
accounting treatment, see "--Restrictions on Resales by Affiliates" above.
DISSENTERS' APPRAISAL RIGHTS
GENERAL. Pursuant to Section 3-202 of the Maryland General Corporation Law,
holders of Patapsco Valley common stock will have the right to object to the
merger and to demand and receive the "fair value" of their Patapsco Valley
common stock. These rights are known as dissenters' rights. The following
discussion is not a complete description of the law relating to the rights
available under the law and is qualified in its entirety by the full text of
Title 3, Subtitle 2 of the Maryland General Corporation Law. All references to
section numbers in this particular discussion are in reference to the Maryland
General Corporation Law. The applicable sections of Title 3, Subtitle 2 of the
Maryland General Corporation Law are reprinted in their entirety as Appendix E
to this proxy statement-prospectus. If you desire to exercise your rights, you
should review carefully these sections and you are urged to consult a legal
advisor before electing or attempting to exercise these rights.
If you are a holder of Patapsco Valley common stock as of October 26, 1999,
the record date, and you comply with the applicable procedures summarized below,
you will be entitled to dissenters' rights under Section 3-202, subject to the
exceptions stated below and in Title 3, Subtitle 2 of the Maryland General
Corporation Law. If you have a beneficial interest in Patapsco Valley common
stock held in the name of another person, you must act promptly to cause the
record holder to follow the steps summarized below in a proper and timely manner
to perfect dissenters' rights.
Under Maryland law, except as described below, if you follow the procedures
stated in Section 3-203, you will be entitled to receive payment of the fair
value of your shares, which shall be determined as of the date you voted against
or failed to vote on the merger. If you properly perfect your rights, you will
not be entitled to surrender your shares of Patapsco Valley common stock for the
shares of F&M Bancorp common stock that you would otherwise have received as a
result of the merger. You will also lose any right to any dividend declared
after the date you voted against or failed to vote on the merger.
EXERCISING DISSENTERS' RIGHTS. If you elect to exercise your dissenters'
rights, you must not vote for approval of the merger. However, a vote against
approval of the merger is not required in order for
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you to exercise dissenters' rights. If you return a signed proxy but do not
specify a vote against approval of the merger or a direction to abstain, the
proxy, if not revoked, will be voted for approval of the merger, which will have
the effect of waiving your dissenters' rights.
WRITTEN DEMAND FOR APPRAISAL. If you elect to exercise your dissenters'
rights, you must deliver to Patapsco Valley a written objection to the merger
prior to the vote on the merger at the Patapsco Valley special meeting. Within
20 days after the articles of merger are accepted by the Maryland State
Department of Assessments and Taxation, you must make a written demand on F&M
Bancorp for payment for your stock. The demand must inform F&M Bancorp of the
number and class of stock for which you demand payment. A proxy or vote against
approval of the merger does not constitute a demand. You must be the beneficial
owner of Patapsco Valley common stock on the record date, and you must continue
to hold your Patapsco Valley common stock as beneficial owner until the date the
merger is completed in order to exercise your dissenters' rights. Accordingly,
you will lose any right to payment of the fair value of your Patapsco Valley
common stock if you transfer your Patapsco Valley common stock prior to the date
the merger is completed.
If you beneficially own Patapsco Valley common stock, you have dissenters'
rights, but only a holder of record of Patapsco Valley common stock is entitled
to assert these rights for Patapsco Valley common stock registered in the
holder's name. A demand for payment of the fair value should be executed by or
on behalf of the holder of record, fully and correctly, as the holder's name
appears on the holder's stock certificates. Thus, if your Patapsco Valley common
stock is owned of record in a fiduciary capacity, such as by a broker, trustee,
guardian or custodian, execution of the demand should be made in that capacity.
All written objections to the merger should be sent or delivered to:
Patapsco Valley Bancshares, Inc.
8593 Baltimore National Pike
Ellicott City, Maryland 21043
Attention: Edwin B. McKee
All written demands for payment of the fair value of Patapsco Valley common
stock should be sent or delivered to:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21705
Attention: Gordon M. Cooley
Your Patapsco Valley common stock will be converted into the right to
receive F&M Bancorp stock in accordance with the merger agreement if you do not
strictly follow the requirements found in Title 3, Subtitle 2 of the Maryland
General Corporation Law. For example, you will lose your right to the payment of
the fair value of your Patapsco Valley common stock if no demand for the payment
thereof is filed within 20 days after the date the merger is completed. If you
demand payment of the fair value of your Patapsco Valley common stock and later
want to withdraw that demand, you may do so pursuant to Section 3-205, but only
with F&M Bancorp's prior consent.
F&M BANCORP NOTICE. Promptly after the articles of merger are accepted by
the Maryland State Department of Assessments and Taxation, F&M Bancorp, pursuant
to Section 3-208, must notify each holder of Patapsco Valley common stock who
has complied with the statutory requirements summarized above of the effective
date of the merger. F&M Bancorp may also send a written offer to pay the
objecting holders of Patapsco Valley common stock what it considers to be the
fair value of the stock. If F&M Bancorp chooses to do this, it will provide each
objecting holder of Patapsco Valley common stock with (1) a balance sheet as of
a date not more than 6 months before the date of the offer, (2) a profit and
loss statement for the 12 months ending on the date of that balance sheet, and
(3) any other information F&M Bancorp considers important.
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PETITION FOR APPRAISAL. Within 50 days after the date the articles of
merger are accepted by the Maryland State Department of Assessments and
Taxation, but not thereafter, F&M Bancorp or any holder of Patapsco Valley
common stock who has complied with the statutory requirements summarized above
may file a petition with a court of equity in Frederick County, Maryland
demanding a determination of the fair value of Patapsco Valley common stock (an
"appraisal"). F&M Bancorp is under no obligation to, and has no present
intention to, file a petition with respect to an appraisal of the fair value of
the Patapsco Valley common stock. Accordingly, it is the obligation of objecting
holders of Patapsco Valley common stock to initiate all necessary action to
perfect their dissenters' rights within the time period prescribed by
Section 3-208.
If a petition for an appraisal is timely filed, after a hearing on the
petition, the court will determine the holders of Patapsco Valley common stock
that are entitled to dissenters' rights and will appoint three disinterested
appraisers to determine the fair value of the Patapsco Valley common stock on
terms and conditions the court considers proper. Within 60 days after
appointment (or such longer period as the court may direct), the appraisers will
file with the court and mail to each party to the proceeding their report
stating their conclusion as to the fair value of the stock. Within 15 days after
the filing of this report, any party may object to such report and request a
hearing. The court shall, upon motion of any party, enter an order either
confirming, modifying, or rejecting such report and, if confirmed or modified,
enter judgment directing the time within which payment shall be made. If the
appraisers' report is rejected, the court may determine the fair value of the
stock of the objecting stockholders or may remit the proceeding to the same or
other appraisers. Any judgment entered pursuant to a court proceeding shall
include interest from the date of the Patapsco Valley stockholders' vote on the
merger. Costs of the proceeding shall be determined by the court and may be
assessed against F&M Bancorp or, under certain circumstances, the objecting
stockholder(s), or both.
FAIR VALUE. You should be aware that the fair value of your Patapsco Valley
common stock as determined under Section 3-202 could be more than, the same as
or less than the value of the F&M Bancorp stock you would receive in the merger
if you did not seek appraisal of your Patapsco Valley common stock. The Maryland
courts have stated that the appraised value of stock must be determined by
including all factors and elements which might reasonably affect its value, such
as market value, earnings prospects and the nature of the enterprise.
You should further be aware that, if you have duly demanded the payment of
the fair value of your Patapsco Valley common stock in compliance with
Section 3-203, you will not, after the date the merger is completed, be entitled
to vote the Patapsco Valley common stock subject to the demand for any purpose
or be entitled to the payment of dividends or other distributions on that stock.
Maryland courts have decided that the rights to receive fair value and to
statutory appraisal procedures, depending on factual circumstances, may or may
not be the dissenting stockholder's exclusive remedy. However, the Maryland
courts have held that equitable remedies are available only where there was
fraud on the part of the majority of the stockholders or the officers and
directors controlled by that majority.
STOCK OPTION AGREEMENT
GENERAL
As a condition for F&M Bancorp to enter into the merger agreement, Patapsco
Valley entered into a stock option agreement dated September 7, 1999 with F&M
Bancorp, which is attached hereto as Appendix B. The stock option agreement
grants F&M Bancorp an option to purchase up to 272,225 shares of Patapsco Valley
common stock, representing approximately 19.9% of the issued and outstanding
shares of such Patapsco Valley common stock without giving effect to the shares
that may be issued upon exercise of such option, at an exercise price of $27.50
per share. Any purchase of Patapsco Valley common stock by F&M Bancorp under the
stock option agreement is subject to the receipt of any required governmental
approvals.
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This summary is not complete and should be read in conjunction with the
complete stock option agreement attached to this proxy statement-prospectus as
Appendix B. We urge you to read Appendix B in its entirety.
EFFECT OF STOCK OPTION AGREEMENT
The stock option agreement is intended to increase the likelihood that the
merger will be completed in accordance with the terms of the merger agreement.
The stock option agreement may have the effect of discouraging persons who might
be interested in acquiring all of or a significant interest in Patapsco Valley,
even if such persons were prepared to pay a higher price per share for Patapsco
Valley common stock than the value per share contemplated by the merger
agreement. The acquisition of Patapsco Valley, a significant portion of its
assets or an interest in Patapsco Valley, or an agreement to do so, could cause
the option to become exercisable and significantly increase the cost to a
potential acquiror. Such increased costs might discourage a potential acquiror
from considering or proposing an acquisition or might result in a potential
acquiror proposing to pay a lower price per share to acquire Patapsco Valley
than it might otherwise have proposed to pay. Moreover, the management of
Patapsco Valley believes that the exercise of the option is likely to prohibit
any acquiror of Patapsco Valley from accounting for any acquisition of Patapsco
Valley using the pooling of interests accounting method for a period of two
years. This could discourage or preclude an acquisition by other banking
organizations.
TERMS OF STOCK OPTION AGREEMENT.
EXERCISING OPTION. F&M Bancorp may exercise its option only if both an
initial triggering event (as defined below) and a subsequent triggering event
(as defined below) occur. The triggering events generally relate to attempts by
any third party to acquire a significant interest in Patapsco Valley.
An initial triggering event means the occurrence of any of the following:
(1) without F&M Bancorp's prior written consent, Patapsco Valley or any of
its subsidiaries enters into an agreement to engage in, or the Patapsco
Valley board of directors recommends or publicly announces its intention
to recommend that you approve or accept, any acquisition transaction (as
defined below) with any third party;
(2) any third party (A) acquires beneficial ownership, or the right to
acquire beneficial ownership, of 10% or more of the outstanding shares of
the Patapsco Valley common stock or (B) commences, or starts to commence,
a tender offer or exchange offer to purchase 10% or more of the then
outstanding shares of Patapsco Valley common stock;
(3) without F&M Bancorp's prior written consent, Patapsco Valley or any of
its subsidiaries authorizes, recommends or proposes, or publicly
announces its intention to authorize, recommend or propose, to engage in
an acquisition transaction with any third party;
(4) the Patapsco Valley board of directors publicly withdraws or modifies,
or publicly announces its intent to withdraw or modify, in any manner
adverse to F&M Bancorp, its recommendation that you approve the
transactions contemplated by the merger agreement;
(5) any third party makes, or announces its intention to make, a proposal to
Patapsco Valley or its stockholders to engage in an acquisition
transaction;
(6) any third party files an application, or gives a notice under any
federal or state banking laws seeking regulatory approval to engage in an
acquisition transaction; or
(7) after a proposal or overture is made by a third party to Patapsco Valley
or its stockholders to engage in an acquisition transaction, Patapsco
Valley (A) breaches any covenant or obligation contained in the merger
agreement and such breach would entitle F&M Bancorp to terminate
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the merger agreement and (B) fails to cure the breach prior to the date
on which F&M Bancorp sends notice to Patapsco Valley that it wishes to
exercise the option.
The term "subsequent triggering event" means the occurrence of either of the
following events:
(1) the acquisition by any person of beneficial ownership of 20% or more of
the then outstanding shares of Patapsco Valley common stock or
(2) without F&M Bancorp's prior written consent, Patapsco Valley or any of
its subsidiaries enters into an agreement to engage in, or the Patapsco
Valley board of directors recommends or publicly announces its intention
to recommend that you approve or accept, any acquisition transaction with
any third party, except that the percentage referred to in clause (3) of
the definition of acquisition transaction set forth below shall be 20%.
The term "acquisition transaction" means any of the following:
(1) a merger or consolidation, or any similar transaction, involving
Patapsco Valley or any of its subsidiaries, other than internal mergers,
reorganizations, consolidations or dissolutions involving only existing
subsidiaries;
(2) a purchase, lease or other acquisition of all or a substantial portion
of the assets or deposits of Patapsco Valley or its subsidiaries; or
(3) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing
10% or more of the voting power of Patapsco Valley.
TERMINATION. F&M Bancorp's option will terminate upon the occurrence of any
of the following:
- the effective time of the merger;
- termination of the merger agreement prior to the occurrence of an initial
triggering event, other than a termination by F&M Bancorp as a result of
Patapsco Valley's breach of the merger agreement, other than a termination
resulting from a willful breach by Patapsco Valley of the merger
agreement; or
- 18 months after the termination of the merger agreement if such
termination occurs after the occurrence of an initial triggering event or
is a termination by F&M Bancorp as a result of Patapsco Valley's willful
breach of the merger agreement.
As of the date of this proxy statement-prospectus, to the best knowledge of
F&M Bancorp and Patapsco Valley, no initial triggering event or subsequent
triggering event has occurred.
ASSIGNMENT. Neither party may assign any of its rights or obligations under
the stock option agreement without the written consent of the other party,
except that if a subsequent triggering event occurs, F&M Bancorp may, subject to
limitations, assign its rights and obligations thereunder in whole or in part
within six months following such subsequent triggering event, subject to
extension as described in the stock option agreement.
REPURCHASE. Immediately prior to the occurrence of a repurchase event (as
defined below), Patapsco Valley will:
(1) following a request of the current holder of the option, repurchase the
option from the holder at a price equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) $27.50, multiplied by
the number of shares for which the option may then be exercised plus F&M
Bancorp's reasonable out-of-pocket expenses incurred in connection with
the stock option agreement and the merger agreement, to the extent not
previously reimbursed, and
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(2) at the request of the owner of option shares from time to time,
delivered within 90 days of such occurrence, or such later period as
provided in the option agreement, repurchase such number of the option
shares from the owner of those shares as the owner designates at a price
equal to the market/offer price multiplied by the number of option shares
so designated plus F&M Bancorp's reasonable out-of-pocket expenses
incurred in connection with the stock option agreement and the merger
agreement, to the extent not previously reimbursed.
A "repurchase event" will be deemed to have occurred upon:
- the completion of any merger, consolidation or similar transaction
involving Patapsco Valley or any purchase, lease or other acquisition of
all or a substantial portion of the assets of Patapsco Valley, other than
internal mergers, reorganizations, consolidations or dissolutions
involving only existing subsidiaries; or
- the acquisition by any third party of beneficial ownership of 50% or more
of the then outstanding shares of Patapsco Valley common stock.
The term "market/offer price" means the highest of:
- the price per share of Patapsco Valley common stock at which a tender
offer or exchange offer therefor has been made,
- the price per share of Patapsco Valley common stock to be paid by any
third party pursuant to an agreement with Patapsco Valley,
- the highest closing price for shares of Patapsco Valley common stock
within the six-month period immediately preceding the date the holder or
the owner, as the case may be, gives notice of the required repurchase of
the option or any Patapsco Valley common stock issued upon total or
partial exercise of the option granted under the stock option agreement,
as the case may be, or
- in the event of a sale of all or a substantial portion of Patapsco
Valley's assets, (1) the sum of (A) the price paid in the sale for such
assets and (B) the current market value of the remaining assets of
Patapsco Valley as determined by a nationally recognized investment
banking firm selected by the holder of the option or the owner of the
option shares and reasonably acceptable to Patapsco Valley, divided by
(2) the number of shares of Patapsco Valley common stock outstanding at
the time of such sale.
In determining the market/offer price, the value of consideration other than
cash will be determined by a nationally recognized investment banking firm
selected by the holder of the option or the owner of the option shares and
reasonably acceptable to Patapsco Valley.
CONVERSION OF OPTION. In the event that Patapsco Valley enters into any
agreement:
- to merge into or consolidate with any third party such that Patapsco
Valley is not the surviving corporation,
- to permit any third party to merge into Patapsco Valley and Patapsco
Valley is the surviving corporation, but, in connection with such merger,
the then outstanding shares of Patapsco Valley common stock are changed
into or exchanged for stock or other securities of Patapsco Valley or any
other person or cash or any other property or the outstanding shares of
Patapsco Valley common stock prior to such merger shall after such merger
represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or
- to sell or otherwise transfer all or substantially all of its assets to
any person other than F&M Bancorp or one of its subsidiaries,
then, in each case, the agreement governing the third-party transaction must
provide that, upon completion of the transaction, the option will be converted
into or exchanged for an option to purchase
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securities of either the acquiring person, any person that controls the
acquiring person or Patapsco Valley, if Patapsco Valley is the surviving entity,
in all cases at the election of F&M Bancorp.
REGISTRATION RIGHTS. Patapsco Valley has granted F&M Bancorp registration
rights with respect to option shares. These rights include requiring Patapsco
Valley to file up to two registration statements under the Securities Act in
order to permit the sale or other disposition of any option shares. In addition,
in the event that at the time of any request by F&M Bancorp for registration,
Patapsco Valley is in registration with respect to an underwritten public
offering of shares of Patapsco Valley common stock, Patapsco Valley will allow
F&M Bancorp to participate in such registration, subject to limitations. In
connection with any registration described above, Patapsco Valley and F&M
Bancorp will provide to each other and any underwriter of the offering customary
representations, warranties, covenants, indemnifications and contributions.
VOTING AGREEMENT
In connection with the execution of the merger agreement, directors and
certain executive officers and stockholders of Patapsco Valley entitled to
exercise sole voting power with respect to an aggregate of 300,064.6268 shares
of Patapsco Valley common stock or approximately 21.8% of the outstanding
Patapsco Valley common stock entered into a voting agreement with F&M Bancorp.
Under the voting agreement, these stockholders agree to vote all such shares of
Patapsco Valley common stock that they are entitled to vote in favor of approval
of the merger. The voting agreement, dated as of September 7, 1999, is attached
as Appendix C.
EXPENSES
All costs and expenses incurred in connection with the merger agreement, the
stock option agreement and the transactions contemplated by those agreements
will be paid by the party incurring such expense, except that the expenses
incurred in connection with printing and mailing this proxy statement-prospectus
to the Patapsco Valley stockholders, and all filing and other fees paid to the
SEC or any other governmental entity in connection with the merger, the merger
of the bank subsidiaries and the other related transactions will be shared
equally by F&M Bancorp and Patapsco Valley.
MERGER AND RESTRUCTURING CHARGES
Non-recurring merger and restructuring charges will be incurred upon
completion of the merger by both companies. The restructuring charges include
merger related severance and employee related expenses, facility and system
costs and other merger costs resulting from the merger. See "Pro Forma Condensed
Combined Financial Statements (Unaudited)."
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DESCRIPTION OF F&M BANCORP CAPITAL STOCK
AUTHORIZED STOCK
The authorized capital of F&M Bancorp consists exclusively of 50,000,000
shares of capital stock, par value $5.00 per share. All are currently classified
as F&M Bancorp common stock. As of September 7, 1999, there were issued and
outstanding 9,360,558 shares of F&M Bancorp common stock, which were held by
5,119 owners of record, and there were 270,670 shares issuable upon the exercise
of options to purchase F&M Bancorp common stock. F&M Bancorp has issued no
warrants to purchase its common stock. F&M Bancorp common stock is listed for
quotation on Nasdaq under the symbol "FMBN."
COMMON STOCK
The shares of F&M Bancorp common stock to be issued to you in the merger
will be fully paid and non-assessable and you will not be subject to call or
assessment under Maryland law. Norwest Shareowner Services serves as the
transfer agent for F&M Bancorp.
VOTING RIGHTS. The holders of F&M Bancorp common stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders and may
not cumulate their votes for the election of directors. Subject to the voting
rights of the holders of shares of F&M Bancorp preferred stock, if any, the
exclusive voting power for all purposes is vested in the holders of F&M Bancorp
common stock.
DIVIDENDS. Each share of F&M Bancorp common stock is entitled to
participate on a PRO RATA basis in dividends and other distributions.
PREEMPTIVE RIGHTS. The holders of F&M Bancorp common stock do not have
preemptive rights to acquire additional shares that may be issued by F&M
Bancorp, and no share is entitled in any manner to any preference over any other
share.
CLASSIFICATION OF BOARD OF DIRECTORS. The F&M Bancorp certificate of
incorporation and F&M Bancorp's bylaws provide that the F&M Bancorp board of
directors is to be divided into three classes as nearly equal in number as
possible. Directors are elected by classes to three year terms, so that
approximately one-third of the directors of F&M Bancorp are elected at each
annual meeting of the stockholders. Classification of the F&M Bancorp board of
directors has the effect of decreasing the number of directors that could be
elected in a single year by any person who seeks to elect its designees to a
majority of the seats on the F&M Bancorp board of directors and could impede a
change in control of F&M Bancorp.
LIQUIDATION RIGHTS. In the event of voluntary or involuntary liquidation,
dissolution or winding-up of F&M Bancorp, the holders of F&M Bancorp common
stock will be entitled to their proportionate share of the assets or funds that
are available for distribution to its stockholders after the satisfaction of its
liabilities and after preferences given to any outstanding F&M Bancorp preferred
stock.
ISSUANCE OF STOCK. F&M Bancorp's certificate of incorporation authorizes
the F&M Bancorp board of directors to issue authorized shares of F&M Bancorp
common stock and F&M Bancorp preferred stock and any other securities without
stockholder approval.
PREFERRED STOCK
The board of directors of F&M Bancorp may classify and reclassify any
unissued shares of capital stock into other classes and series, including one or
more series of preferred stock. F&M Bancorp's board of directors can set or
change in any one or more respects the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of shares of preferred stock. Preferred stock
may rank senior to the F&M Bancorp
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common stock in one or more respects. For example, holders of shares of F&M
Bancorp preferred stock may received dividends first or may also receive assets
of F&M Bancorp ahead of holders of common stock in a liquidation of F&M Bancorp.
BUSINESS COMBINATIONS INVOLVING INTERESTED STOCKHOLDERS
Under the Maryland General Corporation Law, certain "business combinations"
(including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and (1) any person who beneficially
owns 10% or more of the voting power of the corporation's shares, (2) an
affiliate of the corporation who, at any time within the two-year period prior
to the date in question, was the beneficial owner of 10% or more of the voting
power of the then-outstanding voting stock of that corporation (in either case,
an "interested stockholder"), or (3) any affiliate of an interested stockholder,
are prohibited for five years after the most recent date on which the interested
stockholder became an interested stockholder, and thereafter any such business
combination must be recommended by the board of the Maryland corporation and
approved by the affirmative vote of at least (A) 80% of the votes entitled to be
cast by holders of the corporation's outstanding voting shares, and
(B) two-thirds of the votes entitled to be cast by holders of such outstanding
voting shares, other than shares held by the interested stockholder with whom
the business combination is to be effected; unless, among other things, the
corporation's stockholders receive a minimum price (as defined in the Maryland
General Corporation Law) for their shares and the consideration is received in
cash or in the same form as previously paid by the interested stockholder for
its shares. These provisions of the Maryland General Corporation Law do not
apply to business combinations that are approved or exempted by the board of the
corporation prior to the time that the interested stockholder becomes an
interested stockholder.
COMPARISON OF STOCKHOLDER RIGHTS
F&M Bancorp and Patapsco Valley are each incorporated under the laws of the
State of Maryland. Your rights as a holder of Patapsco Valley common stock are
currently governed by the Maryland General Corporation Law, the Patapsco Valley
charter and the bylaws of Patapsco Valley. Upon completion of the merger, your
rights as an F&M Bancorp stockholder will be governed by the Maryland General
Corporation Law, the F&M Bancorp charter and the bylaws of F&M Bancorp.
The material differences between your rights and the rights of holders of
F&M Bancorp stock are summarized below. This summary is necessarily general and
is not a complete discussion of, and is qualified by, the more detailed
provisions of Maryland General Corporation Law, F&M Bancorp's charter and bylaws
and Patapsco Valley's charter and bylaws. The identification of specific
differences is not intended to indicate that other equally or more significant
differences do not exist. You should read carefully the relevant provisions of
the Maryland General Corporation Law, Patapsco Valley's charter and bylaws and
F&M Bancorp's charter and bylaws. Copies of the governing corporate instruments
of F&M Bancorp and Patapsco Valley are available, without charge, to any person,
including any beneficial owner to whom this proxy statement-prospectus is
delivered, by following the instructions listed under "Where You Can Find More
Information."
REMOVAL OF DIRECTORS
F&M BANCORP. The F&M Bancorp charter provides that any director, or its
entire board of directors, may be removed from office at any time only for cause
and only by an affirmative vote of the holders of at least 80% of the combined
voting power of all classes of shares of capital stock entitled to vote.
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PATAPSCO VALLEY. The Patapsco Valley charter provides that the Patapsco
Valley board of directors shall be staggered into classes. Thus, pursuant to
Maryland law, any director of the Patapsco Valley board of directors may be
removed from office only for cause and only by the affirmative vote of the
holders of at least a majority of the aggregate number of votes entitled to be
cast in the election of the directors.
AMENDMENT OF BYLAWS
F&M BANCORP. The F&M Bancorp bylaws may be repealed, altered, amended, or
rescinded at an annual or special meeting of the stockholders by the affirmative
vote of the holders of 80% of the issued and outstanding stock entitled to vote
at that meeting. In addition, the F&M Bancorp board of directors may repeal,
alter, amend, or rescind the bylaws by the affirmative vote of two-thirds of the
board at a meeting held in accordance with such bylaws.
PATAPSCO VALLEY. The Patapsco Valley bylaws may be repealed, altered, or
amended at a regular meeting of stockholders by the affirmative vote of the
holders of a majority of the stock issued and outstanding and entitled to vote
at that meeting. In addition, the Patapsco Valley board of directors may repeal,
alter, or amend the Patapsco Valley bylaws by a majority vote of the board at a
meeting held in accordance with such bylaws.
AMENDMENT OF CHARTER
F&M BANCORP. Except for amendments relating to the powers of the board of
directors, which require approval of 80% of the outstanding capital stock, the
F&M Bancorp charter may be amended by resolution of the F&M Bancorp board of
directors, setting forth the proposed amendment and declaring it advisable,
followed by the affirmative vote of a majority of all stockholders entitled to
vote on the matter.
PATAPSCO VALLEY. The Patapsco Valley charter may be amended by resolution
of the Patapsco Valley board of directors, setting forth the proposed amendment
and declaring it advisable, followed by the affirmative vote of two-thirds of
all stockholders entitled to vote on the matter.
FACTORS THAT MAY BE CONSIDERED BY THE BOARD OF DIRECTORS
F&M BANCORP. The F&M Bancorp charter provides that the F&M Bancorp board of
directors must, in connection with the exercise of its business judgment
involving a business combination or any actual or proposed transaction which
would or may involve a change in control of F&M Bancorp (whether by purchases of
shares of stock or any other securities of F&M Bancorp in the open market or
otherwise, tender offer, merger, consolidation, dissolution, liquidation, sale
of all or substantially all of the assets of the F&M Bancorp, proxy solicitation
or otherwise), in determining what is in the best interests of F&M Bancorp and
its stockholders and in making any recommendation to its stockholders, give due
consideration to all relevant factors, including, but not limited to
(1) the economic effect, both immediate and long-term, upon F&M Bancorp's
stockholders, including stockholders, if any, not to participate in the
transaction,
(2) the social and economic effect on the employees, depositors and
customers of, and others dealing with, F&M Bancorp and its subsidiaries
and on the communities in which F&M Bancorp and its subsidiaries operate
or are located,
(3) whether the proposal is acceptable based on the historical and current
operating results or financial condition of F&M Bancorp,
(4) whether a more favorable price could be obtained for F&M Bancorp's stock
or other securities in the future,
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(5) the reputation and business practices of the offeror and its management
and affiliates as they would affect the employees of F&M Bancorp and its
subsidiaries,
(6) the future value of the stock or any other securities of F&M Bancorp,
(7) any antitrust or other legal and regulatory issues that are raised by
the proposal, and
(8) the business and financial condition and earnings prospects of the
acquiring person or entity, including, but not limited to, debt service
and other existing financial obligations, financial obligations to be
incurred in connection with the acquisition, and other likely financial
obligations of the acquiring person or entity.
If the F&M Bancorp board of directors determines that any proposed business
combination or actual or proposed transaction which would or may involve a
change in control of F&M Bancorp should be rejected, the F&M Bancorp charter
authorizes it to take any lawful action to defeat such transaction, including,
but not limited to, any or all of the following:
(1) advising stockholders not to accept the proposal and instituting
litigation against the party making the proposal;
(2) filing complaints with governmental and regulatory authorities;
(3) acquiring the stock or any of the securities of F&M Bancorp;
(4) selling or otherwise issuing authorized but unissued stock, other
securities or treasury stock, or granting options with respect thereto;
(5) acquiring a company to create an antitrust or other regulatory problem
for the party making the proposal; and
(6) obtaining a more favorable offer from another individual or entity.
Any amendment to, repeal of or adoption of any charter provision
inconsistent with these provisions must be authorized by not less than 80% of
the aggregate votes entitled to be cast thereon (considered for this purpose as
a single class), by vote at a meeting or in writing with or without a meeting.
PATAPSCO VALLEY. The charter of Patapsco Valley requires that, in addition
to any considerations which the board of directors may lawfully take into
account, in determining what is in the best interest of Patapsco Valley when
considering whether to take or to refrain from taking any action, including, but
not limited to, proposing any matter to stockholders, and any action with
respect to a tender offer or proposal of acquisition, merger, consolidation or
sale of assets, the Patapsco Valley board of directors must consider
(1) the effects of the action on Patapsco Valley's and its subsidiaries'
employees, customers, suppliers, creditors or other constituencies,
(2) the effects of the action on the communities in which Patapsco Valley or
any of its subsidiaries do business or in which the employees, customers,
suppliers or creditors do business and/or reside, and
(3) the long-term as well as short-term interests of Patapsco Valley and its
stockholders, including the possibility that these interests may be best
served by the continued independence of Patapsco Valley.
The Patapsco Valley charter permits the Patapsco Valley board of directors
to act in accordance with the conclusion it reaches based on the factors it may
lawfully consider and any applicable law. Any amendment to, repeal of or
adoption of any charter provision inconsistent with these requirements may be
authorized in the manner that other charter amendments are authorized.
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COMPARATIVE MARKET PRICES AND DIVIDENDS
F&M Bancorp common stock is listed and traded principally on Nasdaq under
the symbol "FMBN." Patapsco Valley common stock is traded principally on the
Nasdaq OTC Bulletin Board.
The following table sets forth, for the calendar periods indicated, the high
and low sale prices per share for F&M Bancorp common stock, as reported on
Nasdaq, and Patapsco Valley common stock, as reported on the Nasdaq OTC Bulletin
Board, and the quarterly cash dividends declared by each of F&M Bancorp and
Patapsco Valley, in the periods indicated.
<TABLE>
<CAPTION>
F&M BANCORP PATAPSCO VALLEY
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
HIGH LOW DIVIDENDS(1) HIGH LOW DIVIDENDS(2)
-------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997
Quarter ended March 31............... $24.41 $19.88 $0.19 $17.70 $12.08 N/A
Quarter ended June 30................ 23.97 22.03 0.19 17.50 16.05 $0.21
Quarter ended September 30........... 30.50 24.19 0.20 17.92 16.05 N/A
Quarter ended December 31............ 34.47 29.94 0.20 17.70 17.30 0.33
1998
Quarter ended March 31............... 37.42 31.30 0.23 19.63 17.75 0.12
Quarter ended June 30................ 40.42 34.92 0.46 23.00 18.75 0.12
Quarter ended September 30........... 40.47 31.55 0.24 23.56 22.25 0.12
Quarter ended December 31............ 32.97 29.05 0.24 26.00 21.75 0.13
1999
Quarter ended March 31............... 31.55 29.05 0.26 28.25 25.75 0.13
Quarter ended June 30................ 32.63 29.28 0.26 28.38 26.00 0.13
</TABLE>
- ------------------------
(1) Adjusted to reflect five percent (5%) stock dividends paid August 1997,
July 1998 and August 1999.
(2) Adjusted to reflect a 20% stock dividend paid April 1998 and a 100% stock
dividend paid October 1998.
The holders of F&M Bancorp common stock receive dividends if and when
declared by the F&M Bancorp board of directors out of funds legally available
for dividends. F&M Bancorp expects to continue paying quarterly cash dividends
on F&M Bancorp common stock. However, there can be no guarantee that F&M
Bancorp's dividend policy will remain unchanged after completion of the merger.
The declaration and payment of dividends thereafter will depend upon business
conditions, operating results, capital and reserve requirements, and the board
of directors' consideration of other relevant factors.
49
<PAGE>
The following table sets forth the last reported sales price per share of
F&M Bancorp common stock and Patapsco Valley common stock and the equivalent per
share price for Patapsco Valley common stock giving effect to the merger on
(1) the last business day that trading occurred preceding public announcement of
the execution of the merger agreement and (2) the last business day that trading
occurred preceding the date of this proxy statement-prospectus:
<TABLE>
<CAPTION>
EQUIVALENT
F&M BANCORP PATAPSCO VALLEY PRICE PER
COMMON STOCK COMMON STOCK PATAPSCO VALLEY SHARE(1)
------------ --------------- ------------------------
<S> <C> <C> <C>
Last business day trading occurred before
merger announcement(2)...................... $28.875 $27.50 $34.07
Last business day trading occurred before the
date of this proxy
statement-prospectus(3).....................
</TABLE>
- ------------------------
(1) The equivalent price per share of Patapsco Valley common stock at each
specified date was determined by multiplying the last reported sale price of
F&M Bancorp common stock on each specified date by an exchange ratio of
1.18, the number of shares of F&M Bancorp common stock to be issued in
exchange for each share of Patapsco Valley common stock in the merger.
(2) The last business day that trading occurred preceding public announcement of
the execution of the merger agreement for F&M Bancorp was September 3, 1999
and for Patapsco Valley was September 2, 1999.
(3) The last day that trading occurred preceding the date of this proxy
statement-prospectus for F&M Bancorp was November , 1999 and for Patapsco
Valley was October , 1999.
YOU ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR PATAPSCO VALLEY
COMMON STOCK AND F&M BANCORP COMMON STOCK. It is expected that the market price
of F&M Bancorp common stock will fluctuate between the date of this proxy
statement-prospectus and the date on which the merger is completed and
thereafter. Because the number of shares of F&M Bancorp common stock to be
received by you in the merger is fixed, subject to possible adjustment in
certain circumstances, and because the market price of F&M Bancorp common stock
is subject to fluctuation, the value of the shares of F&M Bancorp common stock
that holders of Patapsco Valley common stock would receive in the merger may
increase or decrease prior to the merger. No assurance can be given concerning
the market price of F&M Bancorp common stock before or after the closing of the
merger. See "The Merger-Exchange of Patapsco Valley Common Stock," "The
Merger--Extension, Waiver and Amendment of the Merger Agreement" and "The
Merger--Termination of the Merger Agreement."
50
<PAGE>
REGULATORY CONSIDERATIONS
As bank holding companies, F&M Bancorp and Patapsco Valley are subject to
extensive supervision and regulation by the Federal Reserve Board. In addition,
F&M Bancorp is also a non-diversified unitary thrift holding company, supervised
and regulated by the Office of Thrift Supervision, as a result of its ownership
of Home Federal Savings Bank. F&M Bancorp will continue to be subject to this
regulatory scheme following the merger.
Farmers & Mechanics National Bank is a national bank subject to supervision
and regulation by the OCC. As an FDIC-insured, Maryland-chartered bank and a
member of the Federal Reserve, Commercial and Farmers Bank is subject to
supervision and regulation by the Federal Reserve Board and the Maryland
Commissioner of Financial Regulation. The deposits of Farmers & Mechanics
National Bank and Commercial and Farmers Bank are insured up to applicable
limits by the FDIC. Following the merger of the bank subsidiaries, Farmers &
Mechanics National Bank, as the surviving institution, will continue to be
subject to supervision and regulation by the OCC and its deposits will be
insured by the FDIC. Home Federal Savings Bank is subject to supervision and
regulation by the OTS and will continue to be regulated and supervised by the
OTS following the merger.
Supervision and regulation of banking organizations and their subsidiaries
are intended primarily for the protection of depositors, the deposit insurance
funds of the FDIC and the banking system as a whole, not for the protection of
bank holding company stockholders or creditors. The following description
summarizes some of the laws to which F&M Bancorp, Patapsco Valley and each of
their depository institution subsidiaries are subject. To the extent statutory
or regulatory provisions or proposals are described, the description is
qualified in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
HOLDING COMPANY REGULATION
The activities of bank holding companies and their banking and nonbanking
subsidiaries are generally limited to the business of banking and activities
that the Federal Reserve Board determines to be closely related or incidental to
banking. Bank holding companies may not directly or indirectly acquire the
ownership or control of more than five percent of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board.
DIVIDEND RESTRICTIONS
Federal Reserve Board policy provides that, as a matter of prudent banking,
a bank holding company generally should not maintain a rate of cash dividends
unless its net income available to common stockholders has been sufficient to
fully fund the dividends, and the prospective rate of earnings retention appears
to be consistent with the holding company's capital needs, asset quality and
overall financial condition.
CROSS-GUARANTEE AND POTENTIAL HOLDING COMPANY LIABILITY
A depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (1) the default of a commonly-controlled FDIC-insured depository
institution or (2) any assistance provided by the FDIC to a commonly-controlled
depository institution in danger of default. Cross-guarantee liability may
result in the ultimate failure or insolvency of other insured depository
institutions in a holding company structure. Any obligation or liability,
including any secured obligation, owed by a bank subsidiary to its holding
company or any affiliate is subordinate to the bank subsidiary's cross-guarantee
liability. Following the merger of the bank subsidiaries, Farmers & Mechanics
National Bank and Home Federal Savings Bank will continue to be
commonly-controlled depository institutions for this purpose.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company
51
<PAGE>
may not be inclined to provide it. As discussed below under "--Prompt Corrective
Action," a bank holding company in certain circumstances could be required to
guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
BANK REGULATION
PAYMENT OF DIVIDENDS
F&M Bancorp is a legal entity separate and distinct from its subsidiaries.
The principal source of F&M Bancorp's cash revenues is dividends from its
depository institution subsidiaries. There are various legal and regulatory
limitations under federal and state law on the extent to which banking
subsidiaries can finance or otherwise supply funds to their holding company.
Under OCC regulations, national banks such as Farmers & Mechanics National
Bank are limited in the amount of dividends they may declare. Two different
calculations are performed to measure the amount of dividends that may be paid:
a recent earnings test and a cumulative net profit test. Under the recent
earnings test, a dividend may not be paid if the total of all dividends declared
by the bank in any calendar year is in excess of the current year's net profits
combined with the retained net profits of the two preceding years unless the
bank obtains the approval of the OCC. Under the cumulative net undivided profits
test, a dividend may not be paid in excess of a bank's cumulative net profits
after deducting bad debts in excess of the reserve for loan losses. OTS
regulations also limit the amount of dividends that may be paid by Home Federal
Savings Bank.
In addition, under federal law, a depository institution is prohibited from
paying a dividend if the depository institution would thereafter be
"undercapitalized" as determined by the federal bank regulatory agencies. The
relevant federal regulatory agencies also have authority to prohibit a
depository institution from engaging in what, in the opinion of such regulatory
body, constitutes an unsafe or unsound practice in conducting its business. The
payment of dividends could, depending upon the financial condition of Farmers &
Mechanics National Bank or Home Federal Savings Bank, be deemed to constitute
such an unsafe or unsound practice.
TRANSACTIONS WITH AFFILIATES
Farmers & Mechanics National Bank and Home Federal Savings Bank are subject
to restrictions under federal law that limit certain transactions with F&M
Bancorp and its nonbanking subsidiaries, including loans, other extensions of
credit, investments or asset purchases. Such transactions by a depository
institution subsidiary with any one affiliate are limited in amount to 10% of
the institution's capital and surplus and, with all affiliates together, to an
aggregate of twenty percent of such institution's capital and surplus. Such
loans and extensions of credit, as well as certain other transactions, are also
required to be secured in specified amounts. These and certain other
transactions must be on terms and conditions that are, or in good faith would
be, offered to nonaffiliated companies.
FDIC INSURANCE ASSESSMENTS
The deposits of Farmers & Mechanics National Bank are primarily insured by
the Bank Insurance Fund of the FDIC to the extent provided by law. The deposits
of Home Federal Savings Bank, and certain deposits of Farmers & Mechanics
National Bank that are related to the bank's prior acquisitions of deposits, are
insured by the Savings Association Insurance Fund of the FDIC.
The FDIC has adopted a risk-based assessment system under which the
assessment rate for an insured depository institution varies according to the
level of risk involved in its activities.
52
<PAGE>
PROMPT CORRECTIVE ACTION
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the
federal banking agencies must take prompt supervisory and regulatory actions
against undercapitalized depository institutions. Depository institutions are
assigned one of five capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized," and are subjected to differential regulation
corresponding to the capital category within which the institution falls. Under
certain circumstances, a well capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category. A depository institution is generally prohibited
from making capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would thereafter be
undercapitalized. Adequately capitalized institutions cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC, and are subject
to restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll over brokered
deposits.
The banking regulatory agencies are permitted or, in certain cases, required
to take certain actions with respect to institutions falling within one of the
three undercapitalized categories. Depending on the level of an institution's
capital, the agency's corrective powers include, among other things:
- prohibiting the payment of principal and interest on subordinated debt,
- prohibiting the holding company from making distributions without prior
regulatory approval,
- placing limits on asset growth and restrictions on activities,
- placing additional restrictions on transactions with affiliates,
- restricting the interest rate the institution may pay on deposits,
- prohibiting the institution from accepting deposits from correspondent
banks, and
- in the most severe cases, appointing a conservator or receiver for the
institution.
A banking institution that is undercapitalized is required to submit a
capital restoration plan, and such a plan will not be accepted unless, among
other things, the banking institution's holding company guarantees the plan up
to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. As of June 30, 1999, both Farmers & Mechanics National Bank and Home
Federal Savings Bank exceeded the minimum capital ratios for "well capitalized"
institutions. See "--Capital Adequacy." It is expected that immediately
following the merger, Farmers & Mechanics National Bank and Home Federal Savings
Bank will continue to exceed the minimum capital ratios for a "well capitalized"
institution.
CAPITAL ADEQUACY
RISK-BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
RISK-BASED RATIOS
------------------------------
TIER I TOTAL LEVERAGE
AS OF JUNE 30, 1999 CAPITAL CAPITAL RATIO(1)
- ------------------- -------- -------- --------
<S> <C> <C> <C>
F&M Bancorp................................................. 13.39% 14.64% 8.89%
Farmers & Mechanics National Bank........................... 11.68% 12.83% 8.45%
Home Federal Savings Bank................................... 8.48% 14.40% 8.48%
Patapsco Valley............................................. 13.46% 14.64% 9.12%
Commercial and Farmers Bank................................. 12.72% 13.90% 8.62%
MINIMUM REQUIRED RATIO...................................... 4.0% 8.0% 3.0%
"WELL CAPITALIZED" MINIMUM RATIO............................ 6.0% 10.0% 5.0%
</TABLE>
- ------------------------
(1) For all but the most highly-rated bank holding companies and banks, the
leverage ratio is 3% plus an additional percentage of at least 100 to 200
basis points.
53
<PAGE>
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. The minimum ratio of total capital to risk-weighted assets,
which are the credit risk equivalents of balance sheet assets and certain off
balance sheet items such as standby letters of credit, is 8 percent. At least
half of the total capital must be composed of common stockholders' equity,
including retained earnings, qualifying non-cumulative perpetual preferred stock
(and, for bank holding companies only, a limited amount of qualifying cumulative
perpetual preferred stock), and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, other disallowed intangibles and
disallowed deferred tax assets, among other items ("Tier 1 capital"). The
remainder may consist of a limited amount of subordinated debt, other perpetual
preferred stock, hybrid capital instruments, mandatory convertible debt
securities that meet certain requirements, as well as a limited amount of
reserves for loan losses ("Tier 2 capital"). The Federal Reserve Board has also
adopted a minimum leverage ratio for bank holding companies, requiring Tier 1
capital of at least 3 percent of average total consolidated assets.
The OCC and OTS have also established minimum risk-based and leverage
capital guidelines that are substantially similar to those established by the
Federal Reserve Board for bank holding companies.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. In addition, the regulations
of the Federal Reserve Board provide that concentration of credit risk, interest
rate risk and certain risks arising from nontraditional activities, as well as
an institution's ability to manage these risks, are important factors to be
taken into account by regulatory agencies in assessing an organization's overall
capital adequacy.
Institutions are required to effectively measure and monitor their interest
rate risk and to maintain capital adequate for that risk. In determining a
banking organization's capital adequacy, the federal banking agencies consider
interest rate risk under risk base capital regulations.
As discussed below under "--Enforcement Powers of the Federal Banking
Agencies," failure to meet the minimum regulatory capital requirements could
subject a banking organization to a variety of enforcement remedies available to
federal regulatory authorities, including, in the most severe cases, the
termination of deposit insurance by the FDIC and placing a depository
institution into conservatorship or receivership.
Each of F&M Bancorp, Farmers & Mechanics National Bank, Home Federal Savings
Bank, Patapsco Valley and Commercial and Farmers Bank met the minimum capital
ratios on June 30, 1999. It is expected that immediately following the merger
and the merger of the bank subsidiaries, F&M Bancorp, Farmers & Mechanics
National Bank, and Home Federal Savings Bank will continue to meet the minimum
capital requirements of their respective regulators.
ENFORCEMENT POWERS OF THE FEDERAL BANKING AGENCIES
The federal banking agencies have broad enforcement powers, including the
power to terminate deposit insurance, impose substantial fines and other civil
and criminal penalties and, in the most severe cases, appoint a conservator or
receiver for insured depository institutions. Failure to comply with applicable
laws, regulations and supervisory agreements could subject F&M Bancorp and its
depository institution subsidiaries, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed under "Prompt Corrective Action," the appropriate federal
banking agency may appoint the FDIC as conservator or receiver for a banking
institution (or the FDIC may
54
<PAGE>
appoint itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% (or
5% in the case of an acquisition by a bank holding company) or more of a class
of voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act, such as F&M Bancorp, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
F&M Bancorp.
In addition, any company is required to obtain the approval of the Federal
Reserve under the BHC Act before acquiring 25% (5% in the case of a purchaser
that is itself a bank holding company) or more of the outstanding F&M Bancorp
common stock, or otherwise obtaining control or a "controlling influence" over
F&M Bancorp.
FUTURE LEGISLATION
A Congressional conference committee is finalizing historic financial
services modernization legislation that, if enacted, would repeal restrictions
on banks affiliating with securities firms and pave the way for creation of
financial services holding companies. The so-called Gramm-Leach-Bliley Act of
1999 creates the mechanism by which bank holding companies may engage in a
statutorily-provided list of financial activities, including insurance and
securities underwriting and agency activities, while establishing functional
regulation of bank securities and insurance activities. In order to engage in
these expanded activities, insured depository institution subsidiaries of the
holding company must be well-capitalized, well-managed and receive at least
satisfactory ratings in their most recent CRA examinations. The act also
contains privacy provisions that require certain consumer disclosures regarding
sharing of non-public customer information with affiliates and third parties and
requires separate rulemakings on privacy by the appropriate banking agency.
Other provisions would prevent commercial companies from becoming unitary
savings and loan holding companies, modernize the federal home loan bank system,
require additional disclosures for ATM fees charged to non-customers, and
require disclosure of CRA agreements and annual public reports on how resources
involved in such agreements were used, among other things. F&M Bancorp cannot
determine whether the final version of the legislation, which has not yet been
considered by either the House or Senate, will ultimately be enacted, and if
enacted the ultimate effect that changes to the competitive environment or
compliance costs resulting from the legislation, or implementing regulations,
would have upon the financial condition or results of operations of F&M Bancorp
or its subsidiaries.
55
<PAGE>
THE COMPANIES
F&M BANCORP
GENERAL. F&M Bancorp is a bank holding company headquartered in Frederick,
Maryland that is organized under the laws of the State of Maryland and
registered under the Bank Holding Company Act of 1956. F&M Bancorp derives
substantially all of its income from the operation of its wholly-owned
subsidiaries. F&M Bancorp was formed in 1983 as a bank holding company for its
primary subsidiary, Farmers & Mechanics National Bank, which is a national
banking association incorporated in 1865 and is the successor to
Maryland-chartered banking institutions dating from 1817. Farmers & Mechanics
National Bank, the deposits of which are insured by the Federal Deposit
Insurance Corporation, conducts a general banking and trust company business
through 36 offices and 42 automated teller machines located in Frederick,
Carroll and Montgomery Counties of Maryland, and in Adams County, Pennsylvania.
In addition, F&M Bancorp owns Home Federal Savings Bank, a federal savings bank
that offers full-service banking through nine community offices, 19 automated
teller machines, and other electronic banking systems in Allegheny and
Washington Counties of Maryland.
On July 15, 1999, F&M Bancorp consummated a merger with Potomac Basin Group
Associates, Inc., in a tax-free exchange of shares accounted for as a
pooling-of-interests. Potomac Basin is a Beltsville, Maryland based, full-line
independent insurance agency specializing in corporate employee benefit plans.
On June 30, 1999, F&M Bancorp had consolidated assets of approximately
$1.462 billion, total deposits of approximately $1.160 billion and total
stockholders' equity of approximately $130.0 million. The principal executive
offices of F&M Bancorp are located at 110 Thomas Johnson Drive, Frederick,
Maryland 21702 and its telephone number is (301) 694-4000.
On June 18, 1999, F&M Bancorp, through Farmers & Mechanics National Bank,
purchased assets and liabilities associated with the Fairfield, Pennsylvania
office of Farmers Bank, a subsidiary of First Maryland Bancorp. Under the terms
of the agreement, Farmers & Mechanics National Bank assumed responsibility for
services related to checking, savings and certificates of deposit products
totaling $10.8 million and purchased the branch office and real estate of
Farmers Bank located at 20 East Main Street, Fairfield, PA.
