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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-12638
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F&M BANCORP
(Exact name of registrant as specified in its charter)
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MARYLAND 52-1316473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(Address of principal executive offices) (Zip Code)
(301) 694-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($5 PAR VALUE)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 5, 1999, the aggregate market value of 8,053,861 shares of Common
Stock outstanding and held by non-affiliates of Registrant was $257,723,560.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement dated
March 22, 1999 relating to the 1999 Annual Meeting of Stockholders of the
Registrant are incorporated herein by reference into Part III.
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TABLE OF CONTENTS
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PART 1
Item 1 Business....................................................................................... 3
Acquisitions............................................................................... 3
Farmers & Mechanics National Bank.......................................................... 3
Home Federal Savings Bank.................................................................. 3
Competition................................................................................ 3
Financial Information About Industry Segments.............................................. 4
Supervision and Regulation................................................................. 4
Bank Holding Company Regulation........................................................ 4
Bank Regulation........................................................................ 5
Savings Bank Regulation................................................................ 5
Regulatory Restrictions................................................................ 5
Capital Requirements................................................................... 5
Interstate Banking..................................................................... 6
Monetary Policy........................................................................ 7
Legislation............................................................................ 7
Employees.................................................................................. 7
Item 2 Properties..................................................................................... 7
Item 3 Legal Proceedings.............................................................................. 8
Item 4 Submission of Matters to a Vote of Security Holders............................................ 8
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................... 8
Item 6 Selected Financial Data........................................................................ 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk..................................... 27
Item 8 Financial Statements and Supplementary Data.................................................... 31
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 63
PART III
Item 10 Directors and Executive Officers of the Registrant............................................. 64
Item 11 Executive Compensation......................................................................... 65
Item 12 Security Ownership of Certain Beneficial Owners and Management................................. 65
Item 13 Certain Relationships and Related Transactions................................................. 65
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 65
Signatures................................................................................................. 68
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PART I
ITEM 1. BUSINESS
F&M Bancorp ("Bancorp") is a Maryland corporation incorporated in 1984 and
is registered as a bank holding company under the Bank Holding Company Act of
1956. At December 31, 1998, Bancorp had consolidated total assets of $1.4
billion, total loans of $892 million, total deposits of $1.1 billion, and total
stockholders' equity of $131 million. Its principal subsidiaries are Farmers &
Mechanics National Bank (the "Bank") and Home Federal Savings Bank (the "Savings
Bank").
ACQUISITIONS
On May 29, 1998, Bancorp acquired Keller-Stonebraker Insurance, Inc.
("K-S"), Hagerstown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. K-S operates as an independent, wholly owned subsidiary of
the Bank and provides a full line of consumer and commercial business insurance
products through offices in Hagerstown, Cumberland, MD and Keyser, WV. Consumer
insurance products include annuities, homeowners, automobile, life and personal
umbrellas. Commercial business products include property and casualty packages,
workers' compensation, bonds, professional liability, umbrella, and 401(k) and
other benefit plans.
On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. and its commercial banking subsidiary, Taneytown Bank & Trust
Company, Taneytown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. Under the terms of the merger agreement, Taneytown Bank
was merged with and into the Bank at closing, increasing the Bank's assets by
approximately $304 million, loans by approximately $167 million, and deposits by
approximately $244 million.
FARMERS & MECHANICS NATIONAL BANK
The Bank was incorporated in 1865 as a national banking association under
the laws of the United States, and is the successor to Maryland State chartered
banking institutions dating from 1817. In 1915, the Bank acquired trust powers.
Following the acquisition of Taneytown Bank & Trust Company described above, it
provides broad-based commercial and retail banking services; personal trust,
investment management, and financial planning services; and a wide variety of
related financial products and services to individuals, businesses and
governmental units through 35 full-service community offices and 38 ATMs across
Frederick, Carroll, Montgomery, Baltimore and Howard Counties, MD, and Adams
County, PA. The Bank also operates the East Coast's first full-service mobile
unit, Express Bank, and delivers electronic services throughout its market with
personal and business PC banking access and with its 24-hour telephone banking
service, ExpressLine. At December 31, 1998, the Bank had total assets of $1.226
billion, total loans of $731 million, and total deposits of $957 million.
HOME FEDERAL SAVINGS BANK
The Savings Bank is federally chartered and was acquired by Bancorp in 1996
through its merger with Home Federal Corporation. The transaction was completed
as a tax-free exchange of shares accounted for as a pooling-of-interests. The
Savings Bank provides consumer, commercial banking, mortgage and brokerage
services, and offers full-service banking through eight community offices, 18
ATMs, and other electronic banking systems in Washington and Allegany Counties,
MD. At December 31, 1998, Savings Bank had total assets of $226 million, total
loans of $161 million, and total deposits of $183 million.
COMPETITION
The market for banking and bank-related services is highly competitive and
is growing more competitive every year. Traditional banks are developing
capabilities in nontraditional lines of business
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such as insurance, brokerage, mutual funds, investment banking, securities
underwriting and asset management, and commercial enterprises such as insurance
companies, investment banking firms and retailers are gaining regulatory
approvals to operate thrift banking subsidiaries.
Bancorp operates in a highly competitive marketplace that has intensified in
the past several years largely as a result of interstate banking and the
acquisition of in-state financial institutions by larger, out-of-state banks.
The full range of competition includes other bank holding companies, other
commercial banks, other savings and loan associations, credit unions, money
market funds, brokerage houses, investment managers, mortgage companies,
consumer finance companies, leasing companies, insurance carriers, other
insurance agencies, automobile manufacturers and their financing units, and
commercial loan syndicates.
Bancorp competes successfully in its marketplace by effectively focusing its
business energy and resources on meeting the specific needs of its customers
with a level of sales, service, and support intended to foster long-term
relationships.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
New Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"), is
applicable to Bancorp beginning January 1, 1998 and establishes standards for
reporting financial information about "operating segments" of an enterprise.
Among other provisions, the standard sets forth the conditions under which two
or more segments may be combined into a single operating segment such that
disclosure of financial information pertaining to individual segments so
combined may not be required.
As disclosed above, the principal business of the Bank and the Savings Bank
are similar inasmuch as both affiliates are engaged in community banking
services to consumers and commercial business establishments, offer similar
branch office and electronic delivery channels, and are subject to similar
regulation. In the aggregate, Bancorp derives more than 90% of its consolidated
revenue and net income and more than 90% of its consolidated assets from the
Bank and the Savings Bank.
Accordingly, the financial information required in this section under the
provisions of SFAS No. 131 is contained in the consolidated financial statements
beginning on page 31 which are hereby incorporated by reference.
SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION
Bancorp is registered with the Federal Reserve Board (the "Board") as a bank
holding company and is subject to reporting requirements, supervision and
examination by the Board under the Bank Holding Company Act of 1956 (the "Act"),
as amended. The Act restricts the business activities and acquisitions that may
be engaged in or made by Bancorp. Bancorp is generally prohibited from acquiring
direct or indirect ownership or control of more than 5% of any class of the
voting shares of any company which is not a bank or bank holding company and
from engaging in any business other than that of banking or of managing or
controlling banks, or of furnishing services to, or performing services for, its
affiliated banks. The Act and regulations thereunder require prior approval of
the Board of the acquisition by Bancorp of more than 5% of any class of the
voting shares of any additional bank. After prior approval or notice, Bancorp
may acquire other banks and bank holding companies and engage directly or
indirectly in certain activities closely related to banking. Bancorp must give
prior notice of certain purchases or redemptions of its outstanding equity
securities. Bancorp and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease, sale of
property, or furnishing of services.
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The Board may issue cease and desist orders against bank holding companies
and nonbank subsidiaries to stop actions believed to present a serious threat to
a subsidiary bank. The Board also regulates certain debt obligations of bank
holding companies.
BANK REGULATION
The Bank is subject to supervision and regulation by the Comptroller of the
Currency ("OCC"), the Board, and the Federal Deposit Insurance Corporation
("FDIC"). The regulator having primary supervisory and examination authority
over the Bank is the OCC. Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfers, responsiveness to community needs, management practices, compensation
policies, and other aspects of operations are subject to regulation by the
appropriate Federal supervisory authorities and the applicable banking laws of
the State of Maryland. The Bank may establish branch banking offices throughout
Maryland with the prior approval of the OCC. Mergers of the Bank with any other
bank would require approval of, and involve review by, various governmental
agencies.
Some of the aspects of the lending and deposit business of the Bank which
are subject to regulation by the Board or the FDIC include disclosure
requirements in connection with personal or mortgage loans, interest on deposits
and reserve requirements. In addition, the Bank is subject to numerous federal,
state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit, (including to
insiders), credit practices, disclosure of credit terms and discrimination in
credit transactions.
The Bank is subject to restrictions under federal law which limit the
transfer of funds by the Bank to Bancorp and its nonbanking subsidiaries,
whether in the form of loans, extensions of credit, investments, asset
purchases, or otherwise. Such transfers by the Bank to Bancorp or any of
Bancorp's nonbanking subsidiaries are limited in amount to 10% of the Bank's
capital and surplus and, with respect to Bancorp and all such nonbanking
subsidiaries, to an aggregate of 20% of the Bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to be secured in
specified amounts.
SAVINGS BANK REGULATION
The Savings Bank is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), and by the FDIC. The OTS has extensive
authority over the operations of savings associations. The OTS' enforcement
authority over all savings associations includes, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders, and to initiate injunctive actions.
REGULATORY RESTRICTIONS
See Note 14, Regulatory Restrictions, Notes to Consolidated Financial
Statements, page 61, for additional information regarding certain regulatory
restrictions on inter-company transfers of funds and on the payment of dividends
by Bank and Savings Bank to Bancorp.
CAPITAL REQUIREMENTS
Under regulatory capital adequacy guidelines discussed below, Bancorp, the
Bank and the Savings Bank were "well capitalized" at December 31, 1998 and 1997.
The Board, OCC and OTS maintain capital adequacy guidelines applicable to
Bancorp, the Bank and the Savings Bank, respectively, which set forth minimum
levels of capital relative to assets and risk-adjusted assets. The guidelines
require Bancorp and the Bank to maintain a minimum tangible (leverage) capital
ratio of 3% (1.5% for the Savings Bank) Tier 1 capital (primarily shareholders'
equity) to
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total regulatory assets, plus, for all but the most highly rated institutions,
an additional cushion of 100 to 200 basis points. Tier 1 capital for bank
holding companies includes common equity, minority interest in equity accounts
of consolidated subsidiaries, and qualifying perpetual preferred stock. Tier 1
capital excludes goodwill and other disallowed intangibles, certain deferred tax
assets and any net unrealized loss on marketable equity securities. At December
31, 1998, Bancorp's tangible capital ratio was 8.81%.
Bancorp and the Bank must also meet a minimum core, "Tier 1" capital to
risk-weighted assets ratio of 4% (3% for Savings Bank), and Bancorp, the Bank
and the Savings Bank must meet a minimum core and supplemental, "Total" capital
to risk-weighted assets ratio of 8%, measuring the amount of defined capital as
a percentage of the amount and nature of assets and commitments currently at
risk. The risk-weighted capital rules specify four categories of asset or
commitment risk, with each category being assigned a weight ranging from 0% to
100%, depending upon the defined risk of each category. At least 50% of
Bancorp's Total capital must be made up of Tier 1 capital elements including
common equity, retained earnings, guaranteed preferred beneficial interest in
junior subordinated debentures, and a limited amount of perpetual preferred
stock, after subtracting goodwill and certain other adjustments. The remainder
may consist of perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock, and a limited amount of loan
loss reserves. At December 31, 1998, Bancorp's Tier 1 and Total risk-weighted
capital ratios were 12.55% and 13.80%, respectively.
The FDIC requires "prompt corrective action" when an insured institution's
capital falls to certain levels. This rule restricts or prohibits certain
activities and requires an insured institution to submit a capital restoration
plan when it becomes undercapitalized. The restrictions and prohibitions become
more severe as an institution's capital level declines.