On November 30, 1998, F&M Bancorp completed the acquisition of Monocacy
Bancshares, Inc. and its commercial banking subsidiary, Taneytown Bank & Trust
Company located in Taneytown, Maryland, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Taneytown Bank was merged with and into
Farmers & Mechanics National Bank at closing, increasing Farmers & Mechanics
National Bank's assets by approximately $304 million, loans by approximately
$167 million, and deposits by approximately $244 million.
On May 29, 1998, F&M Bancorp completed its purchase of Keller-Stonebraker
Insurance, Inc., a Hagerstown, Maryland-based, full-line independent insurance
agency that at closing had approximately $1.2 million in assets and no deposits,
for $2.085 million in F&M Bancorp common stock. The acquisition was accounted
for as a pooling-of-interests. Keller-Stonebraker operates as an independent,
wholly-owned subsidiary of Farmers & Mechanics National Bank.
On November 15, 1996, F&M Bancorp completed its purchase of Home Federal
Corporation, a Maryland corporation and unitary thrift holding company, which at
closing had approximately $228 million in assets and $161 million in deposits.
F&M Bancorp, through its wholly-owned subsidiaries, provides banking and
bank-related financial services to middle market and small business
organizations, local governmental units, and retail customers in central
Maryland. F&M Bancorp, through its subsidiaries, also provides broad-based
commercial and retail banking services; brokerage; personal trust, investment
management, and financial planning services; and a wide variety of related
financial products and services to individuals, businesses and governmental
units. In addition, F&M Bancorp provides a full line of consumer and
56
<PAGE>
commercial business insurance products through offices in Beltsville,
Hagerstown, and Cumberland, Maryland and Keyser, West Virginia.
From time to time, F&M Bancorp investigates and holds discussions and
negotiations regarding possible transactions with other financial services
companies. As of the date of this proxy statement-prospectus, F&M Bancorp has
not entered into any agreements or understandings with respect to any
significant transactions of the type referred to above except for the
transactions described herein and in documents incorporated herein by reference.
See "Where You Can Find More Information." Any such transaction would be subject
to stockholder approval only if required under applicable law or the rules of
the National Association of Securities Dealers, Inc. ("NASD").
For more information about F&M Bancorp, reference is made to F&M Bancorp's
annual report on Form 10-K for the year ended December 31, 1998, which is
incorporated herein by reference. See "Where You Can Find More Information."
MANAGEMENT AND ADDITIONAL INFORMATION. Certain information relating to the
executive compensation, various benefit plans (including stock option plans),
voting securities, including the principal holders of those securities, certain
relationships and related transactions and other matters as to F&M Bancorp is
incorporated by reference from or set forth in F&M Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1998, incorporated herein by
reference. Stockholders desiring copies of this document and other documents may
contact F&M Bancorp at its address or telephone number indicated under "Where
You Can Find More Information."
PATAPSCO VALLEY
GENERAL. Patapsco Valley is a Maryland corporation and is registered as a
bank holding company under the Federal Bank Holding Company Act of 1956.
Patapsco Valley was incorporated on August 22, 1996 to acquire all of the
outstanding shares of common stock of Commercial and Farmers Bank. Patapsco
Valley engages in business through its primary subsidiary, Commercial and
Farmers Bank, a Maryland state-chartered bank, Commercial and Farmers Bank's
subsidiaries, as well as through Central Maryland Service Corporation, a
Maryland corporation and data processing company. Commercial and Farmers Bank
was chartered in November 1934 and is engaged in a general commercial and retail
banking business.
Commercial and Farmers Bank has seven full service branches located in the
Maryland communities of Historic Ellicott City, Catonsville, Dorsey Search,
Columbia Crossing, West Friendship, Hickory Ridge and Elkridge, in addition to
the main office branch located in Ellicott City, Maryland. Commercial and
Farmers Bank has one additional branch commitment in the Woodstock community,
which is expected to open in the year 2000. The executive offices of Patapsco
Valley and the main office of Commercial and Farmers Bank are located at 8593
Baltimore National Pike, Ellicott City, Maryland 21043 and its telephone number
is (410) 465-0900.
Commercial and Farmers Bank's general market area consists principally of
Howard County, Maryland which is located between the cities of Baltimore and
Washington, D.C. Geographically, all but one of its branch offices are located
in Howard County. Commercial and Farmers Bank has one office in Catonsville,
which is located in Baltimore County, Maryland. A number of Commercial and
Farmers Bank's customers both live and work in the Baltimore/Washington
corridor.
Commercial and Farmers Bank attracts deposits and generates loan activity
through its branch network to provide convenience and service to the various
communities that Commercial and Farmers Bank serves.
BANK DEPOSITS AND LENDING ACTIVITIES. As of June 30, 1999, Commercial and
Farmers Bank had deposits of $149 million. No material portion of Commercial and
Farmers Bank's deposits has been obtained from any single depositor or group of
related depositors, including federal, state and local governments and agencies.
57
<PAGE>
As of June 30, 1999, Commercial and Farmers Bank had approximately
$115.8 million in loans, representing approximately 66.7% of its total assets of
$173.6 million. No material portion of Commercial and Farmers Bank's loans is
concentrated within a single industry or group of related industries. Commercial
and Farmers Bank is not dependent upon any single borrower or a few principal
borrowers. The loss of any individual borrower or of a few principal borrowers
would not have a material adverse effect on the operations or earnings of
Commercial and Farmers Bank.
BANKING PRODUCTS AND SERVICES. Commercial and Farmers Bank has been doing
business in Maryland since 1934 and provides a broad range of consumer and
commercial banking products and services to individuals, business, professionals
and governments. Commercial and Farmers Bank services its customers through a
branch network, including the main office. Commercial and Farmers Bank provides
a wide range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, IRA, and minor and holiday club accounts. It also
offers relationship savings accounts, as well as money market accounts.
Commercial and Farmers Bank offers Advantage checking, Value checking and no-fee
checking as a service for those requiring less activity at a more modest cost.
Commercial and Farmers Bank continues its community affiliations by offering
Collegiate checking for student customers and Prime Time checking for seniors.
Commercial and Farmers Bank also grants credit for installment, unsecured
and secured personal loans, residential mortgages and home equity loans, as well
as automobile and other consumer financing.
As a convenience to its customers, Commercial and Farmers Bank offers at
each branch location Saturday banking hours, drive-through teller windows, Just
Press One access telephone banking service and 24-hour automated teller
machines. Commercial and Farmers Bank recently introduced a debit card program
for its customers.
Commercial and Farmers Bank also engages in financing commerce and industry
by providing credit and deposit services for small to medium size businesses and
the agricultural community in Commercial and Farmers Bank's market area.
Commercial and Farmers Bank offers many forms of commercial lending, including
lines of credit, revolving credit, term loans, accounts receivable financing,
commercial construction loans, commercial real estate mortgage lending, as well
as many Small Business Administration guaranteed loans. Additionally, Commercial
and Farmers Bank recently introduced a business overdraft protection product.
Commercial and Farmers Bank offers a Zero Balance Account, as well as sweep
accounts, in order for companies to better utilize their investable cash.
Business depositors may also take advantage of many different services and have
all fees included in their monthly account analysis. Commercial and Farmers Bank
provides small ticket leasing opportunities for its customers through a
strategic alliance with a local equipment leasing company.
Additional types of real estate loans, credit card and related services are
also offered through Commercial and Farmers Bank and its subsidiaries.
Commercial and Farmers Bank does not offer trust services and does not engage in
municipal trading services.
Consumer and non-mortgage loans entail greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or secured
by rapidly depreciating assets such as automobiles. In these cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on these loans.
Commercial loans and loans secured by commercial and multi-family real
estate properties are generally larger and involve a greater degree of credit
risk than one- to four-family residential mortgage loans. Because payments on
these loans are often dependent on the successful operation of
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the business or management of the property, repayment of such loans may be
subject to adverse conditions in the economy or real estate markets. It has been
Patapsco Valley's practice to underwrite such loans based on its analysis of the
amount of cash flow generated by the business and the resulting ability of the
borrower to meet its payment obligations. In addition, Patapsco Valley in
general seeks to obtain a personal guarantee of the loan by the owner of the
business and under certain circumstances, seeks additional collateral.
Construction loans are generally considered to involve a higher degree of
credit risk than residential mortgage loans. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the secured
property's value upon completion of construction as compared to the estimated
costs of construction, including interest. Patapsco Valley assumes certain risks
associated with the borrowers' ability to complete construction in a timely and
workmanlike manner. If the estimate of value proves to be inaccurate, or if
construction is not performed timely or accurately, Patapsco Valley may be
confronted with a project that, when completed, has a value insufficient to
assure full repayment or Patapsco Valley may be required to advance funds beyond
the amount originally committed to permit completion of the project.
BANK SUBSIDIARIES. Commercial and Farmers Bank wholly owns the following
three subsidiaries:
- Founders Mortgage Company, Inc., a Maryland corporation formed in 1997;
- C&F Insurance Agency, Inc., a Maryland corporation formed in 1992; and
- Rogers Avenue Realty, Inc., a Maryland corporation formed in 1993.
Patapsco Valley formed Founders Mortgage, a mortgage banking company, as a
wholly-owned subsidiary of Commercial and Farmers Bank. Founders Mortgage is in
the business of originating residential first mortgage loans and construction
loans in Howard and surrounding counties in Maryland, as well as in other
states, including Delaware, Pennsylvania, Virginia and West Virginia, and
selling the mortgage and construction loans to unaffiliated financial
institutions and other mortgage purchasers. Founders Mortgage contributed 21% of
Patapsco Valley's total fiscal 1998 consolidated revenues. Founders Mortgage
currently has Maryland offices in Columbia, Bel Air, North East and Frederick.
Outstanding product offerings are an important factor in continued expansion of
Founders Mortgage. All of Founder Mortgage's representatives are equipped with
laptop computers so as to accommodate customer needs in any location at any
time. Direct underwriting also gives the customers answers quickly. Founders
Mortgages' executive office is located at 8818 Centre Park Drive, Suite 100,
Columbia, Maryland 21045.
C&F Insurance Agency, Inc. is a Maryland insurance agency. C&F Insurance
Agency's address is P.O. Box 347, West Friendship, Maryland 21794. Upon the
acquisition of the Ellicott City branch of Fowler and Seidl, Inc. on
February 1, 1999, C&F Insurance Agency became actively engaged in the insurance
business and sells a full line of insurance products.
Rogers Avenue Realty, Inc., holds properties foreclosed upon by Commercial
and Farmers Bank, and is located at 8593 Baltimore National Pike, Ellicott City,
Maryland 21043. This corporation was established to help facilitate the
liquidation of these foreclosed properties as expeditiously as possible.
CENTRAL MARYLAND SERVICE CORPORATION. Central Maryland Service Corporation
became a wholly-owned subsidiary of Patapsco Valley in June 1997. Central
Maryland Service provides account processing, item processing, check imaging and
automated-teller-machine processing services to Commercial and Farmers Bank.
Central Maryland Service recently began providing loan portfolio accounting
services for a financial institution in Pennsylvania, and, in the third quarter
of 1999, will begin sorting checks and rendering account statements for several
local financial institutions. The goal of Central Maryland Service is to market
its services to other clients in Maryland and adjoining states. Central Maryland
Service's executive office is located at 3290 Pine Orchard Lane, Ellicott City,
Maryland 21042. For the year ended December 31, 1998, Central Maryland Service
contributed less than one percent to the total consolidated revenues for
Patapsco Valley.
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ENVIRONMENTAL LIABILITIES. Management of Patapsco Valley is not aware of
any environmental liabilities that would have a material adverse effect on the
operations or earnings of Patapsco Valley.
SEASONAL ASPECTS. Management does not believe that the deposits or the
business of Commercial and Farmers Bank or its subsidiaries in general are
seasonal in nature. The deposits may, however, vary with local and national
economic conditions but should not have a material effect on planning and policy
making.
EMPLOYEES. As of June 30, 1999, Patapsco Valley had 2 full-time employees.
As of that date, Commercial and Farmers Bank had 101 employees, Founders
Mortgage had 51 employees, Central Maryland Service had 6 employees, and C&F
Insurance had 7 employees. A total of 167 persons work for Patapsco Valley and
its direct and indirect subsidiaries.
COMPETITION. Patapsco Valley and Commercial and Farmers Bank operate in a
competitive environment, competing for deposits and loans with commercial banks,
thrifts and other financial entities. Principal competitors include other
community commercial banks and larger institutions with branches in Commercial
and Farmers Bank's market area. Numerous mergers and consolidations involving
banks in Commercial and Farmers Bank's market area have occurred recently,
requiring Commercial and Farmers Bank to compete with banks with greater
resources.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. Commercial and Farmers
Bank also competes with money market mutual funds for deposits. Many of the
financial institutions operating in Commercial and Farmers Bank's market area
offer services such as trust, investment and international banking, which
Commercial and Farmers Bank does not offer, and have greater financial resources
or have substantially higher lending limits than does Commercial and Farmers
Bank.
To compete with other financial services providers, Commercial and Farmers
Bank principally relies upon local promotional activities, personal
relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs.
Commercial and Farmers Bank offers many personalized services and attracts
customers by being responsive and sensitive to the needs of the community.
Commercial and Farmers Bank attracts new customers through the goodwill and
referrals of satisfied customers, traditional media advertising and the efforts
of individual employees who develop new relationships to build the customer base
of Commercial and Farmers Bank. To enhance Commercial and Farmers Bank's image
in the community, Commercial and Farmers Bank supports and participates in many
local events. Employees, officers and directors represent Commercial and Farmers
Bank on many boards and local civic and charitable organizations.
INVESTMENT ACTIVITIES. Commercial and Farmers Bank maintains a portfolio of
investment securities to provide liquidity and income. The current portfolio
amounts to approximately 20% of the total assets and is invested primarily in
U.S. Treasury, U.S. Government Agency, and state and municipal bonds.
A key objective of the investment portfolio is to provide a balance in
Commercial and Farmers Bank's asset mix of loans and investments consistent with
its liability structure, and to assist in management of interest rate risk. The
investments augment Commercial and Farmers Bank's capital position in the
risk-based capital formula, providing the necessary liquidity to meet
fluctuations in credit demands of the community and fluctuations in deposit
levels. In addition, the portfolio provides collateral for pledging against
public funds and a reasonable allowance for control of tax liabilities. Finally,
the investment portfolio is designed to provide income for Commercial and
Farmers Bank. In view of the above objectives, the portfolio is treated
conservatively by management, and only securities that meet conservative
investment criteria are purchased.
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PATAPSCO VALLEY MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides an overview of the financial condition and
results of operations of Patapsco Valley and its subsidiaries for years ended
December 31, 1998 and 1997, and the six months ended June 30, 1999 and 1998.
This discussion is intended to assist readers in their analysis and
understanding of the accompanying consolidated financial statements and notes
thereto.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
FINANCIAL CONDITION
ASSETS. Total assets of Patapsco Valley were $173,636,000 as of June 30,
1999, compared to $169,843,000 as of December 31, 1998, an increase of
$3,793,000 or 2.23%. The increase was primarily allocated to increases in
securities available for sale of $20,357,000, net loans of $467,000 and cash and
due from banks of $425,000 as a result of increases in deposits and securities
sold under repurchase agreements. These increases were slightly offset by
declines in federal funds sold of $10,914,000, and loans held for sale of
$6,980,000. The increase in securities available for sale was the result of
excess cash and federal funds sold invested in higher yielding investments in
order to increase profitability in the investment portfolio. The increase in net
loans is due to the emphasis on services to small and medium size businesses and
professional practices. While retail loan demand is currently soft, management
plans to grow this portfolio in the future by additional product promotions. In
addition, Commercial and Farmers Bank's subsidiary, C&F Insurance Agency, Inc.,
acquired the assets of the Ellicott City branch of Fowler & Seidl, Inc. The
increase in total assets is part of management's strategy to diversify Patapsco
Valley's services to the community and to increase profitability.
LIABILITIES. Total liabilities were $156,965,000 as of June 30, 1999
compared to $153,021,000 as of December, 1998, an increase of $3,944,000 or
2.58%. The increase was primarily due to an increase in deposits of $1,969,000
and an increase in securities sold under repurchase agreements of $1,790,000.
The increase in deposits was the result of Commercial and Farmers Bank opening a
branch during the first quarter of 1999 and aggressively marketing for new
deposits. Primarily as a result of the advertising campaign, all branch
locations have exceeded projections in deposit growth. Commercial and Farmers
Bank is continuing its branch expansion with the signing of a lease for a new
free standing branch pad in the Waverly Woods Shopping Center. This branch is
expected to open in the year 2000 and is located in a new shopping center,
anchored by a grocery store, in Woodstock, Maryland. With the current branch
expansion, the deposit growth is expected to continue.
STOCKHOLDERS' EQUITY. Stockholders' equity was $16,670,000 as of June 30,
1999 compared to $16,822,000 as of December 31, 1998, a decrease of $152,000.
The decrease was due to cash dividends of $355,000. This decrease was partially
offset by comprehensive income for the period of $44,000 and dividends
reinvested in the amount of $159,000.
RESULTS OF OPERATIONS
GENERAL. Net income for the six and three months ended June 30, 1999 was
$231,000 and $109,000 respectively, as compared to $742,000 and $318,000 for the
same periods in 1998. The decreases in net income of $511,000 and $209,000 for
the six and three months ended June 30, 1999 respectively as compared to the
same periods in 1998 was primarily due to an increase in non-interest expenses.
These increases were slightly offset by increases in net interest income and
non-interest income.
INTEREST INCOME. Total interest income for the six and three months ended
June 30, 1999 was $6,070,000 and $3,066,000 respectively, compared to $5,766,000
and $2,948,000 for the same periods in
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1998, an increase of $304,000 or 5.27% and $118,000 or 4.00% respectively. The
increases were primarily due to an increase of $18,809,000 and $24,055,000 in
the average dollar amount of investments and federal funds sold for the six and
three months ended in June 30, 1999. In addition, the weighted average yields on
investment securities increased to 5.50% and 5.71% for the six and three months
ended June 30, 1999 as compared to 5.42% and 5.66% for the same periods in 1998.
The growth in investment securities and federal funds sold were the result of
deposit growth and the high volume of loans sold to investors during the
periods. Management's strategy has been to invest the funds from the inflow of
deposits into higher yielding investments to improve profitability in the
investment portfolio. These increases were primarily offset by a decline in the
average balances in net loans and loans held for sale by $363,000 and $5,177,000
for the six and three months ended June 30,1999, respectively, as compared to
the same periods in 1998. In addition the weighted yields on loans and loans
held for sale declined to 8.76% and 8.71% for the six and three months ended
June 30,1999, respectively, as compared to 9.05% and 9.03% for the same periods
in 1998.
During 1999, Commercial and Farmers Bank has experienced higher than normal
principal repayments due to the decline in interest rates, causing higher rate
loans to either pay-off or refinance at a lower rate. Also, production in
Commercial and Farmers Bank's mortgage banking subsidiary, Founders Mortgage
Company, has declined due to a drop in residential mortgage loan demand. The
volume of loan originations is expected to improve in the second half of 1999 as
Commercial and Farmers Bank's number of commercial loan applications has
increased toward the end of the second quarter of 1999.
INTEREST EXPENSE. Total interest expense for the six and three months ended
June 30, 1999 was $2,004,000 and $1,016,000 respectively, compared to $1,775,000
and $926,000 for the same periods in 1998, an increase of $229,000 or 12.90% and
$90,000 or 9.72% respectively. The increases resulted primarily from increases
in the average dollar amount of deposits of $21,880,000 and $22,940,000
respectively as Commercial and Farmers Bank conducted an aggressive marketing
campaign, advertising Commercial and Farmers Bank and its various new deposit
products. In addition, Commercial and Farmers Bank has opened two new branches
since June 1998, which have contributed to the deposit growth. The average rates
paid on deposits were 3.46% for each of the six and three months ended
June 30,1999 as compared to 3.64% and 3.56% for the same periods in 1998.
The increases were partially offset by decreases of $2,544,000 and
$4,521,000 in the average dollar amount of borrowings for the six and three
month periods in 1999, as compared to the same periods in 1998. The decrease was
due to Commercial and Farmers Bank borrowing from the Federal Home Loan Bank
during 1998 in order to fund new loan originations at Founders Mortgage Company.
There was $5,214,000 in outstanding Federal Home Loan Bank borrowings as of
June 30, 1998. The weighted average rates paid on interest-bearing liabilities
were 3.48% and 3.44% for the six and three months ended June 30, 1999,
respectively as compared to 3.70% and 3.71% for the same periods in 1998.
PROVISION FOR LOAN LOSSES. For the six and three months ended June 30, 1999
and 1998 no provision for loan losses was charged to expense. Commercial and
Farmers Bank recorded $23,000 and $36,000 in net charge-offs for the six and
three months ended June 30,1999 as compared to $157,000 and $156,000 for the
same periods in 1998.
While management believes that, based on information currently available,
Commercial and Farmers Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that Commercial and Farmers Bank's level of allowance for loan losses will be
sufficient to cover future loan losses incurred by Commercial and Farmers Bank
or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions at the time management determined the current
level of the allowance for loan losses.
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Commercial and Farmers Bank's allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at the amount management considers adequate to cover
estimated losses in loans receivable that are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual losses
experience, diversification and size of the portfolio, adequacy of the
collateral, the amount of non-performing loans and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review Commercial and Farmers Bank's allowance for loan losses.
Such agencies may require Commercial and Farmers Bank to make additional
provision for estimated loan losses based upon judgments different from those of
management.
Patapsco Valley continues to experience a decline in principal balances of
loans past 90 days due and on non-accrual status. As of June 30, 1999, the loans
delinquent greater than 90 days or on non-accrual status totaled $769,000, a
delinquency ratio of 1.03%. Included in these loans is one commercial loan
totaling $330,000 and one mortgage loan totaling $146,000 which management
believes are subject to little risk of loss based on collateral values. However,
management cannot be certain that collateral values will be maintained. The
commercial loan is a purchased participation from another local commercial bank.
Commercial and Farmers Bank is currently in negotiations with the bankruptcy
court that could lead to a refinancing of the existing obligations to be
supported by a multi-year lease by a well-known oil company. The mortgage loan
has an active purchaser that is currently waiting for financing approval from an
independent third party. During the second quarter of 1999, Commercial and
Farmers Bank experienced a $50,000 loss on a commercial loan that was under
contract as of March 1999.
NON-INTEREST INCOME. Non-interest income for the six and three months ended
June 30, 1999 was $1,574,000 and $760,000, respectively as compared to
$1,534,000 and $748,000 for the same period in 1998. Commercial and Farmers Bank
has experienced an increase in service charges on deposit accounts. These
increases follow an increased level of fees collected for checks drawn against
insufficient funds, increases in deposit accounts and the introduction of new
checking account programs that have monthly fees. In addition, Commercial and
Farmers Bank's subsidiary, C&F Insurance Agency, Inc., had commissions totaling
$147,000 in the first half of 1999. These increases were partially off-set by a
decline in mortgage banking fees and gains due to a decrease in Founders
Mortgage Company's loan origination volume and an increase in the cost to
originate a loan. With the continued expansion of Commercial and Farmers Bank's
branch network and the continued expansion of C&F Insurance, management expects
to see increased levels of non-interest income.
NON-INTEREST EXPENSE. Total non-interest expense for the six and three
months ended June 30, 1999 was $5,302,000 and $2,653,000 as compared to
$4,363,000 and $2,273,000 for the same periods in 1998.
A significant portion of the increase in non-interest expense is related to
the increases in salaries and related benefits of $511,000 and $187,000 for the
six and three month periods in 1999 as compared to the same periods in 1998.
Patapsco Valley has added a significant number of employees to the payroll as a
result of the expansion in Commercial and Farmers Bank, Founders Mortgage
Company, C&F Insurance, and Central Maryland Service. Salaries and benefits also
include cost of living increases and benefit cost increases. Employee expenses
continue to increase to reflect full year salaries for the employees added in
1998 and 1999.
Occupancy and furniture and equipment expense increased by $72,000 for the
six months and decreased by $34,000 for the three months ended in 1999 as
compared to the same periods in 1998. The increases are due to Patapsco Valley
expanding its facilities, making improvements to existing facilities and
upgrading equipment. Although occupancy and furniture and equipment expense
declined
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in the three months ended June 30, 1999, these expenses are expected to continue
to increase as new branches are opened and a full year of depreciation costs and
equipment service contracts are realized. With more facilities and equipment,
Patapsco Valley will also require more maintenance, and the additional
investment will be depreciated over the estimated useful life of the asset.
Other expenses increased by $356,000 and $228,000 for the six and three
months ended June 30, 1999 as compared to the same periods in 1998. Increases
were noted in marketing, telephone, professional services, and stationery and
supplies. These areas of increased expense include costs associated with the
promotion and establishment of new locations for Founders Mortgage Company, C&F
Insurance, and the new branches. In addition, Patapsco Valley had adopted a
full-scale marketing program including direct mail, cable television
commercials, newspaper advertising and product promotion. Marketing plays a
significant role in banking today, more so than in the past. As the banking
industry continues to consolidate, both banking and non-banking companies are
competing much more aggressively. Direct competition for deposits comes from
other commercial banks, savings banks, savings and loan associations, and credit
unions as well as brokerage houses, mutual funds and the securities market.
Patapsco Valley also competes with the same banking entities for loans as well
as with mortgage banking companies and institutional lenders.
Given the increases in non-interest expense, management is exploring
additional alternatives to decrease these expenses in order to maximize income.
INCOME TAX. Patapsco Valley's income tax expense was $107,000 and $48,000
for the six and three months ended June 30, 1999 as compared to $421,000 and
$179,000 for the same periods in 1998. The changes were primarily the result of
the variations in pre-tax income. The effective tax rate for the six and three
months ended June 30, 1999 was 31.63% and 30.46% as compared to 36.19% and
35.96% in the same periods in 1998.
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Patapsco Valley to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrower and depositor withdrawal requirements and to
fund current and planned expenditures. Patapsco Valley maintains its asset
liquidity position internally through short-term investments, the maturity
distribution of the investment portfolio, loan repayments, proceeds from the
sale of loans held for sale and income from earning assets. A primary source of
cash is from the proceeds from the sale of loans held for sale. In addition,
Patapsco Valley relies on the proceeds from maturity of securities available for
sale and the investment portfolio contains readily marketable securities that
could be converted to cash. On the liability side of the balance sheet,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed. Patapsco Valley may borrow up to
$32,300,000 under secured lines of credit with the Federal Home Loan Bank of
Atlanta and has available lines of credit of $2,500,000 in overnight federal
funds and $1,000,000 in short-term credit from other correspondent banks. The
decrease in federal funds sold of $10,914,000 or 63.07% from December 31, 1998
to June 30, 1999 was primarily the result of the funds being invested in
securities available for sale. In addition, these purchases were funded by an
increase in growth in deposits of 1.34% and a reduction in loans held for sale
of 29.43%. Patapsco Valley believes that it has adequate liquidity sources to
meet all anticipated liquidity needs over the next twelve months. While
management plans to continue to rely on the secured lines of credit from the
Federal Home Loan Bank of Atlanta, management knows of no trend or event which
will have a material impact on Patapsco Valley's ability to maintain liquidity
at satisfactory levels.
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CAPITAL RESOURCES AND ADEQUACY
One measure of capital adequacy is the leverage ratio, which is calculated
by dividing average total assets for the most recent quarter into Tier l
capital. The regulatory minimum for this ratio is 4%, with 6% being the
regulatory minimum for well-capitalized companies. The leverage capital ratio as
of June 30, 1999 was 8.62%.
Another measure of capital adequacy is the risk-based capital ratio, or the
ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier l) and supplemental capital (Tier 2), including
adjustments for off balance sheet items, such as letters of credit, and the
different degrees of risk among various assets. Regulators require a minimum
risk-based capital ratio of 8%. As of June 30, 1999, the total risk-based
capital ratio was 13.90%. According to FDIC capital guidelines, Commercial and
Farmers Bank is considered to be "well capitalized".
Commercial and Farmers Bank opened a new branch in January 1999, and
Commercial and Farmers Bank's subsidiary, C&F Insurance Agency, Inc., purchased
the assets of a local insurance agency in February 1999. Founders Mortgage
Company is also planning to expand. The funding sources for these projects are
primarily cash, federal funds and maturities of investment securities.
Management knows of no other trend or event that will have a material impact on
capital.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
MARKET RISK
Market Risk is defined as the potential loss of net interest income due to a
decline in market rates. Commercial and Farmers Bank's net interest income is
sensitive to changes in rates. Deposits and other short term liabilities tend to
re-price more rapidly than loans, investments and other interest earning assets.
In order to mitigate the impact of changing interest rates, it is Patapsco
Valley's policy to maintain total rate sensitive assets (RSA) divided by total
rate sensitive liabilities (RSL) between 90% and 110% in any twelve month
period. As of December 31, 1998, Patapsco Valley's RSA/RSL was 103%.
During periods of increasing interest rates Patapsco Valley's RSL would
re-price faster than the RSA causing a decline in the interest rate spread and
margin in the short term. In the long term Patapsco Valley might experience an
increase in interest rate spread and margin, but such an increase might
significantly reduce the demand for loans in Patapsco Valley's market, thus
diminishing the prospects for improved earnings. During periods of decreasing
rates Patapsco Valley could experience a short term increase in interest margin
but may have difficulty in retaining deposits without having to pay above market
rates. If Patapsco Valley paid above market rates to retain deposits, there
could be a reduction in the margins as RSA re-priced. This reduction in rate,
however, should stimulate the demand for loans in the market thus helping the
net margins.
Table 1, Average Balance Sheet, sets forth certain information relating to
Patapsco Valley's average interest-earning assets and interest-bearing
liabilities for the periods indicated. The yields and costs are calculated by
dividing income or expense by the daily average balance of assets or
liabilities, respectively.
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TABLE 1--AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------- ------------------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST(2) YIELD BALANCE INTEREST(2) YIELD BALANCE INTEREST(2)
------------ ----------- -------- ------------ ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans (1)............ $ 98,815,746 $9,315,112 9.43% $ 91,619,315 $ 8,860,825 9.67% $ 78,760,184 $7,540,831
Loans held for
sale............... 17,574,286 $1,176,668 6.70% 288,190 $ 20,155 7.00% 0 0
Investment
securities......... 14,098,634 764,750 5.42% 19,044,604 1,074,219 5.64% 28,275,573 1,563,523
Federal funds sold... 8,754,820 480,401 5.49% 12,011,554 671,736 5.59% 12,579,343 681,141
Other interest-
earning assets..... 1,850,831 93,240 5.04% 44,384 2,355 5.31% 60,418 3,066
------------ ---------- ------------ ----------- ------------ ----------
Total interest-
earning assets... 141,094,317 11,830,171 8.38% 123,008,047 $10,629,290 8.64% $119,675,518 $9,788,561
Noninterest-earning
assets............. 11,288,904 9,251,991 9,206,500
------------ ------------ ------------
Total assets....... $152,383,221 $132,260,038 $128,882,018
============ ============ ============
INTEREST-BEARING
LIABILITIES:
Deposits............. $ 60,861,085 1,584,750 2.60% $ 57,138,271 $ 1,518,989 2.66% $ 57,326,020 $1,622,133
Other time........... 34,737,662 1,883,413 5.42% 25,540,675 1,333,331 5.22% $ 26,024,247 $1,407,649
Borrowings........... 5,989,520 280,716 4.69% 3,070,489 143,184 4.66% 2,564,945 115,001
------------ ---------- ------------ ----------- ------------ ----------
Total interest-
bearing
Liabilities...... 101,588,267 3,748,879 3.69% 85,749,435 2,995,504 3.49% 85,915,212 3,144,783
Noninterest-bearing
liabilities........ 34,334,031 30,691,330 28,749,736
------------ ------------ ------------
Total
liabilities...... 135,922,298 116,440,765 114,664,948
Stockholders'
equity............. 16,460,923 15,819,273 14,217,070
------------ ------------ ------------
Total liabilities
and stockholders'
equity........... $152,383,221 $132,260,038 $128,882,018
============ ============ ============
Net interest income.. $8,081,292 $ 7,633,786 $6,643,778
========== =========== ==========
Interest rate
spread............. 4.69% 5.15%
Net yield on
interest-earning
assets............. 5.73% 6.21%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........ 138.89% 143.45%
<CAPTION>
1996
--------
YIELD
--------
<S> <C>
INTEREST-EARNING
ASSETS:
Loans (1)............ 9.57%
Loans held for
sale............... 0.00%
Investment
securities......... 5.53%
Federal funds sold... 5.41%
Other interest-
earning assets..... 5.07%
Total interest-
earning assets... 8.18%
Noninterest-earning
assets.............
Total assets.......
INTEREST-BEARING
LIABILITIES:
Deposits............. 2.83%
Other time........... 5.41%
Borrowings........... 4.48%
Total interest-
bearing
Liabilities...... 3.66%
Noninterest-bearing
liabilities........
Total
liabilities......
Stockholders'
equity.............
Total liabilities
and stockholders'
equity...........
Net interest income..
Interest rate
spread............. 4.52%
Net yield on
interest-earning
assets............. 5.55%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........ 139.29%
</TABLE>
- ------------------------------
(1) Includes nonaccrual loans and deferred loan fees.
(2) Interest on loans and investments is presented on a fully taxable equivalent
basis using a marginal tax rate of 34%
66
<PAGE>
Table 2, Rate Volume, sets forth the dollar amount of changes in interest
income and interest expense for the major categories of Patapsco Valley's
interest-earning assets and interest-bearing liabilities. The table
distinguishes between (1) changes in net interest income attributed to volume
(change in volume multiplied by the prior year's interest rate), and (2) changes
in net interest income attributed to rate (change in rate multiplied by the
prior year's volume). The change in interest due to the combined rate and volume
changes is allocated entirely to the change in rates.
TABLE 2--RATE VOLUME
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
CHANGE DUE TO VARIANCE IN CHANGE DUE TO VARIANCE IN
----------------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1)..................... $ 680,532 ($226,245) $ 454,287 $1,286,665 $ 33,329 $1,319,994
Loans held for sale........... 1,208,929 (52,416) 1,156,513 0 20,155 20,155
Investment securities......... (273,900) (35,569) (309,469) (499,002) 9,698 (489,304)
Federal funds sold............ (182,130) (9,205) (191,335) (30,744) 21,339 (9,405)
Other interest-earning
assets...................... 95,849 (4,964) 90,885 (814) 103 (711)
---------- --------- ---------- ---------- --------- ----------
Total interest-earning
assets.................... 1,529,280 (328,399) 1,200,881 756,105 84,624 840,729
Interest expense
Deposits...................... 96,894 (31,133) 65,761 (6,979) (96,165) (103,144)
Other time.................... 480,122 69,960 550,082 (26,156) (48,162) (74,318)
Borrowings.................... 136,121 1,411 137,532 22,666 5,517 28,183
---------- --------- ---------- ---------- --------- ----------
Total interest-bearing
liabilities............... 713,137 40,238 753,375 (10,469) (138,810) (149,279)
Change in net interest
income...................... $ 816,143 ($368,637) $ 447,506 $ 766,574 $ 223,434 $ 990,008
========== ========= ========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
1996 COMPARED TO 1995
CHANGE DUE TO VARIANCE IN
-----------------------------------
VOLUME RATE TOTAL
---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1)..................... $ 17,591 ($ 12,180) $ 5,411
Investment securities......... 642,780 (41,358) 601,422
Federal funds sold............ (49,201) (63,874) (113,075)
Other interest-earning
assets...................... 1,264 65 1,329
---------- --------- ----------
Total interest-earning
assets.................... 612,434 (117,347) 495,087
Interest expense
Deposits...................... 111,226 (97,008) 14,218
Other time.................... 305,488 51,475 356,963
Borrowings.................... 47,843 (13,938) 33,905
---------- --------- ----------
Total interest-bearing
liabilities............... 464,557 (59,471) 405,086
Change in net interest
income...................... $ 147,877 ($ 57,876) $ 90,001
========== ========= ==========
</TABLE>
- ------------------------
(1) includes nonaccrual loans and deferred loan fees
FINANCIAL CONDITION
ASSETS. Total assets of Patapsco Valley increased by $29,614,000 or 21.12%
to $169,843,000 at December 31, 1998 as compared to $140,229,000 at
December 31, 1997. The increase for fiscal 1998 as
67
<PAGE>
compared to fiscal 1997 was primarily due to increases in cash and due from
banks $1,889,000, interest bearing deposits $1,180,000, Federal Funds sold
$4,123,000, loans $1,795,000, loans held for sale $18,178,000, and furniture and
equipment $2,921,000. These increases were slightly off-set by a decline in
investment securities of $434,000.
LOANS. Loans increased by $1,795,000 or 1.85% to $98,591,000 at
December 31, 1998 as compared to $96,796,000 at December 31, 1997. The increase
in fiscal 1998 compared to fiscal 1997 was generally the result of an increase
of $5,854,000 in construction and land development loans. The increase was
offset by a combined decrease of $5,181,000 in residential and commercial real
estate loans and lease financing loans. While competition for new loan
origination continues to be strong, management plans to grow the portfolio in
the future in part by additional product promotions.
The increases in loans and loans held for sale over the 2 year periods are
part of management's strategy to continue with the mortgage bank subsidiary's
operations and to emphasize services to small and medium size businesses and
professional practices.
The majority of residential mortgage loans which were originated by Patapsco
Valley have been sold on the secondary market. Loans held for sale increased by
$18,178,000 or 328.06% to $23,719,000 at December 31, 1998 as compared to
$5,541,000 at December 31, 1997. The increase is attributed to the mortgage
banking subsidiary "Founders Mortgage Company" which began operations during the
last part of the fiscal year ending December 31, 1997. Although the growth in
loans held for sale is impressive, the pace is not expected to continue at
328.06% and is attributed to the subsidiary's expansion.
Table 3, Major Categories of Loans, sets forth Patapsco Valley's loan
portfolio at the dates indicated.
TABLE 3--MAJOR CATEGORIES OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
AMOUNT % AMOUNT % AMOUNT %
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential.................. $10,560,638 10.55% $11,877,703 12.06% $12,231,065 14.32%
Commercial................... 28,248,679 28.21% 29,376,631 29.83% 25,363,764 29.69%
Construction and land
development................ 12,606,395 12.59% 6,752,244 6.86% 2,205,656 2.58%
Lease financing................ 17,692,772 17.67% 20,428,755 20.75% 16,166,804 18.92%
Commercial..................... 24,789,631 24.76% 24,143,558 24.52% 22,784,968 26.67%
Consumer....................... 6,231,079 6.22% 5,893,248 5.98% 6,679,736 7.82%
----------- ------ ----------- ------ ----------- ------
100,129,194 100.00% 98,472,139 100.00% 85,431,993 100.00%
Allowance for loan losses...... 1,424,047 1,615,008 1,562,853
Deferred loan fees............. 114,320 61,303 27,786
----------- ----------- -----------
$98,590,827 $96,795,828 $83,841,354
=========== =========== ===========
</TABLE>
68
<PAGE>
Table 4, Maturities, sets forth at December 31, 1998 the dollar amount of
loans maturing in the loan portfolio. Adjustable rate loans are included in the
period that the loan matures based on Contractual maturity. Demand loans and
overdrafts are reported as due in one year or less. The table does not include
prepayment and scheduled principal repayments assumptions which could shorten
the average life on loans.
TABLE 4--MATURITIES
<TABLE>
<CAPTION>
DUE AFTER
DUE WITHIN 1 THROUGH DUE AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real Estate
Residential............................ $ 5,845,985 $ 2,925,915 $ 1,788,738 $ 10,560,638
Commercial............................. 11,047,441 10,068,118 7,133,120 28,248,679
Construction and land development...... 8,720,215 3,155,118 731,062 12,606,395
Lease financing.......................... 1,866,280 15,168,930 657,562 17,692,772
Commercial............................... 15,365,205 7,898,789 1,525,637 24,789,631
Consumer................................. 4,382,242 1,743,345 105,492 6,231,079
----------- ----------- ----------- ------------
$47,227,368 $40,960,215 $11,941,611 $100,129,194
=========== =========== =========== ============
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED
FIXED RATES RATES TOTAL
----------- ----------- -----------
<S> <C> <C> <C> <C>
Real Estate
Residential............................ $ 2,532,817 $ 2,181,837 $ 4,714,654
Commercial............................. 9,062,623 8,138,615 17,201,238
Construction and land development...... 2,657,664 1,228,516 3,886,180
Lease financing.......................... 15,826,492 0 15,826,492
Commercial............................... 6,596,185 2,828,240 9,424,425
Consumer................................. 1,848,837 0 1,848,837
----------- ----------- -----------
$38,524,618 $14,377,208 $52,901,826
=========== =========== ===========
</TABLE>
Patapsco Valley has policies and procedures designed to mitigate credit risk
and to maintain the quality of the loan portfolio. These policies include
underwriting standards for new credits as well as the continuous monitoring and
reporting of asset quality and the adequacy of the allowance for loan losses.
These policies, coupled with continuous training efforts, have provided
effective checks and balances for the risk associated with the lending process.
Lending authority is based on the level of risk, size of the loan and the
experience of the lending officer.
Patapsco Valley's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has in-depth knowledge
of the risk to which a given credit is subject. Although the loan portfolio is
diversified, its performance will be influenced by the economy of the region.
It is the policy of Patapsco Valley to place a loan in non-accrual status
whenever there is substantial doubt about the ability of the borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Management closely monitors non-accrual loans. A non-accruing loan is
restored to current status when the prospects of future contractual payments are
not in doubt. As of December 31, 1998, Patapsco
69
<PAGE>
Valley had $1,348,000 in non-accrual loans, and $380,000 in accruing loans which
are past due all of which management believes, although it cannot be certain, to
be collectable. As of December 31, 1998, Patapsco Valley had $7,366,000 on the
Watch List for which the borrower had the potential for experiencing financial
difficulties. These loans are subject to ongoing management attention and their
classifications are reviewed regularly.
SECURITIES AVAILABLE FOR SALE. Securities available for sale decreased by
$434,000 or 2.86% to $14,726,000 at December 31, 1998 from $15,160,000 at
December 31, 1997. The decline was primarily due to the decrease in investments
in securities of U.S. government agencies and state and municipals by
$1,684,000. The decline was substantially offset by increase in the investment
of U.S. treasury and equity securities of $1,249,000.
Table 5, Investment Schedule, sets forth the carrying value of Patapsco
Valley's investments at the dates indicated.
TABLE 5--INVESTMENT SCHEDULE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasuries....................................... $10,915,154 $ 9,968,222 $21,830,297
U.S. Government Agencies.............................. 1,996,564 3,127,876 4,928,497
State and Municipal................................... 500,321 1,053,259 1,061,600
----------- ----------- -----------
13,412,039 14,149,357 27,820,394
----------- ----------- -----------
Equity securities..................................... 1,314,323 1,010,976 735,751
----------- ----------- -----------
Total................................................. $14,726,362 $15,160,333 $28,556,145
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE YEAR TO
WITHIN ONE YEAR FIVE YEARS
--------------------- --------------------
AMOUNT YIELD AMOUNT YIELD
---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasuries........................................... 9,870,025 4.73% 1,045,129 6.57%
U.S. Government Agencies.................................. 1,996,564 5.06% -- --
State and Municipal....................................... 295,129 3.83% 205,192 4.90%
---------- ---- --------- ----
12,161,718 4.76% 1,250,321 6.29%
========== ==== ========= ====
</TABLE>
Investment securities classified as available for sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available for sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders equity net of income taxes. Patapsco Valley does not have
securities classified as held to maturity, although management may find a
benefit in the future and purchase such securities in the future. If securities
were classified as held to maturity, then management would have both the
positive intent and ability to hold them to maturity, and they would be reported
at cost. Patapsco Valley does not currently follow a strategy of making security
purchases with a view to near-term sales, and, therefore, does not own trading
securities. Patapsco Valley manages the investment portfolio within policies
that seek to achieve desired levels of liquidity, manage interest rate
sensitivity risk, meet earnings objectives and provide required collateral
support for deposit and borrowing activities.
DEPOSITS. Total deposits increased by $27,572,000 or 23.07% to $147,067,000
at December 31, 1998 as compared to $119,495,000 at December 31, 1997.
Commercial and Farmers Bank has seen an increase in deposits in all branches but
growth was enhanced by Commercial and Farmers Bank opening one branch at the end
of 1997 and another in September 1998. Both branches have exceeded
70
<PAGE>
deposit growth projections. Deposit growth is expected to continue as a third
branch, located in Elkridge, opened in January, 1999 and as Commercial and
Farmers Bank continues additional product promotions.
Table 6, Deposit Schedule, presents the daily average balances of various
interest-bearing deposit accounts and the rates paid on each for the periods
presented.
TABLE 6--DEPOSIT SCHEDULE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996
AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Savings and NOW........................ $42,900,959 2.56% $38,744,167 2.62% $38,271,927 2.74%
Money market........................... 17,960,126 2.71% 18,394,104 2.74% 19,054,113 3.02%
Other time............................. 34,737,662 5.42% 25,540,675 5.22% 26,024,247 5.41%
----------- ----------- -----------
95,598,747 3.63% 82,678,946 3.45% 83,350,287 3.63%
</TABLE>
BORROWINGS. Borrowings increased by $940,000 or 32.86% to $3,801,000 at
December 31, 1998 as compared to $2,861,000 at December 31, 1997. The increase
was primarily due to growth of the Founders Mortgage Company operation. During
the year ended December 31, 1998, Patapsco Valley borrowed from the Federal Home
Loan Bank in order to fund new loan originations at Founders Mortgage Company.
There were no outstanding Federal Home Loan Bank advances as of December 31,
1998.
Table 7, Borrowing Schedule, sets forth certain information regarding short
term borrowings.
TABLE 7--BORROWING SCHEDULE
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Amount of borrowings outstanding......................... $3,800,623 $2,861,324 $3,236,572
Weighted average rate paid on:
Repurchase agreements.................................. 4.02% 4.81% 4.42%
Advances from Federal Home Loan Bank................... -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month
end:
Repurchase agreements................................. $ 5,505,806 $3,575,213 $3,958,006
Advances from Federal Home Loan Bank.................. $13,302,003 -- --
Approximate average short term borrowings outstanding
with respect to:
Repurchase agreements................................. $ 3,643,525 $3,070,489 $1,477,289
Advances from Federal Home Loan Bank.................. 2,345,995 -- --
Approximate weighted average rate paid on:
Repurchase agreements................................. 4.05% 4.66% 4.48%
Advances from Federal Home Loan Bank.................. 5.68% -- --
</TABLE>
71
<PAGE>
RESULTS OF OPERATIONS
GENERAL. Patapsco Valley had net income of $1,077,000 for the year ended
December 31, 1998 as compared to $1,548,000 for the year ended December 31,
1997. The decrease for fiscal 1998 was due to an increase in non-interest
expenses of $3,282,000 offset by an increase of $461,000 and $2,035,000 in net
interest and non-interest income, respectively.
NET INTEREST INCOME. Patapsco Valley's net interest income increased by
$461,000 to $8,053,000 in fiscal 1998 as compared to $7,592,000 in fiscal 1997.
The increase in Patapsco Valley's net interest income is primarily attributed to
the growth in Patapsco Valley's loans held for sale. Patapsco Valley has
experienced a large increase in residential loan originations in the mortgage
banking subsidiary, Founders Mortgage Company. Although these loans are pre-sold
prior to closing, the turn-around time until the loan is actually sold to a
third party is approximately three to five weeks. During this time, Patapsco
Valley is able to benefit from the interest income until the loan is sold. In
order to fund these originations, Patapsco Valley has made use of Federal Home
Loan Bank borrowings and deposit growth.
Patapsco Valley's interest rate spread decreased to 4.69% in fiscal 1998
from 5.15% in fiscal 1997. Although Patapsco Valley has experienced a decline in
the interest rate spread, it is well above industry averages.
Patapsco Valley's net yield on interest earning assets decreased to 5.73% in
fiscal 1998 compared to 6.21% in fiscal 1997. The decline was primarily due to
the decrease in yields on interest earning assets to 8.38% in fiscal 1998 as
compared to 8.64% in fiscal 1997. The decline was partially offset by an
increase in the average balances of interest earning assets to $141,094,000 in
fiscal 1998 from $123,008,000 in fiscal 1997.
INTEREST INCOME. Patapsco Valley's total interest income increased by
$1,214,000 to $11,802,000 in fiscal 1998 from $10,588,000 in fiscal 1997. The
increase was primarily due to an increase in the average of interest earning
assets of $18,086,000 to $141,094,000 in fiscal 1998 as compared to $123,008,000
in fiscal 1997. The increase was slightly offset by a decline in the overall
yield to 8.38% in fiscal 1998 as compared to 8.64% in fiscal 1997.
Interest income from loans increased by $464,000 to $9,300,000 in fiscal
1998 from $8,836,000 in fiscal 1997. The increase was primarily due to the
increase of $7,197,000 in the average balance of loans to $98,816,000 in fiscal
1998 from $91,619,000 in fiscal 1997 and was partially offset by a 0.24% decline
in the average yields to 9.43% in fiscal 1998 from 9.67% in fiscal 1997.
Interest income from loans held for sale increased by $1,157,000 to
$1,177,000 in fiscal 1998 from $20,000 in fiscal 1997. The increase was due to a
full year of operation for the mortgage banking subsidiary, Founders Mortgage
Company. Founders Mortgage Company began operations in December, 1997 and
originated over 1,400 residential loans during fiscal 1998.
Interest income on investment securities decreased by $306,000 to $752,000
in fiscal 1998 from $1,058,000 in 1997. The decrease was due to a decrease in
the average balance of investments by $4,946,000 to $14,099,000 during fiscal
1998 from $19,045,000 in fiscal 1997. The decline in interest income was also
attributed to a decrease in the average yield by 0.22% to 5.42% in fiscal 1998
from 5.64% in fiscal 1997. Patapsco Valley is planning to diversify its
investment portfolio with varying maturities to attempt to maximize the earnings
potential of the portfolio.
Interest income on Federal funds sold decreased by $192,000 to $480,000
during fiscal 1998 from $672,000 in fiscal 1997. The decline was due in part to
a decrease in the average balance by $3,257,000 to $8,755,000 in fiscal 1998
from $12,012,000 in fiscal 1997. The decrease was also attributed to a decrease
in the average yield by 0.10% to 5.49% in fiscal 1998 from 5.59% in fiscal 1997.