Capital adequacy guidelines also provide for consideration of interest rate
risk in the overall determination of a bank's minimum capital requirement. The
guidelines explicitly provide that a bank's exposure to declines in the economic
value of its capital due to changes in interest rates is a factor to be
considered in evaluating capital adequacy.
For additional information pertaining to capital adequacy and interest rate
risk management, see Management's Discussion and Analysis of Financial Condition
and Results of Operations, pages 27 and 28.
INTERSTATE BANKING
In September 1994, the Riegle-Neal Interstate Banking and Branching Act of
1994 (the "Banking and Branching Act") became law. The Banking and Branching Act
provides that, as of September 29, 1995, adequately capitalized and managed bank
holding companies may acquire banks in any state. State laws prohibiting
interstate banking or discriminating against out-of-state banks are preempted,
although states are permitted to require that target banks located within the
state be in existence for a period of up to five years before they become
subject to the Banking and Branching Act. Additionally, the Banking and
Branching Act establishes deposit caps that prohibit acquisitions if the
acquirer would thereafter control 30% or more of the deposits of insured banks
and thrifts held in the state in which the acquisition or merger is occurring or
in any state in which the target maintains a branch or 10% or more of the
deposits nationwide. State-level deposit caps are not preempted as long as they
do not discriminate against out-of-state acquirers, and the federal deposit caps
apply only to initial entry acquisitions.
In addition, the Banking and Branching Act provides that, as of June 1,
1997, adequately capitalized and managed banks may engage in interstate
branching by merging banks in different states and by opening and maintaining de
novo, or new, branches in states other than the states in which the banks
maintain their principal place of business. With respect to interstate merger,
each state had the opportunity to "opt out" of the interstate merger provisions
and, thus, prohibit such activity. With respect to de novo branching, the
Banking and Branching Act permits such activity only if a state has "opted in"
and specifically allowed such activity. The State of Maryland permits interstate
branching, both by mergers and by establishing new branches.
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Under regulatory guidelines, Bancorp is "well-capitalized" and, therefore,
meets the "adequately-capitalized" standard required to participate in
interstate affiliations with out-of-state banks and bank holding companies.
MONETARY POLICY
The earnings and growth of Bancorp, the Bank, and the Savings Bank are
affected by general economic conditions as well as by monetary policies of
regulatory authorities, including the Board, which regulates the national money
supply in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the Board are engaging in open market transactions in
U.S. Government securities, changing the discount rate on bank borrowings, and
changing reserve requirements against bank deposits. These techniques are used
in varying combinations to influence the overall growth and distribution of bank
loans, investments and deposits. Their use may also affect interest rates
charged on loans or paid on deposits. The effect of governmental monetary
policies on the earnings of Bancorp cannot be predicted.
LEGISLATION
In addition to extensive existing government regulation, laws and
regulations in the states in which Bancorp and its subsidiaries do business can
change in unpredictable ways, often with significant effects on the way in which
financial institutions may conduct business. The enactment of banking
legislation such as the Financial Institution Reform, Recovery and Enforcement
Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") has affected the banking industry by, among other things,
broadening the powers of the federal banking agencies in a number of areas.
Later banking legislation, such as the Riegle Community Development and
Regulatory Improvement Act of 1994 and the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, have eased some of the regulatory burdens
imposed on banks and bank holding companies, including certain FDICIA
requirements, and is intended to make the bank regulatory system more efficient.
Other legislation that has been enacted in recent years has substantially
increased the level of competition among commercial banks, thrift institutions
and non-banking institutions, including insurance companies, brokerage firms,
mutual funds, investment banks and major retailers. The enactment of the Banking
and Branching Act in 1994 has facilitated, and is expected to continue to
facilitate, consolidation within financial institutions that have separate
operations in two or more states and within the financial services industry. See
"Interstate Banking" above.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the states' legislatures, and before
the various bank regulatory agencies. Some of these proposals are significant
and, if adopted, could result in a fundamental restructuring of the financial
services industry. Although such legislation would likely have an effect on the
business of Bancorp and its subsidiaries, Bancorp cannot accurately predict what
that effect would be.
EMPLOYEES
At December 31, 1998, Bancorp and its subsidiaries had 620 full-time
equivalent employees.
ITEM 2. PROPERTIES
The following describes the location and general character of the principal
offices and other materially important physical properties of Bancorp and its
subsidiaries.
The Bank owns a fee simple interest in its principal executive offices and
main banking facility, totaling approximately 115,000 square feet, located at
110 Thomas Johnson Drive, Frederick, MD. The Savings Bank owns a fee simple
interest in its principal executive office and main banking facility, with
approximately 39,000 square feet, located at 122-128 West Washington Street,
Hagerstown, MD. Keller-Stonebraker leases approximately 8,000 square feet for
its headquarters office located at 1120 Professional
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Court, Hagerstown, MD, from a partnership in which Keller-Stonebraker's
executive officers hold a 30% limited partnership interest. Bancorp acquired, in
its merger with Monocacy Bancshares, Inc., a fee simple interest in the 43,500
square foot headquarters building of Taneytown Bank & Trust Company located at
222 East Baltimore Street, Taneytown, MD.
Out of a total of 40 additional branch offices of the Bank and the Savings
Bank at December 31, 1998, 22 were owned and 18 were leased. Information
concerning Bancorp's lease commitments is included in Note 12, Commitments and
Contingencies, Notes to Consolidated Financial Statements, page 57.
ITEM 3. LEGAL PROCEEDINGS
Bancorp and its subsidiaries become involved, from time to time, in various
legal proceedings incidental to their respective businesses. As disclosed in
Note 12, Commitments and Contingencies, Notes to Consolidated Financial
Statements, page 57, in the opinion of the management, there were no legal
matters pending as of December 31, 1998 which would have a material effect on
the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on November 24, 1998 to act upon
a proposal recommended by the Board of Directors of Bancorp to approve the
Agreement and Plan of Merger, dated as of September 4, 1998, by and between
Bancorp and Monocacy Bancshares, Inc. The following are the results of that
vote:
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For 4,929,872
Against or Withheld 123,755
Abstentions 34,583
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The principal market on which F&M Bancorp Common Stock is traded is The
NASDAQ Stock Market. The following table sets forth share prices and dividend
payments for the periods indicated:
STOCK PRICE AND DIVIDENDS (1)
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1998 1997
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HIGH LOW CLOSE DIVIDEND HIGH LOW CLOSE
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1st Q......................................... $ 39.28 $ 32.86 $ 39.28 $ 0.24 $ 25.85 $ 20.87 $ 24.49
2nd Q......................................... 44.05 36.42 42.44 0.24 25.85 23.13 25.17
3rd Q......................................... 43.00 32.50 33.88 0.25 33.10 24.27 31.67
4th Q......................................... 34.63 30.50 32.75 0.25 36.19 31.43 36.19
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DIVIDEND
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1st Q......................................... $ 0.20
2nd Q......................................... 0.20
3rd Q......................................... 0.21
4th Q......................................... 0.21
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(1) Data has been restated for 5% stock dividend paid in July 1998.
Information concerning restrictions on the ability of affiliates to transfer
funds in the form of dividends to Bancorp is included in Note 14, Regulatory
Restrictions, Notes to Consolidated Financial Statements, page 61.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
F&M BANCORP AND SUBSIDIARIES
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YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE --------------------------------------------------------------------
DATA) 1998 1997 1996 1995 1994
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OPERATING INCOME
Interest income.......................... $ 99,179 $ 96,397 $ 90,473 $ 87,203 $ 76,600
Interest expense......................... 46,878 44,602 42,378 40,286 31,222
------------ ------------ ------------ ------------ ------------
Net interest income...................... 52,301 51,795 48,095 46,917 45,378
Provision for credit losses.............. 3,056 2,910 1,822 2,536 1,875
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
credit losses.......................... 49,245 48,885 46,273 44,381 43,503
Net gains (losses) on sales of
securities............................. 1,104 76 (550) 20 (97)
Other noninterest income................. 18,679 18,220 15,533 15,710 12,283
Noninterest expense...................... 50,890 47,704 47,659 43,836 39,947
------------ ------------ ------------ ------------ ------------
Income before provision for income
taxes.................................. 18,138 19,477 13,597 16,275 15,742
Provision for income taxes............... 5,046 5,251 3,196 3,261 4,077
------------ ------------ ------------ ------------ ------------
Net income............................... $ 13,092 $ 14,226 $ 10,401 $ 13,014 $ 11,665
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER SHARE DATA
Net income--basic........................ $ 1.51 $ 1.65 $ 1.21 $ 1.52 $ 1.36
Net income--diluted...................... 1.49 1.64 1.21 1.51 1.36
Cash dividends paid...................... 1.06 0.68 0.49 0.48 0.41
Book value............................... 15.07 14.56 13.39 12.75 11.10
KEY RATIOS
Return on average assets................. 0.96% 1.10% 0.84% 1.14% 1.09%
Return on average shareholders' equity... 10.13 11.96 9.35 12.77 12.43
Average shareholders' equity to total
average assets......................... 9.44 9.16 9.03 8.89 8.79
Dividend payout ratio(1)................. 70.20 41.21 40.50 31.58 30.15
SELECTED AVERAGE BALANCES
Total average assets..................... $ 1,368,144 $ 1,298,543 $ 1,232,123 $ 1,145,991 $ 1,067,486
Total average shareholders' equity....... 129,179 118,921 111,217 101,874 93,868
AT PERIOD END
Loans, net of unearned income............ $ 891,741 $ 882,550 $ 829,229 $ 765,311 $ 769,861
Total assets............................. 1,449,682 1,338,559 1,273,265 1,221,859 1,123,252
Total deposits........................... 1,138,194 1,053,562 1,022,854 1,008,037 925,180
Total shareholders' equity............... 130,824 125,635 114,947 109,225 94,939
ASSET QUALITY
Nonperforming assets..................... $ 5,901 $ 12,549 $ 16,187 $ 18,949 $ 28,558
Nonperforming assets / total assets...... 0.41% 0.94% 1.27% 1.55% 2.54%
Net charge-offs to average loans
outstanding............................ 0.26 0.30 0.23 0.54 0.32
</TABLE>
(1) Reflects the percentage relationship of cash dividends paid to basic
earnings per share.
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ITEM 7. 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 F&M Bancorp and Subsidiaries ("Bancorp") for the three
years in the period ended December 31, 1998, and is intended to assist readers
in their analysis and understanding of the accompanying consolidated financial
statements and notes thereto.
Bancorp's acquisition of Keller-Stonebraker Insurance, Inc. ("K-S"),
completed in May 1998, and Monocacy Bancshares, Inc. and its wholly owned
subsidiary, Taneytown Bank & Trust Company ("TBT"), completed in November 1998,
are accounted for as poolings-of-interests transactions. Accordingly, the
consolidated financial statements, notes, and historical financial data
contained herein were restated for all prior periods presented to include the
financial condition and results of operations for K-S and TBT. Refer to Note 2,
Notes to Consolidated Financial Statements, for further information regarding
acquisition activity within the periods reported.
All per share amounts in this report have been restated to give effect to
subsequent stock dividends and shares issued in pooling-of-interest
transactions.
FORWARD-LOOKING STATEMENTS
Certain information included in the following section of this report, other
than historical information, may contain certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "likely", "unlikely", "continue",
or similar terms. Although Bancorp believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from those projected in the forward-looking statements.
1998 COMPARED TO 1997
OVERVIEW
Net income for 1998 decreased 8% to $13.1 million, or $1.49 per share, from
$14.2 million, or $1.64 per share, for 1997, largely reflecting the influence of
special items of an unusual or nonrecurring nature recognized in the periods
compared and as set forth in Table 1. Excluding special items in both years, net
(operating) income INCREASED 7% to $15.0 million, or $1.71 per share, from $14.0
million, or $1.61 per share, for 1997. Per share amounts are stated throughout
this section on a diluted basis unless specifically noted otherwise.