72
<PAGE>
Interest income from other interest earning assets increased by $91,000 to
$93,000 in fiscal 1998 from $2,000 in fiscal 1997. The increase was primarily
due to the increase in the average balance of the Federal Home Loan Bank account
by $1,807,000 to $1,851,000 in fiscal 1998 from $44,000 in fiscal 1997. The
increase was slightly offset by a decline in the average yield by 0.27% to 5.04%
in fiscal 1998 from 5.31% in fiscal 1997.
INTEREST EXPENSE. Patapsco Valley's total interest expense increased by
$753,000 to $3,749,000 in fiscal 1998 as compared to $2,996,000 in fiscal 1997.
The increase was due to an increase in the average balance of interest bearing
liabilities by $15,839,000 to $101,588,000 in fiscal 1998 from $85,749,000 in
fiscal 1997. The increase was also attributed to an increase in the average rate
by 0.20% to 3.69% in fiscal 1998 from 3.49% in fiscal 1997.
Interest on savings, NOW and money market deposit accounts increased by
$66,000 to $1,585,000 in fiscal 1998 from $1,519,000 in fiscal 1997. The
increase was due to the increase in the average balance by $3,723,000 to
$60,861,000 in fiscal 1998 from $57,138,000 in fiscal 1997. The decrease in the
average rate by 0.06% to 2.60% in fiscal 1998 from 2.66% in fiscal 1997 had only
a slight effect on the increase in interest expense.
Interest on other time deposits increased by $550,000 to $1,883,000 in
fiscal 1998 from $1,333,000 in fiscal 1997. The increase in interest expense was
attributed to an increase in the average balance by $9,197,000 to $34,738,000 in
fiscal 1998 from $25,541,000 in fiscal 1997. The increase was also attributed to
an increase in the average rate by 0.20% to 5.42% in fiscal 1998 from 5.22% in
fiscal 1997. Patapsco Valley opened a branch at the end of 1997 and another one
in the third quarter of 1998. Due to the new locations, Patapsco Valley
conducted an aggressive marketing campaign, advertising Commercial and Farmers
Bank and its various new deposit products. Both branches have exceeded
projections in deposit growth and continue to attract new deposits. Another new
branch opened in January, 1999 and Patapsco Valley expects deposit growth to
continue.
Interest on borrowings increased by $138,000 to $281,000 in fiscal 1998 from
$143,000 in fiscal 1997. The increase was primarily due to an increase in the
average balance by $2,920,000 to $5,990,000 in fiscal 1998 from $3,070,000 in
fiscal 1997. The increase was also attributable to a small extent to the
increase in the average rate by 0.03% to 4.69% in fiscal 1998 from 4.66% in
fiscal 1997. The increase in the average balance was due to Patapsco Valley
borrowing from the Federal Home Loan Bank to fund the rapid loan origination
growth experienced in Founders Mortgage Company.
PROVISION FOR LOAN LOSSES. No provision for loan losses was charged to
expense for fiscal years 1998 and 1997. Patapsco Valley has seen a recent
increase in real estate loans past due 90 days and non-accrual. Management
believes that these real estate loans are subject to little risk of loss based
on collateral values. However, management cannot be certain that collateral
values will be maintained. In addition, Patapsco Valley experienced net
charge-offs of $191,000 in fiscal 1998 as compared to net recoveries of $52,000,
and $784,000 for fiscal year ended 1997. While management believes that, based
on information currently available, Commercial and Farmers Bank's allowance for
loan losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that Commercial and Farmers Bank's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by Commercial and Farmers Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions at the time
management determined the current level of the allowance for loan losses.
Commercial and Farmers Bank's allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at the amount management considers adequate to cover
estimated losses in loans receivable that are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors,
73
<PAGE>
including current economic conditions, actual loss experience, diversification
and size of the portfolio, adequacy of the collateral, the amount of
non-performing loans and industry trends. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
Commercial and Farmers Bank's allowance for loan losses. Such agencies may
require Commercial and Farmers Bank to make additional provision for estimated
loan losses based upon judgments different from those of management.
NON-INTEREST INCOME. Total non-interest income increased by $2,035,000 to
$3,037,000 in fiscal 1998 from $1,002,000 in fiscal 1997. The increase was
attributed to a $1,870,000 increase in mortgage banking fees and gains. In
addition, Patapsco Valley experienced an increase in service charges on deposit
accounts. These increases follow an increased level of fees collected for checks
drawn against insufficient funds, because of increases in deposit accounts and
due to the introduction of new checking account programs that have monthly fees.
With the continued anticipated expansion of Commercial and Farmers Bank's branch
network and of Founders Mortgage Company, management expects to see increased
levels of non-interest income.
NON-INTEREST EXPENSE. Total non-interest expense increased by $3,282,000 to
$9,460,000 in fiscal 1998 from $6,178,000 in fiscal 1997.
A significant portion of the increase in non-interest expense is related to
increases in salaries and related benefits by $2,193,000 to $5,423,000 in fiscal
1998 from $3,230,000 in fiscal 1997. Patapsco Valley has added a significant
number of employees to the payroll as a result of the expansion in Commercial
and Farmers Bank, Founders Mortgage Company and Central Maryland Service
Corporation. Salaries and benefits also include cost of living increases and
benefit cost increases. Employee expenses continue to increase to reflect full
year salaries for the employees added in 1997 and as Patapsco Valley continued
to expand.
Occupancy and furniture and equipment expense increased by $578,000 to
$1,637,000 in fiscal 1998 from $1,059,000 in fiscal 1997. The increases are due
to Patapsco Valley expanding its facilities, making improvements to existing
facilities and upgrading equipment. Absent unforeseen circumstances, these
increases are expected to continue as new branches are opened and a full year of
depreciation costs and equipment service contracts are realized. With more
facilities and equipment, Patapsco Valley will also require more maintenance and
the additional investment will be depreciated over the estimated useful life of
the asset.
Other expenses increased by $510,000 to $2,400,000 in fiscal 1998 from
$1,890,000 in fiscal 1997. These areas of increased expense include costs
associated with the promotion and establishment of Founders Mortgage Company and
the new branches. In addition, Patapsco Valley had adopted a full-scale
marketing program to compete effectively for deposits and loans, including
direct mail, cable television commercials, newspaper advertising and product
promotion.
PROVISION FOR INCOME TAXES. For 1998, the effective tax rate for Patapsco
Valley decreased to 33.95% from 35.95% in 1997. This reduction in the effective
tax rate in 1997 was partially the result of an Affordable Housing tax benefit.
Commercial and Farmers Bank is a limited partner in a partnership that builds
and owns affordable housing projects. Commercial and Farmers Bank receives tax
credits and loss deductions resulting from depreciation of the housing projects.
Note 15 of the audited Consolidated Financial Statements includes a
reconciliation of the Federal tax expense computed using the Federal Statutory
rate of 34% and provides additional detail.
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Patapsco Valley to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrower and depositor withdrawal requirements and to
fund current and planned expenditures. Patapsco Valley maintains its asset
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liquidity position internally through short-term investments, the maturity
distribution of the investment portfolio, loan repayments, proceeds from the
sale of loans held for sale and income from earning assets. A primary source of
cash is from the proceeds from the sale of loans held for sale. In addition,
Patapsco Valley relies on the proceeds from maturity of securities available for
sale and the investment portfolio contains readily marketable securities that
could be converted to cash. On the liability side of the balance sheet,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed. Patapsco Valley may borrow up to
$32,300,000 under secured lines of credit with the Federal Home Loan Bank of
Atlanta and has available lines of credit of $2,500,000 in overnight federal
funds and $1,000,000 in short-term credit from other correspondent banks. The
increase in loans held for sale of $18,178,000 or 328.06% from December 31, 1997
to December 31, 1998 was primarily funded by an increase in deposits of
$27,572,000 or 23.07%. Patapsco Valley believes that it has adequate liquidity
sources to meet all anticipated liquidity needs over the next twelve months.
While management plans to continue to rely on the secured lines of credit from
the Federal Home Loan Bank of Atlanta, management knows of no trend or event
which will have a material impact on Patapsco Valley's ability to maintain
liquidity at satisfactory levels.
CAPITAL RESOURCES AND ADEQUACY
One measure of capital adequacy is the leverage ratio, which is calculated
by dividing average total assets for the most recent quarter into Tier I
capital. The regulatory minimum for this ratio is 4.0%, with 6.0% being the
regulatory minimum to be classified well-capitalized. The leverage capital ratio
for Commercial and Farmers Bank as of December 31, 1998 was 10.3%.
Another measure of capital adequacy is the risk-based capital ratio, or the
ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier I) and supplemental capital (Tier 2), including a
limited amount of the allowance for credit losses. In calculating risk-weighted
assets, specific risk percentages are applied to each category of asset and to
off balance sheet items such as letters of credit. Regulators require a minimum
risk-based capital ratio of 8%. As of December 31, 1998, the total risk-based
capital ratio of Commercial and Farmers Bank was 13.8%. According to FDIC
capital guidelines, Commercial and Farmers Bank is considered to be "well
capitalized."
Commercial and Farmers Bank opened a new branch in September, 1998 and in
January, 1999 and Founders Mortgage Company is planning to continue to expand.
The funding sources for these projects are primarily cash, Federal funds and
maturities of investment securities. Management knows of no other trend or event
that will have a material impact on capital.
STATISTICAL INFORMATION
The following supplementary information required under Guide 3 for the
respective periods and at the respective dates is set forth on the pages
indicated below. The information should be read in conjunction with the related
Consolidated Financial Statements and Notes thereto for the year ended
December 31, 1998.
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Table 8, Non-Accrual, Past Due, and Restructured Loans, sets forth
information regarding non-accrual loans, foreclosed real estate and certain
other repossessed assets and loans. As of the dates indicated, management has
not classified any loan as "troubled debt restructurings" as defined in SFAS
no. 15.
TABLE 8--NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Loans accounted for on non-accrual basis:
Real estate................................................ $ 766,514 $ 448,513 $274,903
Lease financing............................................ 12,644 45,683 13,751
Commercial................................................. 567,117 682,504 78,925
Consumer................................................... 1,423 20,531 9,480
---------- ---------- --------
TOTAL NON-ACCRUAL LOANS................................ 1,347,698 1,197,231 377,059
Accruing loans which are past due
Real estate................................................ 145,308 -- --
Lease financing............................................ 5,085 -- 47,766
Commercial................................................. 224,760 50,000 --
Consumer................................................... 4,898 27,752 202
---------- ---------- --------
Total accruing loans which are past due................ 380,051 77,752 47,968
Total non-performing loans................................. $1,727,749 $1,274,983 $425,027
========== ========== ========
Total non-performing loans to loans receivable............. 1.73% 1.29% 0.50%
Allowance for loan losses to total non-performing Loans.... 82.42% 126.67% 367.77%
Total non-performing loans to total assets................. 1.02% 0.91% 0.32%
</TABLE>
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<PAGE>
TABLE 9--SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance........................................ $1,615,008 $1,562,853 $ 778,612
Loans charged-off:
Real Estate
Residential real estate.............................. -- -- 11,692
Commercial real estate............................... -- 29,818 --
Construction and land development.................... -- -- --
Lease financing.......................................... 57,510 -- 12,386
Commercial............................................... 201,452 51,749 382,189
Consumer................................................. 83,464 48,237 30,783
---------- ---------- ----------
342,426 129,804 437,050
Recoveries:
Real Estate
Residential real estate.............................. -- -- --
Commercial real estate............................... -- 9,637 8,000
Construction and land development.................... -- -- --
Lease financing.......................................... 12,016 1,202 --
Commercial............................................... 119,302 143,197 1,178,248
Consumer................................................. 20,147 27,923 35,043
---------- ---------- ----------
151,465 181,959 1,221,291
Net charge-offs(recoveries).............................. 190,961 (52,155) (784,241)
Provision for loan losses................................ 0 0 0
---------- ---------- ----------
Ending balance........................................... $1,424,047 $1,615,008 $1,562,853
========== ========== ==========
Allowance for loan losses as a % of total loans
outstanding............................................ 1.44% 1.67% 1.86%
Net loans charged-off as a % average loans Outstanding... 0.19% (0.06)% (1.00)%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
FINANCIAL CONDITION
ASSETS. Total assets increased by $6,329,000 or 4.73% to $140,229,000 at
December 31, 1997 as compared to $133,900,000 at December 31, 1996. The increase
for fiscal 1997 as compared to fiscal 1996 was primarily due to increases in
Federal Funds sold of $2,337,000, loans held for sale of $5,541,000, and loans
receivable of $12,954,000. These increases were offset by a decline in
securities available for sale of $13,396,000.
LOANS. Loans receivable as shown in Table 3 increased by $12,955,000 or
15.45% to $96,796,000 in 1997 as compared to $83,841,000 at December 31, 1996.
The increase in fiscal 1997 compared to fiscal 1996 was the result of an
increase in all loan types except residential real estate and consumer loans,
which declined by $1,140,000.
SECURITIES AVAILABLE FOR SALE. Securities available for sale as shown in
Table 5 decreased by $13,396,000 or 46.91% to $15,160,000 at December 31, 1997
as compared to $28,556,000 at December 31, 1996. The decrease in 1997 was
primarily due to the need for additional resources to fund the increase in loan
originations during the year.
DEPOSITS. Total deposits as shown in Table 6 increased by $4,907,000 or
4.28% to $119,495,000 at December 31, 1997 as compared to $114,588,000 at
December 31, 1996. The increase in 1997 was
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attributable to deposit growth in all branches and by Commercial and Farmers
Bank opening a new branch at the end of 1997.
BORROWINGS. Borrowings decreased as shown in Table 7 by $376,000 or 11.62%
to $2,861,000, at December 31, 1997 compared to $3,237,000 at December 31, 1996.
The decrease in 1997 was due to the fluctuation in securities sold under
repurchase agreements. Commercial and Farmers Bank sells the securities as a
form of cash management service to commercial account customers.
RESULTS OF OPERATIONS
GENERAL. Patapsco Valley net income for the year ended December 31, 1997
was $1,548,000 as compared to $1,502,000 for the year ended December 31, 1996.
The increase for fiscal 1997, as compared to fiscal 1996 was the result of an
increase of $1,234,000 in net interest and non-interest income. This increase
was offset by an increase of $1,181,000 in non-interest expenses.
NET INTEREST INCOME. Patapsco Valley's net interest income in fiscal 1997
increased by $983,000 to $7,592,000 in fiscal 1997 as compared to $6,609,000 in
fiscal 1996. For fiscal 1997, the interest rate spread increased to 5.15% from
4.52% in fiscal 1996 due to an increase in the overall yields in interest
earning assets.
Patapsco Valley's net yield on interest earning assets increased to 6.21% in
fiscal 1997 as compared to 5.55% in fiscal 1996. The increase was due to the
increase in the yields earned on interest earning assets to 8.64% in fiscal 1997
as compared to 8.18%, in fiscal 1996.
INTEREST INCOME. Patapsco Valley's total interest income increased by
$834,000 to $10,588,000 in fiscal 1997 from $9,754,000 in fiscal 1996. The
average balance on interest earning assets increased to $123,008,000 in fiscal
1997 from $119,676,000 in fiscal 1996. The increase was also a result of an
increase in the overall yield to 8.64% in fiscal 1997 as compared to 8.18% in
fiscal 1996.
Interest income from loans increased by $1,314,000 to $8,836,000 in fiscal
1997 from $7,521,000 in fiscal 1996. The increase was due to increases of both
the average balances to $91,619,000 and the yield of 9.67% in fiscal 1997 from
$78,760,000 and 9.57% in fiscal 1996.
Interest income on investment securities decreased by $490,000 to $1,058,000
in fiscal 1997 from $1,548,000 in fiscal 1996. The decrease was due to a decline
in the average balances by $9,231,000 to $19,045,000 in fiscal 1997 from
$28,276,000 in fiscal 1996. The decrease was partially offset by an increase in
the average yields by 0.11% to 5.64% in fiscal 1997 from 5.53% in fiscal 1996.
Interest income on Federal funds sold decreased by $9,000 to $672,000 in
fiscal 1997 from $681,000 in fiscal 1996. The decline in interest income for
fiscal 1997 as compared to fiscal 1996 is not significant.
Interest income from other interest earning assets in fiscal 1997 as
compared to fiscal 1996 did not change significantly.
INTEREST EXPENSE. Patapsco Valley's total interest expense decreased by
$149,000 to $2,996,000 in fiscal 1997 from $3,145,000 in fiscal 1996. The
decrease for fiscal 1997 was attributed to a decline in the average balance by
$166,000 to $85,749,000 in fiscal 1997 from $85,915,000 in fiscal 1996 and a
decrease in the average rates by 0.17% to 3.49% in fiscal 1997 from 3.66% in
fiscal 1996.
Interest on savings, NOW and money market deposit accounts declined by
$103,000 to $1,519,000 in fiscal 1997 from $1,622,000 in fiscal 1996. The
decline was due to a decrease in the average balance by $188,000 to $57,138,000
in fiscal 1997 from $57,326,000 in fiscal 1996. The decrease in interest expense
was also attributable to the decrease in the average rate by 0.16% to 2.66% in
fiscal 1997 from 2.83% in fiscal 1996.
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<PAGE>
Interest on other time deposits decreased by $75,000 to $1,333,000 in fiscal
1997 from $1,408,000 during fiscal 1996. This decline was due to a decrease in
the average balance by $483,000 to $25,541,000 in fiscal 1997 from $26,024,000
in fiscal 1996 and a decrease in the average rate by 0.19% to 5.22% in fiscal
1997 from 5.41% during fiscal 1996.
Interest on borrowings in fiscal 1997 increased by $28,000 to $143,000 in
fiscal 1997 from $115,000 in fiscal 1996. This increase was due to an increase
in the average balance of $505,000 to $3,070,000 in fiscal 1997 from $2,565,000
in fiscal 1996 and an increase in the average rate of 0.18% to 4.66% in fiscal
1997 from 4.48% in fiscal 1996.
ALLOWANCE FOR LOAN LOSSES. For year ended December 31, 1997, Commercial and
Farmers Bank recorded net recoveries of $52,155 and net recoveries for 1996 were
$784,241. No provision for loan losses was charged to expense in 1997 or 1996.
While Commercial and Farmers Bank's management believes that Commercial and
Farmers Bank's allowance for loan losses is sufficient to cover losses inherent
in its loan portfolio at this time, no assurances can be given that Commercial
and Farmers Bank's level of allowance for loan losses will be sufficient to
cover future loan losses incurred by Commercial and Farmers Bank or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
at the time management determined the current level of the allowance for loan
losses.
Commercial and Farmers Bank's allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. The allowance for loan
losses is maintained at the amount management considers adequate to cover
estimated losses in loans receivable that are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience, diversification and size of the portfolio, adequacy of the
collateral, the amount of non-performing loans and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review Commercial and Farmers Bank's allowance for loan losses.
Such agencies may require Commercial and Farmers Bank to make additional
provision for estimated loan losses based upon judgments different from those of
management. The allowance for loan losses was $1.6 million as of December 31,
1997 and 1996, which represented 1.64% and 1.86% of gross loans (exclusive of
loans held for sale) respectively.
Patapsco Valley has seen a rise in principal balances of loans past due
90 days or more and non-accrual loans as seen in Table 8. Included in these
loans are one commercial and one mortgage totaling $856,430 which management
believes are subject to little risk of loss based on collateral values, although
management cannot be certain that collateral values will be maintained.
NON-INTEREST INCOME. Total non-interest income increased by $250,000 to
$1,002,000 in fiscal 1997 from $752,000 in fiscal 1996. The increase was
primarily due to an increase in service fees on deposit accounts.
NON-INTEREST EXPENSE. Total non-interest expense increased by $1,181,000 to
$6,178,000 in fiscal 1997 from $4,997,000 in fiscal 1996. Salaries and related
benefits increased by $536,000 to $3,230,000 in fiscal 1997 from $2,694,000 in
fiscal 1996. Occupancy and furniture and equipment increased by $205,000 to
$1,059,000 in fiscal 1997 from $854,000 in fiscal 1996. The increases are due to
Patapsco Valley expanding its facilities, making improvements to existing
facilities and upgrading equipment. Other expenses also increased by $441,000 to
$1,890,000 in fiscal 1997 from $1,449,000 in fiscal 1996. These areas of
increased expense include costs associated with the promotion and establishment
of Founders Mortgage Company and the new branches.
PROVISION FOR INCOME TAXES. For 1997, the effective tax rate for Patapsco
Valley decreased to 35.95% from 36.44% in 1996. This reduction in the effective
tax rate in 1997 was primarily the result of
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<PAGE>
an affordable housing tax benefit. Commercial and Farmers Bank is a limited
partner in a partnership that builds and owns affordable housing projects.
Commercial and Farmers Bank receives tax credits and loss deductions resulting
from depreciation of the housing projects. Note 15 of the audited consolidated
financial statements includes a reconciliation of the federal tax expense
computed using the federal statutory rate of 34% and provides additional detail.
Patapsco Valley noted a decrease in state income taxes beginning in 1996 as the
Maryland legislature exempted a portion of the interest from securities issued
by the United States Treasury, bank-qualified Maryland municipals, and some
United States Government agencies. This change in state income taxes has not had
a material impact on liquidity, financial condition or operations.
YEAR 2000 CONVERSION AND COMPLIANCE
THIS IS A YEAR 2000 READINESS DISCLOSURE UNDER THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT OF 1998
The Year 2000 problem is the result of computer programs being written and
microcontrollers using two digits (rather than four) to define the applicable
year. Any of Patapsco Valley's programs that have time--sensitive software or
embedded technology may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations.
Patapsco Valley currently believes that, with the completed modifications to
existing information technology ("IT") and non-IT systems and converting to new
IT and non-IT software or systems, the Year 2000 problem will not pose a
significant operational problem for Patapsco Valley's computer systems. There
can be no assurance that the systems of other companies or governments will be
timely converted or that any such failure to convert by another company or
government would not have a material adverse effect on Patapsco Valley. The Year
2000 issue could disrupt Patapsco Valley's normal business operations. The most
likely worst case Year 2000 scenario foreseeable at this time includes the
inability to systematically process various types of customer transactions. This
could affect Patapsco Valley's ability to accept deposits or process
withdrawals, originate new loans or accept loan payments. This could have a
material adverse effect on Patapsco Valley. The contingency plan addresses
alternative methods to enable Patapsco Valley to continue to offer basic
services to Patapsco Valley's customers.
Patapsco Valley developed a Year 2000 implementation and testing plan (the
"Plan") in accordance with guidelines set forth by the Federal Financial
Institutions Examination Council (the "FFIEC"). Patapsco Valley expects that its
Year 2000 activities will continue during 1999 and that all phases of its Plan
will be completed by the deadlines established by the FFIEC in its eight
interagency statements concerning Year 2000. The Plan has five primary phases:
AWARENESS--This phase is ongoing and is designed to inform Patapsco Valley's
board of directors and management, employees, customers and vendors of the
impact of the Year 2000 Issue. Patapsco Valley implemented by September 30,
1998, its customer awareness program that includes appropriate communications
channels to effectively respond to customer inquiries. Customer awareness will
be ongoing.
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ASSESSMENT--During this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by the Year
2000 problem. The review included information technology and communication
systems such as personal computers, local area networks and servers, ATM modems,
printers, copy machines, facsimile machines, telephones and the operating
systems and software for these systems. It also included non-information
technology systems, such as heating, air conditioning and vault controls, alarm
systems, surveillance systems, time clocks, coin and currency counters, and
postage meters. The assessment phase of the Plan was completed by September 30,
1997.
RENOVATION AND/OR REPLACEMENT--This phase includes programming code
enhancements, hardware and software upgrades, system replacements, vendor
certification and any other changes necessary to make any hardware, software and
other equipment Year 2000 compliant. Patapsco Valley is actively working with
vendors and suppliers to determine that their operation, products and services
are Year 2000 capable or to monitor their progress toward Year 2000 capability.
Patapsco Valley has obtained written assurances of current Year 2000 compliance
from 14% of its vendors and service providers which have long term written
contracts with Patapsco Valley. Patapsco Valley has reviewed the products and
services supplied by all of its material vendors and has been informed that
these products and services either are or are expected to be Year 2000 compliant
prior to January 1, 2000. Patapsco Valley was able to substantially complete the
validation for the Year 2000 compliance of the products and services supplied by
its material vendors by March 31, 1999. Any material vendors that are determined
not to be Year 2000 compliant, Patapsco Valley will enter into new relationships
with other vendors who have achieved Year 2000 readiness prior to January 1,
2000. The renovation phase of the Plan was largely completed by December 31,
1998, and was fully complete by June 30, 1999.
VALIDATION AND TESTING--The next phase of the Plan is to complete a
comprehensive testing of all known processes. Patapsco Valley has met the
following key milestones:
June 30, 1998--completion of written validation strategies and plans.
September 1, 1998--commence validation of internal mission critical
systems, including those programmed in-house and those purchased from
software vendors.
December 31, 1998--validation of internal mission-critical systems was
substantially complete.
March 31, 1999--validation of service providers for mission critical
systems was substantially completed. External testing with material third
parties was started.
June 30, 1999--validation of mission-critical systems was completed and
implementation was substantially completed.
IMPLEMENTATION--This phase will occur when Year 2000 processing commences.
On some applications Patapsco Valley is already entering dates greater than
December 31, 1999 into its systems. In these situations no adverse events have
been noted. The significant part of the implementation phase will occur after
December 31, 1999.
CONTINGENCY PLANS
The Plan calls for the development of contingency plans for at-risk systems.
Patapsco Valley has completed its business resumption contingency planning
process by June 30, 1999. This effort will be made in conjunction with Patapsco
Valley's disaster recovery initiatives. The Contingency Plans are being
developed to provide continuity of business in the event some, or all, of the
applications, hardware, or software is not year 2000 ready by the year 2000 or
an unexpected failure occurs. The contingency plan identifies workarounds for
processing business should a failure occur.
CUSTOMER RISK
Patapsco Valley's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address Year 2000 issues. Patapsco Valley
may be subject to increased liquidity risk to the
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extent of deposit withdrawals. It is not possible to quantify the potential
impact of such risks or losses at this time and there is no assurance that the
failure of customers to achieve Year 2000 compliance would not have a material
adverse affect on Patapsco Valley.
Patapsco Valley implemented a due diligence process which identifies,
assesses, and establishes controls for Year 2000 risk posed by customers as
funds takers, funds providers and capital market/asset management counter
parties. The process included identifying material customers (commercial
customers with outstanding credit over $100,000 (over 44% of Commercial and
Farmers Bank's loan portfolio) or deposits over $1,000,000) evaluating their
Year 2000 readiness; assessing their Year 2000 risk to Patapsco Valley; and
implementing appropriate controls to manage and mitigate their Year 2000 related
risk to Patapsco Valley.
Patapsco Valley's method of assessing its material customers' Year 2000
preparedness included one or more of the following: mailing surveys, telephone
calls and/or personal interviews with appropriate staff at the borrower's
location. Each material customer's assessment was reviewed to determine the
level of Year 2000 preparedness and the risk posed to Patapsco Valley. Based on
this review, each customer will receive the appropriate type and level of
reassessment using similar techniques. Each customer was reassessed either
monthly, quarterly, or at least once prior to March 31, 1999, depending on the
level of preparedness and level of risk posed to Patapsco Valley. Patapsco
Valley expects to continue to reassess material customers throughout the rest of
1999, using similar techniques, to ensure the level of Year 2000 preparedness
and risk posed to Patapsco Valley remains acceptable. As part of the continued
monitoring process, another assessment of material customers was begun in May.
The reassessment of 35% of these customers was completed by June 30,1999.
Patapsco Valley expects to complete the reassessment by September and expects
the risk posed to Patapsco Valley to remain acceptable.
Patapsco Valley has completed its customer assessment. While Patapsco Valley
believes that close to 90% of the customers reviewed require continued
monitoring of their Year 2000 readiness, Patapsco Valley also believes that no
customer presents a material risk to Patapsco Valley. Patapsco Valley also has
changed its lending process to include in its evaluation of a borrower's risk an
assessment of the borrower's Year 2000 preparedness. Customers and potential
customers are required to sign a Year 2000 Disclosure & Acknowledgment
agreement. This agreement states that the customer is aware of the Year 2000
issue, that the customer has a comprehensive business plan appropriate for the
business to address all Year 2000 issues, and that the customer must provide
Patapsco Valley with copies of its Year 2000 program and report on its progress
upon request. In addition, a Year 2000 addendum has been added to all commercial
loan agreements whereby the borrower agrees to become Year 2000 compliant, that
the borrower has a Year 2000 business plan, that the borrower will inform
Patapsco Valley about the borrower's Year 2000 status and that non-compliance
with the borrower's Year 2000 plan shall be deemed non-compliance with the
borrower's loan agreement.
YEAR 2000 COSTS
Patapsco Valley spent approximately $45,000 in the first half of 1999 on
annual software maintenance agreements. These agreements include periodic
software upgrades, which have or will ensure that the processing of dates up to
and beyond the year 2000 is handled properly. For the six months ended June 30,
1999, Patapsco Valley did not incur additional expenses for upgrades, training
and testing. Patapsco Valley's ongoing data processing and information
technology budget has been sufficient to fund Patapsco Valley's Year 2000 costs,
and Patapsco Valley expects that Year 2000 costs will continue to be covered by
its ongoing data processing and information technology budget. Patapsco Valley
plans to fund these budget items and costs from operations. Based on current
analysis and projections, management believes that the cost to ensure compliance
with the Plan will not have a material impact on Patapsco Valley's consolidated
financial statements. While Patapsco Valley has incurred an opportunity cost for
implementing the Plan, Patapsco Valley has not deferred any specific projects as
a result of this implementation.
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DESCRIPTION OF PROPERTIES
Commercial and Farmers Bank owns properties and operates branches at the
following locations. Other than as described below, there are no encumbrances on
any of these properties or leases: 8137 Main Street, Ellicott City, MD (Historic
Ellicott City Branch); 6130 Columbia Crossing Cir.,Columbia, MD (Columbia
Crossing Branch); and 6245 Washington Blvd., Elkridge, MD (Elkridge Branch).
Commercial and Farmers Bank, Founders Mortgage Company and Central Maryland
Service operate under leases at the following properties:
<TABLE>
<CAPTION>
RENEWAL
CURRENT LOCATION SQUARE FEET ANNUAL RENTAL LEASE EXPIRATION OPTION
- ---------------- ----------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL AND FARMERS BANK 10,706 Min. Ground July, 2064 --
8593 Baltimore National Pike Rent Only
Ellicott City, MD
(Main Office)
611 Frederick Road 1,524 $36,164 Dec., 2000 One 5-yr. term
Catonsville, MD
(Catonsville Branch)
9501 Old Annapolis Road 1,686 $65,212 Nov., 2001 --
Ellicott City, MD
(Dorsey Search Branch)
12800 Route 144 1,100 $14,700 July, 2001 One 5-yr. term
West Friendship, MD
(West Friendship Branch)
6430 Freetown Road 2,400 $72,000 July, 2007 --
Columbia, MD
(Hickory Ridge Branch)
3290 Pine Orchard Lane 10,200 $87,347 Aug., 1999 One 5-yr. term
Ellicott City, MD
(Operations Center)
FOUNDERS MORTGAGE COMPANY 4,197 $64,550 May, 2001 --
8818 Centre Park Drive
Suite 100
Columbia, MD
211-B South Jefferson Street 2,583 $27,192 March, 1999 1 year
Frederick, MD
139 North Main Street 2,098 $35,666 Monthly --
Suite 101
Bel Air, MD
120-B Cecil Avenue * $4,800 April, 1999 6 months
North East, MD
11 N. Carlisle Street 1,762 $975 Monthly --
Suite B1
Greencastle, Pa.
</TABLE>
- ------------------------
* Small "back-office" room.
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business to which Patapsco Valley, Commercial and
Farmers Bank, or their subsidiaries is a party or of which any of their
properties is subject. There are also no material proceedings to which any
director, officer or affiliate of Commercial and Farmers Bank, any person
holding beneficially in excess of 5% of the Patapsco Valley's common stock, or
any associate of any such director, officer, or securing holder is a party, or
has a material interest adverse to Patapsco Valley or its subsidiaries.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF
PATAPSCO VALLEY
The following table lists, as of October 1, 1999, (1) the stockholders known
by Patapsco Valley to be the beneficial owners of more than five percent of
outstanding Patapsco Valley common stock and (2) the names of the directors and
executive officers of Patapsco Valley and their beneficial ownership of shares
of Patapsco Valley common stock. Except as otherwise indicated and except for
shares of Patapsco Valley common stock held by members of an individual's family
or in trust, all Patapsco Valley common stock is held with sole dispositive and
voting power. The term "beneficial ownership" includes common stock that may be
acquired within 60 days upon the exercise of options, warrants and other rights.
Shares are rounded to the nearest whole share. Because of rounding, the group
total may not be equal to the total number of shares for each beneficial owner.
Except as noted below, the address of each person listed below is the
address of Patapsco Valley.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------ ------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Ronald L. Eyre (1).......................................... 4,837 .34%
John F. Feezer, III (2)..................................... 37,637 2.68%
Howard E. Harrison, III (3)................................. 10,321 .74%
Kevin P. Huffman............................................ 1,929 .14%
Eugene William Iager, Sr. (4)............................... 70,595 5.03%
Fred T. Lewis (5)........................................... 19,012 1.36%
Richard H. Pettingill (6)................................... 2,103 .15%
John S. Whiteside........................................... 39,954 2.85%
Total Directors............................................. 186,358 13.29%
All Directors and Executive Officers as a Group (12 201,064 14.34%
persons)..................................................
5% BENEFICIAL OWNERS
John F. Feezer, Jr. & Beulah Feezer......................... 87,247 6.22%
Carrollton Bancorp.......................................... 74,832 5.34%
344 North Charles Street, Suite 300
Baltimore, MD 21201
</TABLE>
- ------------------------
(1) Includes 4,000 shares that may be acquired pursuant to options granted to
Mr. Eyre under the Director's Stock Option Plan.
(2) Includes 4,000 shares that may be acquired pursuant to options granted to
Mr. Feezer under the Director's Stock Option Plan; 1,954 shares held as
custodian for two children; 2,811 shares held through a corporation as
Trustee to a Profit Sharing Plan; 19,326 shares held by a limited
partnership; and 6,897 shares held through a corporation affiliated with
Mr. Feezer.
(3) Includes 4,000 shares that may be acquired pursuant to options granted to
Mr. Harrison under the Director's Stock Option Plan.
(4) Includes 4,000 shares that may be acquired pursuant to options granted to
Mr. Iager under the Director's Stock Option Plan; and 23,560 shares held as
custodian for his four children.
(5) Includes 4,000 shares that may be acquired pursuant to options granted to
Dr. Lewis under the Director's Stock Option Plan.
(6) Includes 2,000 shares that may be acquired pursuant to options granted to
Mr. Pettingill under the Director's Stock Option Plan.
84
<PAGE>
LEGAL MATTERS
The validity of the shares of F&M Bancorp common stock that will be issued
in the merger will be passed upon for F&M Bancorp by Gordon M. Cooley, General
Counsel and Secretary of F&M Bancorp. As of the date of this proxy
statement-prospectus, Mr. Cooley beneficially owned 12,292 shares of F&M Bancorp
common stock and held options to purchase 7,782 shares of F&M Bancorp common
stock that are vested and options to purchase 3,914 shares of F&M Bancorp common
stock that are not vested.
EXPERTS
The consolidated financial statements of F&M Bancorp and its subsidiaries
incorporated in this proxy statement-prospectus by reference to F&M Bancorp's
Current Report on Form 8-K filed on October 4, 1999 and amended on November 1,
1999 have been so incorporated by reference in this document in reliance on the
reports with respect to those financial statements of Arthur Andersen LLP and of
Stegman & Company, independent auditors, as stated in their reports appearing in
the proxy statement-prospectus and are included in reliance upon the report of
those firms given on their authority as experts in accounting and auditing.
The consolidated financial statements of Patapsco Valley and subsidiaries,
as of December 31, 1998, 1997 and 1996 and for the years then ended, included in
this proxy statement-prospectus, have been audited by Rowles & Company LLP,
independent auditors, as stated in their audit report appearing in the proxy
statement-prospectus and are included in reliance upon the report of Rowles &
Company, LLP given on the authority of Rowles & Company, LLP as experts in
accounting and auditing.
STOCKHOLDER PROPOSALS
Patapsco Valley's intention is to hold a 2000 Annual Meeting of Stockholders
only if the merger is not closed. In the event of such a meeting, in order to be
considered for inclusion in Patapsco Valley's proxy materials for the 2000
Annual Meeting of Stockholders, stockholder proposals must have been received at
Patapsco Valley's principal executive offices no later than November 22, 1999.
OTHER MATTERS
As of the date of this proxy statement-prospectus, neither the F&M Bancorp
board of directors nor the Patapsco Valley board of directors knows of any
matters that will be presented for consideration at the Patapsco Valley special
meeting other than as described in this proxy statement-prospectus. If any other
matters do properly come before the Patapsco Valley special meeting and are
voted upon, the enclosed proxy will be deemed to confer discretionary authority
on the individuals named as proxies to vote the shares represented by such proxy
as to any of those other matters. The individuals named as proxies intend to
vote or not to vote in accordance with the recommendation of management.
WHERE YOU CAN FIND MORE INFORMATION
F&M Bancorp has filed with the SEC a registration statement under the
Securities Act that registers the distribution to Patapsco Valley stockholders
of the shares of F&M Bancorp common stock to be issued as a result of the
merger. The registration statement, including the attached exhibits and
schedules, contains additional relevant information about F&M Bancorp and F&M
Bancorp common stock. The rules and regulations of the SEC allow us to omit
certain information included in the registration statement from this proxy
statement-prospectus.
85
<PAGE>
In addition, F&M Bancorp and Patapsco Valley file reports, proxy statements
and other information with the SEC under the Exchange Act. You may read and copy
this information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room North East Regional Office Midwest Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like F&M Bancorp
and Patapsco Valley, who file electronically with the SEC. The address of that
site is HTTP://WWW.SEC.GOV.
The SEC allows F&M Bancorp to "incorporate by reference" information into
this proxy statement-prospectus. This means that F&M Bancorp can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this proxy statement-prospectus, except for any information that
is superseded by information that is included directly in this document.
This proxy statement-prospectus incorporates by reference the documents
listed below that F&M Bancorp had previously filed with the SEC. They contain
important information about F&M Bancorp and its financial condition.
<TABLE>
<CAPTION>
F&M BANCORP SEC FILINGS PERIOD
- ----------------------- ---------------------------------------------
<S> <C>
Annual Report on Form 10-K................... Year ended December 31, 1998, as filed on
March 25, 1999
Quarterly Report on Form 10-Q................ Quarter ended March 31, 1999, as filed on
May 17, 1999 (as amended on May 18, 1999)
Quarterly Report on Form 10-Q................ Quarter ended June 30, 1999, as filed on
August 16, 1999
Current Reports on Form 8-K.................. Filed on: I. September 8, 1999 (as amended
on September 22, 1999 and October 25, 1999)
II. October 4, 1999 (as amended
on November 1, 1999)
The portions of F&M Bancorp's proxy statement
for the annual meeting of stockholders held
on April 20, 1999 that have been incorporated
by reference in the 1998 F&M Bancorp
Form 10-K
The description of F&M Bancorp common stock
set forth in F&M Bancorp's registration
statements filed by F&M Bancorp pursuant to
Section 12 of the Exchange Act including any
amendment or report filed for purposes of
updating any such description.
</TABLE>
F&M Bancorp incorporates by reference additional documents that it may file
with the SEC between the date of this proxy statement-prospectus and the date of
the Patapsco Valley special
86
<PAGE>
meeting. These documents include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
F&M Bancorp has supplied all information contained or incorporated by
reference in this proxy statement-prospectus relating to F&M Bancorp, as well as
all pro forma financial information, and Patapsco Valley has supplied all
relevant information relating to Patapsco Valley.
You can obtain any of the documents incorporated by reference in this
document through F&M Bancorp or from the SEC through the SEC's Internet world
wide web site at the address described above. Documents incorporated by
reference are available from F&M Bancorp without charge, excluding any exhibits
to those documents, unless the exhibit is specifically incorporated by reference
as an exhibit in this proxy statement-prospectus. You can obtain documents
incorporated by reference in this proxy statement-prospectus by requesting them
in writing or by telephone from F&M Bancorp at the following address:
F&M BANCORP
110 Thomas Johnson Drive
Frederick, Maryland 21702
Attention: Gordon M. Cooley, Secretary
(301) 694-4171
If you would like to request documents, please do so by December 4, 1999 to
receive them before the special meeting. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.
We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different from, or in
addition to, that contained in this proxy statement-prospectus or in any of the
materials that we have incorporated into this proxy statement-prospectus.
Therefore, if anyone does give you information of this sort, you should not rely
on it. If you are in a jurisdiction where offers to exchange or sell, or
solicitations of offers to exchange or purchase, the securities offered by this
document or the solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then the offer
presented in this document does not extend to you. The information contained in
this document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
FORWARD-LOOKING STATEMENTS
This proxy statement-prospectus, including information included or
incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of F&M Bancorp and
Patapsco Valley, including,
- statements relating to the cost savings and accretion to reported earnings
estimated to result from the merger,
- statements relating to revenues of the combined company after the merger,
- statements relating to the restructuring charges estimated to be incurred
in connection with the merger, and
- statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates," "estimates" or similar expressions.
87
<PAGE>
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following factors:
- expected cost savings from the merger may not be fully realized or may not
be realized within the expected time frame,
- revenues following the merger may be lower than expected,
- competitive pressures among financial services companies may increase
significantly,
- costs or difficulties related to the integration of the businesses of F&M
Bancorp and Patapsco Valley may be greater than expected,
- changes in the interest rate environment may reduce interest margins,
- general economic conditions, whether internationally, nationally or in the
states and local market areas in which F&M Bancorp and/or Patapsco Valley
are doing business, may be less favorable than expected,
- legislative or regulatory changes may adversely affect the business in
which F&M Bancorp or Patapsco Valley is engaged,
- technological changes, including year 2000 data systems compliance issues,
may be more difficult or expensive than anticipated, and
- changes may occur in the securities markets.
See "Where You Can Find More Information."
88
<PAGE>
PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma financial statements set forth certain selected
condensed financial information for F&M Bancorp and Patapsco Valley on an
unaudited combined basis giving effect to the merger, as if such transaction had
become effective as of January 1, 1996. The pro forma information assumes that
the merger is accounted for using the pooling of interests method of accounting
(See "The Merger--Anticipated Accounting Treatment").
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 or indicative of
the results that would have occurred had the transaction been consummated on
January 1, 1996. F&M Bancorp expects to incur a non-recurring merger and
restructuring charge. The amount of this charge is not yet finalized but it is
estimated at $5.0 million, on a pre-tax basis, which will be recognized upon
completion of the transaction.