SPECIAL ITEMS--1998
Special items for 1998, as shown in Table 1 on an after-tax basis, included
$2.332 million of merger-related expense, or $0.27 per share. This amount
included $192 thousand ($0.02 per share) of merger-related expenses pertaining
to the 1998 integration of core processing systems and administrative functions
at the Savings Bank, acquired in November 1996, $190 thousand ($0.02 per share)
related to the May 1998 acquisition of K-S, and $1.922 million ($0.23 per share)
related to the acquisition and integration of TBT. A special provision for
possible loan losses related to the acquisition of TBT amounted to $460 thousand
after tax, or $0.05 per share The integration of TBT's core processing systems
and administrative functions was completed in February 1999. Net securities
gains realized by TBT during 1998 amounted to $661 thousand ($0.07 per share),
and Bancorp realized a net gain of $270 thousand ($0.03 per share) on the sale
of bank-owned real estate.
10
<PAGE>
SPECIAL ITEMS--1997
Special items for 1997, as shown in Table 1 on an after-tax basis, included
a $552 thousand gain on the sale of the credit card merchant processing business
($0.06 per share). Recognizing the difficulty in achieving sufficient economies
of scale over the near term, Bancorp elected to exit this highly competitive
line of business in favor of alternatives expected to produce greater
profitability over the long term. TBT incurred litigation costs of $177 thousand
($0.02 per share) and realized a $110 thousand gain on the sale of loans in 1997
($0.01 per share) and a $59 thousand gain on the sale of investment securities
($0.01 per share).
Pursuant to the provisions of the Plan and Agreement to Merge with Home
Federal, compensatory payments were recognized in 1997 for two executive
officers who elected to resign during the year. Such compensation expense
totaled $294 thousand ($0.03 per share) and was to be paid over a 24-month
period.
TABLE 1. NET INCOME EXCLUDING SPECIAL ITEMS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 EPS(1) 1997 EPS(1) 1996 EPS(1)
- -------------------------------------------------------------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income as reported........................................ $ 13,092 $ 1.49 $ 14,226 $ 1.64 $ 10,401 $ 1.21
Adjustments (net of income taxes):
Merger-related expense...................................... 2,332 0.27 294 0.03 1,176 0.14
Special provision for credit losses......................... 460 0.05 -- -- 200 0.02
Gain on sale of property.................................... (270) (0.03) -- -- -- --
Gain on sale of merchant services........................... -- -- (552) (0.06) -- --
Gain on sale of loans....................................... -- -- (110) (0.01) -- --
Litigation expense.......................................... -- -- 177 0.02 -- --
SAIF assessment............................................. -- -- -- -- 724 0.08
Securities losses (gains)................................... (661) (0.07) (59) (0.01) 203 0.02
--------- --------- --------- --------- --------- -----
Net income excluding special items.......................... $ 14,953 $ 1.71 $ 13,976 $ 1.61 $ 12,704 $ 1.47
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
</TABLE>
- ------------------------
(1) Diluted earnings per share
RESULTS OF OPERATIONS
NET INTEREST INCOME
Approximately 72% of Bancorp's gross revenue was derived from net interest
income in 1998, down from 74% in 1997. Net interest income is principally the
sum of interest and fees on loans plus interest and discount on investment
securities, less interest paid on deposits and borrowings. Although
interest-bearing deposits continued to represent Bancorp's principal funding
source, factors largely related to intense competition for bank deposits
throughout the financial services industry have forced banks to seek dependable,
relatively low-cost alternative sources of funds. Bancorp frequently supplements
its funding with Federal Home Loan Bank ("FHLB") borrowings, which have proven
to be reliable and cost-effective across all maturities selected. Other, more
traditional, funding sources include repurchase agreements and federal funds
purchased.
Net interest income is influenced by a number of external economic and
competitive factors such as Board monetary policy and its influence on market
interest rates; loan demand and competition from nonbank lenders; and
competition with investment managers, brokerage firms and investment bankers for
consumer and commercial business assets that might otherwise be deposited in
banks. Internal factors impacting levels and changes in net interest income are
attributed to Bancorp's interest rate risk management policies, which address a
variety of issues including loan and deposit pricing practices, funding
alternatives and maturity schedules. Historically, Bancorp has not made use of
derivatives, interest rate hedges or similar instruments or transactions to
manage interest rate risk, but is prepared to employ such instruments as
circumstances dictate.