89
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M BANCORP PATAPSCO ADJUSTMENTS PROFORMA
----------- -------- ------------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from Banks.................. 42,744 8,307 51,051
Federal funds sold....................... 33,405 6,390 39,795
---------- ------- ------------------- ---------
Total cash and cash equivalents........ 76,149 14,697 -- 90,846
Loans held for sale...................... 1,095 16,739 17,834
Investment securities
Held-to-maturity....................... 104,680 -- 104,680
Available-for-sale, at fair value...... 322,412 35,084 357,496
---------- ------- ------------------- ---------
Total investment securities.......... 427,092 35,084 -- 462,176
Loans, net of unearned income............ 897,857 100,459 998,316
Less: Allowance for credit losses........ (12,457) (1,401) (13,858)
---------- ------- ------------------- ---------
Net loans.............................. 885,400 99,058 -- 984,458
Bank premises and equipment, net......... 31,015 4,927 35,942
Other assets............................. 42,822 3,130 45,952
---------- ------- ------------------- ---------
Total assets............................. 1,463,573 173,635 -- 1,637,208
========== ======= =================== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing.................... 141,605 35,990 177,595
Interest-bearing....................... 1,018,539 113,046 1,131,585
---------- ------- ------------------- ---------
Total deposits....................... 1,160,144 149,036 -- 1,309,180
Federal funds purchased & securities sold
under agreements to repurchase......... 57,869 5,591 63,460
Other short-term borrowings.............. 1,971 -- 1,971
Advance from the Federal Home Loan Bank
of Atlanta............................. 98,764 -- 98,764
Accrued interest and other liabilities... 14,164 2,338 16,502
---------- ------- ------------------- ---------
Total liabilities...................... 1,332,912 156,965 -- 1,489,877
Shareholders' Equity
Common Stock............................. 44,545 14 8,365 (1) 52,924
Surplus.................................. 62,334 11,977 (8,365)(1) 65,946
Retained earnings........................ 28,717 4,809 33,526
Net unrealized loss on securities
available for sale..................... (4,935) (130) (5,065)
---------- ------- ------------------- ---------
Total shareholders' equity............... 130,661 16,670 -- 147,331
---------- ------- ------------------- ---------
Total liabilities and shareholders'
equity................................. 1,463,573 173,635 -- 1,637,208
========== ======= =================== =========
</TABLE>
90
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA F&M
F& M BANCORP PATAPSCO ADJUSTMENTS PRO FORMA
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................... $ 38,717 $ 5,190 $ 43,907
Interest and dividends on investment
securities:................................ --
Taxable.................................... 7,754 319 8,073
Tax-exempt................................. 2,144 25 2,169
Interest on deposits with banks.............. 283 30 313
Interest on federal funds sold............... 460 202 662
---------- ---------- -------- -----------
Total interest income...................... 49,358 5,766 -- 55,124
Interest expense:
Interest on deposits......................... 18,999 1,609 20,608
Interest on federal funds purchased and
securities sold under agreements to
repurchase................................. 1,109 166 1,275
Interest on advances from the FHLB of
Atlanta.................................... 2,734 -- 2,734
Interest on other borrowings................. 96 -- 96
---------- ---------- -------- -----------
Total interest expense..................... 22,938 1,775 -- 24,713
---------- ---------- -------- -----------
Net interest income............................ 26,420 3,991 -- 30,411
Provision for credit losses.................... 1,156 1,156
---------- ---------- -------- -----------
Net interest income after provision for credit
losses....................................... 25,264 3,991 -- 29,255
Noninterest income:
Trust income................................. 1,377 -- 1,377
Service charges on deposit accounts.......... 3,027 393 3,420
Insurance Income............................. 3,108 -- 3,108
Net gains on sales of loans.................. 1,160 1,013 2,173
Net gains (losses) on sales of securities.... 738 -- 738
Net gains on sales of property............... -- -- --
Other operating income....................... 2,839 128 2,967
---------- ---------- -------- -----------
Total noninterest income................... 12,249 1,534 -- 13,783
Noninterest expense:
Salaries..................................... 11,806 2,085 13,891
Pension and other employee benefits.......... 2,916 468 3,384
Merger related............................... -- -- --
Occupancy and equipment expense.............. 4,056 803 4,859
Other operating expense...................... 7,302 1,007 8,309
---------- ---------- -------- -----------
Total noninterest expense.................. 26,080 4,363 -- 30,443
---------- ---------- -------- -----------
Income before provision for income taxes....... 11,433 1,162 -- 12,595
Provision for income taxes..................... 3,174 421 3,595
---------- ---------- -------- -----------
Net income..................................... $ 8,259 $ 741 $ -- $ 9,000
========== ========== ======== ===========
Earnings per Common Share--Basic:
Net income................................... $ 0.89 $ 0.55 $ 0.82
Weighted average number of shares.............. 9,242,353 1,346,721 329,090(2) 10,918,164
Earnings per Common Share--Diluted:
Net income................................... $ 0.88 $ 0.55 $ 0.82
Weighted average number of shares.............. 9,356,427 1,346,721 329,090(2) 11,032,238
</TABLE>
91
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PROFORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, AS PER SHARE)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M BANCORP PATAPSCO ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................... $ 37,172 $ 5,004 $ 42,176
Interest and dividends on investment
securities:................................ --
Taxable.................................... 8,803 488 9,291
Tax-exempt................................. 2,938 5 2,943
Interest on deposits with banks.............. 581 106 687
Interest on federal funds sold............... 193 466 659
---------- ---------- -------- -----------
Total interest income...................... 49,687 6,069 -- 55,756
Interest expense:
Interest on deposits......................... 19,550 1,907 21,457
Interest on federal funds purchased and
securities sold under agreements to
repurchase................................. 1,121 -- 1,121
Interest on advances from the FHLB of
Atlanta.................................... 2,693 -- 2,693
Interest on other borrowings................. 29 97 126
---------- ---------- -------- -----------
Total interest expense..................... 23,393 2,004 -- 25,397
---------- ---------- -------- -----------
Net interest income............................ 26,294 4,065 -- 30,359
Provision for credit losses.................... 850 -- 850
---------- ---------- -------- -----------
Net interest income after provision for credit
losses....................................... 25,444 4,065 -- 29,509
Noninterest income:
Trust income................................. 1,510 -- 1,510
Service charges on deposit accounts.......... 2,964 432 3,396
Insurance income............................. 3,388 147 3,535
Net gains on sales of loans.................. 353 870 1,223
Net gains (losses) on sales of securities.... (1) -- (1)
Other operating income....................... 2,641 125 2,766
---------- ---------- -------- -----------
Total noninterest income................... 10,855 1,574 -- 12,429
Noninterest expense:
Salaries..................................... 11,047 2,516 13,563
Pension and other employee benefits.......... 2,435 548 2,983
Occupancy and equipment expense.............. 3,754 875 4,629
Other operating expense...................... 7,741 1,362 9,103
---------- ---------- -------- -----------
Total noninterest expense.................. 24,977 5,301 -- 30,278
---------- ---------- -------- -----------
Income before provision for income taxes....... 11,322 338 -- 11,660
Provision for income taxes..................... 3,030 107 3,137
---------- ---------- -------- -----------
Net income..................................... $ 8,292 $ 231 $ -- $ 8,523,000
========== ========== ======== ===========
Earnings per Common Share--Basic:
Net income................................... $ 0.89 $ 0.17 $ 0.77
Weighted average number of shares.............. 9,331,642 1,362,475 313,336(2) 11,007,453
Earnings per Common Share--Diluted:
Net income................................... $ 0.88 $ 0.77 $ 0.77
Weighted average number of shares.............. 9,391,188 1,369,775 306,036(2) 11,066,999
</TABLE>
92
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M BANCORP PATAPSCO ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................ $ 76,894 $ 10,477 $ 87,371
Interest and dividends on investment
securities:............................. --
Taxable................................. 15,772 641 16,413
Tax-exempt.............................. 4,645 43 4,688
Interest on deposits with banks........... 1,292 161 1,453
Interest on federal funds sold............ 615 480 1,095
---------- ---------- -------- -----------
Total interest income................... 99,218 11,802 -- 111,020
Interest expense:
Interest on deposits...................... 38,799 3,468 42,267
Interest on federal funds purchased and
securities sold under agreements to
repurchase.............................. 2,399 -- 2,399
Interest on advances from the FHLB of
Atlanta................................. 5,529 -- 5,529
Interest on other borrowings.............. 151 281 432
---------- ---------- -------- -----------
Total interest expense.................. 46,878 3,749 -- 50,627
---------- ---------- -------- -----------
Net interest income......................... 52,340 8,053 -- 60,393
Provision for credit losses................. 3,056 3,056
---------- ---------- -------- -----------
Net interest income after provision for
credit losses............................. 49,284 8,053 -- 57,337
Noninterest income:
Trust income.............................. 2,671 -- 2,671
Service charges on deposit accounts....... 6,007 803 6,810
Insurance Income.......................... 5,793 -- 5,793
Net gains on sales of loans............... 1,968 1,962 3,930
Net gains (losses) on sales of
securities.............................. 1,104 -- 1,104
Other operating income.................... 5,709 272 5,981
---------- ---------- -------- -----------
Total noninterest income................ 23,252 3,037 -- 26,289
Noninterest expense:
Salaries.................................. 23,541 4,511 28,052
Pension and other employee benefits....... 5,344 912 6.256
Occupancy and equipment expense........... 7,919 1,636 9,555
Other operating expense................... 17,130 2,400 19,530
---------- ---------- -------- -----------
Total noninterest expense............... 53,934 9,459 -- 63.393
---------- ---------- -------- -----------
Income before provision for income taxes.... 18,602 1,631 -- 20,233
Provision for income taxes.................. 5,046 554 5,600
---------- ---------- -------- -----------
Net income.................................. $ 13,556 $ 1,077 $ -- $ 14,633
========== ========== ======== ===========
Earnings per Common Share--Basic:
Net income................................ $ 1.47 $ 0.80 $ 1.34
Weighted average number of shares........... 9,253,113 1,350,717 325,094(2) 10,928,924
Earnings per Common Share--Diluted:
Net income................................ $ 1.45 $ 0.80 $ 1.33
Weighted average number of shares........... 9,361,846 1,353,358 322,453(2) 11,037,657
</TABLE>
93
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M BANCORP PATAPSCO ADJUSTMENTS PRO FORMA
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans..................... $ 76,764 $ 8,856 $ 85,620
Interest and dividends on investment
securities: --
Taxable.................................... 14,273 948 15,221
Tax-exempt................................. 4,741 59 4,800
Interest on deposits with banks................ 365 53 418
Interest on federal funds sold................. 280 672 952
---------- ---------- -------- -----------
Total interest income...................... 96,423 10,588 -- 107,011
Interest expense:
Interest on deposits........................... 37,241 2,853 40,094
Interest on federal funds purchased and
securities sold under agreements to
repurchase................................... 2,264 -- 2,264
Interest on advances from the FHLB of
Atlanta...................................... 4,907 -- 4,907
Interest on other borrowings................... 191 143 334
---------- ---------- -------- -----------
Total interest expense..................... 44,603 2,996 -- 47,599
---------- ---------- -------- -----------
Net interest income................................ 51,820 7,592 -- 59,412
Provision for credit losses........................ 2,910 -- 2,910
---------- ---------- -------- -----------
Net interest income after provision for credit
losses........................................... 48,910 7,592 -- 56,502
Noninterest income:
Trust income................................... 2,715 -- 2,715
Service charges on deposit accounts............ 5,855 669 6,524
Insurance Income............................... 5,083 -- 5,083
Net gains on sales of loans.................... 1,421 92 1,513
Net gains (losses) on sales of securities...... 76 -- 76
Other operating income......................... 6,202 241 6,443
---------- ---------- -------- -----------
Total noninterest income................... 21,352 1,002 -- 22,354
Noninterest expense:
Salaries....................................... 22,561 2,701 25,262
Pension and other employee benefits............ 5,254 529 5,783
Occupancy and equipment expense................ 7,979 1,059 9,038
Other operating expense........................ 14,880 1,889 16,769
---------- ---------- -------- -----------
Total noninterest expense.................. 50,674 6,178 -- 56,852
---------- ---------- -------- -----------
Income before provision for income taxes........... 19,588 2,416 -- 22,004
Provision for income taxes......................... 5,251 868 6,119
---------- ---------- -------- -----------
Net income......................................... $ 14,337 $ 1,548 $ -- $ 15,885
========== ========== ======== ===========
Earnings per Common Share--Basic:
Net income..................................... $ 1.56 $ 1.16 $ 1.46
Weighted average number of shares.................. 9,202,878 1,329,010 346,801(2) 10,878,689
Earnings per Common Share--Diluted:
Net income..................................... $ 1.55 $ 1.16 $ 1.45
Weighted average number of shares.................. 9,275,924 1,329,010 346,801(2) 10,951,735
</TABLE>
94
<PAGE>
F&M BANCORP--PATAPSCO VALLEY BANCSHARES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA F&M
F&M PATAPSCO ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $ 70,400 $ 7,521 $ 77,921
Interest and dividends on investment securities:.......... --
Taxable................................................. 14,039 1,444 15,483
Tax-exempt.............................................. 5,143 59 5,202
Interest on deposits with banks........................... 302 49 351
Interest on federal funds sold............................ 599 681 1,280
---------- ---------- -------- -----------
Total interest income................................... 90,483 9,754 -- 100,237
Interest expense:
Interest on deposits...................................... 36,864 3,030 39,894
Interest on federal funds purchased and securities sold
under agreements to repurchase.......................... 1,908 -- 1,908
Interest on advances from the FHLB of Atlanta............. 3,453 -- 3,453
Interest on other borrowings.............................. 153 115 268
---------- ---------- -------- -----------
Total interest expense.................................. 42,378 3,145 -- 45,523
---------- ---------- -------- -----------
Net interest income......................................... 48,105 6,609 -- 54,714
Provision for credit losses................................. 1,822 -- 1,822
---------- ---------- -------- -----------
Net interest income after provision for credit losses....... 46,283 6,609 -- 52,892
Noninterest income:
Trust income.............................................. 1,956 -- 1,956
Service charges on deposit accounts....................... 5,122 520 5,642
Insurance Income.......................................... 4,590 -- 4,590
Net gains on sales of loans............................... 1,187 -- 1,187
Net gains (losses) on sales of securities................. (550) -- (550)
Other operating income.................................... 5,171 231 5,402
---------- ---------- -------- -----------
Total noninterest income................................ 17,476 751 -- 18,227
Noninterest expense:
Salaries.................................................. 20,526 2,157 22,683
Pension and other employee benefits....................... 4,921 537 5,458
Occupancy and equipment expense........................... 7,207 854 8,061
Other operating expense................................... 17,545 1,449 18,994
---------- ---------- -------- -----------
Total noninterest expense............................... 50,199 4,997 -- 55,196
---------- ---------- -------- -----------
Income before provision for income taxes.................... 13,560 2,363 -- 15,923
Provision for income taxes.................................. 3,196 861 4,057
---------- ---------- -------- -----------
Net income................................................ $ 10,364 $ 1,502 $ -- $ 11,866
========== ========== ======== ===========
Earnings per Common Share--Basic:
Net income................................................ $ 1.13 $ 1.16 $ 1.09
Weighted average number of shares........................... 9,174,628 1,298,140 377,671(2) 10,850,439
Earnings per Common Share--Diluted:
Net income................................................ $ 1.12 $ 1.15 $ 1.09
Weighted average number of shares........................... 9,233,409 1,301,210 374,601(2) 10,909,220
</TABLE>
95
<PAGE>
F&M BANCORP AND
PATAPSCO VALLEY BANCSHARES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (UNAUDITED)
(1) Represents the issuance of 1,675,811 shares of F&M Bancorp common stock
pursuant to the merger agreement. Under the terms of the merger agreement,
Patapsco Valley could decide to terminate the merger agreement based on the
market price of F&M Bancorp's common stock during a specified period before
the receipt of approval of the merger from the Office of the Comptroller of
the Currency. Specifically, Patapsco Valley may terminate the merger
agreement if both F&M Bancorp's average stock price during the period is
less than $21.375 per share and F&M Bancorp's common stock underperforms a
specified group of bank holding company stocks by an agreed amount during
the period following the date on which Patapsco Valley entered into the
merger agreement. Patapsco Valley, however, will not be able to terminate
the merger agreement in this situation if F&M Bancorp elects to make a
compensating adjustment to the exchange ratio that provides more shares of
F&M Bancorp common stock in exchange for each share of Patapsco Valley
common stock.
(2) Represents the adjustment necessary to increase Patapsco Valley's weighted
average shares outstanding to a total of 1,675,811 shares of F&M Bancorp
common stock to be issued pursuant to the merger agreement.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Unaudited Consolidated Financial Statements for the Six
Months Ended June 30, 1999 and 1998
Consolidated Statements of Financial Condition at June 30,
1999 and December 31, 1998 (unaudited).................. F-2
Consolidated Statements of Operations for Six Months and
Three Months Ended June 30, 1999 and 1998 (unaudited)... F-3
Consolidated Statements of Cash Flows for Six Months Ended
June 30, 1999 and 1998 (unaudited)...................... F-4
Notes to Consolidated Financial Statements (unaudited).... F-6
Report on Audit of Consolidated Financial Statements for the
Year Ended December 31, 1998
Report of Independent Auditors............................ F-8
Consolidated Balance Sheets............................... F-9
Consolidated Statements of Income......................... F-10
Consolidated Statements of Changes in Stockholders'
Equity.................................................. F-11
Consolidated Statements of Cash Flows..................... F-12
Notes to Consolidated Financial Statements................ F-14
</TABLE>
F-1
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 7,359,295 $ 6,933,961
Interest bearing assets in other banks...................... 948,313 1,221,174
Federal funds sold.......................................... 6,389,999 17,304,000
Securities available for sale............................... 35,083,716 14,726,362
Loans held for sale......................................... 16,739,045 23,718,740
Net loans, less allowance for credit losses of $1,401,136
and $1,424,047............................................ 99,057,981 98,590,827
Premises and equipment...................................... 4,926,508 5,029,296
Deferred income taxes....................................... 533,282 348,806
Accrued interest receivable................................. 878,330 704,649
Prepaid income taxes........................................ 301,278 331,818
Intangibles................................................. 744,724 423,099
Other assets................................................ 673,137 510,710
------------ ------------
$173,635,608 $169,843,442
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest-bearing...................................... $ 35,990,404 $ 38,003,939
Interest-bearing.......................................... 113,045,624 109,063,004
------------ ------------
Total deposits.......................................... 149,036,028 147,066,943
Securities sold under repurchase agreements................. 5,590,729 3,800,623
Accrued interest payable.................................... 699,995 787,102
Other liabilities........................................... 1,638,644 1,366,336
------------ ------------
7,929,368 5,954,061
Total liabilities....................................... 156,965,396 153,021,004
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; authorized
50,000,000 shares; issued and outstanding 1,365,969
shares June 30, 1999 and 1,359,990 shares December 31,
1998.................................................... 13,660 13,600
Surplus................................................... 11,976,657 11,817,719
Retained earnings......................................... 4,809,628 4,933,506
Accumulated other comprehensive income.................... (129,733) 57,613
------------ ------------
Total stockholders' equity.............................. 16,670,212 16,822,438
------------ ------------
$173,635,608 $169,843,442
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-2
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR SIX MONTHS ENDED FOR THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees......................... $5,004,443 $5,190,077 $2,468,803 $2,676,724
U.S. Treasury securities...................... 227,137 247,447 102,012 116,761
U.S. Government agency securities............. 261,073 71,294 232,890 33,189
State and municipal securities................ 4,900 24,743 2,450 11,628
Federal funds sold............................ 465,777 202,203 210,275 94,755
Other investments............................. 106,205 30,173 49,549 15,112
---------- ---------- ---------- ----------
Total interest income....................... 6,069,535 5,765,937 3,065,979 2,948,169
INTEREST EXPENSE
Deposits...................................... 1,907,507 1,609,490 961,070 799,153
Other short-term borrowings................... 96,834 165,575 54,634 126,916
---------- ---------- ---------- ----------
Total interest expense...................... 2,004,341 1,775,065 1,015,704 926,069
Net interest income........................... 4,065,194 3,990,872 2,050,275 2,022,100
Provision for credit losses................... 0 0 0 0
---------- ---------- ---------- ----------
Net interest income after provision for
credit losses............................. 4,065,194 3,990,872 2,050,275 2,022,100
NON-INTEREST INCOME
Service charges on deposit accounts........... 431,847 393,647 227,314 204,431
Mortgage banking fees and gains............... 870,008 1,012,866 396,081 480,507
Other fees and commissions.................... 272,255 127,892 136,181 62,757
---------- ---------- ---------- ----------
Total non-interest income................... 1,574,110 1,534,405 759,576 747,695
NON-INTEREST EXPENSES
Salaries...................................... 2,516,116 2,084,767 1,231,089 1,080,041
Employee benefits............................. 547,950 468,596 250,771 214,871
Occupancy..................................... 438,820 430,229 211,413 260,773
Furniture and equipment....................... 435,990 372,504 219,718 204,741
Other......................................... 1,362,740 1,006,805 740,467 512,839
---------- ---------- ---------- ----------
Total non-interest expenses................. 5,301,616 4,362,901 2,653,458 2,273,265
Income before taxes........................... 337,688 1,162,376 156,393 496,530
Income taxes.................................. 106,817 420,694 47,630 178,569
---------- ---------- ---------- ----------
Net income.................................... 230,871 741,682 108,763 317,961
Change in unrealized gain (loss) on securities
available for sale.......................... (187,346) (13,021) (179,399) 9,364
---------- ---------- ---------- ----------
Comprehensive income.......................... $ 43,525 $ 728,661 $ (70,636) $ 327,325
========== ========== ========== ==========
Basic and diluted earnings per share.......... $ 0.17 $ 0.55 $ 0.08 $ 0.24
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received........................................... $ 5,679,631 $ 5,699,060
Fees and commissions received............................... 704,102 521,539
Proceeds from sales of loans held for sale.................. 77,782,724 75,440,705
Originations of loans held for sale......................... (69,933,021) (91,243,953)
Interest paid............................................... (2,091,448) (1,867,015)
Cash paid to suppliers and employees........................ (4,750,743) (3,888,712)
Income taxes paid........................................... (142,876) (175,451)
------------ ------------
7,248,369 (15,513,827)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale... 18,182,016 14,259,894
Purchases of securities available for sale.................. (38,844,593) (13,065,662)
Loans made, net of principal collected...................... (250,931) (564,025)
Payments of intangibles..................................... (287,398) 196
Purchases of premises, equipment, and software.............. (372,431) (1,434,723)
------------ ------------
(21,573,337) (804,320)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits.................... 4,073,297 (4,622,711)
Net increase (decrease) in other deposits................... (2,104,212) 8,315,118
Net increase in other borrowed funds........................ 1,790,106 6,154,031
Dividends paid.............................................. (354,749) (613,768)
Dividends reinvested........................................ 158,998 271,904
------------ ------------
3,563,440 9,504,574
Net increase (decrease) in cash and cash equivalents........ (10,761,528) (6,813,573)
Cash and equivalents at beginning of year................... 25,459,135 18,266,542
------------ ------------
Cash and equivalents at end of year......................... $ 14,697,607 $ 11,452,969
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
---------- ------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES
Net income.................................................. $ 230,871 $ 741,682
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation, amortization and losses....................... 440,992 331,757
Deferred taxes.............................................. (66,599) (1,208)
Increase (decrease) in
Deferred loan fees........................................ (216,223) (61,303)
Accrued interest payable.................................. (87,107) (91,950)
Income taxes payable...................................... 0 (87,811)
Other liabilities......................................... 272,308 196,190
Loans held for sale....................................... 6,979,695 (16,816,114)
Decrease (increase) in
Accrued interest receivable............................... (173,681) (5,920)
Prepaid taxes............................................. 30,540 334,262
Other assets.............................................. (162,427) (53,412)
---------- ------------
$7,248,369 $(15,513,827)
========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Patapsco
Valley Bancshares, Inc., (the Company), The Central Maryland Service Corporation
(CMSC), Commercial and Farmers Bank (the Bank) and its subsidiaries, Founders
Mortgage Company, Inc., C&F Insurance Agency, Inc. and Rogers Avenue
Realty, Inc. All inter-company accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to form 10-QSB.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments necessary for a fair presentation of the results
of operations for the interim periods have been made. Such adjustments were
normal and recurring in nature. The results of operations for the six months
ended June 30, 1999 do not necessarily reflect the results that may be expected
for the entire fiscal year ending December 31, 1999 or any other interim period.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes which are incorporated in
the Company's Annual Report for the year ended December 31, 1998.
NOTE 3--EARNINGS PER SHARE
Earnings per share is presented in accordance with Statement of Financial
Accounting Standards No. 128. This Statement requires dual presentation of basic
and diluted earnings per share (EPS) with a reconciliation of the numerator and
denominator of the EPS computations. Basic per share amounts are based on
weighted average shares of common stock outstanding. Diluted earnings per share
assume the conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce a loss or increase earnings per
share. Average shares outstanding for the six and three months ending June 30,
1998 is adjusted giving retroactive effect of a 100% stock dividend declared on
September 15, 1998. No adjustments were made to net income for all periods
presented. The basic and diluted average shares outstanding for the six and
three month periods are as follows:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income................................. $ 230,871 $ 741,682 $ 108,763 $ 317,961
========== ========== ========== ==========
Weighted Average Shares
Outstanding--Basic..................... $1,362,475 $1,346,721 $1,363,952 $1,348,830
Diluted Securities:
Options.................................. 7,300 0 7,300 0
---------- ---------- ---------- ----------
Adjusted Weighted Average
Shares--Diluted........................ 1,369,775 1,346,721 1,371,252 1,348,830
Basic and Diluted EPS.................... $ 0.17 $ 0.55 $ 0.08 $ 0.24
========== ========== ========== ==========
</TABLE>
F-6
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4--SEGMENTS
The Company's reportable segments are strategic business units that offer
complimentary products and services to the core business of banking. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Segment information follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 HOLDING MORTGAGE DATA CONSOLIDATED
REVENUE COMPANY BANK BANKING PROCESSING INSURANCE ELIMINATION TOTALS
- ------------- -------- ------------ ----------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue From External
Customers.......... $ 4,284 $ 6,068,415 $ 1,420,484 $ 3,860 $146,602 -- $ 7,643,645
Intersegment Service
Revenue............ 1,494 383,448 -- 386,397 -- 771,339 --
Segment Profit
(Loss)............. (81,285) 406,924 (103,005) 27,334 (34,348) -- 215,620
Total Assets......... 783,048 171,563,269 17,618,282 379,051 351,075 17,074,368 173,620,357
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998 HOLDING MORTGAGE DATA CONSOLIDATED
REVENUE COMPANY BANK BANKING PROCESSING INSURANCE ELIMINATION TOTALS
- ------------- -------- ------------ ----------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from External
Customers.......... $ 2,526 $ 5,738,816 $ 1,559,000 -- -- -- $ 7,300,342
Intersegment Service
Revenues........... 1,850 547,956 -- 358,736 -- 908,542 --
Segment Profit
(Loss)............. (29,532) 784,246 (30,279) 17,247 -- -- 741,682
Total Assets......... 546,882 148,751,189 22,760,163 327,794 909 21,908,126 150,478,811
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Ellicott City, Maryland
We have audited the accompanying consolidated balance sheets of Patapsco
Valley Bancshares, Inc. and Subsidiaries as of December 31, 1998, 1997, and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Patapsco Valley Bancshares, Inc. and Subsidiaries as of December 31, 1998, 1997,
and 1996, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Rowles & Company, LLP
Baltimore, Maryland
March 2, 1999
F-8
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................ $ 6,933,961 $ 5,044,605 $ 7,660,810
Interest-bearing deposits.......................... 1,221,174 40,937 66,931
Federal funds sold................................. 17,304,000 13,181,000 10,843,991
Securities available for sale...................... 14,726,362 15,160,333 28,556,145
Loans held for sale................................ 23,718,740 5,540,585 --
Loans, less allowance for credit losses of
$1,424,047, $1,615,008, and $1,562,853........... 98,590,827 96,795,828 83,841,354
Premises and equipment............................. 5,029,296 2,108,434 1,396,815
Foreclosed real estate............................. -- 23,581 194,000
Deferred income taxes.............................. 348,806 284,213 282,610
Accrued interest receivable........................ 704,649 706,904 673,602
Prepaid income taxes............................... 331,818 496,763 56,740
Intangibles........................................ 423,099 406,392 83,330
Other assets....................................... 510,710 439,572 243,436
------------ ------------ ------------
$169,843,442 $140,229,147 $133,899,764
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing.............................. $ 38,003,939 $ 31,006,823 $ 30,871,980
Interest-bearing................................. 109,063,004 88,488,181 83,715,535
------------ ------------ ------------
Total deposits................................. 147,066,943 119,495,004 114,587,515
Securities sold under repurchase agreements........ 3,800,623 2,861,324 3,236,572
Dividend payable................................... -- 444,287 436,251
Accrued interest payable........................... 787,102 548,505 358,418
Other liabilities.................................. 1,366,336 986,168 583,239
------------ ------------ ------------
153,021,004 124,335,288 119,201,995
------------ ------------ ------------
Stockholders' equity
Common stock, par value $0.01 per share;
authorized 50,000,000 shares; issued and
outstanding 1,359,990 shares in 1998, 667,408
shares in 1997, and 547,726 shares in 1996..... 13,600 6,674 5,477
Surplus.......................................... 11,817,719 11,307,989 11,000,055
Retained earnings................................ 4,933,506 4,546,605 3,720,507
Accumulated other comprehensive income........... 57,613 32,591 (28,270)
------------ ------------ ------------
16,822,438 15,893,859 14,697,769
------------ ------------ ------------
$169,843,442 $140,229,147 $133,899,764
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
INTEREST AND DIVIDEND REVENUE
Loans, including fees................................. $10,476,841 $8,855,753 $7,521,415
U.S. Treasury securities.............................. 517,790 735,626 1,148,698
U.S. Government agency securities..................... 123,958 212,317 294,580
State and municipal securities........................ 42,664 58,676 58,676
Federal funds sold.................................... 480,401 671,736 681,141
Other investments..................................... 160,683 53,446 49,195
----------- ---------- ----------
Total interest and dividend revenue................. 11,802,337 10,587,554 9,753,705
----------- ---------- ----------
INTEREST EXPENSE
Deposits.............................................. 3,468,163 2,852,320 3,029,782
Other................................................. 280,716 143,184 115,001
----------- ---------- ----------
Total interest expense.............................. 3,748,879 2,995,504 3,144,783
----------- ---------- ----------
Net interest income................................. 8,053,458 7,592,050 6,608,922
PROVISION FOR CREDIT LOSSES -- -- --
----------- ---------- ----------
Net interest income after provision for credit
losses.............................................. 8,053,458 7,592,050 6,608,922
----------- ---------- ----------
OTHER OPERATING REVENUE
Service charges on deposit accounts................... 803,171 668,785 519,848
Mortgage banking fees and gains....................... 1,962,104 92,265 --
Other fees and commissions............................ 271,881 241,238 231,755
----------- ---------- ----------
Total other operating revenue....................... 3,037,156 1,002,288 751,603
----------- ---------- ----------
OTHER EXPENSES
Salaries.............................................. 4,510,919 2,700,796 2,157,309
Employee benefits..................................... 912,064 529,013 536,597
Occupancy............................................. 829,218 525,165 481,825
Furniture and equipment............................... 807,376 533,513 372,494
Other................................................. 2,400,067 1,889,507 1,448,557
----------- ---------- ----------
Total other expenses................................ 9,459,644 6,177,994 4,996,782
----------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 1,630,970 2,416,344 2,363,743
Income taxes............................................ 553,793 868,734 861,413
----------- ---------- ----------
NET INCOME.............................................. $ 1,077,177 $1,547,610 $1,502,330
=========== ========== ==========
Basic earnings per share................................ $ 0.80 $ 1.16 $ 1.16
Diluted earnings per share.............................. 0.80 1.16 1.15
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------------ RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES PAR VALUE SURPLUS EARNINGS INCOME INCOME
---------- ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995...................... 536,326 $ 5,363,260 $ 5,003,341 $3,102,160 $(44,822)
Exchange of $.01 par value
shares for $10 par value
shares.................... -- (5,357,897) 5,357,897 -- --
Net income.................. -- -- -- 1,502,330 -- $1,502,330
Change in unrealized gain
(loss) on securities
available for sale........ -- -- -- -- 16,552 16,552
----------
Comprehensive income........ $1,518,882
==========
Exercise of stock options... 5,018 50 116,913 -- --
Cash dividends, $0.48 per
share..................... -- -- -- (626,305) --
Dividends reinvested........ 6,382 64 264,226 -- --
Transfer to surplus......... -- -- 257,678 (257,678) --
---------- ----------- ----------- ---------- --------
BALANCE, DECEMBER 31,
1996...................... 547,726 5,477 11,000,055 3,720,507 (28,270)
Net income.................. -- -- -- 1,547,610 -- $1,547,610
Change in unrealized gain
(loss) on securities
available for sale........ -- -- -- -- 60,861 60,861
----------
Comprehensive income........ $1,608,471
==========
Exercise of stock options... 136 1 5,458 -- --
Cash dividends, $0.54 per
share..................... -- -- -- (720,391) --
Dividends reinvested........ 7,496 75 302,476 -- --
Stock split effected in the
form of a 20% stock
dividend.................. 112,050 1,121 -- (1,121) --
---------- ----------- ----------- ---------- --------
BALANCE, DECEMBER 31,
1997...................... 667,408 6,674 11,307,989 4,546,605 32,591
Net income.................. -- -- -- 1,077,177 -- $1,077,177
Change in unrealized gain
(loss) on securities
available for sale........ -- -- -- -- 25,022 25,022
----------
Comprehensive income........ $1,102,199
==========
Cash dividends, $0.51 per
share..................... -- -- -- (683,495) --
Dividends reinvested........ 14,486 145 509,730 -- --
Stock split effected in the
form of a 100% stock
dividend.................. 678,096 6,781 -- (6,781) --
---------- ----------- ----------- ---------- --------
BALANCE, DECEMBER 31,
1998...................... 1,359,990 $ 13,600 $11,817,719 $4,933,506 $ 57,613
========== =========== =========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received................................ $ 11,858,862 $ 10,586,933 $ 9,800,556
Fees and commissions received.................... 1,075,036 910,023 751,603
Proceeds from sales of loans held for sale....... 170,664,799 1,879,924 --
Originations of loans held for sale.............. (185,132,635) (7,313,766) --
Interest paid.................................... (3,510,282) (2,805,417) (3,152,621)
Cash paid to suppliers and employees............. (10,105,941) (5,333,037) (4,610,489)
Income taxes paid................................ (533,299) (1,340,640) (49,494)
------------- ------------ ------------
(15,683,460) (3,415,980) 2,739,555
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities............. 27,322,536 30,407,220 44,096,612
Purchases of securities available for sale....... (26,849,052) (16,911,419) (45,247,510)
Loans made, net of principal collected........... (1,848,016) (12,987,991) (6,364,373)
Payments of organization costs................... -- (27,445) (28,849)
Proceeds from sales of foreclosed real estate.... 16,369 125,419 583,133
Purchases of premises, equipment, and software... (3,659,115) (1,622,890) (300,254)
------------- ------------ ------------
(5,017,278) (1,017,106) (7,261,241)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits......... 9,579,505 6,467,431 (171,627)
Net increase (decrease) in other deposits........ 17,992,434 (1,559,942) 6,770,703
Net increase (decrease) in other borrowed
funds.......................................... 939,299 (375,248) 1,849,335
Dividends paid................................... (1,127,782) (712,355) (531,077)
Dividends reinvested............................. 509,875 302,551 264,290
Stock options exercised.......................... -- 5,459 116,963
------------- ------------ ------------
27,893,331 4,127,896 8,298,587
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 7,192,593 (305,190) 3,776,901
Cash and equivalents at beginning of year.......... 18,266,542 18,571,732 14,794,831
------------- ------------ ------------
Cash and equivalents at end of year................ $ 25,459,135 $ 18,266,542 $ 18,571,732
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income............................................. $ 1,077,177 $ 1,547,610 $1,502,330
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation, amortization and losses................ 721,545 615,655 361,786
Loss on foreclosed real estate....................... 7,213 45,000 32,919
Deferred income taxes................................ (80,337) (39,896) 14,520
Amortization of premiums and accretion of discounts,
net................................................ 1,253 (836) (16,946)
Increase (decrease) in
Deferred loan fees................................. 53,017 33,517 (1,874)
Accrued interest payable........................... 238,597 190,087 (7,838)
Income taxes payable............................... (64,114) 8,012 79,799
Other liabilities.................................. 444,282 394,917 (64,910)
Decrease (increase) in
Loans held for sale................................ (18,178,155) (5,540,585) --
Accrued interest receivable........................ 2,255 (33,302) 65,671
Prepaid income taxes............................... 164,945 (440,023) 717,600
Other assets....................................... (71,138) (196,136) 56,498
------------ ----------- ----------
$(15,683,460) $(3,415,980) $2,739,555
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected in the financial statements
conform to generally accepted accounting principles and to general practices
within the banking industry. Management makes estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosures of
commitments and contingent liabilities at the balance sheet date, and revenues
and expenses during the year. Actual results could differ from those estimates.
HOLDING COMPANY FORMATION
On August 22, 1996, Patapsco Valley Bancshares, Inc. (the Company) was
incorporated in the State of Maryland to acquire the stock of Commercial and
Farmers Bank (the Bank) and to engage in such other business activities
permitted for bank holding companies by law. The Bank's stockholders approved an
agreement for the exchange of shares on September 30, 1996, and each outstanding
share of Bank common stock was exchanged for one share of the Company's common
stock.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
Central Maryland Service Corporation, and the Bank and its subsidiaries,
Founders Mortgage Company, Inc., C&F Insurance Agency, Inc. and Rogers Avenue
Realty, Inc. Intercompany balances and transactions have been eliminated.
On July 1, 1997, the Company acquired all of the outstanding shares of
Central Maryland Service Corporation (CMSC), an organization originally formed
by the Bank and two other banks to provide data processing services on a
cooperative basis to the owner-banks. The acquisition was accounted for as a
purchase. The consolidated financial statements include balance sheet accounts
of CMSC as of December 31, 1998 and 1997, and income statement accounts since
July 1, 1997, with intercompany transactions eliminated. Consequently, the
Company's payments to CMSC prior to July 1, 1997 are reported as data processing
expense (a component of other operating expense); and afterward these payments
are eliminated in consolidation.
BUSINESS
Through its subsidiaries, the Company provides banking services to customers
located in Howard County and surrounding areas of Central Maryland.
COMPREHENSIVE INCOME
The Company adopted Statement No. 130 of the Financial Accounting Standards
Board, REPORTING COMPREHENSIVE INCOME, in 1998. Comprehensive income includes
net income and the unrealized gain or loss on investment securities available
for sale. The statements of changes in stockholders' equity have been restated
to include comprehensive income for the years ended December 31, 1997 and 1996.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods.
F-14
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
As securities are purchased, management determines if the securities should
be classified as held to maturity or available for sale. Securities held to meet
liquidity needs or which may be sold before maturity are classified as available
for sale and carried at fair value with unrealized gains and losses included in
stockholders' equity on an after tax basis. Management has classified all
securities as available for sale.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale are carried at the lower of
aggregate cost or estimated market value.
LOANS
Loans are stated at the current amount of unpaid principal, less deferred
origination fees and the allowance for credit losses.
Interest on loans is accrued based on the principal amounts outstanding.
Origination fees are amortized to income over the terms of loans. The accrual of
interest is discontinued when any portion of the principal or interest is ninety
days past due and collateral is insufficient to discharge the debt in full.
Loans are considered impaired when, based on current information, management
considers it unlikely that the collection of principal and interest payments
will be made according to contractual terms. Generally, loans are not reviewed
for impairment until the accrual of interest has been discontinued. If
collection of principal is evaluated as doubtful, all payments are applied to
principal.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents an amount which, in management's
judgment, will be adequate to absorb possible losses on existing loans and other
extensions of credit that may become uncollectible. Management's judgment in
determining the adequacy of the allowance is based on evaluations of the
collectibility of loans. These evaluations take into consideration such factors
as the volume and quality of the loan portfolio and current economic conditions
that may affect the borrowers' ability to pay. The amounts ultimately collected
on these loans could differ materially from the estimated collections.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the assets using the
straight-line and accelerated methods.
INTANGIBLES
Computer software and organization costs are recorded at cost less
accumulated amortization. Amortization is computed over estimated useful lives
of three to five years using the straight-line method.
F-15
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure is recorded at the lower of cost or
fair market value on the date acquired. Losses incurred at the time of
acquisition of the property are charged to the allowance for credit losses.
Subsequent reductions in the estimated carrying value of the property and other
expenses of owning the property are included in other operating expense.
INCOME TAXES
The provision for income taxes includes income taxes payable for the current
year and deferred income taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
2. CASH AND EQUIVALENTS
The Bank normally carries balances with other banks that exceed the
federally insured limit. Average balances carried in excess of the limit were
$207,680 for 1998, $337,013 for 1997, and $227,337 for 1996. The Bank sold
federal funds to other banks, on an unsecured basis, that averaged $8,754,820
for 1998, $12,011,554 for 1997, and $12,579,343 for 1996.
Banks are required to carry noninterest-bearing cash reserves of specified
percentages of deposit balances. The Bank's normal balances of cash on hand and
on deposit with other banks are sufficient to satisfy the reserve requirements.
F-16
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury.................. $10,886,928 $ 46,446 $ 18,220 $10,915,154
U.S. Government agency......... 2,000,000 -- 3,436 1,996,564
State and municipal............ 495,000 5,321 -- 500,321
----------- -------- -------- -----------
Total debt securities.......... 13,381,928 51,767 21,656 13,412,039
Equity securities.............. 1,250,571 72,678 8,926 1,314,323
----------- -------- -------- -----------
$14,632,499 $124,445 $ 30,582 $14,726,362
=========== ======== ======== ===========
DECEMBER 31, 1997
U.S. Treasury.................. $ 9,950,524 $ 31,037 $ 13,339 $ 9,968,222
U.S. Government agency......... 3,150,000 1,141 23,265 3,127,876
State and municipal............ 1,047,402 6,749 892 1,053,259
----------- -------- -------- -----------
Total debt securities.......... 14,147,926 38,927 37,496 14,149,357
Equity securities.............. 959,310 52,662 996 1,010,976
----------- -------- -------- -----------
$15,107,236 $ 91,589 $ 38,492 $15,160,333
=========== ======== ======== ===========
DECEMBER 31, 1996
U. S. Treasury................. $21,818,295 $ 46,832 $ 34,830 $21,830,297
U. S. Government agency........ 4,998,436 8,926 78,865 4,928,497
State and municipal............ 1,049,719 13,847 1,966 1,061,600
----------- -------- -------- -----------
Total debt securities.......... 27,866,450 69,605 115,661 27,820,394
Equity securities.............. 735,751 -- -- 735,751
----------- -------- -------- -----------
$28,602,201 $ 69,605 $115,661 $28,556,145
=========== ======== ======== ===========
</TABLE>
Contractual maturities, shown below, will differ from actual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year....... $12,183,245 $12,161,718 $12,652,590 $12,626,838
Due over one to five
years................... 1,198,683 1,250,321 1,495,336 1,522,519
----------- ----------- ----------- -----------
$13,381,928 $13,412,039 $14,147,926 $14,149,357
=========== =========== =========== ===========
</TABLE>
Securities with an amortized cost of $10,900,715, $9,702,317, and
$13,551,164, respectively, were pledged as collateral for government deposits
and repurchase agreements.
F-17
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
Major categories of loans are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Real estate
Residential........................ $ 10,560,638 $11,877,703 $12,231,065
Commercial......................... 28,248,679 29,376,631 25,363,764
Construction and land
development...................... 12,606,395 6,752,244 2,205,656
Lease financing...................... 17,692,772 20,428,755 16,166,804
Commercial........................... 24,789,631 24,143,558 22,784,968
Consumer............................. 6,231,079 5,893,248 6,679,736
------------ ----------- -----------
100,129,194 98,472,139 85,431,993
Deferred origination fees............ (114,320) (61,303) (27,786)
Allowance for credit losses.......... (1,424,047) (1,615,008) (1,562,853)
------------ ----------- -----------
$ 98,590,827 $96,795,828 $83,841,354
============ =========== ===========
</TABLE>
The Bank makes loans to customers located primarily in Howard County and
surrounding areas of central Maryland. Although the loan portfolio is
diversified, its performance will be influenced by the regional economy. Lease
financing is provided to diverse customers located throughout the United States.
The maturity and rate repricing distribution of the loan portfolio are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Variable rate immediately............ $ 50,216,678 $41,521,332 $36,557,108
Due within one year.................. 21,616,200 23,029,056 19,274,415
Due over one to five years........... 20,447,154 27,448,251 26,367,186
Due over five years.................. 7,849,162 6,473,500 3,233,284
------------ ----------- -----------
$100,129,194 $98,472,139 $85,431,993
============ =========== ===========
</TABLE>
Transactions in the allowance for credit losses were as follows:
<TABLE>
<S> <C> <C> <C>
Beginning balance.................... $ 1,615,008 $ 1,562,853 $ 778,612
Provision charged to operations...... -- -- --
Recoveries........................... 151,465 181,959 1,221,291
------------ ----------- -----------
1,766,473 1,744,812 1,999,903
Loans charged off.................... 342,426 129,804 437,050
------------ ----------- -----------
Ending balance....................... $ 1,424,047 $ 1,615,008 $ 1,562,853
============ =========== ===========
</TABLE>
F-18
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
Principal balances of loans past due 90 days or more and accruing interest,
and nonaccrual loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
PAST DUE NONACCRUAL PAST DUE NONACCRUAL PAST DUE NONACCRUAL
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial..................... $224,760 $ 567,117 $50,000 $ 682,504 $ -- $ 78,925
Lease financing................ 5,085 12,644 -- 45,683 47,766 13,751
Real estate.................... 145,308 766,514 -- 448,513 -- 274,903
Consumer....................... 4,898 1,423 27,752 20,531 202 9,480
-------- ---------- ------- ---------- ------- --------
$380,051 $1,347,698 $77,752 $1,197,231 $47,968 $377,059
======== ========== ======= ========== ======= ========
Interest not accrued........... $ 126,202 $ 80,913 $ 37,978
========== ========== ========
</TABLE>
Management has not classified any loans as impaired at December 31, 1998,
1997, or 1996.
5. CREDIT COMMITMENTS
Outstanding loan and investment commitments, unused lines of credit, and
letters of credit are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Loan commitments
Construction and land development.... $ 8,303,426 $ 4,761,851 $1,940,747
Other mortgage loans................. 1,934,698 2,389,000 919,450
Lease financing...................... 3,679,476 5,686,841 2,571,464
Other commercial loans............... 1,519,916 1,494,988 311,244
----------- ----------- ----------
$15,437,516 $14,332,680 $5,742,905
=========== =========== ==========
Investment commitment.................. $ 160,197 $ 230,739 $ 296,440
=========== =========== ==========
Unused lines of credit
Home-equity lines.................... $ 3,365,724 $ 2,599,090 $2,417,674
Commercial lines..................... 7,186,157 7,892,471 6,047,438
Unsecured consumer lines............. 1,788,782 1,414,067 1,286,077
----------- ----------- ----------
$12,340,663 $11,905,628 $9,751,189
=========== =========== ==========
Letters of credit...................... $ 1,139,712 $ 1,563,259 $1,555,036
=========== =========== ==========
</TABLE>
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 at current market amounts, fixed expiration dates,
and may require payment of a fee. Lines of credit generally have variable
interest rates. Such lines do not represent future cash requirements because it
is unlikely that all customers will draw upon their lines in full at any time.
Letters of credit are commitments issued to guarantee the performance of a
customer to a third party. The Bank has also committed to invest in a limited
partnership that owns affordable housing projects.
F-19
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CREDIT COMMITMENTS (CONTINUED)
The maximum exposure to credit loss in the event of nonperformance by the
customer is the contractual amount of the commitment. Loan commitments, lines of
credit and letters of credit are made on the same terms, including collateral,
as outstanding loans. Management is not aware of any accounting loss it would
incur by funding its credit commitments.
6. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Beginning balance............................. $ 4,809 $ -- $ 89,488
Provision charged to operations............... 7,213 45,000 32,919
Charge-offs, net of recoveries................ (12,022) (40,191) (122,407)
-------- -------- ---------
Ending balance................................ $ -- $ 4,809 $ --
======== ======== =========
</TABLE>
7. PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
USEFUL
LIVES 1998 1997 1996
------------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Land and improvements......................... 15 years $1,538,398 $ 248,031 $ 248,031
Buildings and improvements.................... 5-40 years 2,151,879 1,457,021 1,269,889
Furniture and equipment....................... 3-33 years 3,553,101 3,242,278 2,097,382
Construction and acquisitions in progress..... 1,019,361 126,489 27,404
---------- ---------- ----------
8,262,739 5,073,819 3,642,706
Accumulated depreciation...................... 3,233,443 2,965,385 2,245,891
---------- ---------- ----------
$5,029,296 $2,108,434 $1,396,815
========== ========== ==========
</TABLE>
Depreciation expense was $544,413, $464,343, and $322,341 for 1998, 1997,
and 1996, respectively.
F-20
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTANGIBLES
A summary of intangibles is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computer software............................. $911,864 $867,633 $148,861
Organization costs............................ 53,759 90,172 28,849
-------- -------- --------
965,623 957,805 177,710
Accumulated amortization...................... 542,524 551,413 94,380
-------- -------- --------
$423,099 $406,392 $ 83,330
======== ======== ========
</TABLE>
Amortization of computer software was $166,220, $115,583, and $34,816 for
1998, 1997, and 1996, respectively. Amortization of organization costs was
$10,914, $8,972 and $1,422 for 1998, 1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The executive officers and directors of the Bank enter into loan
transactions with the Bank in the ordinary course of business. These loans were
made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable loans with unrelated borrowers. At
December 31, 1998, 1997, and 1996, the amounts of such loans outstanding were
$4,544,230, $4,868,770, and $4,481,021, respectively.
10. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
NOW.................................. $ 22,181,322 $16,201,755 $14,812,423
Money market......................... 17,699,670 16,082,492 19,204,708
Savings.............................. 27,483,083 24,084,510 24,046,411
Certificates of deposit, $100,000 or
more............................... 7,880,556 6,575,623 3,919,868
Other time deposits.................. 33,818,373 25,543,801 21,732,125
------------ ----------- -----------
$109,063,004 $88,488,181 $83,715,535
============ =========== ===========
</TABLE>
Certificates of deposit $100,000 or more mature as follows:
<TABLE>
<S> <C> <C> <C>
Three months or less................. $ 3,192,811 $ 3,506,396 $ 2,173,555
Three through 12 months.............. 3,871,898 2,424,546 1,615,839
Over 12 months....................... 815,847 644,681 130,474
------------ ----------- -----------
$ 7,880,556 $ 6,575,623 $ 3,919,868
============ =========== ===========
</TABLE>
Interest expense associated with certificates of deposit of $100,000 or more
was $301,281, $214,630, and $196,898 for the years ended December 31, 1998,
1997, and 1996, respectively.
F-21
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. BORROWINGS
The Bank sells securities under repurchase agreements as a form of cash
management service to commercial account customers. The Bank pays interest on
these overnight borrowings at a slight discount to the current three month
Treasury Bill rate. The average balances outstanding were $3,643,525 in 1998,
$3,021,190 in 1997, and $2,564,945 in 1996.
The Bank may borrow up to $32,300,000 under secured lines of credit with the
Federal Home Loan Bank. The Bank also has available lines of credit of
$2,500,000 in overnight federal funds and $1,000,000 in short-term secured
credit from other banks.
12. RETIREMENT PLANS
The Bank has a defined benefit pension plan covering substantially all of
the employees, and a supplemental plan covering certain executives. Benefits are
based on years of service and the employee's highest average rate of earnings
for the five consecutive years during the last ten years before retirement. The
Bank makes contributions to the employees' plan in amounts sufficient to satisfy
minimum funding standards determined using the frozen entry age actuarial
method. Assets of the employees' plan are held in trust and invested in listed
stocks and bonds.
F-22
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RETIREMENT PLANS (CONTINUED)
The following table sets forth the financial status of the plans:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..... $1,186,949 $1,114,222
Actual return on plan assets....................... 202,051 172,974
Employer contribution.............................. -- --
Benefits paid...................................... (225,855) (100,247)
---------- ----------
Fair value of plan assets at end of year........... 1,163,145 1,186,949
---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ 1,629,910 1,505,339
Service cost....................................... 93,367 88,823
Interest cost...................................... 104,997 100,598
Benefits paid...................................... (225,855) (100,247)
Acutuarial gain.................................... 85,781 35,397
---------- ----------
Benefit obligation at end of year.................. 1,688,200 1,629,910
---------- ----------
Funded status...................................... (525,055) (442,961)
Unamortized prior service cost..................... (119,077) (134,382)
Unamortized net (gain)............................. (103,816) (83,989)
Unamortized net obligation from transition......... 171,981 184,565
---------- ----------
(Accrued) pension expense.......................... $ (575,967) $ (476,767)
========== ==========
</TABLE>
Net pension expense includes the following components:
<TABLE>
<S> <C> <C>
Service cost....................................... $ 93,367 $ 88,823
Interest cost...................................... 104,997 100,598
Expected return on assets.......................... (94,146) (88,830)
Net amortization and deferral...................... (5,018) (4,158)
---------- ----------
Net pension expense................................ $ 99,200 $ 96,433
========== ==========
</TABLE>
Assumptions used in the accounting for net pension expense were:
<TABLE>
<S> <C> <C>
Discount rates..................................... 7.00% 7.25%
Rate of increase in compensation levels............ 5.00% 5.00%
Long-term rate of return on assets................. 8.00% 8.00%
</TABLE>
The Company also has contributory thrift plans qualifying under
Section 401(k) of the Internal Revenue Code. All employees age 21 or more with
one year of service are eligible for participation in the plans. The Company's
contributions to these plans, included in expenses, were $84,812, $36,335, and
$48,121 for 1998, 1997, and 1996, respectively.
F-23
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Data processing.......................... $ 421,190 $ 314,046 $ 373,927
Legal, accounting, and consulting........ 336,521 328,521 158,832
Stationery, printing, and supplies....... 290,220 225,049 157,464
Telephone................................ 246,414 107,025 60,447
Postage and delivery..................... 236,044 136,476 114,261
Advertising.............................. 226,668 168,210 122,017
Liability insurance...................... 117,246 110,167 110,098
Correspondent bank services.............. 105,358 106,178 81,501
Directors fees........................... 77,560 63,495 59,490
FDIC assessment.......................... 14,023 13,095 2,000
Losses and expenses on foreclosed real
estate................................. 7,801 65,448 33,883
Other.................................... 321,022 251,797 174,637
---------- ---------- ----------
$2,400,067 $1,889,507 $1,448,557
========== ========== ==========
</TABLE>
14. LEASE COMMITMENTS
The Company is obligated under noncancelable lease agreements for certain
premises and equipment. The leases generally contain renewal options and provide
that the Company will pay property taxes, insurance and maintenance costs. Rent
expense was $489,500, $267,453, and $218,774 for 1998, 1997, and 1996,
respectively.
Future minimum lease payments are as follows.
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1999........................................................ $ 391,719
2000........................................................ 301,558
2001........................................................ 244,115
2002........................................................ 115,314
2003........................................................ 97,700
Thereafter.................................................. 1,237,850
----------
$2,388,256
==========
</TABLE>
F-24
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal..................................... $546,876 $765,766 $728,671
State....................................... 87,254 142,864 118,222
-------- -------- --------
634,130 908,630 846,893
Deferred...................................... (80,337) (39,896) 14,520
-------- -------- --------
$553,793 $868,734 $861,413
======== ======== ========
</TABLE>
The components of the deferred tax expense (benefits) are as follows:
<TABLE>
<S> <C> <C> <C>
Depreciation.................................. $ 6,291 $ 10,967 $(18,309)
Discount accretion............................ (1,118) (1,894) (1,348)
Provisions for credit losses.................. (22,773) (8,028) 33,303
Loan origination fees......................... -- 8,526 --
Accrued vacation and pension.................. (62,737) (49,467) 874
-------- -------- --------
$(80,337) $(39,896) $ 14,520
======== ======== ========
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets
Allowances for credit losses.................. $117,609 $ 94,836 $ 86,808
Deferred loan origination fees................ -- -- 8,526
Unrealized loss on securities available for
sale........................................ -- -- 17,787
Accrued vacation and pension liabilities...... 274,490 211,753 162,286
Depreciation.................................. -- -- 10,761
-------- -------- --------
392,099 306,589 286,168
-------- -------- --------
Deferred tax liabilities
Depreciation.................................. 6,497 206 --
Discount accretion............................ 546 1,664 3,558
Unrealized gain on securities available for
sale........................................ 36,250 20,506 --
-------- -------- --------
43,293 22,376 3,558
-------- -------- --------
Net deferred tax asset........................ $348,806 $284,213 $282,610
======== ======== ========
</TABLE>
F-25
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES (CONTINUED)
The differences between the federal income tax rate of 34 percent and the
effective tax rate for the Company are reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Federal tax-exempt income.......................... (1.1) (1.1) (0.9)
State income taxes, net of federal income tax
benefit.......................................... 3.0 3.7 3.3
Affordable housing tax benefits and other, net..... (1.9) (0.6) --
----- ----- -----
34.0% 36.0% 36.4%
===== ===== =====
</TABLE>
The Bank is a limited partner in a partnership that builds and owns
affordable housing projects. The Bank receives tax credits and loss deductions
resulting from depreciation of the housing projects. These tax benefits are
accounted for as a reduction of income tax expenses over the expected life of
the partnership using the level-yield method.