11
<PAGE>
TABLE 2. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES INTEREST RATE BALANCES INTEREST RATE BALANCES INTEREST
--------- --------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Short-term funds................. $ 30,255 $ 1,868 6.17% $ 12,729 $ 619 4.86% $ 16,055 $ 891
--------- --------- --------- ----------- ----------- -----------
Investment securities:(1)
Taxable...................... 255,798 15,772 6.17 221,361 14,273 6.45 224,510 14,039
Tax-exempt(2)................ 100,352 7,040 7.02 98,559 7,185 7.29 104,210 7,791
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Total investment securities(2)... 356,150 22,812 6.40 319,920 21,458 6.71 328,720 21,830
--------- --------- ----------- --------- ----------- ----------- -----------
Loans, net, including loans held
for sale(2).................... 879,705 77,129 8.77 864,986 76,892 8.89 789,604 70,560
--------- --------- ----------- --------- ----------- ----------- -----------
Total interest-earning assets and
average yield(2)............... 1,266,110 $ 101,809 8.04% 1,197,635 $ 98,969 8.26% 1,134,379 $ 93,281
--------- ----------- ----------- ----------- -----------
Total noninterest-earning
assets......................... 102,034 100,908 97,744
--------- --------- ---------
Total assets..................... $1,368,144 $1,298,543 $1,232,123
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY
INTEREST-BEARING LIABILITIES
Interest bearing deposits:
Checking..................... $ 138,948 $ 2,670 1.92% $ 130,624 $ 2,653 2.03% $ 116,971 $ 2,505
Savings...................... 154,762 3,893 2.52 163,897 4,310 2.63 172,101 4,707
Money market accounts........ 146,577 4,797 3.27 126,654 3,850 3.04 127,497 3,860
Certificates of deposit...... 502,458 27,439 5.46 482,398 26,428 5.48 464,991 25,792
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Total interest bearing
deposits..................... 942,745 38,799 4.12 903,573 37,241 4.12 881,560 36,864
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Short-term borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase... 49,095 2,399 4.89 44,280 2,264 5.11 38,565 1,908
Other short-term
borrowings................. 26,703 1,476 5.53 62,001 3,663 5.91 41,819 2,393
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Total short-term borrowings...... 75,798 3,875 5.11 106,281 5,927 5.58 80,384 4,301
Long-term borrowings............. 73,964 4,204 5.68 24,350 1,434 5.89 18,765 1,213
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Total borrowed funds............. 149,762 8,079 5.39 130,631 7,361 5.63 99,149 5,514
--------- --------- ----------- --------- ----------- ----------- --------- -----------
Total interest-bearing
liabilities and average rate
incurred....................... 1,092,507 46,878 4.29 1,034,204 44,602 4.31 980,709 42,378
--------- --------- ----------- --------- ----------- ----------- --------- -----------
NONINTEREST-BEARING LIABILITIES
Demand deposits.................. 134,457 131,769 127,323
Other liabilities................ 12,001 13,649 12,874
--------- --------- ---------
Total noninterest-bearing
liabilities.................... 146,458 145,418 140,197
--------- --------- ---------
Total liabilities................ 1,238,965 1,179,622 1,120,906
--------- --------- ---------
Shareholders' equity............. 129,179 118,921 111,217
--------- --------- ---------
Total liabilities and
shareholders' equity........... $1,368,144 $1,298,543 $1,232,123
--------- --------- ---------
--------- --------- ---------
Net interest income.............. $ 54,931 $ 54,367 $ 50,903
--------- ----------- -----------
--------- ----------- -----------
Net interest spread(3)........... 3.75% 3.95%
----------- -----------
----------- -----------
Net interest margin (4).......... 4.34% 4.54%
----------- -----------
----------- -----------
<CAPTION>
AVERAGE
(DOLLARS IN THOUSANDS) RATE
-----------
<S> <C>
ASSETS
INTEREST-EARNING ASSETS
Short-term funds................. 5.55%
-----------
Investment securities:(1)
Taxable...................... 6.25
Tax-exempt(2)................ 7.48
-----------
Total investment securities(2)... 6.64
-----------
Loans, net, including loans held
for sale(2).................... 8.94
-----------
Total interest-earning assets and
average yield(2)............... 8.22%
-----------
Total noninterest-earning
assets.........................
Total assets.....................
LIABILITIES AND SHAREHOLDERS'
EQUITY
INTEREST-BEARING LIABILITIES
Interest bearing deposits:
Checking..................... 2.14%
Savings...................... 2.74
Money market accounts........ 3.03
Certificates of deposit...... 5.55
-----------
Total interest bearing
deposits..................... 4.18
-----------
Short-term borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase... 4.95
Other short-term
borrowings................. 5.72
-----------
Total short-term borrowings...... 5.35
Long-term borrowings............. 6.46
-----------
Total borrowed funds............. 5.56
-----------
Total interest-bearing
liabilities and average rate
incurred....................... 4.32
-----------
NONINTEREST-BEARING LIABILITIES
Demand deposits..................
Other liabilities................
Total noninterest-bearing
liabilities....................
Total liabilities................
Shareholders' equity.............
Total liabilities and
shareholders' equity...........
Net interest income..............
Net interest spread(3)........... 3.90%
-----------
-----------
Net interest margin (4).......... 4.49%
-----------
-----------
</TABLE>
SEE FOOTNOTES, NEXT PAGE.
12
<PAGE>
- ------------------------------
(1) Average Balances and the related average rate are based on amortized cost.
(2) Interest and yields on obligations of states and political subdivisions and
tax-exempt loans are computed on a taxable equivalent basis using the U.S.
statutory tax rate of 35 percent. In addition, loan fee income is included
in the interest income calculations, and nonaccrual loans are included in
the average loan base upon which the interest rate earned on loans is
calculated.
(3) Net interest spread is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to interest-bearing liabilities.
(4) Net interest margin is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to earning assets.
Table 2 displays average balances, interest and interest rates for each
major category of interest-earning assets and interest-bearing liabilities over
a three-year period. Total interest income, expressed on a taxable-equivalent
basis as if every dollar of interest income was fully taxable at the same
federal and state tax rate, increased 3% to $101.8 million for 1998 from $99.0
million for 1997. The increase was attributed largely to an 11% increase in
average investment securities supplementing a modest 2% growth in average loans.
Bancorp took deliberate action to reduce its indirect loan portfolio by
approximately $17.8 million in 1998 and was not willing to compete with the
aggressive tactics of loan syndicates regarding commercial loan pricing and
credit structure evident during most of the year. Favoring growth in lower
yielding investment securities then, the yield on average earning assets
declined to 8.04% for 1998, from 8.26% for 1997.
Total interest expense increased 5%, to $46.9 million for 1998, from $44.6
million for 1997, but trailed the rate of growth of interest-bearing liabilities
as the average cost of funds declined to 4.29% for 1998, from 4.31% for 1997.
Average interest-bearing deposits, led by a $27.4 million increase in Bancorp's
successful new T-Bill Plus Money Market Deposit Account, with interest rates
tied to the 13-week Treasury Bill, increased by 4% for 1998, and average
borrowings, principally long term, increased by 15%. While the 11% growth in
average repurchase balances between 1998 and 1997 reflected growth in underlying
commercial account relationships, a 19% increase in FHLB borrowings was related
chiefly to investment opportunities with unusually attractive terms and
contributions to growth in net interest income in 1998.