16. CAPITAL STANDARDS
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
adopted capital standards for banking organizations. These standards require
ratios of capital to assets for minimum capital adequacy and to be classified as
well capitalized under prompt corrective action provisions.
Tier 1 capital consists of common stock, surplus, and retained earnings.
Total capital includes a limited amount of the allowance for credit losses. In
calculating risk-weighted assets, specified risk percentages are applied to each
category of asset and off-balance sheet items.
The consolidated capital ratios, capital balances, and risk-weighted assets
at December 31, were as follows:
<TABLE>
<CAPTION>
REGULATORY
REQUIREMENTS
----------------------
CAPITAL WELL
ADEQUACY CAPITALIZED 1998 1997 1996
-------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Risk-based ratios
Tier 1 capital.................. 4.0% 6.0% 12.8% 13.8% 16.0%
Total risk-based capital........ 8.0% 10.0% 13.8% 15.0% 17.3%
Leverage ratio (Tier 1 capital to
average assets)................. 4.0% 5.0% 10.3% 11.3% 11.1%
Capital balances
Tier 1.......................... $ 16,764,825 $ 15,861,268 $14,726,039
Total........................... 18,188,872 17,301,613 15,879,891
Risk-weighted assets.............. $131,344,577 $115,052,924 $91,899,175
</TABLE>
Failure to satisfy the capital standards could impair the Company's ability
to pay dividends, accept deposits, or continue in business.
F-26
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of shares outstanding, giving retroactive effect to stock
dividends. The number of shares used to compute basic and diluted earnings per
share are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Average share outstanding............... 1,350,717 1,329,010 1,298,140
Dilutive effect of options.............. 2,641 -- 3,070
--------- --------- ---------
Diluted shares.......................... 1,353,358 1,329,010 1,301,210
========= ========= =========
</TABLE>
STOCK OPTION PLANS
The Company has adopted stock option plans for directors, officers and
employees. The following were outstanding at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
GRANT EXPIRATION VESTING ------------------- EXERCISE
DATE DATE DATE GRANTED RESERVED PRICE
-------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Director plan............ 4/21/98 4/21/08 4/21/98 12,000 30,000 $19.00
Officer incentive plan... 12/18/98 12/18/08 12/18/01 12,275 24,625 23.00
Employee plan............ 12/18/98 3/18/01 3/18/99 6,980 34,120 19.55
</TABLE>
The Company applies Opinion No. 25 of the Accounting Principles Board,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for stock options.
Accordingly, the Company does not recognize compensation expense for stock
options granted. Statement No. 123 of the Financial Accounting Standards Board,
ACCOUNTING FOR STOCK-BASED COMPENSATION, established new accounting and
reporting standards for stock-based compensation plans. This standard defines a
fair value based method for measuring compensation expense for stock-based plans
to be recognized in the statement of income or disclosed in the notes to the
financial statements.
Had compensation expense been determined in accordance with the provisions
of FASB Statement No. 123, the Company's income for 1998 would have been reduced
as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income........................................ $1,077,177 $936,642
Basic earnings per share.......................... 0.80 0.69
Diluted earnings per share........................ 0.80 0.69
</TABLE>
For purposes of determining the pro forma adjustments to income, the Company
used the Black-Scholes option pricing model, and assumed dividend yields of
2.15% to 2.40%, risk-free interest rates of 4.48% to 5.68%, volatility of
22.38%, and expected lives of 2.25 to 10 years.
During 1996, executive officers exercised options to buy 11,500 shares at
prices of $8.87 to $9.92 per share (as restated for stock dividends) under a
plan that expired that year.
F-27
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. PARENT COMPANY FINANCIAL INFORMATION
The balance sheet and statements of income and cash flows for Patapsco
Valley Bancshares, Inc. (Parent Only) at December 31, 1998, 1997, and 1996 and
for the years then ended are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
<CAPTION>
ASSETS
CASH. $ 98,563 $ 128,185 $ 51,877
<S> <C> <C> <C>
Due from the Bank..................... 68,000 250,000 280,000
Investment in the Bank................ 15,730,610 15,570,141 14,803,433
Investment in CMSC.................... 334,654 110,664 --
Other investments..................... 340,122 245,575 --
Other assets.......................... 278,464 53,535 28,557
----------- ----------- -----------
$16,850,413 $16,358,100 $15,163,867
=========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
DIVIDEND PAYABLE. $ -- $ 444,287 $ 436,251
<S> <C> <C> <C>
Other liabilities..................... 27,975 19,954 29,847
----------- ----------- -----------
27,975 464,241 466,098
----------- ----------- -----------
Stockholders' equity
Common stock.......................... 13,600 6,674 5,477
Surplus............................... 11,817,719 11,307,989 11,000,055
Retained earnings..................... 4,933,506 4,546,605 3,720,507
Accumulated other comprehensive
income.............................. 57,613 32,591 (28,270)
----------- ----------- -----------
16,822,438 15,893,859 14,697,769
----------- ----------- -----------
$16,850,413 $16,358,100 $15,163,867
=========== =========== ===========
</TABLE>
F-28
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividends from the Bank.................. $ 978,300 $ 835,000 $ 280,000
Equity in undistributed income of the
Bank................................... 142,864 737,560 1,224,563
Equity in undistributed income of CMSC... 23,991 35,664 --
Fees for services to the Bank............ 68,000 -- --
---------- ---------- ----------
1,213,155 1,608,224 1,504,563
Interest and dividends on other
investments............................ 10,011 5,198 --
Operating expenses....................... (182,738) (97,710) (3,383)
Income tax benefit....................... 36,749 31,898 1,150
---------- ---------- ----------
Net income............................... $1,077,177 $1,547,610 $1,502,330
========== ========== ==========
</TABLE>
F-29
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Dividends received from the Bank....................... $ 1,228,300 $ 865,000 $ --
Other interest and dividends received.................. 10,011 5,198 --
Cash paid to suppliers and employees................... (173,614) (121,787) (943)
Income tax (paid) benefit received..................... (193,950) 1,150 --
----------- ---------- ----------
870,747 749,561 (943)
----------- ---------- ----------
Cash flows from investing activities
Acquisition of CMSC stock.............................. (200,000) (75,000) --
Acquisition of other investments....................... (82,462) (193,908) --
----------- ---------- ----------
(282,462) (268,908) --
----------- ---------- ----------
Cash flows from financing activities
Dividends paid......................................... (1,127,782) (712,355) --
Dividends reinvested................................... 509,875 302,551 --
Stock options exercised................................ -- 5,459 52,820
----------- ---------- ----------
(617,907) (404,345) 52,820
----------- ---------- ----------
Net increase in cash and cash equivalents................ (29,622) 76,308 51,877
Cash and equivalents at beginning of year................ 128,185 51,877 --
=========== ========== ==========
Cash and equivalents at end of year...................... $ 98,563 $ 128,185 $ 51,877
=========== ========== ==========
Reconciliation of net income to net cash
provided by operating activities
Net income............................................... $ 1,077,177 $1,547,610 $1,502,330
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of organization costs..................... 5,770 5,770 1,442
(Increase) decrease in receivable from Bank............ 182,000 30,000 (280,000)
(Increase) in other assets............................. (230,699) (30,748) (29,999)
Increase (decrease) in other liabilities............... 3,354 (29,847) 29,847
Equity in undistributed income of subsidiaries......... (166,855) (773,224) (1,224,563)
----------- ---------- ----------
$ 870,747 $ 749,561 $ (943)
=========== ========== ==========
</TABLE>
F-30
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- ------------------------- -------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and due from
banks............... $ 8,155,135 $ 8,155,135 $ 5,085,542 $ 5,085,542 $ 7,727,741 $ 7,727,741
Federal funds sold.... 17,304,000 17,304,000 13,181,000 13,181,000 10,843,991 10,843,991
Investment
securities.......... 14,726,362 14,726,362 15,160,333 15,160,333 28,556,145 28,556,145
Loans held for sale... 23,718,740 23,718,740 5,540,585 5,540,585 -- --
Variable rate loans... 50,216,678 50,216,678 41,521,332 41,521,332 36,557,108 36,557,108
Accrued interest
receivable.......... 704,649 704,649 706,904 706,904 673,602 673,602
Financial liabilities
Noninterest-bearing
deposits............ $39,554,220 $39,554,220 $31,006,823 $31,006,823 $30,871,980 $30,871,980
Variable rate
deposits............ 65,813,794 65,813,794 56,368,757 56,368,757 58,082,449 58,082,449
Securities sold under
repurchase
agreements.......... 3,800,623 3,800,623 2,861,324 2,861,324 3,236,572 3,236,572
Interest and dividend
payable............. 787,102 787,102 992,792 992,792 794,669 794,669
</TABLE>
The fair values of investment securities are estimated using a matrix that
considers yield to maturity, credit quality, and marketability. This method of
valuation is permitted by the FASB, but may not be indicative of net realizable
or liquidation values.
It is not practicable to estimate the fair value of loans with fixed
maturities, deposit liabilities with fixed maturities, or outstanding credit
commitments. The Company does not have available resources to estimate fair
values based on quoted prices or discounted cash flows for individual accounts
or groups of accounts.
F-31
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Maturities and weighted-average interest rates on loans and deposits with
fixed maturities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ---------------------- ----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
LOANS
Maturing within one year........ $21,616,200 9.1% $23,029,056 9.2% $19,274,415 9.3%
Maturing over one to five
years......................... 20,447,154 9.5% 27,448,251 9.5% 26,367,186 9.3%
Maturing over five years........ 7,849,162 9.1% 6,473,500 9.5% 3,233,284 9.6%
DEPOSITS
Maturing within three months.... $13,320,833 5.2% $13,227,308 5.7% $10,501,542 5.4%
Maturing over three to six
months........................ 10,738,655 5.6% 8,670,525 5.5% 6,922,356 5.0%
Maturing over six months to one
year.......................... 12,462,723 5.6% 4,428,344 5.2% 4,865,607 5.2%
Maturing over one to eight
years......................... 5,171,718 5.5% 5,657,773 4.1% 3,208,107 5.4%
Maturing over eight years....... 5,000 4.8% 135,474 4.8% 135,474 4.8%
</TABLE>
20. SEGMENTS
The Company's reportable segments are strategic business units that offer
complimentary products and services to the core business of banking. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Segment information follows:
<TABLE>
<CAPTION>
HOLDING MORTGAGE DATA CONSOLIDATED
COMPANY BANK BANKING PROCESSING ELIMINATIONS TOTALS
--------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend
revenue................ $ 10,011 $ 11,650,699 $ 1,176,668 $ -- $ (1,035,041) $ 11,802,337
Interest expense......... -- 3,752,829 1,026,511 4,580 1,035,041 3,748,879
--------- ------------ ----------- --------- ------------ ------------
Net interest income...... 10,011 7,897,870 150,157 (4,580) -- 8,053,458
Provision for credit
losses................. -- -- -- -- -- --
Other revenue from
external customers..... -- 1,065,123 1,962,104 9,929 -- 3,037,156
Intersegment service
revenue................ 68,000 -- -- 716,271 (784,271) --
Other (expenses)......... (182,738) (7,159,190) (2,219,581) (682,406) 784,271 (9,459,644)
--------- ------------ ----------- --------- ------------ ------------
Income before income
taxes.................. (104,727) 1,803,803 (107,320) 39,214 -- 1,630,970
Income tax expense
(benefit).............. (36,749) 611,648 (36,329) 15,223 -- 553,793
--------- ------------ ----------- --------- ------------ ------------
Net income (loss)........ $ (67,978) $ 1,192,155 $ (70,991) $ 23,991 $ -- $ 1,077,177
========= ============ =========== ========= ============ ============
Segment assets........... $ 760,528 $167,362,707 $24,130,607 $ 344,841 $(22,755,241) $169,843,442
Segment capital.......... 757,175 14,729,761 1,000,848 334,654 -- 16,822,438
</TABLE>
F-32
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SEGMENTS (CONTINUED)
The following inter-company assets and liabilities are eliminated in
consolidation:
<TABLE>
<S> <C>
Deposits.................................................... $ 369,508
Loans....................................................... 22,352,126
Income tax benefit accruals................................. 33,607
-----------
$22,755,241
===========
</TABLE>
21. CONTINGENCIES
The Company is party to various legal actions normally associated with a
financial institution. In management's opinion, the effect of these actions will
not be material to the financial condition of the Company.
Management has determined the scope of the Year 2000 issue as it relates to
the operation of the Company. The internal systems have been tested and those
found not to be ready will be ready before the end of 1999. During 1998, the
Company spent $159,686 on annual software maintenance agreements which include
periodic upgrades and modification to address Year 2000, plus an additional
$19,000 for upgrades, training and testing. In 1999, the Company expects to
spend $168,527 on annual software maintenance agreements, plus $20,000 for
upgrades, training and testing. Management has contacted vendors and large
customers to assess their preparedness and expects no significant impact on the
operations of the Company.
F-33
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
F&M BANCORP
AND
PATAPSCO VALLEY BANCSHARES, INC.
DATED AS OF SEPTEMBER 7, 1999
- --------------------------------------------------------------------------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE I THE MERGER....................................... A-5
1.1. The Merger......................................... A-5
1.2. Effective Time..................................... A-5
1.3. Effects of the Merger.............................. A-5
1.4. Conversion of Company Common Stock................. A-6
1.5. Stock Options...................................... A-6
1.6. Buyer Common Stock................................. A-7
1.7. Articles of Incorporation.......................... A-7
1.8. By-Laws............................................ A-7
1.9. Directors and Officers............................. A-7
1.10. Tax Consequences; Accounting Treatment............ A-7
ARTICLE II EXCHANGE OF SHARES.............................. A-8
2.1. Buyer to Make Shares Available..................... A-8
2.2. Exchange of Shares................................. A-8
ARTICLE III DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES.............................. A-9
3.1. Disclosure Schedules............................... A-9
3.2. Standards.......................................... A-10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY... A-10
4.1. Corporate Organization............................. A-10
4.2. Capitalization..................................... A-11
4.3. Authority; No Violation............................ A-12
4.4. Consents and Approvals............................. A-13
4.5. Reports............................................ A-13
4.6. Financial Statements............................... A-14
4.7. Broker's Fees...................................... A-14
4.8. Absence of Certain Changes or Events............... A-14
4.9. Legal Proceedings.................................. A-15
4.10. Taxes............................................. A-15
4.11. Employees......................................... A-16
4.12. SEC Reports....................................... A-17
4.13. Company Information............................... A-17
4.14. Compliance with Applicable Law.................... A-17
4.15. Certain Contracts................................. A-17
4.16. Agreements with Regulatory Agencies............... A-18
4.17. Investment Securities............................. A-18
4.18. Intellectual Property............................. A-18
4.19. State Takeover Laws............................... A-18
4.20. Administration of Fiduciary Accounts.............. A-18
4.21. Environmental Matters............................. A-18
4.22. Derivative Transactions........................... A-19
4.23. Opinion........................................... A-19
4.24. Approvals......................................... A-20
4.25. Loan Portfolio.................................... A-20
4.26. Accounting for the Merger; Reorganization......... A-20
4.27. Ownership of Company Common Stock................. A-20
</TABLE>
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ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER.......... A-20
5.1. Corporate Organization............................. A-20
5.2. Capitalization..................................... A-21
5.3. Authority; No Violation............................ A-22
5.4. Consents and Approvals............................. A-23
5.5. Reports............................................ A-23
5.6. Financial Statements............................... A-23
5.7. Broker's Fees...................................... A-24
5.8. Absence of Certain Changes or Events............... A-24
5.9. Legal Proceedings.................................. A-24
5.10. SEC Reports....................................... A-24
5.11. Agreements with Regulatory Agencies............... A-24
5.12. Buyer Information................................. A-24
5.13. Ownership of Company Common Stock; Affiliates and
Associates............................................. A-25
5.14. Approvals......................................... A-25
5.15. Accounting for the Merger; Reorganization......... A-25
5.16. Taxes............................................. A-25
5.17. Employees......................................... A-25
5.18. Compliance with Applicable Law.................... A-26
5.19. Investment Securities............................. A-26
5.20. Intellectual Property............................. A-27
5.21. Environmental Matters............................. A-27
5.22. Derivative Transactions........................... A-27
5.23. Loan Portfolio.................................... A-27
5.24. Administration of Fiduciary Accounts.............. A-28
ARTICLE VI COVENANTS RELATING TO CONDUCT OF BUSINESS....... A-28
6.1. Covenants of the Company........................... A-28
6.2. Covenants of Buyer................................. A-30
ARTICLE VII ADDITIONAL AGREEMENTS.......................... A-31
7.1. Regulatory Matters................................. A-31
7.2. Access to Information.............................. A-32
7.3. No Solicitation.................................... A-33
7.4. Stockholder Meeting................................ A-34
7.5. Legal Conditions to Merger......................... A-35
7.6. Affiliates......................................... A-35
7.7. Stock Exchange Listing............................. A-35
7.8. Employee Benefit Plans; Existing Agreements........ A-35
7.9. Indemnification.................................... A-36
7.10. Additional Agreements............................. A-37
7.11. Advice of Changes................................. A-37
7.12. Current Information............................... A-37
7.13. Execution and Authorization of Bank Merger
Agreement.............................................. A-37
7.14. Directorship...................................... A-38
7.15. Advisory Council.................................. A-38
7.16. Coordination of Dividends......................... A-38
7.17. Year 2000 Survey.................................. A-38
7.18. Company DRIP...................................... A-38
</TABLE>
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ARTICLE VIII CONDITIONS PRECEDENT.......................... A-39
8.1. Conditions to Each Party's Obligation To Effect the
Merger................................................. A-39
8.2. Conditions to Obligations of Buyer................. A-39
8.3. Conditions to Obligations of the Company........... A-40
ARTICLE IX TERMINATION AND AMENDMENT....................... A-41
9.1. Termination........................................ A-41
9.2. Effect of Termination; Expenses.................... A-43
9.3. Amendment.......................................... A-44
9.4. Extension; Waiver.................................. A-44
ARTICLE X GENERAL PROVISIONS............................... A-44
10.1. Closing........................................... A-44
10.2. Alternative Structure............................. A-44
10.3. Nonsurvival of Representations, Warranties and
Agreements............................................. A-44
10.4. Expenses.......................................... A-44
10.5. Notices........................................... A-45
10.6. Interpretation.................................... A-45
10.7. Counterparts...................................... A-46
10.8. Entire Agreement.................................. A-46
10.9. Governing Law..................................... A-46
10.10. Enforcement of Agreement......................... A-46
10.11. Severability..................................... A-46
10.12. Publicity........................................ A-46
10.13. Assignment; No Third Party Beneficiaries......... A-46
AMENDMENT NO. 1............................................. A-48
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 7, 1999 by and between
F&M Bancorp, a Maryland corporation ("Buyer"), and Patapsco Valley
Bancshares, Inc., a Maryland corporation (the "Company"). (Buyer and the Company
are sometimes collectively referred to herein as the "Constituent
Corporations".)
WHEREAS, the Boards of Directors of Buyer and the Company have determined
that it is in the best interests of their respective companies and their
stockholders to consummate the business combination transaction provided for
herein in which the Company will, subject to the terms and conditions set forth
herein, merge (the "Merger") with and into Buyer; and
WHEREAS, as soon as practicable after the execution and delivery of this
Agreement, Farmers & Mechanics National Bank, a banking association organized
under the laws of the United States and a wholly owned subsidiary of Buyer
("Buyer Bank," and sometimes referred to herein as the "Surviving Bank"), and
Commercial and Farmers Bank, a Maryland-chartered commercial bank and a wholly
owned subsidiary of the Company (the "Company Bank"), will enter into a
Subsidiary Agreement and Plan of Merger in substantially the form set forth on
EXHIBIT A hereto (the "Bank Merger Agreement") providing for the merger (the
"Subsidiary Merger") of the Company Bank with and into Buyer Bank, and it is
intended that the Subsidiary Merger be consummated immediately following the
consummation of the Merger; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for financial accounting purposes, it is intended that the Merger
will be accounted for as a pooling of interests transaction.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1. THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with the Maryland General Corporation Law (the "MGCL"), at the
Effective Time (as defined in Section 1.2 hereof), the Company shall merge with
and into Buyer. Buyer shall be the surviving corporation (hereinafter sometimes
called the "Surviving Corporation") in the Merger, and shall continue its
corporate existence under the laws of the State of Maryland. The name of the
Surviving Corporation shall continue to be F&M Bancorp. Upon consummation of the
Merger, the separate corporate existence of the Company shall terminate.
1.2. EFFECTIVE TIME. The Merger shall become effective as set forth in the
articles of merger (the "Articles of Merger") which shall be filed with the
State Department of Assessments and Taxation (the "Department") on the Closing
Date (as defined in Section 10.1 hereof). The term "Effective Time" shall be the
date and time when the Merger becomes effective, as set forth in the Articles of
Merger.
1.3. EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in Section 3-114 of the MGCL.
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1.4. CONVERSION OF COMPANY COMMON STOCK. (a) At the Effective Time,
subject to Section 2.2(e) hereof, each share of the common stock, par value
$0.01 per share, of the Company (the "Company Common Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
Company Common Stock held directly or indirectly by Buyer or the Company or any
of their respective Subsidiaries (as defined below) (except for Trust Account
Shares and DPC Shares, as such terms are defined in Section 1.4(b) hereof))
shall, by virtue of this Agreement and without any action on the part of the
holder thereof, be converted into and exchangeable for 1.18 shares (the
"Exchange Ratio") of the common stock, par value $5.00 per share, of Buyer
("Buyer Common Stock"). All of the shares of Company Common Stock converted into
Buyer Common Stock pursuant to this Article I shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist, and each certificate
(each a "Certificate") previously representing any such shares of Company Common
Stock shall thereafter only represent the right to receive (i) the number of
whole shares of Buyer Common Stock and (ii) the cash in lieu of fractional
shares into which the shares of Company Common Stock represented by such
Certificate have been converted pursuant to this Section 1.4(a) and
Section 2.2(e) hereof. Certificates previously representing shares of Company
Common Stock shall be exchanged for certificates representing whole shares of
Buyer Common Stock and cash in lieu of fractional shares issued in consideration
therefor upon the surrender of such Certificates in accordance with Section 2.2
hereof, without any interest thereon. If, between the date of this Agreement and
the Effective Time, the outstanding shares of Buyer Common Stock shall be
changed into a different number or class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, or a stock dividend thereon shall be declared with a record date
within said period, the Exchange Ratio shall be adjusted accordingly.
(b) At the Effective Time, all shares of Company Common Stock that are owned
directly or indirectly by Buyer or the Company or any of their respective
Subsidiaries (other than shares of Company Common Stock (x) held directly or
indirectly in trust accounts, managed accounts and the like or otherwise held in
a fiduciary capacity for the benefit of third parties (any such shares, and
shares of Buyer Common Stock which are similarly held, whether held directly or
indirectly by Buyer or the Company, as the case may be, being referred to herein
as "Trust Account Shares") and (y) held by Buyer or the Company or any of their
respective Subsidiaries in respect of a debt previously contracted (any such
shares of Company Common Stock, and shares of Buyer Common Stock which are
similarly held, whether held directly or indirectly by Buyer or the Company,
being referred to herein as "DPC Shares") shall be cancelled and shall cease to
exist and no stock of Buyer or other consideration shall be delivered in
exchange therefor. All shares of Buyer Common Stock that are owned by the
Company or any of its Subsidiaries (other than Trust Account Shares and DPC
Shares) shall become authorized but unissued shares of Buyer Common Stock. As
used in this Agreement, the word "Subsidiary" when used with respect to any
party means any corporation, partnership or other organization, whether
incorporated or unincorporated, which is consolidated with such party for
financial reporting purposes.
1.5. STOCK OPTIONS. (a) At the Effective Time, each option granted by the
Company (a "Company Option") to purchase shares of Company Common Stock which is
outstanding and unexercised (whether vested or unvested) immediately prior
thereto shall be assumed by Buyer and converted automatically into an option (a
"Buyer Option") to purchase shares of Buyer Common Stock in an amount and at an
exercise price determined as provided below (and otherwise subject to the terms
of the Company's Incentive Stock Option Plan, the Company's Employee Stock
Purchase Plan or the Company's Directors' Stock Option Plan, as the case may be
(collectively, the "Company Option Plans") or the Agreement for Non-Qualified
Stock Option, dated February 1, 1999, by and between the Company and W. William
Cookson (the "Cookson Option"), as applicable):
(1) the number of shares of Buyer Common Stock to be subject to the new
option shall be equal to the product of the number of shares of Company
Common Stock subject to the original
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option and the Exchange Ratio, provided that any fractional shares of Buyer
Common Stock resulting from such multiplication shall be rounded down to the
nearest whole share; and
(2) the exercise price per share of Buyer Common Stock under the new
option shall be equal to the exercise price per share of Company Common
Stock under the original option divided by the Exchange Ratio, provided that
such exercise price shall be rounded up to the nearest whole cent.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be and is intended
to be effected in a manner which is consistent with Section 424(a) of the Code
and, to the extent it is not so consistent, such Section 424(a) shall override
anything to the contrary contained herein. The duration and other terms of the
new option shall be the same as the original option, except that all references
to the Company shall be deemed to be references to Buyer.
(b) Buyer shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Buyer Common Stock for delivery upon exercise
of Buyer Options, and, at or prior to the Effective Time, Buyer shall file a
registration statement on Form S-8 with respect to the shares of Buyer Common
Stock subject to Buyer Options, and shall use its reasonable best efforts to
maintain the effectiveness of such registration statement for so long as any
such Buyer Options remain outstanding.
(c) Buyer and the Company shall take all such steps as may be required to
cause the transactions contemplated by this Section 1.5 and any other
dispositions of Company equity securities (including derivative securities) or
acquisitions of Buyer equity securities (including derivative securities) in
connection with this Agreement by each individual who (i) is a director or
officer of the Company or (ii) at the Effective Time, will become a director or
officer of Buyer, to be exempt under Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), such steps to be taken in
accordance with the No-Action Letter dated January 12, 1999, issued by the SEC
to Skadden, Arps, Slate, Meagher & Flom LLP.
1.6. BUYER COMMON STOCK. Except for shares of Buyer Common Stock owned by
the Company or any of its Subsidiaries (other than Trust Account Shares and DPC
Shares), which shall constitute authorized but unissued shares of Buyer Common
Stock as contemplated by Section 1.4 hereof, the shares of Buyer Common Stock
issued and outstanding immediately prior to the Effective Time shall be
unaffected by the Merger and such shares shall remain issued and outstanding.
1.7. ARTICLES OF INCORPORATION. At the Effective Time, the Articles of
Incorporation of Buyer, as in effect at the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation.
1.8. BY-LAWS. At the Effective Time, the By-Laws of Buyer, as in effect
immediately prior to the Effective Time, shall be the By-Laws of the Surviving
Corporation until thereafter amended in accordance with applicable law.
1.9. DIRECTORS AND OFFICERS. Except as contemplated by Section 7.14
hereof, the directors and officers of Buyer immediately prior to the Effective
Time shall be the directors and officers of the Surviving Corporation, each to
hold office in accordance with the Articles of Incorporation and By-Laws of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified.
1.10. TAX CONSEQUENCES; ACCOUNTING TREATMENT. It is intended that the
Merger shall (i) constitute a reorganization within the meaning of
Section 368(a) of the Code, and that this Agreement shall constitute a "plan of
reorganization" for purposes of Section 368 of the Code, and (ii) be accounted
for as a "pooling-of-interests" under generally accepted accounting principles
("GAAP").
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ARTICLE II
EXCHANGE OF SHARES
2.1. BUYER TO MAKE SHARES AVAILABLE. At or prior to the Effective Time,
Buyer shall deposit, or shall cause to be deposited, with a bank or trust
company (which may be a Subsidiary of Buyer) (the "Exchange Agent"), selected by
Buyer, for the benefit of the holders of Certificates, for exchange in
accordance with this Article II, certificates representing the shares of Buyer
Common Stock and the cash in lieu of fractional shares (such cash and
certificates for shares of Buyer Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 1.4 and paid pursuant to
Section 2.2(a) in exchange for outstanding shares of Company Common Stock.
2.2. EXCHANGE OF SHARES. (a) As soon as practicable after the Effective
Time, and in no event more than five business days thereafter, the Exchange
Agent shall mail to each holder of record of a Certificate or Certificates a
form letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent) advising such holder of the
effectiveness of the Merger and instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing the shares of
Buyer Common Stock and the cash in lieu of fractional shares into which the
shares of Company Common Stock represented by such Certificate or Certificates
shall have been converted pursuant to this Agreement. Upon surrender of a
Certificate for exchange and cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of Buyer Common Stock to which such holder of Company
Common Stock shall have become entitled pursuant to the provisions of Article I
hereof and (y) a check representing the amount of cash in lieu of fractional
shares, if any, which such holder has the right to receive in respect of the
Certificate surrendered pursuant to the provisions of this Article II, and the
Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the cash in lieu of fractional shares and unpaid dividends
and distributions, if any, payable to holders of Certificates.
(b) No dividends or other distributions declared at or after the Effective
Time with respect to Buyer Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate until the
holder thereof shall surrender such Certificate in accordance with this
Article II. After the surrender of a Certificate in accordance with this
Article II, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Buyer Common Stock
represented by such Certificate. No holder of an unsurrendered Certificate shall
be entitled, until the surrender of such Certificate, to vote the shares of
Buyer Common Stock into which his Company Common Stock shall have been
converted.
(c) If any certificate representing shares of Buyer Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Buyer Common Stock in any name other
than that of the registered holder of the Certificate surrendered, or required
for any other reason, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately
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<PAGE>
prior to the Effective Time. If, after the Effective Time, Certificates
representing such shares are presented for transfer to the Exchange Agent, they
shall be cancelled and exchanged for certificates representing shares of Buyer
Common Stock as provided in this Article II.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Buyer Common Stock shall
be issued upon the surrender for exchange of Certificates, no dividend or
distribution with respect to Buyer Common Stock shall be payable on or with
respect to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a stockholder of
Buyer. In lieu of the issuance of any such fractional share, Buyer shall pay to
each former stockholder of the Company who otherwise would be entitled to
receive a fractional share of Buyer Common Stock an amount in cash determined by
multiplying (i) the fraction of a share of Buyer Common Stock to which such
holder would otherwise be entitled to receive pursuant to Section 1.4 hereof by
(ii) the average of the last reported sale prices per share of Buyer Common
Stock as reported on The Nasdaq Market's National Market ("Nasdaq/ NMS") (as
reported in THE WALL STREET JOURNAL or, if not reported therein, in another
mutually agreed upon authoritative source) for the 5 (five) consecutive trading
days ending immediately preceding the date on which the Effective Time shall
occur.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of the Company for six months after the Effective Time shall be
delivered by the Exchange Agent to Buyer. Any stockholders of the Company who
have not theretofore complied with this Article II shall thereafter be entitled
to look to Buyer for payment of their shares of Buyer Common Stock, cash in lieu
of fractional shares and unpaid dividends and distributions on Buyer Common
Stock deliverable in respect of each share of Company Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of Buyer, the
Company, the Exchange Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(g) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by Buyer, the
posting by such person of a bond in such amount as Buyer reasonably may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Buyer Common Stock, cash in lieu of
fractional shares and unpaid dividends and distributions deliverable in respect
thereof pursuant to this Agreement.
ARTICLE III
DISCLOSURE SCHEDULES; STANDARDS FOR REPRESENTATIONS AND WARRANTIES
3.1. DISCLOSURE SCHEDULES. Prior to the execution and delivery of this
Agreement, the Company has delivered to Buyer, and Buyer has delivered to the
Company, a schedule (in the case of the Company, the "Company Disclosure
Schedule," and in the case of Buyer, the "Buyer Disclosure Schedule") setting
forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in
a provision hereof or as an exception to one or more of such party's
representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Buyer, or to one or more of such party's
covenants contained in Article VI; PROVIDED, HOWEVER, that notwithstanding
anything in this Agreement to the contrary (a) no such item is required to be
set forth in the Disclosure Schedule as an exception to a representation or
warranty (other than the representations and warranties contained in Sections
4.2, 4.3(a), 4.3(b), 4.6(a), 4.11(d), 4.12, 4.13, 5.2, 5.3(a), 5.3(b), 5.6(a),
5.10 and 5.12) if its absence would not result in the related representation or
warranty being deemed untrue or incorrect under the
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standard established by Section 3.2, and (b) the mere inclusion of an item in a
Disclosure Schedule as an exception to a representation or warranty shall not be
deemed an admission by a party that such item represents a material exception or
material fact, event or circumstance or that such item has had or is reasonably
likely to have a Material Adverse Effect (as defined herein) with respect to
either the Company or Buyer, respectively.
3.2. STANDARDS. (a) No representation or warranty of the Company contained
in Article IV (other than the representations and warranties contained in
Sections 4.2, 4.3(a), 4.3(b), 4.6(a), 4.11(d), 4.12 and 4.13) or of Buyer in
Article V (other than the representations and warranties contained in Sections
5.2, 5.3(a), 5.3(b), 5.6(a), 5.10 and 5.12) shall be deemed untrue or incorrect
for any purpose under this Agreement, including for purposes of Section 8.2(a)
and Section 8.3(a), and no party hereto shall be deemed to have breached any
such representation or warranty for any purpose under this Agreement, in any
case as a consequence of the existence or absence of any fact, circumstance or
event unless such fact, circumstance or event, individually or when taken
together with all other facts, circumstances or events inconsistent with any
such representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Buyer, has had or is reasonably likely to
have a Material Adverse Effect with respect to the Company or Buyer,
respectively.
(b) As used in this Agreement, the term "Material Adverse Effect" means,
with respect to Buyer or the Company, as the case may be, a material adverse
effect on (i) the business, results of operations or financial condition of such
party and its Subsidiaries taken as a whole, other than any such effect
attributable to or resulting from (A) any change in banking or similar laws,
rules or regulations of general applicability or interpretations thereof by
courts or governmental authorities, (B) any change in GAAP or regulatory
accounting principles applicable to banks or their holding companies generally,
(C) any change in general economic or business conditions affecting banks,
thrifts or holding companies generally, PROVIDED that such change does not
affect the referenced party to a materially greater extent than banks, thrifts
or holding companies generally, and PROVIDED FURTHER that such change does not
have a materially adverse effect on the results of operations or financial
condition of the referenced party, or (D) any action or omission of the Company
or Buyer or any Subsidiary of either of them taken in contemplation of the
Merger with the prior written consent of the other party hereto, or (ii) the
ability of such party and its Subsidiaries to consummate the transactions
contemplated by the Company Documents (as defined herein) and the Bank Merger
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the Company Disclosure Schedule
(PROVIDED, HOWEVER, that no exception shall be taken with respect to any
representation or warranty set forth in any Section of this Article IV unless
such exception is specifically set forth in the correspondingly enumerated
section of the Company Disclosure Schedule), the Company hereby represents and
warrants to Buyer as follows:
4.1. CORPORATE ORGANIZATION. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland. The Company has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such qualification necessary.
The Company is duly registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). The Articles of Incorporation
and By-Laws of the Company, copies of which have previously been made available
to Buyer, are true, complete and correct copies of such documents as in effect
as of the date of this Agreement.
(b) The Company Bank is a commercial bank duly organized, validly existing
and in good standing under the laws of the State of Maryland. The deposit
accounts of the Company Bank are insured by
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the Federal Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund ("BIF") and/or the Savings Association Insurance Fund ("SAIF") to
the fullest extent permitted by law, and all premiums and assessments required
to be paid in connection therewith have been paid when due by the Company Bank.
Each of the Company's other Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of the Company's Subsidiaries has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted and is duly qualified
to do business in each jurisdiction in which the nature of the business
conducted by it or the character or the location of the properties and assets
owned or leased by it makes such qualification necessary. The articles of
incorporation, by-laws and similar governing documents of each Subsidiary of the
Company, copies of which have previously been made available to Buyer, are true,
complete and correct copies of such documents as in effect as of the date of
this Agreement.
(c) The minute books of the Company and each of its Subsidiaries contain
true, complete and accurate records of all meetings and other corporate actions
held or taken since December 31, 1996 of their respective stockholders and
Boards of Directors (including committees of their respective Boards of
Directors).
4.2. CAPITALIZATION. (a) The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock. As of the date of this
Agreement, there are (x) 1,367,968.9364 shares of Company Common Stock
outstanding, (y) 5,200 shares of Company Common Stock reserved for issuance
pursuant to a restricted stock award that was granted by the Board of Directors
of the Company on April 20, 1999 (the "Restricted Stock Award") and described in
Section 4.2(a) of the Company Disclosure Schedule and (z) no shares of Company
Common Stock reserved for issuance upon exercise of outstanding stock options or
otherwise except for (i) 120,000 shares of Company Common Stock reserved for
issuance pursuant to the Company Option Plans and described in Section 4.2(a) of
the Company Disclosure Schedule, (ii) 4,000 shares of Company Common Stock
reserved for issuance pursuant to the Cookson Option Plan and described in
Section 4.2(a) of the Company Disclosure Schedule and (iii) 272,225 shares of
Company Common Stock reserved for issuance upon exercise of the option issued to
Buyer pursuant to the Stock Option Agreement, dated as of the date hereof,
between Buyer and the Company (the "Company Option Agreement"). All of the
issued and outstanding shares of Company Common Stock have been duly authorized
and validly issued and are fully paid and nonassessable, with no personal
liability attaching to the ownership thereof. Except as referred to above or
reflected in Section 4.2(a) of the Company Disclosure Schedule, and except for
the Company Option Agreement, the Company does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Company
Common Stock or any other equity security of the Company or any securities
representing the right to purchase or otherwise receive any shares of Company
Common Stock or any other equity security of the Company. The number of shares
subject to each option to purchase Company Common Stock granted and the price at
which each such option may be exercised are set forth in Section 4.2(a) of the
Company Disclosure Schedule. The names of the optionees, the date of each option
to purchase Company Common Stock granted, and the expiration date of each such
option under the Company Option Plans are set forth in Section 4.2(a) of the
Company Disclosure Schedule.
(b) Section 4.2(b) of the Company Disclosure Schedule sets forth a true,
complete and correct list of all of the Subsidiaries of the Company. The Company
owns, directly or indirectly, all of the issued and outstanding shares of the
capital stock of each of such Subsidiaries, free and clear of all liens,
charges, encumbrances and security interests whatsoever, and all of such shares
are duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof. No Subsidiary of the Company has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the
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purchase or issuance of any shares of capital stock or any other equity security
of such Subsidiary or any securities representing the right to purchase or
otherwise receive any shares of capital stock or any other equity security of
such Subsidiary. Assuming compliance by Buyer with Section 1.5 hereof, at the
Effective Time, there will not be any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character by which the Company
or any of its Subsidiaries will be bound calling for the purchase or issuance of
any shares of the capital stock of the Company or any of its Subsidiaries.
(c) Upon the suspension by the Company of the Company Dividend Reinvestment
Plan (the "Company DRIP") pursuant to Section 7.18, from the date of such
suspension, if any, no issuances or purchases of the Company Common Stock under
the Company DRIP shall be permitted, nor shall any other obligations thereunder
accrue.
4.3. AUTHORITY; NO VIOLATION. (a) The Company has full corporate power and
authority to execute and deliver this Agreement and the Company Option Agreement
(this Agreement and the Company Option Agreement, collectively, the "Company
Documents") and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of each of the Company Documents and the consummation
of the transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of the Company. The Board of Directors of the
Company has directed that this Agreement and the transactions contemplated
hereby be submitted to the Company's stockholders for approval at a meeting of
such stockholders and, except for the approval of the Merger and this Agreement
by the requisite vote of the Company's stockholders, no other corporate
proceedings on the part of the Company are necessary to approve the Company
Documents and to consummate the transactions contemplated hereby and thereby.
Without limiting the foregoing, the Board of Directors of the Company has
adopted a resolution declaring that this Agreement, the Merger and the
transactions contemplated hereby and thereby are advisable on substantially the
terms set forth herein and that such proposed transactions be submitted for
consideration at a special meeting of the stockholders of the Company. Each of
the Company Documents has been duly and validly executed and delivered by the
Company and (assuming due authorization, execution and delivery by Buyer) this
Agreement constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(b) The Company Bank has full corporate power and authority to execute and
deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby will be duly and
validly approved by the Board of Directors of the Company Bank. Upon the due and
valid approval of the Bank Merger Agreement by the Board of Directors of the
Company Bank and by the Company as the sole stockholder of the Company Bank, no
other corporate proceedings on the part of the Company Bank will be necessary to
consummate the transactions contemplated thereby. The Bank Merger Agreement,
upon execution and delivery by the Company Bank, will be duly and validly
executed and delivered by the Company Bank and will (assuming due authorization,
execution and delivery by Buyer Bank) constitute a valid and binding obligation
of the Company Bank, enforceable against the Company Bank in accordance with its
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(c) Neither the execution and delivery of the Company Documents by the
Company or the Bank Merger Agreement by the Company Bank, nor the consummation
by the Company or the Company Bank, as the case may be, of the transactions
contemplated hereby or thereby, nor compliance by the Company or the Company
Bank, as the case may be, with any of the terms or provisions hereof or thereof,
will (i) violate any provision of the Articles of Incorporation or By-Laws of
the Company or
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the articles of incorporation, by-laws or similar governing documents of any of
its Subsidiaries, or (ii) assuming that the consents and approvals referred to
in Section 4.4 hereof are duly obtained prior to the Effective Time,
(x) violate any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to the Company or any of its Subsidiaries,
or any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of the Company or
any of its Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or any of its Subsidiaries
is a party, or by which they or any of their respective properties or assets may
be bound or affected.
4.4. CONSENTS AND APPROVALS. Except for (a) the filing of applications and
notices, as applicable, with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the BHC Act and the Office of the
Comptroller of the Currency (the "OCC") under the Bank Merger Act and approval
of such applications and notices, (b) the filing with the Securities and
Exchange Commission (the "SEC") of a proxy statement in definitive form relating
to the meeting of the Company's stockholders to be held in connection with this
Agreement and the transactions contemplated hereby (the "Proxy Statement") and
the filing and declaration of effectiveness of the registration statement on
Form S-4 (the "S-4") in which the Proxy Statement will be included as a
prospectus, (c) the approval of the Merger and this Agreement by the requisite
vote of the stockholders of the Company, (d) the filing of the Articles of
Merger with the Department pursuant to the MGCL, (e) the approval of the Bank
Merger Agreement by the Company as the sole stockholder of the Company Bank,
(f) authorization for quotation of Buyer Common Stock to be issued in the Merger
on the Nasdaq/NMS, (g) approval of the transactions contemplated by this
Agreement and the Bank Merger Agreement by the Maryland Commissioner of
Financial Regulation and/or filings in connection therewith pursuant to the
Financial Institutions Article of the Annotated Code of Maryland, (h) filings
under state securities and blue sky laws, (i) filings with or approvals of the
State Insurance Commissioner and (j) such filings, authorizations or approvals
as may be set forth in Section 4.4 of the Company Disclosure Schedule, no
consents or approvals of or filings or registrations with any court,
administrative agency or commission or other governmental authority or
instrumentality (each a "Governmental Entity") or with any third party are
necessary in connection with (1) the execution and delivery by the Company of
the Company Documents, (2) the consummation by the Company of the Merger and the
other transactions contemplated hereby and thereby, (3) the execution and
delivery by the Company Bank of the Bank Merger Agreement, and (4) the
consummation by the Company Bank of the Subsidiary Merger and the transactions
contemplated thereby.
4.5. REPORTS. The Company and each of its Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file since
December 31, 1995 with (i) the Federal Reserve Board, (ii) the FDIC, (iii) any
state banking commissions or any other state regulatory authority (each a "State
Regulator") and (iv) and any self-regulatory organization ("SRO") (collectively,
the "Regulatory Agencies"), and have paid all fees and assessments due and
payable in connection therewith. Except for normal examinations conducted by a
Regulatory Agency in the regular course of the business of the Company and its
Subsidiaries, and no Regulatory Agency has initiated any proceeding or
investigation into the business or operations of the Company or any of its
Subsidiaries since December 31, 1995. There is no unresolved material violation,
criticism, or exception by any Regulatory Agency with respect to any report or
statement relating to any examinations of the Company or any of its
Subsidiaries.
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4.6. FINANCIAL STATEMENTS. (a) The Company has previously made available
to Buyer copies of (i) the consolidated balance sheets of Company and its
Subsidiaries as of December 31 for the fiscal years 1997 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1996 through 1998, inclusive, as reported in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998 filed with the SEC under the Exchange Act, in each case accompanied by the
audit report of Rowles & Company, LLP, independent public accountants with
respect to the Company, and (ii) the unaudited consolidated statements of
financial condition of the Company and its Subsidiaries as of June 30, 1999 and
June 30, 1998 and the related unaudited consolidated statements of operations
and cash flows for the six-month periods then ended as reported in the Company's
Quarterly Report on Form 10-QSB for the period ended June 30, 1999 filed with
the SEC under the Exchange Act. The December 31, 1998 consolidated balance sheet
of the Company (including the related notes, where applicable) fairly presents
the consolidated financial position of the Company and its Subsidiaries as of
the date thereof, and the other financial statements referred to in this
Section 4.6 (including the related notes, where applicable) fairly present
(subject, in the case of the unaudited statements, to recurring audit
adjustments normal in nature and amount), and the financial statements to be
filed with the SEC after the date hereof will fairly present (subject, in the
case of the unaudited statements, to recurring audit adjustments normal in
nature and amount), the results of the consolidated operations and consolidated
financial position of the Company and its Subsidiaries for the respective fiscal
periods or as of the respective dates therein set forth; each of such statements
(including the related notes, where applicable) comply, and the financial
statements to be filed with the SEC after the date hereof will comply, with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto; and each of such statements (including the
related notes, where applicable) has been, and the financial statements to be
filed with the SEC after the date hereof will be, prepared in accordance with
GAAP consistently applied during the periods involved, except as indicated in
the notes thereto or, in the case of unaudited statements, as permitted by
Form 10-Q.
(b) The books and records of the Company and its Subsidiaries have been, and
are being, maintained in accordance with applicable legal and accounting
requirements.
4.7. BROKER'S FEES. Neither the Company nor any Subsidiary of the Company
nor any of their respective officers or directors has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with any of the transactions contemplated by the Company
Documents or the Bank Merger Agreement, except that the Company has engaged, and
will pay a fee or commission to, Ferris, Baker Watts Incorporated in accordance
with the terms of a letter agreement between Ferris, Baker Watts Incorporated
and the Company, a true, complete and correct copy of which has been previously
made available by the Company to Buyer.
4.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. (a) Since December 31, 1998,
there has been no change or development or combination of changes or
developments which, individually or in the aggregate, has had or is reasonably
likely to have a Material Adverse Effect on the Company.
(b) Except for the execution and delivery of the Company Documents and the
Bank Merger Agreement, since December 31, 1998, the Company and its Subsidiaries
have carried on their respective businesses in the ordinary course consistent
with their past practices.
(c) Since June 30, 1999, neither the Company nor any of its Subsidiaries has
(i) increased the wages, salaries, compensation, pension or other fringe
benefits or perquisites payable to any executive officer, employee or director
from the amount thereof in effect as of June 30, 1999 (which amounts have been
previously disclosed to Buyer), granted any severance or termination pay,
entered into any contract to make or grant any severance or termination pay, or
paid any bonus other than year-end bonuses for fiscal 1999 as listed in
Section 4.8 of the Company Disclosure Schedule, (ii) suffered any strike, work
stoppage, slow-down, or other labor disturbance, (iii) been a party to a
collective
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bargaining agreement, contract or other agreement or understanding with a labor
union or organization or (iv) had any union organizing activities.
4.9. LEGAL PROCEEDINGS. (a) Neither the Company nor any of its
Subsidiaries is a party to any, and there are no pending or, to the Company's
knowledge, threatened, legal, administrative, arbitral or other proceedings,
claims, actions or governmental or regulatory investigations of any nature
against the Company or any of its Subsidiaries or challenging the validity or
propriety of the transactions contemplated by any of the Company Documents or
the Bank Merger Agreement.
(b) There is no injunction, order, judgment, decree or regulatory
restriction imposed upon the Company, any of its Subsidiaries or the assets of
the Company or any of its Subsidiaries.
4.10. TAXES. (a) Each of the Company and its Subsidiaries (i) has duly and
timely filed (including applicable extensions granted without penalty) all Tax
Returns (as hereinafter defined) required to be filed on or prior to the date
hereof and will duly and timely file all Tax Returns after the date hereof and
prior to the Effective Time, and such Tax Returns are or will be true, correct
and complete, and (ii) has paid or will pay in full or to the extent necessary
made or will make adequate provision in the financial statements of the Company
(in accordance with GAAP) for all Taxes (as hereinafter defined). No
deficiencies for any Taxes have been proposed, asserted, assessed or, to the
knowledge of the Company, threatened against or with respect to the Company or
any of its Subsidiaries. (i) There are no liens for Taxes upon the assets of
either the Company or its Subsidiaries except for statutory liens for current
Taxes not yet due, (ii) neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any Tax Returns in respect
of any fiscal year which have not since been filed and no request for waivers of
the time to assess any Taxes are pending or outstanding, (iii) with respect to
each taxable period of the Company and its Subsidiaries, the federal and state
income Tax Returns of the Company and its Subsidiaries have been audited by the
Internal Revenue Service (the "IRS") or appropriate state tax authorities or the
time for assessing and collecting income Tax with respect to such taxable period
has closed and such taxable period is not subject to review, (iv) neither the
Company nor any of its Subsidiaries has filed or been included in a combined,
consolidated or unitary income Tax Return other than one in which the Company
was the parent of the group filing such Tax Return, (v) neither the Company nor
any of its Subsidiaries is a party to any agreement providing for the allocation
or sharing of Taxes (other than the allocation of federal income taxes as
provided by Regulation 1.1552-1(a)(1) under the Code), (vi) neither the Company
nor any of its Subsidiaries is required to include in income any adjustment
pursuant to Section 481(a) of the Code (or any similar or corresponding
provision or requirement of state, local or foreign income Tax law), by reason
of the voluntary change in accounting method (nor has any taxing authority
proposed in writing any such adjustment or change of accounting method),
(vii) neither the Company nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code, (viii) neither the Company nor any of
its Subsidiaries has made any payment or will be obligated to make any payment
(by contract or otherwise) which will not be deductible by reason of
Section 280G of the Code and (ix) none of the Company, any of its Subsidiaries
or any entity acquired by the Company or its Subsidiaries is or was (a) a
domestic building and loan association, (b) a mutual savings bank or (c) a
cooperative bank without capital stock organized and operated for mutual
purposes and without profit, which has taken a deduction for additions to a
reserve for bad debts under Section 593 of the Code.
(b) For the purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any United
States federal, state, local or foreign taxing authority, including, but not
limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other taxes, including any interest, penalties
or additions attributable thereto. For purposes of this Agreement, "Tax Return"
shall mean any return, report, information return or other document (including
any related or supporting information) with respect to Taxes.
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4.11. EMPLOYEES. (a) Section 4.11(a) of the Company Disclosure Schedule
sets forth a true, complete and correct list of each deferred compensation plan,
incentive compensation plan, equity compensation plan, "welfare" plan, fund or
program (within the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")); each "pension" plan, fund or
program (within the meaning of section 3(2) of ERISA); each employment,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to (the "Company Plans") by the
Company, any of its Subsidiaries or by any trade or business, whether or not
incorporated (a "Company ERISA Affiliate"), all of which together with the
Company would be deemed a "single employer" within the meaning of Section 4001
of ERISA, for the benefit of any employee or former employee of the Company, any
Subsidiary or any Company ERISA Affiliate.
(b) The Company has heretofore made available to Buyer true, complete and
correct copies of each of the Company Plans and all related documents, including
but not limited to (i) the actuarial report for such Company Plan (if
applicable) for each of the last two years and (ii) the most recent
determination letter from the IRS (if applicable) for such Company Plan.
(c) (i) Each of the Company Plans has been operated and administered in all
material respects in accordance with its terms and applicable law, including but
not limited to ERISA and the Code, (ii) each of the Company Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code either (1) has
received a favorable determination letter from the IRS, or (2) is or will be the
subject of an application for a favorable determination letter, and the Company
is not aware of any circumstances likely to result in the revocation or denial
of any such favorable determination letter, (iii) with respect to each Company
Plan which is subject to Title IV of ERISA, the present value of accrued
benefits under such Company Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by such Company
Plan's actuary with respect to such Company Plan, did not, as of its latest
valuation date, exceed the then current value of the assets of such Company Plan
allocable to such accrued benefits, (iv) no Company Plan provides benefits,
including without limitation death or medical benefits (whether or not insured),
with respect to current or former employees of the Company, its Subsidiaries or
any Company ERISA Affiliate beyond their retirement or other termination of
service, other than (w) coverage mandated by applicable law, (x) death benefits
or retirement benefits under any "employee pension plan," as that term is
defined in Section 3(2) of ERISA, (y) deferred compensation benefits accrued as
liabilities on the books of the Company, its Subsidiaries or the Company ERISA
Affiliates or (z) benefits the full cost of which is borne by the current or
former employee (or his beneficiary), (v) no liability under Title IV of ERISA
has been incurred by the Company, its Subsidiaries or any Company ERISA
Affiliate that has not been satisfied in full, and no condition exists that
presents a material risk to the Company, its Subsidiaries or a Company ERISA
Affiliate of incurring a liability thereunder, (vi) no Company Plan is a
"multiemployer pension plan," as such term is defined in Section 3(37) of ERISA,
(vii) all contributions or other amounts payable by the Company, its
Subsidiaries or any Company ERISA Affiliates as of the Effective Time with
respect to each Company Plan in respect of current or prior plan years have been
paid or accrued in accordance with GAAP and Section 412 of the Code,
(viii) neither the Company, its Subsidiaries nor any Company ERISA Affiliate has
engaged in a transaction in connection with which the Company, its Subsidiaries
or any Company ERISA Affiliate could be subject to either a civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to
Section 4975 or 4976 of the Code, (ix) there are no pending or, to the best
knowledge of the Company, threatened or anticipated claims (other than routine
claims for benefits) by, on behalf of or against any of the Company Plans or any
trusts related thereto and (x) the consummation of the transactions contemplated
by this Agreement or the Bank Merger Agreement will not (y) entitle any current
or former employee or officer of the Company or any Company ERISA Affiliate to
severance pay, termination pay or any other payment or benefit, except as
expressly
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provided in this Agreement or (z) accelerate the time of payment or vesting or
increase the amount or value of compensation or benefits due any such employee
or officer.
(d) Section 4.11(d) of the Company Disclosure Schedule sets forth a true,
complete and correct list of each contract, arrangement, commitment or
understanding (whether written or oral,) with respect to the employment or
retention of any director, officer, employee or consultant (each, an "Employment
Agreement") to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound, and the Company has
heretofore made available to Buyer true, complete and correct copies of each
such Employment Agreement and all related documents.
4.12. SEC REPORTS. The Company has previously made available to Buyer a
true, complete and correct copy of each (a) final registration statement,
prospectus, report, schedule and definitive proxy statement filed since
January 1, 1997 by the Company with the SEC pursuant to the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act (the "Company
Reports") and (b) communication mailed by the Company to its stockholders since
January 1, 1997, and no such registration statement, prospectus, report,
schedule, proxy statement or communication contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that information
as of a later date shall be deemed to modify information as of an earlier date.
The Company has timely filed all Company Reports and other documents required to
be filed by it under the Securities Act and the Exchange Act, and, as of their
respective dates, all Company Reports complied with the published rules and
regulations of the SEC with respect thereto.
4.13. COMPANY INFORMATION. The information relating to the Company and its
Subsidiaries which is provided to Buyer by the Company specifically for
inclusion in the Proxy Statement and the S-4, or in any other document filed
with any other regulatory agency in connection herewith, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances in which they are
made, not misleading.
4.14. COMPLIANCE WITH APPLICABLE LAW. The Company and each of its
Subsidiaries hold, and have at all times held, all licenses, franchises, permits
and authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to all, and have complied with and are not in
default in any respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating to the
Company or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has received notice of, any violations of any of the above.
4.15. CERTAIN CONTRACTS. (a) Neither the Company nor any of its
Subsidiaries is a party to or bound by any contract, arrangement, commitment or
understanding (whether written or oral) (i) which is an Employment Agreement,
(ii) which, upon the consummation of the transactions contemplated by this
Agreement or the Bank Merger Agreement, will (either alone or upon the
occurrence of any additional acts or events) result in any payment or benefits
(whether of severance pay or otherwise) becoming due, or the acceleration or
vesting of any rights to any payment or benefits, from Buyer, the Company, the
Surviving Corporation, the Surviving Bank or any of their respective
Subsidiaries to any officer, director, consultant or employee thereof,
(iii) which is a material contract (as defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this Agreement that
has not been filed or incorporated by reference in the Company Reports,
(iv) which is a consulting agreement (including data processing, software
programming and licensing contracts) not terminable on 60 days or less notice
involving the payment of more than $50,000 per annum, in the case of any such
agreement with an individual, or $100,000 per annum, in the case of any other
such agreement, (v) which materially restricts the conduct of any line of
business by the Company or any of its Subsidiaries or (vi) (including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan) any of the benefits of which will be increased, or the vesting of
the benefits of
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which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the Bank Merger Agreement, or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement or the Bank Merger Agreement. Each
contract, arrangement, commitment or understanding of the type described in this
Section 4.15(a), whether or not set forth in Section 4.15(a) of the Company
Disclosure Schedule, is referred to herein as a "Company Contract". The Company
has previously made available to Buyer true, complete and correct copies of each
Company Contract.
(b) (i) Each Company Contract is valid and binding and in full force and
effect, (ii) the Company and each of its Subsidiaries has performed all
obligations required to be performed by it to date under each Company Contract,
(iii) no event or condition exists which constitutes or, after notice or lapse
of time or both, would constitute, a default on the part of the Company or any
of its Subsidiaries under any such Company Contract and (iv) no other party to
such Company Contract is, to the knowledge of the Company, in default in any
respect thereunder.
4.16. AGREEMENTS WITH REGULATORY AGENCIES. Neither the Company nor any of
its Subsidiaries is subject to any cease-and-desist or other order issued by, or
is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, whether or not set forth on Section 4.16 of the Company
Disclosure Schedule, a "Company Regulatory Agreement"), any Regulatory Agency or
other Governmental Entity that restricts the conduct of its business or that in
any manner relates to its capital adequacy, its credit policies, its management
or its business, nor has the Company or any of its Subsidiaries been advised in
writing by any Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any Company Regulatory Agreement.
4.17. INVESTMENT SECURITIES. Section 4.17 of the Company Disclosure
Schedule sets forth the book and market value as of July 31, 1999 of the
investment securities and securities available for sale of the Company and its
Subsidiaries.
4.18. INTELLECTUAL PROPERTY. The Company and each of its Subsidiaries owns
or possesses valid and binding licenses and other rights to use without payment
all patents, copyrights, trade secrets, trade names, servicemarks and trademarks
used in its businesses; and neither the Company nor any of its Subsidiaries has
received any notice of conflict with respect thereto that asserts the right of
others.
4.19. STATE TAKEOVER LAWS. The Board of Directors of the Company has
approved this Agreement, the Company Option Agreement and the transaction
contemplated hereby prior to the date of this Agreement such that the provisions
of Section 3-602 of the MGCL will not, assuming the accuracy of the
representations contained in Section 5.13 hereof, apply to this Agreement, the
Bank Merger Agreement or the Company Option Agreement or any of the transactions
contemplated hereby or thereby.
4.20. ADMINISTRATION OF FIDUCIARY ACCOUNTS. The Company and each of its
Subsidiaries has properly administered all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither the
Company nor any of its Subsidiaries nor any of their respective directors,
officers or employees has committed any breach of trust with respect to any such
fiduciary account, and the accountings for each such fiduciary account are true,
complete and correct and accurately reflect the assets of such fiduciary
account.
4.21. ENVIRONMENTAL MATTERS. (a) Each of the Company and its Subsidiaries
and to the best knowledge of the Company, the Participation Facilities and the
Loan Properties (each as hereinafter defined) are, and have been, in compliance
with all applicable federal, state and local laws including
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common law, regulations and ordinances and with all applicable decrees, orders
and contractual obligations relating to pollution or the discharge of, or
exposure to Hazardous Materials (as hereinafter defined) in the environment or
workplace ("Environmental Laws");
(b) There is no suit, claim, action or proceeding, pending or, to the best
knowledge of the Company, threatened, before any Governmental Entity or other
forum in which the Company, any of its Subsidiaries or to the best knowledge of
the Company, any Participation Facility or any Loan Property, has been or, with
respect to threatened proceedings, may be, named as a defendant (x) for alleged
noncompliance (including by any predecessor), with any Environmental Laws or
(y) relating to the release, threatened release or exposure to any Hazardous
Material, whether or not occurring at or on a site owned, leased or operated by
the Company or any of its Subsidiaries, any Participation Facility or any Loan
Property;
(c) During the period of (x) the Company's or any of its Subsidiaries'
ownership or operation of any of their respective current or former properties,
(y) the Company's or any of its Subsidiaries' participation in the management of
any Participation Facility or (z) the Company's or any of its Subsidiaries'
holding of a security interest in a Loan Property, to the best knowledge of the
Company, there has been no release of Hazardous Materials in, on, under or
affecting any such property. Prior to the period of (x) the Company's or any of
its Subsidiaries' ownership or operation of any of their respective current or
former properties, (y) the Company's or any of its Subsidiaries' participation
in the management of any Participation Facility or (z) the Company's or any of
its Subsidiaries' holding of a security interest in a Loan Property, to the best
knowledge of the Company, there was no release or threatened release of
Hazardous Materials in, on, under or affecting any such property, Participation
Facility or Loan Property; and
(d) The following definitions apply for purposes of this Section 4.21:
(x) "Hazardous Materials" means any chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum or other regulated substances or materials;
(y) "Loan Property" means any property in which the Company or any of its
Subsidiaries holds a security interest, and, where required by the context, said
term means the owner or operator of such property; and (z) "Participation
Facility" means any facility in which the Company or any of its Subsidiaries
participates in the management and, where required by the context, said term
means the owner or operator of such property.
4.22. DERIVATIVE TRANSACTIONS. Since December 31, 1998, neither Company
nor any of its Subsidiaries has engaged in transactions in or involving
forwards, futures, options on futures, swaps or other derivative instruments
except (i) as agent on the order and for the account of others or (ii) as
principal for purposes of hedging interest rate risk on U.S. dollar-denominated
securities and other financial instruments. None of the counterparties to any
contract or agreement with respect to any such instrument is in default with
respect to such contract or agreement and no such contract or agreement, were it
to be a Loan (as defined below) held by the Company or any of its Subsidiaries,
would be classified as "Other Loans Specially Mentioned", "Special Mention",
"Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk
Assets", "Concerned Loans" or words of similar import. The financial position of
the Company and its Subsidiaries on a consolidated basis under or with respect
to each such instrument has been reflected in the books and records of the
Company and such Subsidiaries in accordance with GAAP consistently applied, and
no open exposure of the Company or any of its Subsidiaries with respect to any
such instrument (or with respect to multiple instruments with respect to any
single counterparty) exceeds $50,000.
4.23. OPINION. Prior to the execution of this Agreement, the Company has
received an opinion from Ferris, Baker Watts Incorporated to the effect that, as
of the date hereof and based upon and subject to the matters set forth therein,
the consideration to be received by the stockholders of the Company pursuant to
this Agreement is fair to the Company's stockholders from a financial point of
view. Such opinion has not been amended or rescinded as of the date of this
Agreement.
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4.24. APPROVALS. As of the date of this Agreement, the Company knows of no
reason why all Requisite Regulatory Approvals (as such term is defined in
subsection 8.1(c) hereof) should not be obtained.
4.25. LOAN PORTFOLIO. (a) Neither the Company nor any of its Subsidiaries
is a party to any written or oral (i) loan agreement, note or borrowing
arrangement (including, without limitation, leases, credit enhancements,
commitments, guarantees and interest-bearing assets) (collectively, "Loans"),
other than any Loan the unpaid principal balance of which does not exceed
$50,000, under the terms of which the obligor is, as of the date of this
Agreement, over 90 days delinquent in payment of principal or interest or in
default of any other provision, or (ii) Loan with any director, executive
officer or five percent or greater stockholder of the Company or any of its
Subsidiaries, or to the knowledge of the Company, any person, corporation or
enterprise controlling, controlled by or under common control with any of the
foregoing. Section 4.25 of the Company Disclosure Schedule sets forth (i) all of
the Loans in original principal amount in excess of $50,000 of the Company or
any of its Subsidiaries that as of the date of this Agreement are classified by
any bank examiner (whether regulatory or internal) as "Other Loans Specially
Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified",
"Criticized", "Credit Risk Assets", "Concerned Loans", "Watch List" or words of
similar import, together with the principal amount of and accrued and unpaid
interest on each such Loan and the identity of the borrower thereunder, (ii) by
category of Loan (i.e., commercial, consumer, etc.), all of the other Loans of
the Company and its Subsidiaries that as of the date of this Agreement are
classified as such, together with the aggregate principal amount of and accrued
and unpaid interest on such Loans by category and (iii) each asset of the
Company that as of the date of this Agreement is classified as "Other Real
Estate Owned" and the book value thereof. The Company shall promptly inform
Buyer in writing of any Loan that becomes classified in the manner described in
the previous sentence, or any Loan the classification of which is changed, at
any time after the date of this Agreement.
(b) Each Loan in original principal amount in excess of $50,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been and remain
perfected and (iii) is the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4.26. ACCOUNTING FOR THE MERGER; REORGANIZATION. As of the date of this
Agreement, the Company has no reason to believe that the Merger will fail to
qualify (i) for pooling-of-interests treatment under GAAP or (ii) as a
reorganization under Section 368(a) of the Code.
4.27. OWNERSHIP OF COMPANY COMMON STOCK. Immediately prior to the
Effective Time, none of the Company or its Subsidiaries will beneficially own,
directly or indirectly, any Company Common Stock that will be cancelled,
pursuant to Section 1.4(b) hereof, at the Effective Time.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as specifically set forth in the Buyer Disclosure Schedule (PROVIDED,
HOWEVER, that no exception shall be taken with respect to any representation or
warranty set forth in any Section of this Article V unless such exception is
specifically set forth in the correspondingly enumerated section of the Buyer
Disclosure Schedule), Buyer hereby represents and warrants to the Company as
follows:
5.1. CORPORATE ORGANIZATION. (a) Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland.
Buyer has the corporate power and authority to
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own or lease all of its properties and assets and to carry on its business as it
is now being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary. Buyer is duly registered as a bank
holding company under the BHC Act. The Articles of Incorporation and By-Laws of
Buyer, copies of which have previously been made available to the Company, are
true, complete and correct copies of such documents as in effect as of the date
of this Agreement.
(b) Buyer Bank is a banking association duly organized, validly existing and
in good standing under the laws of the United States. The deposit accounts of
Buyer Bank are insured by the FDIC through the BIF and the SAIF to the fullest
extent permitted by law, and all premiums and assessments required in connection
therewith have been paid by Buyer Bank. Each of Buyer's other Subsidiaries is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each Subsidiary of Buyer has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary.
(c) The minute books of Buyer and each of its Subsidiaries contain true,
complete and accurate records of all meetings and other corporate actions held
or taken since December 31, 1996 of their respective stockholders and Boards of
Directors (including committees of their respective Boards of Directors).
5.2. CAPITALIZATION. (a) As of the date of this Agreement, the authorized
capital stock of Buyer consists of 50,000,000 shares of Buyer Common Stock. As
of August 31, 1999, there were 9,360,558 shares of Buyer Common Stock issued and
outstanding. As of the date of this Agreement, no shares of Buyer Common Stock
were reserved for issuance, except that (i) 63,814 shares of Buyer Common Stock
were reserved for issuance pursuant to Buyer's dividend reinvestment and stock
purchase plans and (ii) 487,408 shares of Buyer Common Stock were reserved for
issuance upon the exercise of stock options pursuant to the Buyer 1983 Incentive
Stock Option Plan, as amended, the Buyer 1995 Stock Option Plan, the Buyer
Employee Stock Purchase Plan, the Buyer 1999 Employee Stock Option Plan, the
Buyer 1999 Stock Option Plan for Non-Employee Directors, the Home Federal
Corporation 1989 Stock Option and Stock Appreciation Rights Plan, the Monocacy
Bancshares, Inc. 1994 Stock Incentive Plan, the Monocacy Bancshares, Inc. 1997
Independent Director Stock Option Plan, and the Keller Stonebraker Stock Option
Plan (collectively, the "Buyer Stock Plans"). All of the issued and outstanding
shares of Buyer Common Stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. As of the date of this Agreement,
except as referred to above or reflected in Section 5.2(a) of the Buyer
Disclosure Schedule, Buyer does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Buyer Common
Stock or any other equity securities of Buyer or any securities representing the
right to purchase or otherwise receive any shares of Buyer Common Stock. The
shares of Buyer Common Stock to be issued pursuant to the Merger will be duly
authorized and validly issued and, at the Effective Time, all such shares will
be fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof.
(b) Section 5.2(b) of the Buyer Disclosure Schedule sets forth a true and
correct list of all of Buyer Subsidiaries as of the date of this Agreement. As
of the date of this Agreement, Buyer owns, directly or indirectly, all of the
issued and outstanding shares of capital stock of each of the Subsidiaries of
Buyer, free and clear of all liens, charges, encumbrances and security interests
whatsoever, and all of such shares are duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership
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thereof. As of the date of this Agreement, no Subsidiary of Buyer has or is
bound by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character with any party that is not a direct or indirect
Subsidiary of Buyer calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
5.3. AUTHORITY; NO VIOLATION. (a) Buyer has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Buyer and no other corporate
proceedings on the part of Buyer are necessary to approve this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Buyer and (assuming due authorization,
execution and delivery by the Company) this Agreement constitutes a valid and
binding obligation of Buyer, enforceable against Buyer in accordance with its
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(b) Buyer Bank has full corporate power and authority to execute and deliver
the Bank Merger Agreement and to consummate the transactions contemplated
thereby. The execution and delivery of the Bank Merger Agreement and the
consummation of the transactions contemplated thereby will be duly and validly
approved by the Board of Directors of Buyer Bank. Upon the due and valid
approval of the Bank Merger Agreement by Buyer as the sole stockholder of Buyer
Bank, and by the Board of Directors of Buyer Bank, no other corporate
proceedings on the part of Buyer Bank will be necessary to consummate the
transactions contemplated thereby. The Bank Merger Agreement, upon execution and
delivery by Buyer Bank, will be duly and validly executed and delivered by Buyer
Bank and will (assuming due authorization, execution and delivery by the Company
Bank) constitute a valid and binding obligation of Buyer Bank, enforceable
against Buyer Bank in accordance with its terms, except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(c) Neither the execution and delivery of this Agreement by Buyer or the
Bank Merger Agreement by Buyer Bank, nor the consummation by Buyer or Buyer
Bank, as the case may be, of the transactions contemplated hereby or thereby,
nor compliance by Buyer or Buyer Bank, as the case may be, with any of the terms
or provisions hereof or thereof, will (i) violate any provision of the Articles
of Incorporation or By-Laws of Buyer, or the articles of incorporation or
by-laws or similar governing documents of any of its Subsidiaries or
(ii) assuming that the consents and approvals referred to in Section 5.4 are
duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Buyer or any of its
Subsidiaries or any of their respective properties or assets, or (y) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Buyer or any of
its Subsidiaries under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Buyer or any of its Subsidiaries is a party,
or by which they or any of their respective properties or assets may be bound or
affected.
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5.4. CONSENTS AND APPROVALS. Except for (a) the filing of applications and
notices, as applicable, with the Federal Reserve Board under the BHC Act and the
Office of the Comptroller of the Currency under the Bank Merger Act, and
approval of such applications and notices, (b) the filing and declaration of
effectiveness of the S-4, (c) the filing of the Articles of Merger with the
Department pursuant to the MGCL, (d) such filings and approvals as are required
to be made or obtained under the securities or "Blue Sky" laws of various states
in connection with the issuance of the shares of Buyer Common Stock pursuant to
this Agreement, (e) the approval of the Bank Merger Agreement by the stockholder
of Buyer Bank, (f) authorization for quotation of Buyer Common Stock to be
issued in the Merger on the Nasdaq/NMS, (g) approval of the transactions
contemplated by this Agreement and the Bank Merger Agreement by the Maryland
Commissioner of Financial Regulation and/or filings in connection therewith
pursuant to the Financial Institutions Article of the Annotated Code of
Maryland, (h) filings with the State Insurance Commissioner and (i) such
filings, authorizations or approvals as may be set forth in Section 5.4 of the
Buyer Disclosure Schedule, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
in connection with (1) the execution and delivery by Buyer of this Agreement,
(2) the consummation by Buyer of the Merger and the other transactions
contemplated hereby, (3) the execution and delivery by Buyer Bank of the Bank
Merger Agreement, and (4) the consummation of Buyer Bank of the transactions
contemplated by the Bank Merger Agreement.
5.5. REPORTS. Buyer and each of its Subsidiaries have timely filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file since
December 31, 1995 with the OCC or any other Regulatory Agency (collectively, the
"Buyer Regulatory Agencies"), and have paid all fees and assessments due and
payable in connection therewith. Except for normal examinations conducted by a
Buyer Regulatory Agency in the regular course of the business of Buyer and its
Subsidiaries, and no Buyer Regulatory Agency has initiated any proceeding or
investigation into the business or operations of Buyer or any of its
Subsidiaries since December 31, 1995. There is no unresolved violation,
criticism, or exception by any Buyer Regulatory Agency with respect to any
report or statement relating to any examinations of Buyer or any of its
Subsidiaries.
5.6. FINANCIAL STATEMENTS. (a) Buyer has previously made available to the
Company copies of (i) the consolidated balance sheets of Buyer and its
Subsidiaries as of December 31 for the fiscal years 1997 and 1998 and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the fiscal years 1996 through 1998,
inclusive, as reported in Buyer's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 filed with the SEC under the Exchange Act, in each case
accompanied by the audit report of Arthur Andersen, LLP, independent public
accountants with respect to Buyer, and (ii) the unaudited consolidated balance
sheets of Buyer and its Subsidiaries as of June 30, 1999 and June 30, 1998 and
the related unaudited consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for the six-month periods
then ended as reported in Buyer's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 filed with the SEC under the Exchange Act. The December 31,
1998 consolidated balance sheet of Buyer (including the related notes, where
applicable) fairly presents the consolidated financial position of Buyer and its
Subsidiaries as of the date thereof, and the other financial statements referred
to in this Section 5.6 (a) (including the related notes, where applicable)
fairly present and the financial statements to be filed with the SEC after the
date hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in shareholders' equity and
consolidated financial position of Buyer and its Subsidiaries for the respective
fiscal periods or as of the respective dates therein set forth; each of such
statements (including the related notes, where applicable) comply, and the
financial statements to be filed with the SEC after the date hereof will comply,
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto; and each of such statements
(including the related notes, where applicable)
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has been, and the financial statements to be filed with the SEC after the date
hereof will be, prepared in accordance with GAAP consistently applied during the
periods involved, except as indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q.
(b) The books and records of Buyer and its Subsidiaries have been, and are
being, maintained in accordance with GAAP and any other applicable legal and
accounting requirements.
5.7. BROKER'S FEES. Neither Buyer nor any Subsidiary of Buyer, nor any of
their respective officers or directors, has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, the
Company Option Agreement or the Bank Merger Agreement, except that Buyer has
engaged, and will pay a fee or commission to, Wheat First Securities, Inc.
5.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1998, there
has been no change or development or combination of changes or developments
which, individually or in the aggregate, has had or is reasonably likely to have
a Material Adverse Effect on Buyer.
5.9. LEGAL PROCEEDINGS. (a) Neither Buyer nor any of its Subsidiaries is a
party to any, and there are no pending or, to the Buyer's knowledge, threatened,
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Buyer or any of
its Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement or the Bank Merger Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Buyer, any of its Subsidiaries or the assets of Buyer
or any of its Subsidiaries.
5.10. SEC REPORTS. Buyer has previously made available to the Company a
true, complete and correct copy of each (a) final registration statement,
prospectus, report, schedule and definitive proxy statement filed since
January 1, 1997 by Buyer with the SEC pursuant to the Securities Act or the
Exchange Act (the "Buyer Reports") and (b) communication mailed by Buyer to its
stockholders since January 1, 1997, and no such registration statement,
prospectus, report, schedule, proxy statement or communication contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
except that information as of a later date shall be deemed to modify information
as of an earlier date. Buyer has timely filed all Buyer Reports and other
documents required to be filed by it under the Securities Act and the Exchange
Act, and, as of their respective dates, all Buyer Reports complied with the
published rules and regulations of the SEC with respect thereto.
5.11. AGREEMENTS WITH REGULATORY AGENCIES. Neither Buyer nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, whether or not set forth in Section 5.11 of the Buyer
Disclosure Schedule, a "Buyer Regulatory Agreement"), any Buyer Regulatory
Agency or other Governmental Entity that restricts the conduct of its business
or that in any manner relates to its capital adequacy, its credit policies, its
management or its business, nor has Buyer or any of its Subsidiaries been
advised by any Buyer Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any Regulatory Agreement.
5.12. BUYER INFORMATION. The information relating to Buyer and its
Subsidiaries which is provided to the Company by Buyer for inclusion in the
Proxy Statement and the S-4, or in any other document filed with any other
regulatory agency in connection herewith, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances in which they are made, not
misleading.
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5.13. OWNERSHIP OF COMPANY COMMON STOCK; AFFILIATES AND ASSOCIATES. (a)
Except for the Company Option Agreement, neither Buyer nor any of its affiliates
or associates (as such terms are defined under the Exchange Act),
(i) beneficially owns, directly or indirectly, or (ii) is a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, any shares of capital stock of the Company
(other than Trust Account Shares and DPC Shares); and
(b) Neither Buyer nor any of its Subsidiaries is an "affiliate" (as such
term is defined in MGCL Section 3-601) or an "associate" (as such term is
defined in MGCL Section 3-601) of the Company or an "Interested Stockholder" (as
such term is defined in MGCL Section 3-601) of the Company.
5.14. APPROVALS. As of the date of this Agreement, Buyer knows of no
reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby (including, without limitation, the Merger and
the Subsidiary Merger) should not be obtained.
5.15. ACCOUNTING FOR THE MERGER; REORGANIZATION. As of the date of this
Agreement, Buyer has no reason to believe that the Merger will fail to qualify
(i) for pooling-of-interests treatment under GAAP or (ii) as a reorganization
under Section 368(a) of the Code.
5.16. TAXES. Each of Buyer and its Subsidiaries (i) has duly and timely
filed (including applicable extensions granted without penalty) all Tax Returns
required to be filed on or prior to the date hereof and will duly and timely
file all Tax Returns after the date hereof and prior to the Effective Time, and
such Tax Returns are or will be true, correct and complete, and (ii) has paid or
will pay in full or to the extent necessary made or will make adequate provision
in the financial statements of Buyer (in accordance with GAAP) for all Taxes. No
deficiencies for any Taxes have been proposed, asserted, assessed or, to the
knowledge of Buyer, threatened against or with respect to Buyer or any of its
Subsidiaries. (i) There are no liens for Taxes upon the assets of either Buyer
or its Subsidiaries except for statutory liens for current Taxes not yet due,
(ii) neither Buyer nor any of its Subsidiaries has requested any extension of
time within which to file any Tax Returns in respect of any fiscal year which
have not since been filed and no request for waivers of the time to assess any
Taxes are pending or outstanding, (iii) with respect to each taxable period of
Buyer and its Subsidiaries, the federal and state income Tax Returns of Buyer
and its Subsidiaries have been audited by the IRS or appropriate state tax
authorities or the time for assessing and collecting income Tax with respect to
such taxable period has closed and such taxable period is not subject to review,
(iv) neither Buyer nor any of its Subsidiaries has filed or been included in a
combined, consolidated or unitary income Tax Return other than one in which
Buyer was the parent of the group filing such Tax Return, (v) neither Buyer nor
any of its Subsidiaries is a party to any agreement providing for the allocation
or sharing of Taxes (other than the allocation of federal income taxes as
provided by Regulation 1.1552-1(a)(1) under the Code), (vi) neither Buyer nor
any of its Subsidiaries is required to include in income any adjustment pursuant
to Section 481(a) of the Code (or any similar or corresponding provision or
requirement of state, local or foreign income Tax law), by reason of the
voluntary change in accounting method (nor has any taxing authority proposed in
writing any such adjustment or change of accounting method), (vii) neither Buyer
nor any of its Subsidiaries has filed a consent pursuant to Section 341(f) of
the Code, and (viii) neither Buyer nor any of its Subsidiaries has made any
payment or will be obligated to make any payment (by contract or otherwise)
which will not be deductible by reason of Section 280G of the Code.
5.17. EMPLOYEES. (a) Section 5.17(a) of the Buyer Disclosure Schedule sets
forth a true, complete and correct list of each deferred compensation plan,
incentive compensation plan, equity compensation plan, "welfare" plan, fund or
program (within the meaning of section 3(1) of ERISA; each "pension" plan, fund
or program (within the meaning of section 3(2) of ERISA); each employment,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or
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required to be contributed to (the "Buyer Plans") by Buyer, any of its
Subsidiaries or by any trade or business, whether or not incorporated (a "Buyer
ERISA Affiliate"), all of which together with Buyer would be deemed a "single
employer" within the meaning of Section 4001 of ERISA, for the benefit of any
employee or former employee of Buyer, any Subsidiary or any Buyer ERISA
Affiliate.
(b) (i) Each of the Buyer Plans has been operated and administered in all
material respects in accordance with its terms and applicable law, including but
not limited to ERISA and the Code, (ii) each of the Buyer Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code either (1) has
received a favorable determination letter from the IRS, or (2) is or will be the
subject of an application for a favorable determination letter, and Buyer is not
aware of any circumstances likely to result in the revocation or denial of any
such favorable determination letter, (iii) with respect to each Buyer Plan which
is subject to Title IV of ERISA, the present value of accrued benefits under
such Buyer Plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such Buyer Plan's actuary with
respect to such Buyer Plan, did not, as of its latest valuation date, exceed the
then current value of the assets of such Buyer Plan allocable to such accrued
benefits, (iv) no Buyer Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect to current or
former employees of Buyer, its Subsidiaries or any Buyer ERISA Affiliate beyond
their retirement or other termination of service, other than (w) coverage
mandated by applicable law, (x) death benefits or retirement benefits under any
"employee pension plan," as that term is defined in Section 3(2) of ERISA,
(y) deferred compensation benefits accrued as liabilities on the books of Buyer,
its Subsidiaries or a Buyer ERISA Affiliates or (z) benefits the full cost of
which is borne by the current or former employee (or his beneficiary), (v) no
liability under Title IV of ERISA has been incurred by Buyer, its Subsidiaries
or any Buyer ERISA Affiliate that has not been satisfied in full, and no
condition exists that presents a material risk to Buyer, its Subsidiaries or a
Buyer ERISA Affiliate of incurring a liability thereunder, (vi) no Buyer Plan is
a "multiemployer pension plan," as such term is defined in Section 3(37) of
ERISA, (vii) all contributions or other amounts payable by Buyer, its
Subsidiaries or any Buyer ERISA Affiliates as of the Effective Time with respect
to each Buyer Plan in respect of current or prior plan years have been paid or
accrued in accordance with GAAP and Section 412 of the Code, (viii) neither
Buyer, its Subsidiaries nor any Buyer ERISA Affiliate has engaged in a
transaction in connection with which Buyer, its Subsidiaries or any Buyer ERISA
Affiliate could be subject to either a civil penalty assessed pursuant to
Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976
of the Code, (ix) there are no pending or, to the best knowledge of Buyer,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Buyer Plans or any trusts related thereto and
(x) the consummation of the transactions contemplated by this Agreement or the
Bank Merger Agreement will not (y) entitle any current or former employee or
officer of Buyer or any Buyer ERISA Affiliate to severance pay, termination pay
or any other payment or benefit, except as expressly provided in this Agreement
or (z) accelerate the time of payment or vesting or increase the amount or value
of compensation or benefits due any such employee or officer.
5.18. COMPLIANCE WITH APPLICABLE LAW. Buyer and each of its Subsidiaries
holds, and have at all times held, all licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
under and pursuant to all, and have complied with and are not in default in any
respect under any, applicable law, statute, order, rule, regulation, policy
and/or guideline of any Governmental Entity relating to Buyer or any of its
Subsidiaries, and neither Buyer nor any of its Subsidiaries has received notice
of, any violations of any of the above.
5.19. INVESTMENT SECURITIES. Section 5.19 of the Buyer Disclosure Schedule
sets forth the book and market value as of July 31, 1999 of the investment
securities and securities available for sale of Buyer and its Subsidiaries.
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5.20. INTELLECTUAL PROPERTY. Buyer and each of its Subsidiaries owns or
possesses valid and binding licenses and other rights to use without payment all
patents, copyrights, trade secrets, trade names, servicemarks and trademarks
used in its businesses; and neither Buyer nor any of its Subsidiaries has
received any notice of conflict with respect thereto that asserts the right of
others.
5.21. ENVIRONMENTAL MATTERS. (a) Each of Buyer and its Subsidiaries and to
the best knowledge of Buyer, the Participation Facilities and the Loan
Properties (each as hereinafter defined) are, and have been, in compliance with
all applicable federal, state and local laws including common law, regulations
and ordinances and with all applicable Environmental Laws;
(b) There is no suit, claim, action or proceeding, pending or, to the best
knowledge of Buyer, threatened, before any Governmental Entity or other forum in
which Buyer, any of its Subsidiaries or to the best knowledge of Buyer, any
Participation Facility or any Loan Property, has been or, with respect to
threatened proceedings, may be, named as a defendant (x) for alleged
noncompliance (including by any predecessor), with any Environmental Laws or
(y) relating to the release, threatened release or exposure to any Hazardous
Material whether or not occurring at or on a site owned, leased or operated by
Buyer or any of its Subsidiaries, any Participation Facility or any Loan
Property;
(c) During the period of (x) Buyer's or any of its Subsidiaries' ownership
or operation of any of their respective current or former properties,
(y) Buyer's or any of its Subsidiaries' participation in the management of any
Participation Facility or (z) Buyer's or any of its Subsidiaries' holding of a
security interest in a Loan Property, to the best knowledge of Buyer, there has
been no release of Hazardous Materials in, on, under or affecting any such
property. Prior to the period of (x) Buyer's or any of its Subsidiaries'
ownership or operation of any of their respective current or former properties,
(y) Buyer's or any of its Subsidiaries' participation in the management of any
Participation Facility or (z) Buyer's or any of its Subsidiaries' holding of a
security interest in a Loan Property, to the best knowledge of Buyer, there was
no release or threatened release of Hazardous Materials in, on, under or
affecting any such property, Participation Facility or Loan Property; and
(d) The following definitions apply for purposes of this Section 5.21:
(x) "Hazardous Materials" means any chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum or other regulated substances or materials;
(y) "Loan Property" means any property in which Buyer or any of its Subsidiaries
holds a security interest, and, where required by the context, said term means
the owner or operator of such property; and (z) "Participation Facility" means
any facility in which Buyer or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner or
operator of such property.
5.22. DERIVATIVE TRANSACTIONS. Since December 31, 1998, neither Buyer nor
any of its Subsidiaries has engaged in transactions in or involving forwards,
futures, options on futures, swaps or other derivative instruments except
(i) as agent on the order and for the account of others or (ii) as principal for
purposes of hedging interest rate risk on U.S. dollar-denominated securities and
other financial instruments. None of the counterparties to any contract or
agreement with respect to any such instrument is in default with respect to such
contract or agreement and no such contract or agreement, were it to be a Loan
held by Buyer or any of its Subsidiaries, would be classified as "Other Loans
Specially Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss",
"Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or words of
similar import. The financial position of Buyer and its Subsidiaries on a
consolidated basis under or with respect to each such instrument has been
reflected in the books and records of Buyer and such Subsidiaries in accordance
with GAAP consistently applied, and no open exposure of Buyer or any of its
Subsidiaries with respect to any such instrument (or with respect to multiple
instruments with respect to any single counterparty) exceeds $10,000,000.
5.23. LOAN PORTFOLIO. (a) Neither Buyer nor any of its Subsidiaries is a
party to any written or oral (i) Loan, other than any Loan the unpaid principal
balance of which does not exceed $1,000,000,
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under the terms of which the obligor is, as of the date of this Agreement, over
90 days delinquent in payment of principal or interest or in default of any
other provision, or (ii) Loan with any director, executive officer or five
percent or greater stockholder of Buyer or any of its Subsidiaries, or to the
knowledge of Buyer, any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing. Section 5.23 of
the Buyer Disclosure Schedule sets forth (i) all of the Loans in original
principal amount in excess of $1,000,000 of Buyer or any of its Subsidiaries
that as of the date of this Agreement are classified by any bank examiner
(whether regulatory or internal) as "Other Loans Specially Mentioned", "Special
Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit
Risk Assets", "Concerned Loans", "Watch List" or words of similar import,
together with the principal amount of and accrued and unpaid interest on each
such Loan and the identity of the borrower thereunder, (ii) by category of Loan
(i.e., commercial, consumer, etc.), all of the other Loans of Buyer and its
Subsidiaries that as of the date of this Agreement are classified as such,
together with the aggregate principal amount of and accrued and unpaid interest
on such Loans by category and (iii) each asset of Buyer that as of the date of
this Agreement is classified as "Other Real Estate Owned" and the book value
thereof.
(b) Each Loan in original principal amount in excess of $10,000,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been and remain
perfected and (iii) is the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
5.24. ADMINISTRATION OF FIDUCIARY ACCOUNTS. Buyer and each of its
Subsidiaries has properly administered all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither Buyer
nor any of its Subsidiaries nor any of their respective directors, officers or
employees has committed any breach of trust with respect to any such fiduciary
account, and the accountings for each such fiduciary account are true, complete
and correct and accurately reflect the assets of such fiduciary account.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1. COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement, the Bank Merger Agreement or the
Company Option Agreement or with the prior written consent of Buyer, the Company
and its Subsidiaries shall carry on their respective businesses in the ordinary
course consistent with past practice and consistent with prudent banking
practice. The Company will use its reasonable best efforts to (x) preserve its
business organization and that of its Subsidiaries intact, (y) keep available to
itself and Buyer the present services of the employees of the Company and its
Subsidiaries and (z) preserve for itself and Buyer the goodwill of the customers
of the Company and its Subsidiaries and others with whom business relationships
exist. Without limiting the generality of the foregoing, and except as set forth
on Section 6.1 of the Company Disclosure Schedule or as otherwise contemplated
by this Agreement or consented to in writing by Buyer, the Company shall not,
and shall not permit any of its Subsidiaries to:
(a) solely in the case of the Company, declare or pay any dividends on, or
make other distributions in respect of, any of its capital stock, other than
normal quarterly dividends not in excess of $0.13 per share of Company Common
Stock;
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(b) (i) split, combine or reclassify any shares of its capital stock or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock except upon
the exercise or fulfillment of rights or options issued or existing pursuant to
employee benefit plans, programs or arrangements, all to the extent outstanding
and in existence on the date of this Agreement and in accordance with their
present terms and except pursuant to the Company Option Agreement or
(ii) repurchase, redeem or otherwise acquire (except for the acquisition of
Trust Account Shares and DPC Shares) any shares of the capital stock of the
Company or any Subsidiary of the Company, or any securities convertible into or
exercisable for any shares of the capital stock of the Company or any Subsidiary
of the Company;
(c) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or any securities convertible into
or exercisable for, or any rights, warrants or options to acquire, any such
shares, or enter into any agreement with respect to any of the foregoing, other
than (i) the issuance of Company Common Stock pursuant to stock options or
similar rights to acquire Company Common Stock granted pursuant to the Company
Option Plans and outstanding prior to the date of this Agreement, in each case
in accordance with their present terms, (ii) the issuance of 4,000 shares of
Company Common Stock pursuant to and in accordance with the terms of the Cookson
Option Plan, (iii) the issuance of 5,200 shares of Company Common Stock pursuant
to and in accordance with the Restricted Stock Award, (iv) if the Company DRIP
has not been suspended pursuant to Section 7.18, the issuance of Company Common
Stock pursuant to and in accordance with the terms of the Company DRIP in
respect of regular quarterly dividend payments and (v) pursuant to the Company
Option Agreement;
(d) amend its Articles of Incorporation, By-Laws or other similar governing
documents;
(e) make any capital expenditures other than those which (i) are made in the
ordinary course of business or are necessary to maintain existing assets in good
repair and (ii) in any event are in an amount of no more than $100,000 in the
aggregate;
(f) enter into any new line of business;
(g) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire any assets, which would be material, individually or in the aggregate,
to the Company, other than in connection with foreclosures, settlements in lieu
of foreclosure or troubled loan or debt restructurings in the ordinary course of
business consistent with prudent banking practices;
(h) take any action that is intended or may reasonably be expected to result
in any of the conditions to the Merger set forth in Article VIII not being
satisfied;
(i) change its methods of accounting in effect at June 30, 1999, except as
required by changes in GAAP or regulatory accounting principles as concurred to
by the Company's independent auditors;
(j) (i) except as required by applicable law or to maintain qualification
pursuant to the Code, adopt, amend, renew or terminate any employee benefit plan
(including, without limitation, any Plan) or any agreement, arrangement, plan or
policy between the Company or any Subsidiary of the Company and one or more of
its current or former directors, officers or employees or (ii) except for normal
increases in the ordinary course of business consistent with past practice or
except as required by applicable law, increase in any manner the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by any Plan or agreement as in effect as of the date hereof (including,
without limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares);
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(k) take or cause to be taken any action which would disqualify the Merger
as a "pooling of interests" for accounting purposes or a tax free reorganization
under Section 368(a) of the Code, PROVIDED, HOWEVER, that nothing contained
herein shall limit the ability of Buyer to exercise its rights under the Company
Option Agreement;
(l) other than activities in the ordinary course of business consistent with
past practice, sell, lease, encumber, assign or otherwise dispose of, or agree
to sell, lease, encumber, assign or otherwise dispose of, any of its material
assets, properties or other rights or agreements;
(m) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity;
(n) file any application to relocate or terminate the operations of any
banking office of it or any of its Subsidiaries;
(o) make any equity investment or commitment to make such an investment in
real estate or in any real estate development project, other than in connection
with foreclosures, settlements in lieu of foreclosure or troubled loan or debt
restructurings in the ordinary course of business consistent with prudent
banking practices;
(p) create, renew, amend or terminate or give notice of a proposed renewal,
amendment or termination of, any material contract, agreement or lease for
goods, services or office space to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries or their
respective properties is bound;
(q) other than in prior consultation with Buyer, restructure or materially
change its investment securities portfolio or its gap position, through
purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
(r) without the prior consent of Buyer, make or purchase, or commit to make
or purchase, any loan or loans, or extend any line of credit, to any borrower
and its affiliates in an aggregate principal amount greater than $1,000,000 or
in an amount which, when aggregated with any existing indebtedness to the
Company and its Subsidiaries and lines of credit from the Company and its
Subsidiaries of such borrower and its affiliates, would exceed $1,000,000;
PROVIDED, HOWEVER, that if at any time from the date of this Agreement to the
Effective Time, the Company or any of its Subsidiaries desires to make or
purchase, or commit to make or purchase, any such loan, or extend any such line
of credit, the Company shall furnish to Buyer, promptly upon its substantial
completion, the information package prepared by the Company's (or such
Subsidiary's) loan committee with respect to such proposed loan requests and any
other information that Buyer may reasonably request (collectively, the "Loan
Request Documents"), and unless, within 24 hours of receiving the Loan Request
Documents, Buyer notifies the Company (whether telephonically or in writing)
that Buyer objects to the making of such loan or the extension of such credit,
Buyer shall be deemed to have consented to such loan or extension of credit; or
(s) agree to do any of the foregoing.
6.2. COVENANTS OF BUYER. During the period from the date of this Agreement
and continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement, the Bank Merger Agreement or the Company Option
Agreement or with the prior written consent of the Company, Buyer and its
Subsidiaries shall carry on their respective businesses in the ordinary course
consistent with prudent banking practice. Without limiting the generality of the
foregoing, and except as set forth on Section 6.2 of the Buyer Disclosure
Schedule or as otherwise contemplated by this Agreement or
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consented to in writing by the Company, Buyer shall not, and shall not permit
any of its Subsidiaries to:
(a) solely in the case of Buyer, declare or pay any extraordinary or special
dividends on or make any other extraordinary or special distributions in respect
of any of its capital stock; PROVIDED, HOWEVER, that nothing contained herein
shall prohibit Buyer from increasing the quarterly cash dividend on Buyer Common
Stock;
(b) take any action that is intended or may reasonably be expected to result
in any of the conditions to the Merger set forth in Article VIII not being
satisfied;
(c) change its methods of accounting in effect at June 30, 1999, except in
accordance with changes in GAAP or regulatory accounting principles as concurred
to by Buyer's independent auditors;
(d) knowingly take any action that would result in a failure to maintain the
authorization for quotation of Buyer Comon Stock on the Nasdaq/NMS;
(e) take or cause to be taken any action which would disqualify the Merger
as a "pooling of interests" for accounting purposes or a tax free reorganization
under Section 368(a) of the Code, PROVIDED, HOWEVER, that nothing contained
herein shall limit the ability of Buyer to exercise its rights under the Company
Option Agreement; or
(f) agree to do any of the foregoing.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. REGULATORY MATTERS. (a) The Company shall promptly prepare and file
with the SEC the Proxy Statement and Buyer shall promptly prepare and file with
the SEC the S-4, in which the Proxy Statement will be included as a prospectus.
Each of the Company and Buyer shall use all reasonable efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing, and the Company shall thereafter mail the Proxy Statement to its
stockholders. Buyer shall also use all reasonable efforts to obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the transactions contemplated by this Agreement and the Company shall
furnish all information concerning the Company and the holders of Company Common
Stock as may be reasonably requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
commercially reasonable efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement (including without limitation the Merger and the Subsidiary Merger)
(it being understood that any amendments to the S-4 or a resolicitation of
proxies as consequence of a subsequent proposed merger, stock purchase or
similar acquisition by Buyer or any of its Subsidiaries shall not violate this
covenant). The Company and Buyer shall have the right to review in advance, and
to the extent practicable each will consult the other on, in each case subject
to applicable laws relating to the exchange of information, all the information
relating to the Company or Buyer, as the case may be, and any of their
respective Subsidiaries, which appears in any filing made with, or written
materials submitted to, any third party or any Governmental Entity in connection
with the transactions contemplated by this Agreement. In exercising the
foregoing right, each of the parties hereto shall act reasonably and as promptly
as practicable. The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate
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the transactions contemplated by this Agreement and each party will keep the
other apprised of the status of matters relating to completion of the
transactions contemplated herein.
(c) Buyer and the Company shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement, the S-4 or any other statement, filing,
notice or application made by or on behalf of Buyer, the Company or any of their
respective Subsidiaries to any Governmental Entity in connection with the Merger
and the other transactions contemplated by this Agreement.
(d) Buyer and the Company shall promptly furnish each other with copies of
written communications received by Buyer or the Company, as the case may be, or
any of their respective Subsidiaries, Affiliates or Associates (as such terms
are defined in Rule 12b-2 under the Exchange Act as in effect on the date of
this Agreement) from, or delivered by any of the foregoing to, any Governmental
Entity in respect of the transactions contemplated hereby.
(e) The information supplied by the Company for inclusion in the S-4 shall
not, at the time the S-4 is declared effective, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by the Company for inclusion in the Proxy Statement shall
not, at the date the Proxy Statement (or any supplement thereto) is first mailed
to stockholders, at the time of the Company's stockholders meeting or at the
Effective Time contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made
not misleading. If at any time prior to the Effective Time, any event or
circumstance relating to the Company or any of its affiliates, or its or their
respective officers or directors, should be discovered by the Company that
should be set forth in an amendment to the S-4 or a supplement to the Proxy
Statement, the Company shall promptly inform Buyer thereof in writing. All
documents that the Company is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form in all material
respects with applicable requirements of the Securities Act and the rules and
regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(f) The information supplied by Buyer for inclusion in the S-4 shall not, at
the time the S-4 is declared effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by Buyer for inclusion in the Proxy Statement shall not, at
the date the Proxy Statement (or any supplement thereto) is first mailed to
stockholders, at the time of the Company's stockholders meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If at any time prior to the Effective Time, any event or
circumstance relating to Buyer or any of its affiliates, or to their respective
officers or directors, should be discovered by Buyer that should be set forth in
an amendment to the S-4 or a supplement to the Proxy Statement, Buyer shall
promptly inform the Company thereof in writing. All documents that Buyer is
responsible for filing with the SEC in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations thereunder.