The net interest margin ("margin"), which is the ratio of taxable-equivalent
net interest income to average earning assets, has been under considerable
pressure throughout the banking industry, especially over the past two years. In
contrast to 1997, when loan growth and a stable cost of funds prevented
Bancorp's margin from declining, a moderate decline in the margin to 4.34% for
1998 compared with 4.54% for 1997 was principally the result of modest growth in
total average loans, with stronger growth in lower-yielding investment
securities. Furthermore, Bancorp's earning assets have a tendency to re-price
more quickly than its interest-bearing liabilities, further exacerbating the
margin decline as interest rates moved lower in 1998. Inasmuch as interest rates
may decline further in 1999, Bancorp is prepared to evaluate available options
to mitigate any possible adverse impact on net interest income.
Table 3, Analysis of Changes in Net Interest Income, quantifies the change
in net interest income for the periods presented and, as discussed above, shows
how much was attributed to volume factors and how much was influenced by
interest rate movements. Bancorp endeavors to maintain a relatively balanced
position between interest-sensitive assets and interest-sensitive liabilities
without forgoing opportunities to benefit from relevant interest rate conditions
within the boundaries of prudent risk management and established corporate
policy. Further information may be found on page 26, Asset and Liability
Management ("ALM"), Market Risk, and in Table 15, Effects of Changes in Interest
Rates on MVE, page 28.
13
<PAGE>
TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 OVER 1997 1997 OVER 1996
--------------------------------- ---------------------------------
DUE TO CHANGE IN(1) DUE TO CHANGE IN(1)
INCREASE -------------------- INCREASE --------------------
(IN THOUSANDS) (DECREASE) VOLUME RATES (DECREASE) VOLUME RATES
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans(2)(3).............. $ 237 $ 1,299 $ (1,062) $ 6,332 $ 6,703 $ (371)
Interest and dividends on investment
securities:
Taxable..................................... 1,499 2,146 (647) 234 (199) 433
Tax-exempt(4)............................... (145) 129 (274) (606) (416) (190)
Interest on federal funds sold................ 335 77 258 (319) (345) 26
Interest-bearing deposits with banks.......... 914 834 80 47 124 (77)
----------- --------- --------- ----------- --------- ---------
Total......................................... 2,840 4,485 (1,645) 5,688 5,867 (179)
----------- --------- --------- ----------- --------- ---------
INTEREST EXPENSE
Interest on deposits.......................... 1,558 1,662 (104) 377 993 (616)
Interest on federal funds purchased and
securities sold under agreements to
repurchase.................................. 135 238 (103) 356 290 66
Interest on other short-term borrowings....... (2,187) (1,966) (221) 1,270 1,190 80
Interest on long-term borrowings.............. 2,770 2,820 (50) 221 336 (115)
----------- --------- --------- ----------- --------- ---------
Total......................................... 2,276 2,754 (478) 2,224 2,809 (585)
----------- --------- --------- ----------- --------- ---------
Net Interest Income........................... $ 564 $ 1,731 $ (1,167) $ 3,464 $ 3,058 $ 406
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
rate and volume changes in porportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Included in the change in interest income are decreased fees on loans of
$431 for the year ended December 31, 1998 over 1997 and increased fees on
loans of $355 for the year ended December 31, 1997 over 1996.
(3) Tax equivalent adjustments of $235 for 1998, $127 for 1997 and $160 for 1996
are included in the calculation of rate changes for interest and fees on
loans.
(4) Tax-equivalent adjustments of $2,394 for 1998, $2,443 for 1997 and $2,648
for 1996 are included in the calculation of rate changes for tax-exempt
investment securities changes for tax-exempt investment securities.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was increased by 5% for 1998, to $3.1
million, from $2.9 million for 1997, related to modest loan growth for the year
and the relatively high, but declining, level of consumer loan losses. Total net
loan losses for 1998 declined by 11% from 1997, and amounted to 0.26% of average
total loans for the year. The decrease was attributed principally to a 25%
reduction in net consumer loan losses. A five-year history of the allowance for
credit losses is displayed in Table 13, page 23.
14
<PAGE>
NONINTEREST INCOME
Noninterest income increased 8% in 1998, to $19.8 million, from $18.3
million in 1997. Excluding special items of an unusual or nonrecurring nature
described below, noninterest income from continuing operations increased 7% in
1998.
Included in the results for 1998 were net investment securities gains of
$1.0 million realized by TBT in the eleven-month period prior to the merger and
a $467 thousand gain realized by Bancorp on the sale of real estate previously
used as a branch office facility. Noninterest income for 1997 included a $179
thousand gain on the sale of loans and $89 thousand in gains on sales of
investment securities by TBT. Bancorp realized a $900 thousand gain on the sale
of the credit card merchant processing business discussed earlier. If the
operating income recognized in 1997 from this line of business was also
eliminated, comparable noninterest income before special items increased 12% in
1998.
Trust income declined 2% in 1998. Excluding approximately $240 thousand
represented by an unusually large estate administration fee realized in 1997,
the underlying rate of increase in trust income was 8% for 1998. Trust assets
under management, having declined significantly related to the late-summer 1998
stock market correction, rebounded to close 1998 at $432 million, 13% above $383
million in assets under management at year-end 1997.
Service charges on deposit accounts increased 3% in 1998, to $6.0 million,
from $5.8 million for 1997 related largely to transaction volume.
Insurance income increased 15% to $2.3 million for 1998 from $2.0 million
for 1997 related to increased sales of consumer and commercial business
insurance products.
Gains on sales of loans increased 38% to $2.0 million for 1998 from $1.4
million for 1997. The historically low mortgage rate environment that was
sustained throughout 1998 triggered high refinancing volume.
Other operating income declined 15% to $5.3 million for 1998 from $6.2
million for 1997 principally related to the mid-year 1997 sale of the credit
card merchant processing business and the termination of revenue therefrom.
NONINTEREST EXPENSE
Total noninterest expense, sometimes referred to as overhead expense,
increased 7% to $50.9 million for 1998 from $47.7 million for 1997. Excluding
merger related expense and other special items of an unusual or nonrecurring
nature as disclosed in Table 1 and discussed below, noninterest expense
increased 2% reflecting stringent cost controls and significant efficiencies
realized through the 1998 integration of the Savings Bank's core processing
systems and administrative functions.