7.2. ACCESS TO INFORMATION. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, the Company shall, and
shall cause each of its Subsidiaries to, afford to the officers, employees,
accountants, counsel and other representatives of Buyer, access, during normal
business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments, records, officers, employees,
accountants, counsel and other representatives and, during
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such period, the Company shall, and shall cause its Subsidiaries to, make
available to Buyer (i) a copy of each report, schedule, registration statement
and other document filed or received by it during such period pursuant to the
requirements of Federal securities laws or Federal or state banking laws (other
than reports or documents which the Company is not permitted to disclose under
applicable law) and (ii) all other information concerning its business,
properties and personnel as Buyer may reasonably request. Neither the Company
nor any of its Subsidiaries shall be required to provide access to or to
disclose information where such access or disclosure would violate or prejudice
the rights of the Company's customers, jeopardize any attorney-client privilege
or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty
or binding agreement entered into prior to the date of this Agreement. The
parties hereto will make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the preceding sentence apply. Buyer
will hold, and will cause its officers, directors, employees, accountants,
counsel and other representatives to hold, all such information in confidence to
the extent required by, and in accordance with, the provisions of the
confidentiality agreement, dated August 25, 1999, by and between the Company and
Buyer, with respect to all of the information furnished by the Company to Buyer
or its representatives (the "Company Confidentiality Agreement").
(b) Upon reasonable notice and subject to applicable laws relating to the
exchange of information, Buyer shall, and shall cause its Subsidiaries to,
afford to the officers, employees, accountants, counsel and other
representatives of the Company, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers, employees, accountants, counsel and other
representatives and, during such period, Buyer shall, and shall cause its
Subsidiaries to, make available to the Company (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of Federal securities laws or
Federal or state banking laws (other than reports or documents which Buyer is
not permitted to disclose under applicable law) and (ii) all other information
concerning its business, properties and personnel as the Company may reasonably
request. Neither Buyer nor any of its Subsidiaries shall be required to provide
access to or to disclose information where such access or disclosure would
violate or prejudice the rights of Buyer's customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply. The Company will hold, and will cause its officers,
directors, employees, accountants, counsel and other representatives to hold,
all such information in confidence to the extent required by, and in accordance
with, the provisions of the confidentiality agreement, dated August 25, 1999, by
and between Buyer and the Company, with respect to all of the information
furnished by Buyer to the Company or its representatives (the "Buyer
Confidentiality Agreement," and together with the Company Confidential
Agreement, the "Confidentiality Agreements").
(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
agreements of the other set forth herein.
7.3. NO SOLICITATION. The Company agrees that neither it nor any of its
Subsidiaries shall, or shall authorize or permit any of its respective officers,
directors, employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it to, directly or indirectly
through another person, (i) solicit, initiate, encourage or facilitate any
inquiries relating to, or the making of any proposal which constitutes, a
"takeover proposal" (as defined below), (ii) recommend or endorse any takeover
proposal, or (iii) enter into, encourage or facilitate any discussions or
negotiations regarding, furnish to any person any information with respect to,
or facilitate any attempt to make or implement any proposal that constitutes or
may reasonably be expected to lead to, any proposal relating to or involving a
takeover proposal; PROVIDED, HOWEVER, that the Company may communicate
information about any such takeover proposal to its stockholders if, in the good
faith judgment of the
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Company's Board of Directors, based upon the advice of outside counsel, such
communication is required under applicable law; PROVIDED, FURTHER, HOWEVER, that
nothing contained in this Section 7.3 shall prohibit the Board of Directors of
the Company from (x) to the extent applicable, complying with Rule 14e-2 and/or
Rule 14d-9 promulgated under the Exchange Act or (y) furnishing information to,
or entering into discussions or negotiations with, any person or entity that
makes an unsolicited, written BONA FIDE proposal regarding a takeover proposal
if, and only to the extent that (A) the meeting of the Company's stockholders
contemplated by Section 7.4 hereof shall not have occurred, (B) the Board of
Directors of the Company concludes in good faith, after consultation with and
based upon the advice of outside counsel, that it is legally required to furnish
such information or enter into such discussions or negotiations in order to
comply with its fiduciary duties to stockholders under applicable law,
(C) prior to taking such action, the Company receives from such person or entity
an executed confidentiality agreement and an executed standstill agreement, each
in reasonably customary form (provided that each such agreement is at least as
limiting as any such agreement between Buyer and the Company), and (D) the Board
of Directors of the Company, after consultation with and based upon the advice
of its financial advisor, concludes in good faith that the proposal regarding
the takeover proposal contains an offer of consideration that is greater than
the consideration set forth herein (a "Superior Takeover Proposal"). The Company
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations previously conducted with any parties other than
Buyer with respect to any of the foregoing. The Company will take all actions
necessary or advisable to inform the appropriate individuals or entities
referred to in the first sentence hereof of the obligations undertaken in this
Section 7.3. The Company will notify Buyer immediately if any such inquiries or
takeover proposals are received by, any such information is requested from, or
any such negotiations or discussions are sought to be initiated or continued
with, the Company, and the Company will promptly inform Buyer in writing of all
of the relevant details with respect to the foregoing. Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
the first sentence of this Section 7.3 by any officer or director of the Company
or any Subsidiary thereof or any investment banker, attorney or other advisor,
representative or agent of the Company or any Subsidiary thereof, acting on
behalf of or at the request of the Board of Directors of the Company, shall be
deemed to be a breach of this Section 7.3 by the Company. As used in this
Agreement, "takeover proposal" shall mean any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving the Company
or any Subsidiary of the Company or any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the assets
of, the Company or any Subsidiary of the Company other than the transactions
contemplated or permitted by this Agreement, the Bank Merger Agreement and the
Company Option Agreement.
7.4. STOCKHOLDER MEETING. (a) The Company shall take all steps necessary
to duly call, give notice of, convene and hold a meeting of its stockholders to
be held as soon as is reasonably practicable after the date on which the S-4
becomes effective for the purpose of voting upon the approval of this Agreement
and the consummation of the transactions contemplated hereby. The Company will,
through its Board of Directors, except as provided in Section 7.4(b) hereof,
recommend to its stockholders approval of this Agreement and the transactions
contemplated hereby and such other matters as may be submitted to its
stockholders in connection with this Agreement.
(b) Notwithstanding the provisions of Section 7.4(a) above, the Board of
Directors of the Company may withdraw or modify, or propose publicly to withdraw
or modify, in a manner adverse to Buyer, the approval or recommendation by such
Board of Directors or such committee of the Merger or this Agreement if the
Company receives an unsolicited, written BONA FIDE proposal regarding a takeover
proposal, and (i) the Board of Directors of the Company concludes in good faith
that it is required to take such action, but only after consultation with and
based upon the advice of outside counsel that the failure to take such action
would result in a violation of any fiduciary duties of the Board of Directors to
its stockholders under applicable law, and (ii) the Board of Directors of the
Company, after consultation with and based upon the advice of its financial
advisor, concludes in good faith that such takeover proposal is a Superior
Takeover Proposal.
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7.5. LEGAL CONDITIONS TO MERGER. Each of Buyer and the Company shall, and
shall cause its Subsidiaries to, use their commercially reasonable efforts
(a) to take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements which may be imposed on such party
or its Subsidiaries with respect to the Merger or the Subsidiary Merger and,
subject to the conditions set forth in Article VIII hereof, to consummate the
transactions contemplated by this Agreement and (b) to obtain (and to cooperate
with the other party to obtain) any consent, authorization, order or approval
of, or any exemption by, any Governmental Entity and any other third party which
is required to be obtained by the Company or Buyer or any of their respective
Subsidiaries in connection with the Merger and the Subsidiary Merger and the
other transactions contemplated by this Agreement, and to comply with the terms
and conditions of such consent, authorization, order or approval.
7.6. AFFILIATES. (a) Each of Buyer and the Company shall use its
commercially reasonable efforts to cause each director, executive officer and
other person who is an "affiliate" (for purposes of Rule 145 under the
Securities Act and for purposes of qualifying the Merger for
"pooling-of-interests" accounting treatment) of such party to deliver to the
other party hereto, as soon as practicable after the date of this Agreement, a
written agreement, in the form of Exhibit 7.6(a) hereto (in the case of
affiliates of Buyer) or 7.6(b) hereto (in the case of affiliates of the
Company).
(b) Buyer shall use its commercially reasonable efforts to publish, not
later than 21 days after the end of the first full calendar month (in which
there are at least 30 days) following the month in which the Effective Time
occurs, financial results covering at least 30 days of post-Merger combined
operations as contemplated by SEC Accounting Series Release No. 135; PROVIDED,
HOWEVER, if the foregoing would otherwise require publication of such financial
results in April, Buyer shall not be required to publish such financial results
prior to the time it has released summary quarterly earnings information with
respect to the first quarter in the ordinary course.
7.7. STOCK EXCHANGE LISTING. Buyer shall use all commercially reasonable
efforts to cause the shares of Buyer Common Stock to be issued in the Merger to
be authorized for quotation on the Nasdaq/NMS, subject to official notice of
issuance, as of the Effective Time.
7.8. EMPLOYEE BENEFIT PLANS; EXISTING AGREEMENTS. (a) Buyer agrees that
those individuals who are employed by the Company or any of its Subsidiaries
immediately prior to the Effective Time shall continue to be employees of the
Surviving Corporation as of the Effective Time (the "Company Employees");
PROVIDED, HOWEVER, that this Section 7.8 shall not be construed to limit the
ability of the applicable employer to terminate the employment of any Company
Employee at any time.
(b) As soon as practicable following the Effective Time, the Company
Employees shall be entitled to participate in Buyer's employee benefit plans in
which similarly situated employees of Buyer or its Subsidiaries participate, to
the same extent as comparable employees of Buyer or its Subsidiaries (it being
understood that inclusion of Company Employees in Buyer's employee benefit plans
may occur at different times with respect to different plans).
(c) Buyer shall, or shall cause the Surviving Bank to, give Company
Employees full credit for the Company Employees' service with the Company or any
Subsidiary of the Company to the same extent recognized by the Company or such
Subsidiary immediately prior to the Effective Time, for purposes of eligibility,
vesting and benefit accrual (except to the extent giving such credit would
result in the duplication of benefits and except for benefit accruals under any
defined benefit pension plan) under any employee benefit plan or arrangement
maintained by the Buyer or the Surviving Bank in which the Company Employees
participate.
(d) Buyer shall, or shall cause the Surviving Bank to, (i) waive all
limitations as to preexisting conditions exclusions and waiting periods with
respect to participation and coverage requirements applicable to the Company
Employees under any welfare benefit plans in which such Company
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Employees may be eligible to participate after the Effective Time, other than
limitations or waiting periods that are already in effect with respect to such
Company Employees and that have not been satisfied as of the Effective Time
under any welfare plan maintained for the Company Employees immediately prior to
the Effective Time, and (ii) provide each Company Employee with credit for any
co-payments and deductibles paid prior to the Effective Time in satisfying any
applicable deductible or out-of-pocket requirements under any welfare plans that
such Company Employees are eligible to participate in after the Effective Time.
(e) Following the Effective Time, Buyer shall honor and shall cause the
Surviving Bank to honor in accordance with their terms all employment, severance
and other compensation agreements and arrangements existing prior to the
execution of this Agreement which are between the Company and any director,
officer or employee thereof and which have been disclosed in the Company
Disclosure Schedule and have previously been made available to Buyer.
7.9. INDEMNIFICATION. (a) In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, including, without limitation, any such claim,
action, suit, proceeding or investigation in which any person who is now, or has
been at any time prior to the date of this Agreement, or who becomes prior to
the Effective Time, a director or officer of the Company or any of its
Subsidiaries (the "Indemnified Parties") is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director or officer of the
Company, any of the Subsidiaries of the Company or any of their respective
predecessors or (ii) this Agreement or any of the transactions contemplated
hereby, whether in any case asserted or arising before or after the Effective
Time, the parties hereto agree to cooperate and use their best efforts to defend
against and respond thereto. It is understood and agreed that after the
Effective Time, Buyer shall indemnify and hold harmless, as and to the extent
permitted by Maryland law, each such Indemnified Party against any losses,
claims, damages, liabilities, costs, expenses (including reasonable attorney's
fees and expenses in advance of the final disposition of any claim, suit,
proceeding or investigation to each Indemnified Party to the fullest extent
permitted by law upon receipt of any undertaking required by applicable law),
judgments, fines and amounts paid in settlement in connection with any such
threatened or actual claim, action, suit, proceeding or investigation, and in
the event of any such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or arising before or after the Effective Time),
the Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Buyer; PROVIDED, HOWEVER, that (1) Buyer shall have the right
to assume the defense thereof and upon such assumption Buyer shall not be liable
to any Indemnified Party for any legal expenses of other counsel or any other
expenses subsequently incurred by any Indemnified Party in connection with the
defense thereof, except that if Buyer elects not to assume such defense or
counsel for the Indemnified Parties reasonably advises that there are issues
which raise conflicts of interest between Buyer and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Buyer, and Buyer shall pay the reasonable fees and expenses of
such counsel for the Indemnified Parties, (2) Buyer shall in all cases be
obligated pursuant to this paragraph to pay for only one firm of counsel for all
Indemnified Parties, (3) Buyer shall not be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld) and (4) Buyer shall have no obligation hereunder to any Indemnified
Party when and if a court of competent jurisdiction shall ultimately determine,
and such determination shall have become final and nonappealable, that
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. Any Indemnified Party wishing to claim
Indemnification under this Section 7.9, upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify Buyer thereof, PROVIDED
that the failure to so notify shall not affect the obligations of Buyer under
this Section 7.9 except to the extent such failure to notify prejudices Buyer.
Buyer's obligations under this Section 7.9 shall continue in full force and
effect for a period of six (6) years from the Effective Time; PROVIDED,
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HOWEVER, that all rights to indemnification in respect of any claim (a "Claim")
asserted or made within such period shall continue until the final disposition
of such Claim.
(b) Prior to the Effective Time the Company shall purchase, and for a period
of six years after the Effective Time, Buyer shall use its commercially
reasonable efforts to maintain, directors and officers liability insurance
"tail" or "runoff" coverage with respect to wrongful acts and/or omissions
committed or allegedly committed prior to the Effective Time. Subject to the
foregoing, such coverage shall have an aggregate coverage limit over the term of
such policy in an amount no less than the annual aggregate coverage limit under
the Company's existing directors and officers liability policy, and in all other
respects shall be at least comparable to such existing policy.
(c) In the event Buyer or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or
(ii) transfers or conveys all or substantially all of its properties and assets
to any person, then, and in each such case, to the extent necessary, proper
provision shall be made so that the successors and assigns of Buyer assume the
obligations set forth in this section.
(d) The provisions of this Section 7.9 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
7.10. ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or the Bank Merger Agreement or to vest the Surviving Corporation or
the Surviving Bank with full title to all properties, assets, rights, approvals,
immunities and franchises of any of the parties to the Merger or the Subsidiary
Merger, the proper officers and directors of each party to this Agreement and
their respective Subsidiaries shall take all such necessary action as may be
reasonably requested by Buyer.
7.11. ADVICE OF CHANGES. Buyer and the Company shall promptly advise the
other party of any change or event having a Material Adverse Effect on it or
which it believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein. From time to time prior to the Effective Time (and on the date prior to
the Closing Date), each party will promptly supplement or amend the Disclosure
Schedules delivered in connection with the execution of this Agreement to
reflect any matter which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in such
Disclosure Schedules or which is necessary to correct any information in such
Disclosure Schedules which has been rendered inaccurate thereby. No supplement
or amendment to such Disclosure Schedules shall have any effect for the purpose
of determining satisfaction of the conditions set forth in Sections 8.2(a) or
8.3(a) hereof, as the case may be, or the compliance by the Company or Buyer, as
the case may be, with the respective covenants and agreements of such parties
contained herein.
7.12. CURRENT INFORMATION. During the period from the date of this
Agreement to the Effective Time, the Company will cause one or more of its
designated representatives to confer on a regular and frequent basis (not less
than monthly) with representatives of Buyer and to report the general status of
the ongoing operations of the Company and its Subsidiaries. The Company will
promptly notify Buyer of any material change in the normal course of business or
in the operation of the properties of the Company or any of its Subsidiaries and
of any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of significant litigation involving the Company or any of its Subsidiaries, and
will keep Buyer fully informed of such events.
7.13. EXECUTION AND AUTHORIZATION OF BANK MERGER AGREEMENT. As soon as
reasonably practicable after the date of this Agreement, (a) Buyer shall
(i) cause the Board of Directors of Buyer Bank to approve the Bank Merger
Agreement, (ii) cause Buyer Bank to execute and deliver the Bank Merger
Agreement, and (iii) approve the Bank Merger Agreement as the sole stockholder
of Buyer Bank, and
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(b) the Company shall (i) cause the Board of Directors of the Company Bank to
approve the Bank Merger Agreement, (ii) cause the Company Bank to execute and
deliver the Bank Merger Agreement, and (iii) approve the Bank Merger Agreement
as the sole stockholder of the Company Bank.
7.14. DIRECTORSHIP. Prior to Closing, Buyer shall take all action as may
be necessary or appropriate to cause one member of the Company's Board of
Directors designated by the Board of Directors of the Company and acceptable to
the Buyer (the "Company Designee") to be a director of Buyer as of the Effective
Time, who is to hold office in accordance with the charter and bylaws of Buyer
until his successor is duly elected or appointed and qualified. Subject to the
next sentence, the Company Designee shall be appointed to the class of directors
with the fewest members as of the Closing Date and at the first annual meeting
of the stockholders of Buyer after the Effective Time shall be nominated by the
Board of Directors of Buyer for election to such position for the remainder of
the term of such class. If at the Effective Time each class of directors has an
equal number of members, the Company Designee shall be appointed to the class of
directors whose term of office expires at the first annual meeting of the
stockholders of Buyer following the Effective Time and at such annual meeting of
the stockholders of Buyer shall be included on the list of nominees for director
presented by the Board of Directors of Buyer.
7.15. ADVISORY COUNCIL. Promptly following the Effective Time, Buyer shall
cause, for a period of not less than twelve months after the Effective Time,
those persons who are members of the Board of Directors of the Company (other
than any such person who shall be appointed to the Board of Directors of Buyer
pursuant to Section 7.14) to be appointed to Buyer Bank's community advisory
council.
7.16. COORDINATION OF DIVIDENDS. After the date of this Agreement each of
Buyer and the Company shall coordinate with the other the declaration of any
dividends in respect of Buyer Common Stock and the Company Common Stock and the
record dates and payments dates relating thereto, it being the intention of the
parties that the holders of Buyer Common Stock or Company Common Stock shall not
receive more than one dividend, or fail to receive one dividend, for any single
calendar quarter with respect to their shares of Buyer Common Stock and/or
Company Common Stock and any shares of Buyer Common Stock any holder of Company
Common Stock receives in exchange therefor in the Merger.
7.17. YEAR 2000 SURVEY. The Company shall, and shall cause its
Subsidiaries to, send to each of its customers identified by Buyer a Year 2000
survey in a form designated by Buyer and the Company shall, and shall cause its
Subsidiaries to, use reasonable best efforts to cause its customers to complete
and return such survey. Furthermore, the Company shall, and shall cause its
Subsidiaries to, (a) seek such additional information as Buyer shall reasonably
request from any customer designated by Buyer, and (b) take such action as is
reasonably necessary to obtain such information, including, without limitation,
scheduling face-to-face meetings with such customers;
7.18. COMPANY DRIP. The Company shall suspend the Company DRIP upon the
request of Buyer if Buyer has been previously advised by its accountants (a copy
of which advice shall be provided to the Company) that such suspension will not
adversely effect pooling-of-interests treatment under GAAP for the Merger.
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ARTICLE VIII
CONDITIONS PRECEDENT
8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the requisite vote of the holders of Company Common Stock under
applicable law.
(b) NASDAQ/NMS LISTING. The shares of Buyer Common Stock which shall
be issued to the stockholders of the Company upon consummation of the Merger
shall have been authorized for quotation on the Nasdaq/NMS, subject to
official notice of issuance.
(c) OTHER APPROVALS. All regulatory approvals required to consummate
the transactions contemplated hereby (including the Merger and the
Subsidiary Merger) shall have been obtained and shall remain in full force
and effect and all statutory waiting periods in respect thereof shall have
expired (all such approvals and the expiration of all such waiting periods
being referred to herein as the "Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the Securities Act
and no stop order suspending the effectiveness of the S-4 shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition (an "Injunction") preventing the consummation
of the Merger or the Subsidiary Merger shall be in effect. No statute, rule,
regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits,
restricts or makes illegal consummation of the Merger or the Subsidiary
Merger.
(f) POOLING OF INTERESTS. Buyer shall have received a letter from
Arthur Andersen, LLP addressed to Buyer, to the effect that the Merger will
qualify for "pooling of interests" accounting treatment, and the Company
shall have received a copy of such letter.
8.2. CONDITIONS TO OBLIGATIONS OF BUYER. The obligation of Buyer to effect
the Merger is also subject to the satisfaction or waiver by Buyer at or prior to
the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) Subject to Section 3.2, the
representations and warranties of the Company set forth in this Agreement
(other than the representations and warranties set forth in Sections 4.2,
4.3(a), 4.3(b), 4.6(a), 4.11(d), 4.12 and 4.13) shall be true and correct as
of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date and (ii) the representations and
warranties of the Company set forth in Sections 4.2, 4.3(a), 4.3(b), 4.6(a),
4.11(d), 4.12 and 4.13 of this Agreement shall be true and correct in all
material respects (without giving effect to Section 3.2 of this Agreement)
as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date. Buyer shall have
received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to the
foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior
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to the Closing Date, and Buyer shall have received a certificate signed on
behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company to such effect.
(c) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any
federal agency or state banking authority seeking an Injunction shall be
pending.
(d) FEDERAL TAX OPINION. Buyer shall have received an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Buyer ("Buyer's
Counsel"), in form and substance reasonably satisfactory to Buyer,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code. In
rendering such opinion, Buyer's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Buyer, Buyer Bank, the Company, the Company Bank and others
reasonably satisfactory in form and substance to such counsel.
8.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) Subject to Section 3.2, the
representations and warranties of Buyer set forth in this Agreement (other
than the representations and warranties set forth in Sections 5.2, 5.3(a),
5.3(b), 5.6(a), 5.10 and 5.12) shall be true and correct as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as
of the Closing Date and (ii) the representations and warranties of Buyer set
forth in Sections 5.2, 5.3(a), 5.3(b), 5.6(a), 5.10 and 5.12 of this
Agreement shall be true and correct in all material respects (without giving
effect to Section 3.2 of this Agreement) as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date. The Company shall have received a certificate signed on behalf of
Buyer by the Chief Executive Officer and the Chief Financial Officer of
Buyer to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF BUYER. Buyer shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date, and the Company shall have
received a certificate signed on behalf of Buyer by the Chief Executive
Officer and the Chief Financial Officer of Buyer to such effect.
(c) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any
federal agency or state banking authority seeking an Injunction shall be
pending.
(d) FEDERAL TAX OPINION. The Company shall have received an opinion of
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC (the "Company's
Counsel"), in form and substance reasonably satisfactory to the Company,
dated as of the Effective Time, substantially to the effect that, on the
basis of facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the Effective Time,
the Merger and the Subsidiary Merger will be treated as reorganizations
within the meaning of Section 368(a) of the Code and that accordingly for
federal income tax purposes:
(i) No gain or loss will be recognized by the Company as a result of
the Merger;
(ii) No gain or loss will be recognized by the Company Bank as a
result of the Subsidiary Merger (except to the extent the Company Bank or
Buyer Bank may be required to recognize income due to the recapture of
bad debt reserves as a result of the Subsidiary Merger);
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(iii) No gain or loss will be recognized by the stockholders of the
Company who exchange all of their Company Common Stock solely for Buyer
Common Stock pursuant to the Merger (except with respect to cash received
in lieu of a fractional share interest in Buyer Common Stock); and
(iv) The aggregate tax basis of Buyer Common Stock received by
stockholders who exchange all of their Company Common Stock solely for
Common Stock pursuant to the Merger will be the same as the aggregate tax
basis of the Company Common Stock surrendered in exchange therefor
(reduced by any amount allocable to a fractional share interest for which
cash is received).
In rendering such opinion, the Company's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Buyer, Buyer Bank, the Company, the Company Bank and others
reasonably satisfactory in form and substance to such counsel.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1. TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual consent of the Company and Buyer in a written instrument,
if the Board of Directors of each so determines by a vote of a majority of
the members of its entire Board;
(b) by either Buyer or the Company upon written notice to the other
party (i) 60 days after the date on which any request or application for a
Requisite Regulatory Approval shall have been denied by any Governmental
Entity which must grant such Requisite Regulatory Approval, unless within
the 60-day period following such denial or withdrawal a petition for
rehearing or an amended application has been filed with the applicable
Governmental Entity, PROVIDED, HOWEVER, that no party shall have the right
to terminate this Agreement pursuant to this Section 9.1(b)(i) if such
denial shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party
set forth herein or (ii) if any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the Merger or the Subsidiary Merger;
(c) by either Buyer or the Company if the Merger shall not have been
consummated on or before March 31, 2000, unless the failure of the Closing
to occur by such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein;
(d) by either Buyer or the Company (provided that if the Company is the
terminating party, it shall not be in material breach of any of its
obligations under Section 7.4) if the approval of the stockholders of the
Company required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of such stockholders or at any adjournment or postponement thereof;
(e) by either Buyer or the Company (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained herein) if there shall have been a material breach
of any of the representations or warranties set forth in this Agreement on
the part of the other party, which breach is not cured within thirty days
following written notice to the party committing such breach, or which
breach, by its nature, cannot be cured prior to the Closing; PROVIDED,
HOWEVER, that neither party shall have the right to terminate this Agreement
pursuant to this Section 9.1(e) unless the breach of representation or
warranty,
A-41
<PAGE>
together with all other such breaches, would entitle the party receiving
such representation not to consummate the transactions contemplated hereby
under Section 8.2(a) (in the case of a breach of representation or warranty
by the Company) or Section 8.3(a) (in the case of a breach of representation
or warranty by Buyer);
(f) by either Buyer or the Company (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained herein) if there shall have been a material breach
of any of the covenants or agreements set forth in this Agreement on the
part of the other party, which breach shall not have been cured within
thirty days following receipt by the breaching party of written notice of
such breach from the other party hereto, or which breach, by its nature,
cannot be cured prior to the Closing;
(g) by Buyer, if the Board of Directors of the Company does not publicly
recommend in the Proxy Statement that the Company's stockholders approve
this Agreement or if, after recommending in the Proxy Statement that
stockholders approve this Agreement, the Board of Directors of the Company
shall have withdrawn, modified or amended such recommendation in any respect
materially adverse to Buyer; or
(h) by the Company at any time during the ten-day period commencing two
days after the Determination Date (as defined below), if both of the
following conditions are satisfied:
(1) the Average Closing Price (as defined below) shall be less than
the product of 0.75 and the Starting Price; and
(2) (i) the number obtained by dividing the Average Closing Price by
the Starting Price (such number being referred to herein as the "Buyer
Ratio") shall be less than (ii) the number obtained by dividing the Index
Price on the Determination Date by the Index Price on the Starting Date
and subtracting 0.15 from such quotient (such number being referred to
herein as the "Index Ratio");
subject to the following four sentences. If the Company elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall give
prompt written notice of such election to Parent; provided that such notice of
election to terminate may be withdrawn at any time within the aforementioned
ten-day period. During the five-day period commencing with its receipt of such
notice, Buyer shall have the option of adjusting the Exchange Ratio to equal the
lesser of (i) a number equal to a quotient (rounded to the nearest
one-ten-thousandth), the numerator of which is the product of 0.75, the Starting
Price and the Exchange Ratio (as then in effect) and the denominator of which is
the Average Closing Price, and (ii) a number equal to a quotient (rounded to the
nearest one-ten-thousandth), the numerator of which is the Index Ratio
multiplied by the Exchange Ratio (as then in effect) and the denominator of
which is the Buyer Ratio. If Buyer makes an election contemplated by the
preceding sentence, within such five-day period, it shall give prompt written
notice to the Company of such election and the revised Exchange Ratio, whereupon
no termination shall have occurred pursuant to this Section 9.1(h) and this
Agreement shall remain in effect in accordance with its terms (except as the
Exchange Ratio shall have been so modified), and any references in this
Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted pursuant to this Section 9.1(h). For purposes of this
Section 9.1(h), the following terms shall have the meanings indicated:
"Average Closing Price" means the average of the last reported sale prices
per share of Buyer Common Stock as reported on Nasdaq/NMS (as reported in The
Wall Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the 20 consecutive trading days on Nasdaq/NMS ending
at the close of trading on the Determination Date.
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<PAGE>
"Determination Date" means the fifth business day prior to the date on which
the approval of the OCC required for consummation of the Merger shall be
received, without regard to any requisite waiting periods in respect thereof.
"Index Group" means the group of each of the 17 bank holding companies
listed below, the common stock of all of which shall be publicly traded and as
to which there shall not have been, since the Starting Date and before the
Determination Date, an announcement of a proposal for such company to be
acquired or for such company to acquire another company or companies in
transactions with a value exceeding 25% of the acquiror's market capitalization
as of the Starting Date. In the event that the common stock of any such company
ceases to be publicly traded or any such announcement is made with respect to
any such company, such company will be removed from the Index Group, and the
weights (which have been determined based on the number of outstanding shares of
common stock) redistributed proportionately for purposes of determining the
Index Price. The 17 bank holding companies and the weights attributed to them
are as follows:
<TABLE>
<CAPTION>
BANK HOLDING COMPANY WEIGHTING
- -------------------- ----------
<S> <C>
BT Financial Corporation.................................... 5.2%
F&M National Corporation.................................... 7.4
F.N.B. Corporation.......................................... 6.7
FCNB Corp................................................... 3.8
First Commonwealth Financial Corp........................... 10.2
Harleysville National Corporation........................... 2.5
National Penn Bancshares, Inc. ............................. 5.6
Omega Financial Corporation................................. 2.9
Provident Bankshares Corporation............................ 8.4
S&T Bancorp, Inc. .......................................... 8.9
Sandy Spring Bancorp, Inc. ................................. 3.2
Sun Bancorp, Inc. .......................................... 2.5
Susquehanna Bancshares, Inc. ............................... 12.2
Trust Company of New Jersey (The)........................... 6.3
Union Bankshares Corporation................................ 2.5
United National Bancorp..................................... 5.0
WesBanco, Inc. ............................................. 6.7
-----
100.0%
</TABLE>
"Index Price" on a given date means the weighted average (weighted in
accordance with the factors listed above) of the closing prices of the companies
comprising the Index Group.
"Starting Date" means September 7, 1999.
"Starting Price" shall mean the last reported sale price per share of Buyer
Common Stock on the Starting Date, as reported by Nasdaq/NMS (as reported in The
Wall Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source).
If any company belonging to the Index Group or Buyer declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company or Buyer
shall be appropriately adjusted for the purposes of applying this
Section 9.1(h).
9.2. EFFECT OF TERMINATION; EXPENSES. In the event of termination of this
Agreement by either Buyer or the Company as provided in Section 9.1, this
Agreement shall forthwith become void and have no effect except (i) the last
sentence of Section 7.2(a), the last sentence of Section 7.2(b), and Sections
9.2 and 10.4, shall survive any termination of this Agreement, and (ii) that
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
A-43
<PAGE>
9.3. AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of either
the Company or Buyer; PROVIDED, HOWEVER, that after any approval of the
transactions contemplated by this Agreement by the Company's stockholders, there
may not be, without further approval of such stockholders, any amendment of this
Agreement which reduces the amount or changes the form of the consideration to
be delivered to the Company stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
9.4. EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
ARTICLE X
GENERAL PROVISIONS
10.1. CLOSING. Subject to the terms and conditions of this Agreement and
the Bank Merger Agreement, the closing of the Merger (the "Closing") will take
place at 10:00 a.m. on the first day which is (a) the last business day of a
month and (b) at least two business days after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article VIII hereof (other than those conditions which relate to actions to
be taken at the Closing)(the "Closing Date"), at the offices of Buyer unless
another time, date or place is agreed to in writing by the parties hereto;
PROVIDED, HOWEVER, that the Closing shall not occur prior to December 19, 1999.
10.2. ALTERNATIVE STRUCTURE. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, Buyer shall be
entitled to revise the structure of the Merger and/or the Subsidiary Merger and
related transactions in order to (x) substitute a subsidiary of Buyer as a
Constituent Corporation in the Merger or (y) provide that a different entity
shall be the surviving corporation in a merger provided that each of the
transactions comprising such revised structure shall (i) qualify as, or be
treated as part of, one or more tax-free reorganizations within the meaning of
Section 368(a) of the Code, and not reduce the amount of consideration to be
received by such stockholders, (ii) be properly treated for financial reporting
purposes as a pooling of interests and (iii) be capable of consummation in as
timely a manner as the structure contemplated herein. This Agreement and any
related documents shall be appropriately amended in order to reflect any such
revised structure.
10.3. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement (other than pursuant to
the Company Option Agreement which shall terminate in accordance with its terms)
shall survive the Effective Time, except for those covenants and agreements
contained herein and therein which by their terms apply in whole or in part
after the Effective Time.
10.4. EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense, PROVIDED, HOWEVER, that the costs and expenses of
printing and mailing the Proxy Statement to the stockholders of the
A-44
<PAGE>
Company and Buyer, and all filing and other fees paid to the SEC or any other
Governmental Entity in connection with the Merger, the Subsidiary Merger and the
other transactions contemplated hereby, shall be borne equally by Buyer and the
Company, PROVIDED, FURTHER, HOWEVER, that nothing contained herein shall limit
either party's rights to recover any liabilities or damages arising out of the
other party's willful breach of any provision of this Agreement.
10.5. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Buyer, to:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
Attn: Chief Executive Officer
with a copy to:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
Attn: General Counsel
and to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attn: William S. Rubenstein, Esq.
and
(b) if to the Company, to:
Patapsco Valley Bancshares, Inc.
8539 Baltimore National Pike
Ellicott City, Maryland 21043
Attn: President and Chief Executive Officer
with a copy to:
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
The Garrett Building
233 E. Redwood Street
Baltimore, Maryland 21202
Attn: Carla Stone Witzel
10.6. INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement",
A-45
<PAGE>
"the date hereof" and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to September 7, 1999.
10.7. COUNTERPARTS. This Agreement may be executed by facsimile or
otherwise in counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
10.8. ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein), together with the Confidentiality Agreements,
the Company Option Agreement and the Bank Merger Agreement, constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
10.9. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland, without regard to any
applicable conflicts of law.
10.10. ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in the last
sentence of Section 7.2(a) and of Section 7.2(b) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 7.2(a) and of
Section 7.2(b) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
10.11. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.12. PUBLICITY. Except as otherwise required by law or the rules of the
Nasdaq/NMS, so long as this Agreement is in effect, neither Buyer nor the
Company shall, or shall permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement without the consent of the other party, which consent shall
not be unreasonably withheld.
10.13. ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
expressly provided herein, this Agreement (including the documents and
instruments referred to herein) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
A-46
<PAGE>
IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
<TABLE>
<S> <C> <C>
F&M BANCORP
By /s/ FAYE E. CANNON
-----------------------------------------
Name: Faye E. Cannon
Title: President & Chief Executive
Officer
</TABLE>
<TABLE>
<S> <C> <C>
Attest:
/s/ GORDON M. COOLEY
- -------------------------------------------
Name: Gordon M. Cooley
Title: Secretary
</TABLE>
<TABLE>
<S> <C> <C>
PATAPSCO VALLEY BANCSHARES, INC
By /s/ JOHN S. WHITESIDE
-----------------------------------------
Name: John S. Whiteside
Title: President & Chief Executive
Officer
</TABLE>
<TABLE>
<S> <C> <C>
Attest:
/s/ EDWIN B. MCKEE
- -------------------------------------------
Name: Edwin B. McKee
Title: Secretary
</TABLE>
A-47
<PAGE>
AMENDMENT NO. 1
AMENDMENT, dated as of October 19, 1999, by and between F&M Bancorp, a
Maryland corporation ("Buyer"), and Patapsco Valley Bancshares, Inc., a Maryland
corporation (the "Company"), to the Agreement and Plan of Merger, dated as of
September 7, 1999 (the "Merger Agreement"), by and between Buyer and the
Company. Capitalized terms that are not otherwise defined herein shall have the
meanings set forth in the Merger Agreement.
WHEREAS, Buyer and Seller desire to amend the Merger Agreement (a) to
provide procedures for handling demands by holders of Company Common Stock for
payment of the fair value of Company Common Stock in lieu of the merger
consideration as contemplated by Sections 3-201 to 3-213 of the Maryland General
Corporation Law and (b) in accordance with a request from the Federal Reserve
Bank to obtain a waiver for the Federal Reserve Bank's approval of the merger
under the Bank Holding Company Act and the Federal Reserve Board's
Regulation Y.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Section 1.4(a) of the Merger Agreement is hereby amended in its entirety
to read as follows:
(a) At the Effective Time, subject to Section 2.2(e) hereof, each share
of the common stock, par value $0.01 per share, of the Company (the "Company
Common Stock") issued and outstanding immediately prior to the Effective
Time (other than shares of Company Common Stock held directly or indirectly
by Buyer or the Company or any of their respective Subsidiaries (as defined
below) (except for Trust Account Shares and DPC Shares, as such terms are
defined in Section 1.4(b) hereof) and other than Dissenting Shares (as such
term is defined in Section 1.4(c) hereof)) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be
converted into and exchangeable for 1.18 shares (the "Exchange Ratio") of
the common stock, par value $5.00 per share, of Buyer ("Buyer Common
Stock"). All of the shares of Company Common Stock converted into Buyer
Common Stock pursuant to this Article I shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist, and each
certificate (each a "Certificate") previously representing any such shares
of Company Common Stock shall thereafter only represent the right to receive
(i) the number of whole shares of Buyer Common Stock and (ii) the cash in
lieu of fractional shares into which the shares of Company Common Stock
represented by such Certificate have been converted pursuant to this
Section 1.4(a) and Section 2.2(e) hereof. Certificates previously
representing shares of Company Common Stock shall be exchanged for
certificates representing whole shares of Buyer Common Stock and cash in
lieu of fractional shares issued in consideration therefor upon the
surrender of such Certificates in accordance with Section 2.2 hereof,
without any interest thereon. If, between the date of this Agreement and the
Effective Time, the outstanding shares of Buyer Common Stock shall be
changed into a different number or class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of
shares or readjustment, or a stock dividend thereon shall be declared with a
record date within said period, the Exchange Ratio shall be adjusted
accordingly.
by adding the phrase "and other than Dissenting Shares (as such term is defined
in Section 14.(c) hereof)" immediately after the phrase "(except for Trust
Account Shares and DPC Shares, as such terms are defined in Section 1.4(b)
hereof)".
2. Section 1.4 of the Merger Agreement is hereby amended by adding the
following subsection (c):
(c) Notwithstanding anything in this Agreement to the contrary, shares
of Company Common Stock that have not been voted for adoption of the Merger
and with respect to which appraisal rights shall have been properly demanded
in accordance with Section 3-203 of the MGCL
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<PAGE>
("Dissenting Shares") shall not be converted into the right to receive, or
be exchangeable for, Buyer Common Stock or cash in lieu of fractional shares
but, instead, the holders thereof shall be entitled to payment of the
appraised value of such Dissenting Shares in accordance with the provisions
of Section 3-202 of the MGCL; PROVIDED, HOWEVER, that (i) if any holder of
Dissenting Shares withdraws his demand for appraisal or payment of the fair
value of such shares or (ii) if any holder shall become ineligible for such
payment of the fair value of such shares, such holder or holders (as the
case may be) shall forfeit the right to appraisal of such shares of Company
Common Stock and such holder's Dissenting Shares shall cease to be
Dissenting Shares and shall thereupon be deemed to have been converted into
the right to receive, and to have become exchangeable for, as of the
Effective Time, Buyer Common Stock and/or cash in lieu of fractional shares,
without any interest thereon, as provided in Section 1.4(a) and Article II
hereof. The Company shall give Buyer (A) prompt notice of any written
demands for appraisal or payment of fair value of any Company Common Stock,
withdrawals of such demands and any other documents or instruments served
pursuant to Section 3-203 of the MGCL received by the Company and (B) the
opportunity to direct all negotiations and proceedings with respect to
demands for appraisal or payment of fair value of shares of Company Common
Stock. The Company shall not make any payment with respect to any demands
for appraisal or payment of fair value without the prior written consent of
Buyer and shall not, except with the prior written consent of Buyer, settle
or offer to settle any such demands.
3. Section 6.1(r) of the Merger Agreement is hereby amended in its entirety
to read as follows:
(r) without at least 24-hour prior written notice to Buyer, make or
purchase, or commit to make or purchase, any loan or loans, or extend any
line of credit, to any borrower and its affiliates in an aggregate principal
amount greater than $1,000,000 or in an amount which, when aggregated with
any existing indebtedness to the Company and its Subsidiaries and lines of
credit from the Company and its Subsidiaries of such borrower and its
affiliates, would exceed $1,000,000. In addition to such notice, the Company
shall furnish to Buyer, promptly upon its substantial completion, the
information package prepared by the Company's (or such Subsidiary's) loan
committee with respect to such proposed loan requests and any other
information that Buyer may reasonably request; or
4. Each of the parties hereto represents to the other that (a) it has full
corporate power and authority to execute and deliver this Amendment and to
consummate the transactions contemplated hereby, (b) the execution and delivery
of this Amendment by such party have been duly and validly approved by the Board
of Directors of such party and no other corporate proceedings on the part of
such party are necessary in connection with such Amendment and (c) this
Amendment has been duly and validly executed and delivered by such party and
constitutes a valid and binding obligation of such party, enforceable against
such party in accordance with its terms.
5. Except as expressly amended by this Amendment, the Merger Agreement is
hereby ratified and confirmed in all respects.
6. This Amendment may be executed in counterparts, all of which shall be
considered one and the same instrument, each being deemed to constitute an
original, and shall be effective when one or more counterparts have been signed
by each party hereto and delivered to the other party hereto, which delivery may
be made by facsimile transmission.
7. This Agreement shall be governed by, and interpreted in accordance with,
the laws of the State of Maryland, without regard to any applicable conflicts of
law.
8. In the event of any inconsistency between the terms of this Amendment
and the Merger Agreement, this Amendment shall govern.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed, under seal, in counterparts by their duly authorized officers, all as
of the day and year first above written.
<TABLE>
<S> <C> <C>
F&M BANCORP
By: /s/ FAYE E. CANNON
----------------------------
Name: Faye E. Cannon
Title: President & Chief Executive Officer
</TABLE>
Attest:
<TABLE>
<S> <C>
/s/ GORDON M. COOLEY
- ----------------------------
Name: Gordon M. Cooley
Title: Secretary
</TABLE>
<TABLE>
<S> <C> <C>
PATAPSCO VALLEY BANCSHARES, INC
By: /s/ JOHN S. WHITESIDE
----------------------------
Name: John S. Whiteside
Title: President & Chief Executive Officer
</TABLE>
Attest:
<TABLE>
<S> <C>
/s/ EDWIN B. MCKEE
- ----------------------------
Name: Edwin B. McKee
Title: Secretary
</TABLE>
A-50
<PAGE>
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated September 7, 1999, between Patapsco Valley
Bancshares, Inc., a Maryland corporation ("Issuer"), and F&M Bancorp, a Maryland
corporation ("Grantee").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(the "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "Option") to purchase, subject to the terms hereof, up to 272,225 fully
paid and nonassessable shares of Issuer's Common Stock, par value $0.01 per
share ("Common Stock"), of Issuer at a price of $27.50 per share as adjusted, if
applicable (the "Option Price"); PROVIDED, HOWEVER, that in no event shall the
number of shares of Common Stock for which this Option is exercisable exceed
19.9% of the Issuer's issued and outstanding shares of Common Stock without
giving effect to any shares subject to or issued pursuant to the Option. The
number of shares of Common Stock that may be received upon the exercise of the
Option and the Option Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are either
(i) issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to this Agreement) or (ii) redeemed, repurchased, retired
or otherwise cease to be outstanding after the date of this Agreement, the
number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that such number equals 19.9% of the number of
shares of Common Stock then issued and outstanding without giving effect to any
shares subject to or issued pursuant to the Option. Nothing contained in this
Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer
or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole
or part, and from time to time, if, but only if, both an Initial Triggering
Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter
defined) shall have occurred prior to the occurrence of an Exercise Termination
Event (as hereinafter defined), PROVIDED, that the Holder shall have sent the
written notice of such exercise (as provided in subsection (e) of this
Section 2) within six months following such Subsequent Triggering Event,
PROVIDED FURTHER, HOWEVER, that if the Option cannot be exercised on any day
because of any injunction, order or similar restraint issued by a court of
competent jurisdiction, the period during which the Option may be exercised
shall be extended so that the Option shall expire no earlier than on the 10th
business day after such injunction, order or restraint shall have been dissolved
or when such injunction, order or restraint shall have become permanent and no
longer subject to appeal, as the case may be. Each of the following shall be an
"Exercise Termination Event": (i) the Effective Time (as defined in the Merger
Agreement) of the Merger; (ii) termination of the Merger Agreement in accordance
with the provisions thereof if such termination occurs prior to the occurrence
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of an Initial Triggering Event (other than a termination resulting from a
willful breach by Issuer of any provision of the Merger Agreement); or
(iii) the passage of 18 months after termination of the Merger Agreement if such
termination follows the occurrence of an Initial Triggering Event or is a
termination by Grantee resulting from a willful breach by Issuer of any
provision of the Merger Agreement. The term "Holder" shall mean the holder or
holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"),
without having received Grantee's prior written consent, shall have entered
into an agreement to engage in an Acquisition Transaction (as hereinafter
defined) with any person (the term "person" for purposes of this Agreement
having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules
and regulations promulgated thereunder) other than Grantee or any of its
Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of
Issuer shall have recommended or publicly announced its intention to
recommend that the stockholders of Issuer approve or accept any Acquisition
Transaction with any person other than Grantee or any Grantee Subsidiary.
For purposes of this Agreement, (A) "Acquisition Transaction" shall mean
with respect to any person except Grantee or any Grantee Subsidiary (w) a
merger or consolidation, or any similar transaction, involving Issuer or any
Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (x) a purchase, lease or other acquisition or assumption of all or a
substantial portion of the assets or deposits of Issuer or any Significant
Subsidiary of Issuer, (y) a purchase or other acquisition (including by way
of merger, consolidation, share exchange or otherwise) of securities
representing 10% or more of the voting power of Issuer, or (z) any
substantially similar transaction; PROVIDED, HOWEVER, that in no event shall
any merger, consolidation, purchase or similar transaction involving only
the Issuer and one or more of its wholly-owned Subsidiaries or involving
only any two or more of such wholly-owned Subsidiaries, be deemed to be an
Acquisition Transaction, provided that any such transaction is not entered
into in violation of the terms of the Merger Agreement and (B) "Subsidiary"
shall have the meaning set forth in the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received Grantee's
prior written consent, shall have authorized, recommended or proposed (or
publicly announced its intention to authorize, recommend or propose) to
engage in an Acquisition Transaction with any person other than Grantee or
any Grantee Subsidiary or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its intent to withdraw
or modify, in any manner adverse to Grantee, its recommendation that the
stockholders of Issuer approve the transactions contemplated by the Merger
Agreement;
(iii) Any person other than Grantee, any Grantee Subsidiary or any
Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of
its business shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of
Common Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the 1934 Act, and
the rules and regulations thereunder) or any person other than Grantee or
any Grantee Subsidiary shall have commenced (as such term is defined under
the rules and regulations of the SEC), or shall have filed or publicly
disseminated a registration statement or similar disclosure statement with
respect to, a tender offer or exchange offer to purchase any shares of
Common Stock such that, upon consummation of such offer, such person would
own or control 10% or more of the then outstanding shares of Common Stock;
(iv) Any person other than Grantee or any Grantee Subsidiary shall have
made (or announced an intention to make) a proposal to Issuer or its
stockholders by public announcement
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or written communication that is or becomes the subject of public disclosure
to engage in an Acquisition Transaction;
(v) After a proposal or overture is made by a third party to Issuer or
its stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle Grantee to terminate the Merger Agreement and
(y) shall not have been cured prior to the Notice Date (as defined below);
or
(vi) Any person other than Grantee or any Grantee Subsidiary, other than
in connection with a transaction to which Grantee has given its prior
written consent, shall have filed an application or notice with the Federal
Reserve Board, or other federal or state bank regulatory authority, which
application or notice has been accepted for processing, for approval to
engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20% or more
of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of any
Initial Triggering Event or Subsequent Triggering Event of which it has notice
(together, a "Triggering Event"), it being understood that the giving of such
notice by Issuer shall not be a condition to the right of the Holder to exercise
the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); PROVIDED that if prior
notification to or approval of the Federal Reserve Board or any other regulatory
agency is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall pay to Issuer the aggregate purchase price for the shares of Common
Stock purchased pursuant to the exercise of the Option in United States dollars,
in immediately available funds by wire transfer to a bank account designated by
Issuer, PROVIDED that failure or refusal of Issuer to designate such a bank
account shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option and stock option agreement evidencing the
rights of the Holder thereof to purchase the balance of the shares purchasable
hereunder, and the Holder shall deliver to Issuer this Agreement and a letter
agreeing that the Holder will not offer to sell or otherwise dispose of such
shares in violation of applicable law or the provisions of this Agreement.
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(h) Certificates for Common Stock delivered at a closing hereunder shall be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject to
certain provisions of an agreement between the registered holder hereof and
Issuer and to resale restrictions arising under the Securities Act of 1933,
as amended. A copy of such agreement is on file at the principal office of
Issuer and will be provided to the holder hereof without charge upon receipt
by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if (a) the Holder shall have delivered to Issuer a copy of a letter from the
staff of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act or (b) the shares of Common Stock represented by such
certificate shall have been registered under the 1933 Act; (ii) the reference to
the provisions to this Agreement in the above legend shall be removed by
delivery of substitute certificate(s) without such reference if the shares have
been sold or transferred in compliance with the provisions of this Agreement and
under circumstances that do not require the retention of such reference; and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued shares of Common Stock so
that the Option may be exercised without additional authorization of Common
Stock after giving effect to all other options, warrants, convertible securities
and other rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution or sale
of assets, or by any other voluntary act, avoid or seek to avoid the observance
or performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by Issuer; (iii) promptly to take all action as
may from time to time be required (including (x) complying with all premerger
notification, reporting and waiting period requirements specified in 15 U.S.C.
Section 18a and regulations promulgated thereunder and (y) in the event, under
the Bank Holding Company Act of 1956, as amended (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state banking law, prior approval
of or notice to the Federal Reserve Board or to any state regulatory authority
is necessary before the Option may be exercised, cooperating fully with the
Holder in preparing such applications or notices and providing such information
to the Federal Reserve Board or such state regulatory authority as they may
require) in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and
(iv) promptly to take all action provided herein to protect the rights of the
Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable, without
expense, at the option of the Holder, upon presentation and surrender of this
Agreement at the principal office of Issuer, for other Agreements providing for
Options of different denominations entitling the holder
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thereof to purchase, on the same terms and subject to the same conditions as are
set forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein include
any stock option agreements and related options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5. In the event of any change in, or distributions
in respect of, the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of shares of Common Stock purchasable upon exercise hereof and the Option
Price shall be appropriately adjusted in such manner as shall fully preserve the
economic benefits provided hereunder and proper provision shall be made in any
agreement governing any such transaction to provide for such proper adjustment
and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to
an Exercise Termination Event, Issuer shall, at the request of Grantee delivered
within six months of such Subsequent Triggering Event (whether on its own behalf
or on behalf of any subsequent holder of this Option (or part thereof) or any of
the shares of Common Stock issued pursuant hereto), promptly prepare, file and
keep current a registration statement under the 1933 Act covering any shares
issued and issuable pursuant to this Option and shall use its best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by Grantee. Issuer will use
its best efforts to cause such registration statement first to become effective
as soon as practicable after Grantee's request and then to remain effective for
such period not in excess of 180 days from the day such registration statement
first becomes effective or such shorter time as may be reasonably necessary to
effect such sales or other dispositions. Grantee shall have the right to demand
two such registrations. The foregoing notwithstanding, if, at the time of any
request by Grantee for registration of Option Shares as provided above, Issuer
is in registration with respect to an underwritten public offering of shares of
Common Stock, and if in the good faith judgment of the managing underwriter or
managing underwriters, or, if none, the sole underwriter or underwriters, of
such offering the inclusion of the Option Shares would interfere with the
successful marketing of the shares of Common Stock offered by Issuer, the number
of Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; and PROVIDED, HOWEVER, that after any such
required reduction the number of Option Shares to be included in such offering
for the account of the Holder shall constitute at least 25% of the total number
of shares to be sold by the Holder and Issuer in the aggregate; and PROVIDED
FURTHER, however, that if such reduction occurs, then the Issuer shall file a
registration statement for the balance as promptly as practicable and no
reduction shall thereafter occur. Each such Holder shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily
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included in secondary offering underwriting agreements for issuers. Upon
receiving any request under this Section 6 from any Holder, Issuer agrees to
send a copy thereof to any other person known to Issuer to be entitled to
registration rights under this Section 6, in each case by promptly mailing the
same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than two registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event (as defined
below), (i) following a request of the Holder, delivered prior to an Exercise
Termination Event, Issuer (or any successor thereto) shall repurchase the Option
from the Holder at a price (the "Option Repurchase Price") equal to (x) the
amount by which (A) the Market/Offer Price (as defined below) exceeds (B) the
Option Price, multiplied by the number of shares for which this Option may then
be exercised plus (y) Grantee's reasonable out-of-pocket expenses incurred in
connection with this Agreement and the Merger Agreement and the transactions
contemplated hereby and thereby (to the extent not previously reimbursed) and
(ii) at the request of the owner of Option Shares from time to time (the
"Owner"), delivered within 90 days of such occurrence (or such later period as
provided in Section 10), Issuer shall repurchase such number of the Option
Shares from the Owner as the Owner shall designate at a price (the "Option Share
Repurchase Price") equal to (x) the Market/Offer Price multiplied by the number
of Option Shares so designated plus (y) Grantee's reasonable out-of-pocket
expenses incurred in connection with this Agreement and the Merger Agreement and
the transactions contemplated hereby and thereby (to the extent not previously
reimbursed). The term "Market/Offer Price" shall mean the highest of (i) the
price per share of Common Stock at which a tender offer or exchange offer
therefor has been made, (ii) the price per share of Common Stock to be paid by
any third party pursuant to an agreement with Issuer, (iii) the highest closing
price for shares of Common Stock within the six-month period immediately
preceding the date the Holder gives notice of the required repurchase of this
Option or the Owner gives notice of the required repurchase of Option Shares, as
the case may be, or (iv) in the event of a sale of all or a substantial portion
of Issuer's assets, the sum of the price paid in such sale for such assets and
the current market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the Market/Offer Price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
selected by the Holder or Owner, as the case may be, and reasonably acceptable
to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and any Option Shares pursuant to this
Section 7 by surrendering for such purpose to Issuer, at its principal office, a
copy of this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the Owner,
as the case may be, elects to require Issuer to repurchase this Option and/or
the Option Shares in accordance with the provisions of this Section 7. Within
the later to occur of (x) five business days after the surrender of the Option
and/or certificates representing Option Shares and the receipt of such notice or
notices relating thereto and (y) the time that is immediately prior to the
occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered
to the Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price therefor or the portion thereof if any that Issuer is not then
prohibited under applicable law and regulation from so delivering.
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(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; PROVIDED, HOWEVER, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to the Holder, a new stock option
agreement evidencing the right of the Holder to purchase that number of shares
of Common Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered stock option agreement was exercisable at the time of
delivery of the notice of repurchase by a fraction, the numerator of which is
the Option Repurchase Price less the portion thereof theretofore delivered to
the Holder and the denominator of which is the Option Repurchase Price, or
(B) to the Owner, a certificate for the Option Shares it is then so prohibited
from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed to
have occurred (i) upon the consummation of any merger, consolidation or similar
transaction involving Issuer or any purchase, lease or other acquisition of all
or a substantial portion of the assets of Issuer, other than any such
transaction which would not constitute an Acquisition Transaction pursuant to
the proviso to Section 2(b)(i) hereof or (ii) upon the acquisition by any person
of beneficial ownership of 50% or more of the then outstanding shares of Common
Stock, provided that no such event shall constitute a Repurchase Event unless a
Subsequent Triggering Event shall have occurred prior to an Exercise Termination
Event. The parties hereto agree that Issuer's obligations to repurchase the
Option or Option Shares under this Section 7 shall not terminate upon the
occurrence of an Exercise Termination Event unless no Subsequent Triggering
Event shall have occurred prior to the occurrence of an Exercise Termination
Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or a Grantee Subsidiary, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or a Grantee Subsidiary, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or a Grantee
Subsidiary, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
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(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than Issuer),
(ii) Issuer in a merger in which Issuer is the continuing or surviving
person, and (iii) the transferee of all or substantially all of Issuer's
assets.
(2) "Substitute Common Stock" shall mean the common stock issued by the
issuer of the Substitute Option upon exercise of the Substitute Option.
(3) "Assigned Value" shall mean the Market/ Offer Price, as defined in
Section 7.
(4) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; PROVIDED that if Issuer is the issuer of
the Substitute Option, the Average Price shall be computed with respect to a
share of common stock issued by the person merging into Issuer or by any
company which controls or is controlled by such person, as the Holder may
elect.
(c) The Substitute Option shall have the same terms as the Option, PROVIDED,
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to the Holder. The issuer of the Substitute Option shall also
enter into an agreement with the then Holder or Holders of the Substitute Option
in substantially the same form as this Agreement, which shall be applicable to
the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option is then exercisable,
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option without
giving effect to the exercise of the Substitute Option. In the event that the
Substitute Option would be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this clause (e),
the issuer of the Substitute Option (the "Substitute Option Issuer") shall make
a cash payment to Holder equal to the excess of (i) the value of the Substitute
Option without giving effect to the limitation in this clause (e) over (ii) the
value of the Substitute Option after giving effect to the limitation in this
clause (e). This difference in value shall be determined by a nationally
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses incurred in connection with this
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Agreement and the Merger Agreement and the transactions contemplated hereby and
thereby (to the extent not previously reimbursed), and at the request of the
owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to
(x) the Highest Closing Price multiplied by the number of Substitute Shares so
designated plus (y) Grantee's reasonable out-of-pocket expenses incurred in
connection with this Agreement and the Merger Agreement and the transactions
contemplated hereby and thereby (to the extent not previously reimbursed). The
term "Highest Closing Price" shall mean the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding the
date the Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the case
may be, may exercise its respective right to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable, and in any event within five business
days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following a
request for repurchase pursuant to this Section 9 shall immediately so notify
the Substitute Option Holder and/ or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the portion of the
Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five business days after the date on which
the Substitute Option Issuer is no longer so prohibited; PROVIDED, HOWEVER, that
if the Substitute Option Issuer is at any time after delivery of a notice of
repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to obtain all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder or Substitute Share
Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, the Substitute Option Issuer shall promptly
(i) deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and
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the denominator of which is the Substitute Option Repurchase Price, or (B) to
the Substitute Share Owner, a certificate for the Substitute Common Shares it is
then so prohibited from repurchasing.
10. The 90-day or six-month period for exercise of certain rights under
Sections 2, 6, 7 and 13 shall be extended: (i) to the extent necessary to obtain
all regulatory approvals for the exercise of such rights, and for the expiration
of all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Issuer and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock
at any time and from time to time issuable hereunder, and all such shares,
upon issuance pursuant hereto, will be duly authorized, validly issued,
fully paid, nonassessable, and will be delivered free and clear of all
claims, liens, encumbrance and security interests and not subject to any
preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Grantee. This Agreement has been duly executed and
delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the Securities Act.
13. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within six months
following such Subsequent Triggering Event (or such later period as provided in
Section 10); PROVIDED, HOWEVER, that until the date 15 days following the date
on which the Federal Reserve Board approves an application by Grantee to acquire
the shares of Common Stock subject to the Option, Grantee may not assign its
rights under the Option except in (i) a widely dispersed public distribution,
(ii) a private placement in which no one party acquires the right to purchase in
excess of 2% of the voting shares of Issuer, (iii) an assignment to a single
party (E.G., a broker or investment banker) for the purpose of conducting a
widely dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts to make all filings
with, and to obtain consents of, all third parties and governmental authorities
necessary to the consummation of the transactions contemplated by this
Agreement, including without limitation making application to
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authorize for quotation the shares of Common Stock issuable hereunder on The
Nasdaq Stock Market's National Market or such other market or exchange on which
the shares of Issuer may be quoted or listed upon official notice of issuance
and applying to the Federal Reserve Board under the BHCA for approval to acquire
the shares issuable hereunder, but Grantee shall not be obligated to apply to
state banking authorities for approval to acquire the shares of Common Stock
issuable hereunder until such time, if ever, as it deems appropriate to do so.
15. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
18. This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
19. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
21. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
22. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
<TABLE>
<S> <C> <C>
GRANTEE:
F&M BANCORP
By: /s/ FAYE E. CANNON
-----------------------------------------
Name: Faye E. Cannon
Title: President & Chief Executive Officer
ISSUER:
PATAPSCO VALLEY BANCSHARES, INC.
By: /s/ JOHN S. WHITESIDE
-----------------------------------------
Name: John S. Whiteside
Title: President & Chief Executive Officer
</TABLE>
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<PAGE>
APPENDIX C
September 7, 1999
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
Ladies and Gentlemen:
Each of the undersigned ("Stockholder") beneficially owns and has sole
voting power with respect to the number of shares of the common stock, par value
$0.01 per share (the "Shares"), of Patapsco Valley Bancshares, Inc., a Maryland
corporation (the "Company"), indicated opposite such Stockholder's name below.
Simultaneously with the execution of this letter agreement, F&M Bancorp, a
Maryland corporation ("Buyer"), and the Company are entering into an Agreement
and Plan of Merger (the "Merger Agreement") providing, among other things, for
the merger of the Company with and into Buyer (the "Merger"). We understand that
Buyer has undertaken and will continue to undertake substantial expenses in
connection with the negotiation and execution of the Merger Agreement and the
subsequent actions necessary to consummate the Merger and the other transactions
contemplated by the Merger Agreement.
In consideration of, and as a condition to, Buyer's entering into the Merger
Agreement, and in consideration of the expenses incurred and to be incurred by
Buyer in connection therewith, as of the date first written above, Stockholder
agrees with Buyer as follows:
1. Stockholder shall vote or cause to be voted for the approval of the
Merger Agreement and the Merger, at any meeting of stockholders of the Company
called for the purpose of voting on the Merger Agreement or the Merger or any
adjournment thereof or in any other circumstance upon which a vote, consent or
other approval with respect to the Merger Agreement or the Merger is sought, all
of the Shares that Stockholder shall be entitled to so vote, whether such Shares
are held by Stockholder on the date of this letter agreement or are subsequently
acquired (whether pursuant to the exercise of stock options or otherwise).
Stockholder hereby waives any rights of appraisal or rights to dissent from the
Merger that Stockholder may have.
2. Stockholder represents that Stockholder has the complete and unrestricted
power and the unqualified right to enter into and perform the terms of this
letter agreement. Stockholder further represents that this letter agreement
constitutes a valid and binding agreement, enforceable against Stockholder in
accordance with its terms. Stockholder represents that Stockholder owns the
number of Shares indicated opposite Stockholder's name below, free and clear of
any liens, claims, charges or other encumbrances and restrictions of any kind
whatsoever ("Liens"), and has sole and unrestricted voting power with respect to
such Shares.
3. Notwithstanding anything herein to the contrary, the agreements contained
herein shall remain in full force and effect until the earlier of (a) the
consummation of the Merger and (b) the termination of the Merger Agreement in
accordance with Article IX thereof.
4. This letter agreement is to be governed by the laws of the State of
Maryland, without giving effect to the principles of conflicts of laws thereof.
If any provision hereof is deemed unenforceable, the enforceability of the other
provisions hereof shall not be affected.
5. Stockholder signs solely in his or her individual capacity with respect
to his or her beneficial ownership of Shares and makes no agreement or
understanding herein in any other capacity, including his or her capacity as a
director of the Company.
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6. Stockholder acknowledges and agrees that Buyer could not be made whole by
monetary damages in the event of any default by Stockholder of the terms and
conditions set forth in this Agreement. It is accordingly agreed and understood
that Buyer, in addition to any other remedy that it may have at law or in
equity, shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and specifically to enforce the terms and provisions hereof in
any action instituted in any court of the United States or in any state having
appropriate jurisdiction.
7. This Agreement may be executed in two or more counterparts, each of which
shall be considered an original but all of which together shall constitute the
same instrument.
8. Nothing contained herein shall be deemed to modify, supersede or in any
manner limit any other restrictions on the transfer of the Shares imposed by any
other agreement between Stockholder and Buyer, except that this Agreement
supersedes the letter, dated September 7, 1999, among each of the undersigned
and Buyer.
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Please confirm our agreement with you by signing a copy of this letter.
<TABLE>
<CAPTION>
DIRECTOR, EXECUTIVE NUMBER OF
OFFICER OR STOCKHOLDER SHARES SIGNATURES
- ---------------------- ----------- ----------
<S> <C> <C>
John F. Feezer, III (individual) 2,386.5050 /s/ JOHN F. FEEZER, III
-------------------------------
Kevin P. Huffman 1,927.5880 /s/ KEVIN P. HUFFMAN
-------------------------------
Eugene W. Iager, Sr. 41,298.8598 /s/ EUGENE W. IAGER, SR.
-------------------------------
Eugene W. Iager, Jr. 5,572.9177 /s/ EUGENE W. IAGER, JR.
MD Uniform Gift to Minor Act -------------------------------
Eugene W. Iager, Sr.
Custodian
Amy E. Iager 5,956.3700 /s/ AMY E. IAGER
MD Uniform Gift to Minor Act -------------------------------
Eugene W. Iager, Sr.
Custodian
Charles E. Iager, Jr. 18,059.7982 /s/ CHARLES E. IAGER, JR.
-------------------------------
Judith Elizabeth Iager 1,970.0568 /s/ JUDITH ELIZABETH IAGER
-------------------------------
Mark E. Iager 12,667.0000 /s/ MARK E. IAGER
-------------------------------
Mary Katherine Iager 1,518.3994 /s/ MARY KATHERINE IAGER
-------------------------------
Matthew E. Iager 12,730.9355 /s/ MATTHEW E. IAGER
-------------------------------
Michael Charles Iager 12,411.9274 /s/ MICHAEL CHARLES IAGER
-------------------------------
Nathan A. Riggs Iager 5,952.0626 /s/ NATHAN A. RIGGS IAGER
MD Uniform Gift to Minor Act -------------------------------
Eugene W. Iager, Sr.
Custodian
Tanya L. Iager 5,956.3700 /s/ TANYA L. IAGER
MD Uniform Gift to Minor Act -------------------------------
Eugene W. Iager, Sr.
Custodian
Richard H. Pettingill 102.1271 /s/ RICHARD H. PETTINGILL
-------------------------------
Ronald L. Eyre 802.5298 /s/ RONALD L. EYRE
-------------------------------
Fred T. Lewis 16,963.4913 /s/ FRED T. LEWIS
-------------------------------
Howard E. Harrison, III 1,544.5130 /s/ HOWARD E. HARRISON, III
-------------------------------
John S. Whiteside 39,757.8626 /s/ JOHN S. WHITESIDE
-------------------------------
Dennis W. Miller 0 /s/ DENNIS W. MILLER
-------------------------------
Edwin B. McKee 1,092.3204 /s/ EDWIN B. MCKEE
-------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DIRECTOR, EXECUTIVE NUMBER OF
OFFICER OR STOCKHOLDER SHARES SIGNATURES
- ---------------------- ----------- ----------
<S> <C> <C>
Barbara M. Broczkowski 0 /s/ BARBARA M. BROCZKOWSKI
-------------------------------
Bernard G. Malinowski 13,611.0010 /s/ BERNARD G. MALINOWSKI
-------------------------------
John F. Feezer, Jr. 28,975.2550 /s/ JOHN F. FEEZER, JR.
-------------------------------
Beulah M. Feezer 42,720.0000 /s/ BEULAH M. FEEZER
-------------------------------
WW Services Limited 19,225.8996 /s/ JOHN F. FEEZER, JR.
Partnership -------------------------------
John F. Feezer, Jr.
General Partner
/s/ JOHN F. FEEZER, JR.
-------------------------------
John F. Feezer, III
General Partner
Westminster Warehousing 6,860.8366 /s/ JOHN F. FEEZER, JR.
Services, Inc. -------------------------------
John F. Feezer, Jr.
President
</TABLE>
Agreed to and Accepted as of this
7(th) day of September, 1999
F&M BANCORP
By:
/s/ FAYE E. CANNON
- ------------------------
Name: Faye E. Cannon
Title: President and
Chief Executive Officer
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APPENDIX D
November 1, 1999
The Board of Directors
Patapsco Valley Bancshares, Inc.
8593 Baltimore National Pike
Ellicott City, MD 21043
Members of the Board:
Patapsco Valley Bancshares, Inc. ("Patapsco" or the "Company") has requested
a review of the proposed transaction (the "Transaction") involving the
acquisition of Patapsco by F&M Bancorp ("F&M") in a stock for stock merger.
Specifically, you have requested a review of the financial consideration to be
offered to the Company's stockholders as consideration for their shares in the
Transaction.
Pursuant to the Transaction, each share of the Company shall be converted
into 1.18 shares of F&M. Based upon the closing stock price of F&M on
October 29, 1999 of $ , the resulting value of the Company's stock is
$ per share.
In connection with the opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) the letter of intent dated June 2, 1999,
(iii) the Agreement and Plan of Merger, as amended, (iv) historical operating
results of Patapsco, (v) internally prepared projections for fiscal year 2000.
We have held discussions with the members of the management of the Company
regarding the past and current business operations as well as the future
prospects of the Company. We have reviewed industry specific data regarding the
valuation of publicly traded companies in the banking industry as well as other
such information as we considered appropriate.
Currently, we make a market in the Company's stock and we periodically
prepare research reports on the banking industry. Ferris, Baker Watts,
Incorporated, its clients, its officers or its employees, in the normal course
of business, may have a position in the common stock of the Company.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information reviewed by us for purposes
of this opinion whether publicly available or provided to us by the Company or
representatives of the Company and we have not assumed any responsibility for
independent verification of such information. We express no opinion as to the
consideration to be received by holders of shares who may perfect dissenters'
statutory fair appraisal remedies, if available. Based upon the foregoing and
based upon other such matters that we considered relevant, it is our opinion
that the consideration to be received by the stockholders of the Company as a
result of the Transaction is fair from a financial point of view as of the date
hereof.
Our opinion is necessarily based upon economic, market and other conditions
as in effect, and the information made available to us, as of the date hereof.
Our opinion is directed to the Board of Directors of the Company and does not
constitute a recommendation to any stockholder of the Company as to how the
stockholder should vote at the stockholders' meeting held in connection with the
Transaction. It is understood that subsequent developments may affect the
conclusions reached in this opinion and that we do not have any obligation to
update, revise or reaffirm this opinion.
Very truly yours,
Ferris, Baker Watts, Incorporated
D-1
<PAGE>
APPENDIX E
MARYLAND GENERAL CORPORATION LAW
TITLE 3. CORPORATIONS IN GENERAL--EXTRAORDINARY ACTIONS
SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS
SECTION 3-201. "SUCCESSOR" DEFINED.
(a) Corporation amending charter. In this subtitle, except as provided in
subsection (b) of this section, "successor" includes a corporation which amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock, unless the right to do so is reserved by
the charter of the corporation.
(b) Corporation whose stock is acquired. When used with reference to a share
exchange, "successor" means the corporation the stock of which was acquired in
the share exchange.
SECTION 3-202. RIGHT TO FAIR VALUE OF STOCK.
(a) General rule. Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under Section 3-105 (e) of this title;
(4) The corporation amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights,
unless the right to do so is reserved by the charter of the
corporation; or
(5) The transaction is governed by Section 3-602 of this title or
exempted by Section 3-603 (b) of this title.
(b) Basis of fair value.
(1) Fair value is determined as of the close of business:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, on the day notice is given or waived under Section
3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its
proposal.
(3) In any transaction governed by Section 3-602 of this title or
exempted by Section 3-603 (b) of this title, fair value shall be
value determined in accordance with the requirements of Section 3-603
(b) of this title.
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(c) When right to fair value does not apply. Unless the transaction is
governed by Section 3-602 of this title or is exempted by Section3-603 (b) of
this title, a stockholder may not demand the fair value of his stock and is
bound by the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc.:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, on the date notice is given or waived under Section
3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction
objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the
right to do so; or
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising
out of provisions for the treatment of fractional shares of stock
in the successor; or
(3) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company
Act of 1940 and the value placed on the stock in the transaction is
its net asset value.
SECTION 3-203. PROCEDURE BY STOCKHOLDER.
(a) Specific duties. A stockholder of a corporation who desires to receive
payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, within 30 days after notice is given or waived under
Section 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be
considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his
stock, stating the number and class of shares for which he demands
payment.
(b) Failure to comply with section.--A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share exchange,
transfer of assets, or charter amendment.
SECTION 3-204. EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under
Section 3-202 of this subtitle; and
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(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
SECTION 3-205. WITHDRAWAL OF DEMAND.
A demand for payment may be withdrawn only with the consent of the
successor.
SECTION 3-206. RESTORATION OF DIVIDEND AND OTHER RIGHTS.
(a) When rights restored. The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief; or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
SECTION 3-207. NOTICE AND OFFER TO STOCKHOLDERS.
(a) Duty of successor.
(1) The successor promptly shall notify each objecting stockholder in
writing of the date the articles are accepted for record by the
Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each
offer shall be accompanied by the following information relating to
the corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice. The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
SECTION 3-208. PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER
OF OBJECTORS.
(a) Petition for appraisal. Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors.
(1) If more than one appraisal proceeding is instituted, the court shall
direct the consolidation of all the proceedings on terms and
conditions it considers proper.
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(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
SECTION 3-209. NOTATION ON STOCK CERTIFICATE.
(a) Submission of certificate. At any time after a petition for appraisal is
filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
SECTION 3-210. APPRAISAL OF FAIR VALUE.
(a) Court to appoint appraisers. If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers--Filing. Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) Same--Contents. The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same--Service; objection.
(1) On the same day that the report is filed, the appraisers shall mail a
copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it
and request a hearing.
SECTION 3-211. ACTION BY COURT ON APPRAISERS' REPORT.
(a) Order of court. The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order.
(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair
value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
E-4
<PAGE>
(c) Judgment includes interest.
(1) Except as provided in paragraph (2) of this subsection, a judgment
for the stockholder shall award the value of the stock and interest
from the date as at which fair value is to be determined under
Section 3-202 of this subtitle.
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under Section 3-207
of this subtitle was arbitrary and vexatious or not in good faith. In
making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Costs of proceedings.
(1) The costs of the proceedings, including reasonable compensation and
expenses of the appraisers, shall be set by the court and assessed
against the successor. However, the court may direct the costs to be
apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer
for the stock made under Section3-207 of this subtitle was arbitrary
and vexatious or not in good faith. In making this finding, the court
shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under
Section3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) Effect of judgment. The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
SECTION 3-212. SURRENDER OF STOCK.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
SECTION 3-213. RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.
(a) General rule. A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under Section 3-202 of this subtitle.
E-5
<PAGE>
(b) Successor in transfer of assets. After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
E-6
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Maryland General Corporation Law permits a corporation to indemnify
its present and former directors, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their services in those capacities, unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
such proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty; or (b) the director actually received an
improper personal benefit in money, property, or services; or (c) in the case of
any criminal proceeding, the director had reasonable cause to believe that the
act or omission was unlawful. Maryland law permits a corporation to indemnify a
present and former officer to the same extent as a director. In addition to the
foregoing, a court of appropriate jurisdiction may under certain circumstances
order indemnification if it determines that the director or officer is fairly
and reasonably entitled to indemnification in view of all of the relevant
circumstances, whether or not the director or officer has met the standards of
conduct set forth in the preceding provisions or has been adjudged liable on the
basis that a personal benefit was improperly received in a proceeding charging
improper personal benefit to the director or the officer. If the proceeding was
an action by or in the right of the corporation or involved a determination that
the director or officer received an improper personal benefit, however, no
indemnification may be made if the individual is adjudged liable to the
corporation, except to the extent of expenses approved by a court of appropriate
jurisdiction. In addition, the Maryland General Corporation Law permits a
corporation to pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses (including attorney's fees) incurred by a
present or former director or officer made a party to the proceeding by reason
of his service in that capacity, provided that the corporation shall have
received (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the corporation; and (b) a written undertaking by or on behalf of the director
to repay the amount paid or reimbursed by the corporation if it shall ultimately
be determined that the standard of conduct was not met.
The Registrant has provided for indemnification of directors, officers,
employees, and agents in Article Eighth, Section (5) of its charter, as amended.
This provision reads as follows:
(5) The Corporation shall indemnify (a) its directors and officers,
whether serving the Corporation or at its request any other entity, to the
full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses under
the procedures and to the full extent permitted by law and (b) other
employees and agents to such extent as shall be authorized by the Board of
Directors or the Corporation's By-Laws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such by-laws, resolutions or contracts implementing
such provisions or such further indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is,
II-1
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(b) The Maryland General Corporation Law authorizes a Maryland corporation
to limit by provision in its charter the liability of directors and officers to
the corporation or to its stockholders for money damages except to the extent
that (i) the director or officer actually received an improper benefit or profit
in money, property, or services, for the amount of the benefit or profit
actually received, or (ii) a judgment or other final adjudication adverse to the
director or officer is entered in a proceeding based on a finding in the
proceeding that the director's or officer's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding.
The Registrant has limited the liability of its directors and officers for
money damages in Article Eighth, Section (6) of its charter. This provision
reads as follows:
(6) To the fullest extent permitted by Maryland statutory or decisional
law, no director or officer of this Corporation shall be personally liable
to the Corporation or its stockholders for money damages. No amendment of
the charter of the Corporation or repeal of any of its provisions shall
limit or eliminate the benefits provided to directors and officers under
this provision with respect to any act or omission which occurred prior to
such amendment or repeal.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT, SCHEDULES.
(a) Exhibits.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 7, 1999,
between F&M Bancorp and Patapsco Valley Bancshares, Inc. and
Amendment No. 1 thereto, dated October 19, 1999 (included as
Appendix A to the proxy statement-prospectus which is part
of this Registration Statement).
3.1 Articles of Incorporation of the Registrant with all
Articles of Amendment (incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1997).
3.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997).
5.1 Opinion of Gordon M. Cooley, General Counsel of the
Registrant as to the legality of the securities being
registered.
8.1 Opinion of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC regarding tax matters.
10.1 Stock Option Agreement, dated September 7, 1999, between F&M
Bancorp and Patapsco Valley Bancshares, Inc. (included as
Appendix B to the proxy statement-prospectus which is part
of this Registration Statement).
10.2 Voting Agreement, dated September 7, 1999, between F&M
Bancorp and certain Patapsco Valley stockholders, the
Patapsco Valley directors, and certain Patapsco Valley
executive officers (included as Appendix C to the proxy
statement-prospectus which is part of this Registration
Statement).
23.1 Consent of Arthur Andersen, LLP, Vienna, Virginia.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
23.2 Consent of Stegman & Company, Towson, Maryland.
23.3 Consent of Rowles & Company, LLP, Baltimore, Maryland.
23.4 Consent of Ferris, Baker Watts, Incorporated.
23.5 Consent of Gordon M. Cooley (included in Exhibit 5.1
hereto).
23.6 Consent of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC (included in Exhibit 8.1 hereto).
23.7 Consent of Howard E. Harrison, III, a person about to become
a director of F&M Bancorp.
99.1 Opinion of Ferris, Baker Watts Incorporated (included as
Appendix D to the proxy statement-prospectus which is part
of this Registration Statement).
99.2 Form of Proxy to be used by Patapsco Valley Bancshares, Inc.
</TABLE>
(b) Financial Statement Schedules.
None.
(c) Item 4(b) Information.
None.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder, through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) of
the Securities Act of 1933, the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(d) The undersigned registrant hereby undertakes that every prospectus
(1) that is filed pursuant to the paragraph immediately preceding, or (2) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to
Rule 415 of the Securities Act of 1933, will be filed as a part of an amendment
to the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Frederick, State of
Maryland, on the 1st day of November, 1999.
<TABLE>
<S> <C> <C>
F&M BANCORP
By: /s/ FAYE E. CANNON
-----------------------------------------
Faye E. Cannon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
We, the undersigned officers and directors of F&M Bancorp, hereby severally
and individually constitute and appoint each of Faye E. Cannon and Anne K.
Wright, our true and lawful attorney-in-fact and agent (with full power of
substitution and resubstitution in each case) of each of us to execute in the
name, place and stead of each of us (individually and in any capacity stated
below) any and all amendments (including post-effective amendments) to this
registration statement and all instruments necessary or advisable to enable said
company to comply with the Securities Act of 1933, as amended, and any rules,
regulations or requirements of the Securities and Exchange Commission in
connection therewith and to file the same with the Securities and Exchange
Commission, said attorney and agent to have power to act and to have full power
and authority to do and perform in the name and on behalf of each of the
undersigned every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as any of the undersigned
might or could do in person and we hereby ratify and confirm our signatures as
they may be signed by our said attorney and agent to any and all such amendments
and instruments.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE 1ST DAY OF NOVEMBER, 1999.
<TABLE>
<CAPTION>
NAME CAPACITY
---- --------
<S> <C>
/s/ FAYE E. CANNON President, Chief Executive Officer and
------------------------------------------- Director
Faye E. Cannon (Principal Executive Officer)
/s/ ANNE K. WRIGHT Controller and Vice President (Principal
------------------------------------------- Accounting Officer)
Anne K. Wright
/s/ R. CARL BENNA Director
-------------------------------------------
R. Carl Benna
/s/ HOWARD B. BOWEN Director
-------------------------------------------
Howard B. Bowen
/s/ JOHN D. BRUNK Director
-------------------------------------------
John D. Brunk
/s/ BEVERLY B. BYRON Director
-------------------------------------------
Beverly B. Byron
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME CAPACITY
---- --------
<S> <C>
/s/ MARTHA E. CHURCH Director
-------------------------------------------
Martha E. Church
/s/ ALBERT H. COHEN Director
-------------------------------------------
Albert H. Cohen
/s/ MAURICE A. GLADHILL Director
-------------------------------------------
Maurice A. Gladhill
/s/ CHARLES W. HOFF, III Director
-------------------------------------------
Charles W. Hoff, III
/s/ DONALD R. HULL Director
-------------------------------------------
Donald R. Hull
/s/ JAMES K. KLUTTZ Director
-------------------------------------------
James K. Kluttz
/s/ RICHARD W. PHOEBUS Director
-------------------------------------------
Richard W. Phoebus
/s/ H. DEETS WARFIELD Director
-------------------------------------------
H. Deets Warfield
/s/ THOMAS R. WINKLER Director
-------------------------------------------
Thomas R. Winkler
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 7, 1999
between F&M Bancorp and Patapsco Valley Bancshares, Inc. and
Amendment No. 1 thereto, dated October 19, 1999 (included as
Appendix A to the proxy statement-prospectus which is part
of this Registration Statement).
3.1 Articles of Incorporation of the Registrant with all
Articles of Amendment (incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1997).
3.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997).
5.1 Opinion of Gordon M. Cooley, General Counsel of the
Registrant as to the legality of the securities being
registered.
8.1 Opinion of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC regarding tax matters.
10.1 Stock Option Agreement, dated September 7, 1999, between F&M
Bancorp and Patapsco Valley Bancshares, Inc. (included as
Appendix B to the proxy statement-prospectus which is part
of this Registration Statement).
10.2 Voting Agreement, dated September 7, 1999, between F&M
Bancorp and certain Patapsco Valley stockholders, the
Patapsco Valley directors, and certain Patapsco Valley
executive officers (included as Appendix C to the proxy
statement-prospectus which is part of this Registration
Statement).
23.1 Consent of Arthur Andersen, LLP, Vienna, Virginia.
23.2 Consent of Stegman & Company, Towson, Maryland.
23.3 Consent of Rowles & Company, LLP, Baltimore, Maryland
23.4 Consent of Ferris, Baker Watts, Incorporated.
23.5 Consent of Gordon M. Cooley (included in Exhibit 5.1
hereto).
23.6 Consent of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC (included in Exhibit 8.1 hereto).
23.7 Consent of Howard E. Harrison, III, a person about to become
a director of F&M Bancorp.
99.1 Opinion of Ferris, Baker Watts Incorporated (included as
Appendix D to the proxy statement-prospectus which is part
of this Registration Statement).
99.2 Form of Proxy to be used by Patapsco Valley Bancshares, Inc.
</TABLE>
II-7
<PAGE>
EXHIBIT 5.1
November 1, 1999
Board of Directors
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
Re: F&M Bancorp
Registration Statement on Form S-4
Gentlemen and Mesdames:
I have acted as General Counsel to F&M Bancorp, a Maryland corporation (the
"Company"), in connection with the issuance and sale by the Company of an
aggregate of up to 1,675,811 shares of common stock, par value $5.00 per share
(the "Common Stock"), of the Company pursuant to an Agreement and Plan of
Merger, dated as of September 7, 1999 (the "Merger Agreement"), by and between
the Company and Patapsco Valley Bancshares, Inc., a Maryland corporation.
This opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In connection with this opinion, I have examined originals or copies,
certified or otherwise identified to my satisfaction, of (i) the Registration
Statement of the Company on Form S-4 filed with the Securities and Exchange
Commission (the "Commission") on the date hereof (the "Registration Statement"),
(ii) the Merger Agreement, (iii) the form of certificates to be used to
represent the shares of Common Stock, (iv) the Articles of Incorporation and
Bylaws of the Company, as amended to date, (v) resolutions adopted by the Board
of Directors of the Company relating to the Merger Agreement and the issuance of
the shares of Common Stock pursuant thereto, and (vi) such other documents as I
have deemed necessary or appropriate as a basis for the opinions set forth
below.
In my examination, I have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified, conformed or photostatic copies, and the
authenticity of originals of such copies. As to any facts material to this
opinion which I did not independently establish or verify, I have relied upon
statements or representations of officers and other representatives of the
Company and others.
I am admitted to the bar in the State of Maryland, and express no opinion as
to the laws of any other jurisdiction.
Based upon and subject to the foregoing, and assuming the due execution and
delivery of certificates representing the shares of Common Stock in the form
examined by me, I am of the opinion that the shares of Common Stock to be issued
by the Company pursuant to the Merger Agreement, when issued in accordance with
the terms of the Merger Agreement, will be duly authorized, validly issued,
fully paid and non-assessable.
<PAGE>
I hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. I also consent to the reference to me
under the caption "LEGAL MATTERS" in the Registration Statement. In giving such
consent I do not thereby admit that I am in the category of persons whose
consent is required under Section 7 of the Act.
Very truly yours,
/s/ Gordon M. Cooley
Gordon M. Cooley
General Counsel
<PAGE>
EXHIBIT 8.1
November 1, 1999
Patapsco Valley Bancshares, Inc.
8593 Baltimore National Pike
Ellicott City, Maryland 21043
Ladies and Gentlemen:
We have acted as counsel to Patapsco Valley Bancshares, Inc., a Maryland
corporation ("PVB"), in connection with the merger (the "Merger") of PVB with
and into F&M Bancorp, a Maryland corporation ("F&M") pursuant to and in
accordance with the terms and conditions of the Agreement and Plan of Merger
dated as of September 7, 1999, as amended on October 19, 1999, by and between
F&M and PVB (the "Agreement"), and the subsequent merger (the "Subsidiary Bank
Merger") of Commercial and Farmers Bank, a Maryland-chartered commercial bank
and a wholly owned subsidiary of PVB ("CFBank") with and into Farmers &
Mechanics National Bank, a banking association organized under the laws of the
United States and a wholly owned subsidiary of F&M ("F&M Bank") pursuant to and
in accordance with the terms and conditions of the Subsidiary Agreement and Plan
of Merger dated as of September 7, 1999 by and between F&M Bank and CFBank (the
"Subsidiary Merger Agreement"), and it is intended that the Subsidiary Bank
Merger be consummated immediately following the consummation of the Merger. This
letter and the opinions expressed herein are being delivered in connection with
the Agreement. Capitalized terms used but not defined in this letter have the
respective meanings given to them in the Agreement.
In giving the opinions set forth in this letter, we have examined and relied
upon originals, or copies of, documents, corporate records, and other
instruments, including the Agreement, and have conducted such investigations of
fact and law as we deemed necessary or advisable.
In giving the opinions set forth herein, we have assumed that (i) all
documents submitted to us as originals are authentic, (ii) all documents
submitted to us as certified or photostatic copies conform to the original
documents, (iii) all signatures on all documents submitted to us for examination
are genuine, (iv) all natural persons who executed any of the documents that
were reviewed or relied upon by us had full legal capacity at the time of such
execution, and (v) all public records reviewed by us or on our behalf are
accurate and complete. We also have assumed that the Agreement constitutes the
valid, binding and enforceable agreement of each of PVB and F&M, and that all
representations and warranties or statements of fact set forth in the Agreement
(except to the extent such representations and warranties constitute conclusions
of law to which this letter expresses our opinion) were when made and, as of the
Closing Date are, true, correct and complete, and that all obligations imposed
on the parties to the Agreement have been or will be performed or satisfied in
accordance with their terms. We have further assumed that you have disclosed to
us all of the documents that are relevant to the transactions that are the
subject of the opinions set forth herein.
We also have assumed that the following representations are true on the date
of this letter and will be true at the Effective Time:
1. The fair market value of the F&M Common Stock and other consideration to
be received by each PVB stockholder in the Merger will be approximately equal to
the fair market value of the PVB Common Stock surrendered by each such
stockholder in the Merger.
2. On the Closing Date, the fair market value of the assets of PVB will
exceed the sum of its liabilities and the liabilities, if any, to which its
assets are subject and the fair market value of the assets of CFBank will exceed
the sum of its liabilities and the liabilities, if any, to which its assets are
subject.
1
<PAGE>
3. None of the compensation received by any stockholder-employees of PVB
will be separate consideration for, or allocable to, any of the shares of PVB
Common Stock owned by such stockholder-employees, and any of the aforementioned
compensation will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arms-length for similar
services.
4. Neither F&M nor any party related to F&M has any plan or intention to
reacquire any of the F&M stock issued in the Merger.
5. The liabilities of PVB assumed by F&M and the liabilities to which the
transferred assets of PVB are subject were incurred by PVB in the ordinary
course of its business and the liabilities of CFBank assumed by F&M Bank and the
liabilities to which the transferred assets of CFBank are subject were incurred
by CFBank in the ordinary course of its business.
6. The number of shares of F&M Common Stock and/or the amount of cash
received by each PVB stockholder in exchange for his or her PVB Common Stock was
determined in arms-length negotiations between F&M and PVB.
7. No fractional shares of F&M Common Stock will be issued in the Merger.
Any shareholder of PVB entitled to a fractional interest in F&M Common Stock
will receive cash in lieu thereof. The payment of cash in lieu of fractional
share interests of F&M Common Stock will be solely for the purpose of avoiding
the expense and inconvenience to F&M of issuing fractional shares, and it does
not represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to the PVB shareholders in lieu of
issuing fractional shares of F&M Common Stock will not exceed one percent of the
total consideration that will be issued in the Merger to the PVB shareholders in
exchange for their PVB Common Stock. No PVB shareholder will receive cash in an
amount equal to or greater than the value of one full share of F&M Common Stock.
8. As a result of the Merger, at least 45% of the outstanding stock of PVB
will be exchanged for stock in F&M. For purposes of this representation, shares
of PVB Common Stock exchanged for cash (including PVB shares exchanged for cash
in lieu of fractional shares of F&M Common Stock) will be considered outstanding
stock of PVB as of the date of the Merger.
9. Following the Merger, F&M will continue the historic business of PVB or
use a significant portion of PVB's business assets in a business and following
the Subsidiary Bank Merger, F&M Bank will continue the historic business of
CFBank or use a significant portion of CFBank's business assets in a business.
10. There is no intercorporate indebtedness existing between F&M and PVB, or
between F&M Bank and CFBank, that was issued, acquired, or will be settled at a
discount.
11. No parties to the transaction are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
12. Neither PVB nor CFBank is under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
We have undertaken no independent investigation or verification with respect
to any of the foregoing representations or any of the other factual matters on
which our opinion is based.
Based upon the foregoing and subject to the limitations, assumptions and
qualifications set forth herein, we are of the opinion that:
1. The Merger and the Subsidiary Bank Merger will each constitute a
reorganization within the meaning of Section 368(a) of the Code, and PVB and
F&M, with respect to the Merger, and CFBank and F&M Bank, with respect to the
Subsidiary Bank Merger, will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code; and
2
<PAGE>
2. No gain or loss for United States federal income tax purposes will be
recognized by PVB as a result of the Merger.
3. No gain or loss for United States federal income tax purposes will be
recognized by CFBank as a result of the Subsidiary Bank Merger (except to the
extent that CFBank is required to recognize income due to the recapture of bad
debt reserves).
4. No gain or loss for United States federal income tax purposes will be
recognized by the PVB shareholders upon the exchange of their PVB Common Stock
solely for F&M Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in F&M Common Stock).
5. The aggregate tax basis of F&M Common Stock received by PVB shareholders
who exchange all of their PVB Common Stock solely for F&M Common Stock pursuant
to the Merger will be the same as the aggregate tax basis of the PVB Common
Stock surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received).
The opinions in this letter are limited to the United States federal income
tax matters specifically covered herein. We have not been asked to express, and
we do not express, an opinion in respect of any other tax consequences of the
Merger. Without limiting the generality of the foregoing, no opinion is
expressed with respect to the tax consequences of the Merger under any other
provisions of the Code or the regulations thereunder or in respect of the tax
consequences of any conditions existing at the Effective Time, or effects
resulting from the Merger, that are not specifically addressed in this letter.
No opinion is expressed in this letter in respect of the tax consequences of the
Merger under applicable foreign, state or local laws or regulations.
This letter is delivered, and the opinions set forth herein are given,
solely to you in connection with the transactions contemplated by the Agreement.
The opinions set forth herein may not be relied upon if any of the facts
contained in the documents referred to herein or otherwise assumed herein are or
later become inaccurate, or if any of the representations and warranties assumed
by us herein are or later become inaccurate. In addition, our opinions are based
upon existing law and applicable rules, regulations, rulings and court decisions
in effect as of the date of this letter, all of which are subject to change at
any time either prospectively or with retroactive effect. Any such change could
modify or adversely affect the opinions set forth herein. We undertake no
obligation to update or modify our opinions or this letter with respect to any
changes in or affecting the Merger or any of the foregoing that may occur after
the date of this letter.
We furnish this opinion to you solely to support the discussion set forth
under the headings "SUMMARY-The Merger is Generally a Tax-Free Transaction For
Patapsco Valley Stockholders," and "THE MERGER--Material Federal Income Tax
Consequences" in the Registration Statement, and we do not consent to its use
for any other purpose. We hereby consent to be named in the Registration
Statement under the foregoing headings and under "THE MERGER--Background of the
Merger" and to the filing of a copy of this opinion as Exhibit 8.1 to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act or the rules and regulations of the Commission thereunder.
GORDON, FEINBLATT, ROTHMAN, HOFFBERGER &
HOLLANDER, LLC
By: /s/ Lester D. Bailey
----------------------------------------
Lester D. Bailey, Member
3
<PAGE>
EXHIBIT 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated July 28, 1999 relating to the consolidated balance
sheets of F&M Bancorp and its subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1998 which report is included in the Registration Statement S-4,
which is to be filed on November 1, 1999 regarding F&M Bancorp's acquisition of
Patapsco Valley Bancshares, Inc.
<TABLE>
<S> <C> <C>
/s/ ARTHUR ANDERSEN LLP
-----------------------------------------
ARTHUR ANDERSEN LLP
Washington, D.C.
November 1, 1999
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
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, 1998, which report is incorporated
by reference from Monocacy's Annual Report on Form 10-K for the year ended
December 31, 1997, and to the reference to us under the caption "Experts" in the
proxy statement-prospectus that is a part of the registration statement.
/C/ STEGMAN & COMPANY
------------------------------------------------------------------
STEGMAN & COMPANY
Baltimore, Maryland
October 29, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of our report dated March 2, 1999 on the consolidated financial
statements of Patapsco Valley Bancshares, Inc. as of December 31, 1998, 1997 and
1996, and for the years then ended from Patapsco Valley's Annual Report on
Form 10-K for the year ended December 31, 1998, and to the reference to us under
the caption "Experts" in the Prospectus.
<TABLE>
<S> <C> <C>
/s/ ROWLES & COMPANY, LLP
-----------------------------------------
ROWLES & COMPANY, LLP
Baltimore, Maryland
October 29, 1999
</TABLE>
<PAGE>
EXHIBIT 23.4
November 1, 1999
Board of Directors
Patapsco Valley Bancshares, Inc.
8593 Baltimore National Pike
Ellicott City, MD 21043
Members of the Board:
We hereby consent to the use of our firm's name in the Form S-4 Registration
Statement of F&M Bancorp/Patapsco Valley Bancshares, Inc. and any amendments
thereto, and the inclusion of, summary of and references to our fairness opinion
in such filings including the Proxy Statement/Prospectus of F&M Bancorp/Patapsco
Valley Bancshares, Inc.
In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Sincerely,
Ferris, Baker Watts, Incorporated
/s/ Michael J. Coiro
----------------------------------------------------------------------
Michael J. Coiro, CFA
Senior Vice President
<PAGE>
EXHIBIT 23.7
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, I hereby
consent to being named as a person about to become a director of F&M Bancorp, a
Maryland corporation ("F&M"), in the Registration Statement on Form S-4 (and any
amendments) filed by F&M in connection with the Agreement and Plan of Merger,
dated September 7, 1999, and any amendment thereto, by and between Patapsco
Valley Bancshares, Inc., a Maryland corporation, and F&M, and to the filing of
this consent as an exhibit to that Registration Statement (and any amendments).
/s/ Howard E. Harrison, III
--------------------------------------------------------------------
Howard E. Harrison, III
Ellicott City, Maryland
November 1, 1999
<PAGE>
Exhibit 99.2
REVOCABLE PROXY
PATAPSCO VALLEY BANCSHARES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PATAPSCO VALLEY BANCSHARES, INC. FOR THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON DECEMBER 14, 1999
The undersigned hereby appoints Howard E. Harrison, III and John S.
Whiteside, each with full power of substitution, to act as attorneys and proxies
for the undersigned, and to vote all shares of Common Stock of Patapsco Valley
Bancshares, Inc. which the undersigned may be entitled to vote at the Special
Meeting of Stockholders (the "Special Meeting") to be held at the Turf Valley
Resort and Conference Center, 2700 Turf Valley Road, Ellicott City, Maryland, at
11:00 a.m. on Tuesday, December 14, 1999, and at any and all adjournments or
postponements thereof, as follows:
1. Approval of the Merger of Patapsco Valley Bancshares, Inc. with and into F&M
Bancorp.
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL LISTED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL.
If any other matters are properly brought before the Special Meeting, shares
represented by properly executed proxies will be voted in the discretion of the
proxies in accordance with their best judgment. Patapsco Valley Bancshares, Inc.
does not have any knowledge of any matters to be presented at the Special
Meeting other than the matters set forth above.
________________________________________________________________________________
<PAGE>
b FOLD AND DETACH HERE b
<PAGE>
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
The undersigned hereby acknowledges receipt from Patapsco Valley Bancshares,
Inc. prior to the execution of this proxy of a Notice of the Special Meeting of
Stockholders and the Proxy Statement-Prospectus, dated November , 1999, for the
Special Meeting to be held on December 14, 1999.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required. If a corporation, please sign in full corporate name by the
President or other authorized officer. If a partnership, please sign in
partnership name by an authorized person.
<TABLE>
<S> <C>
-------------------------
Signature of Stockholder
-------------------------
Print Name of Stockholder
Dated -------------, 1999
</TABLE>
PLEASE COMPLETE, SIGN, DATE, AND MAIL THIS PROXY PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