Salaries increased 5% to $21.6 million for 1998 from $20.6 million for 1997.
Excluding $454 thousand in 1997 compensation expense recognized pursuant to the
provisions of an agreement with Savings Bank, salaries increased 7% attributed
to merit increases, new hires, promotions, and performance-based incentive
payments.
Pension and other employee benefits declined 1% to $4.88 million for 1998
from $4.95 million for 1997 related to favorable experience in medical and
health programs.
Merger-related expense increased to $3.2 million for 1998 from $0.5 million
for 1997 largely associated with legal and accounting fees, severance payments,
contract terminations, and similar expenses incurred in connection with the
acquisition and merger of Monocacy Bancshares, Inc. which closed on November 30,
1998.
15
<PAGE>
Occupancy and equipment expense declined 1% to $7.8 million for 1998 from
$7.9 million for 1997 attributed to cost reductions associated with a systems
conversion at the Savings Bank completed in June 1998.
Other operating expense decreased 3% to $13.4 million for 1998 from $13.8
million for 1997 related principally to discontinued operating expense
associated with the sale of the credit card merchant processing business in the
third quarter of 1997.
INCOME TAXES
Income tax expense decreased by 4% to $5.0 million for 1998, from $5.3
million for 1997, largely related to a 7% decrease in income before taxes. Tax
expense varies with changes in the level of income before taxes, the amount of
tax-exempt income realized, and the relationship of these changes to each other.
Also, the amount of income tax expense differs from the amount computed at
statutory rates primarily because interest realized on state and municipal
obligations and certain loans is tax-exempt. See Note 8, INCOME TAXES, Notes to
Consolidated Financial Statements.
The effective tax rate, which is the provision for income taxes divided by
income before taxes, increased slightly to 27.8% for 1998 compared with 27.0%
for 1997 largely related to non-tax-deductible expenses associated with the
acquisitions of K-S and Monocacy Bancshares in 1998.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Bancorp's financial condition can be evaluated by analyzing its sources and
uses of funds. The comparison of average balances in Table 4 shows an increase
in average earning assets ("Uses") for 1998 of $68.5 million, or 6% above 1997,
and indicates how that increase was funded ("Sources").
INVESTMENT SECURITIES
The investment securities portfolio is structured and managed to meet
several important financial objectives:
- To maintain sufficient balance sheet liquidity to meet any reasonable
decline in deposits and any anticipated increase in loans.
- To insure safety of principal and interest by investing only in securities
permitted by regulation.
- To maximize income consistent with liquidity and safety requirements.
- To maintain a source of assets which can be pledged as collateral for
federal, state and municipal deposits.
The investment securities portfolio is held in two categories for accounting
and reporting purposes: (1) available-for-sale ("AFS") securities are those
which are intended to be held for an indefinite period of time, but not
necessarily to maturity, and (2) held-to-maturity ("HTM") securities are those
for which there is both a positive intent and an ability to hold to maturity.
These determinations are made when the securities are purchased and are integral
to Bancorp's asset/liability ("ALM") policies. The accounting policy for
investment securities is set forth in Note 1, NATURE OF BANKING ACTIVITIES AND
SIGNIFICANT ACCOUNTING POLICIES, Notes to Consolidated Financial Statements.
Short-term uses of funds, shown in Table 4 as federal funds and
interest-bearing deposits with banks, are principally a function of the
management of Bancorp's daily cash and liquidity requirements. An increase in
these accounts, for example, may indicate a temporary excess of investable funds
not otherwise required for increases in loans or investments, or decreases in
deposits. Conversely, a decrease in these categories usually indicates the
opposite.
16
<PAGE>
TABLE 4. SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- ---------
AVERAGE INCREASE AVERAGE INCREASE AVERAGE
BALANCE (DECREASE) % BALANCE (DECREASE) % BALANCE
--------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING USES
Federal funds sold....... $ 5,959 $ 1,123 23.2% $ 4,836 $ (5,972) (55.3)% $ 10,808
Interest-bearing deposits
with banks............. 24,296 16,403 207.8 7,893 2,646 50.4 5,247
Taxable investment
securities............. 255,798 34,437 15.6 221,361 (3,149 ) (1.4) 224,510
Tax-exempt investment
securities............. 100,352 1,793 1.8 98,559 (5,651 ) (5.4) 104,210
Loans, net............... 879,705 14,719 1.7 864,986 75,382 9.5 789,604
--------- ----------- --------- --------- ----------- --------- ---------
Total uses............... $1,266,110 $ 68,475 5.7% $1,197,635 $ 63,256 5.6% $1,134,379
--------- ----------- --------- --------- ----------- --------- ---------
--------- ----------- --------- --------- ----------- --------- ---------
FUNDING SOURCES
Interest-bearing
checking............... $ 138,948 $ 8,324 6.4% $ 130,624 $ 13,653 11.7% $ 116,971
Savings.................. 154,762 (9,135 ) (5.6) 163,897 (8,204 ) (4.8) 172,101
Money market accounts.... 146,577 19,923 15.7 126,654 (843 ) (0.7) 127,497
Certificates of
deposit................ 502,458 20,060 4.2 482,398 17,407 3.7 464,991
Short-term borrowings.... 75,798 (30,483 ) (28.7) 106,281 25,897 32.2 80,384
Long-term borrowings..... 73,964 49,614 203.8 24,350 5,585 29.8 18,765
Noninterest-bearings
funds (net)(1)......... 173,603 10,172 6.2 163,431 9,761 6.4 153,670
--------- ----------- --------- --------- ----------- --------- ---------
Total sources............ $1,266,110 $ 68,475 5.7% $1,197,635 $ 63,256 5.6% $1,134,379
--------- ----------- --------- --------- ----------- --------- ---------
--------- ----------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------
(1) Noninterest-bearing liabilities and shareholders' equity, less
noninterest-earning assets.
TABLE 5. INVESTMENT PORTFOLIO DISTRIBUTION-AMORTIZED COST(1)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U. S. Treasury securities and obligations of U.S. government
corporations and agencies................................... $ 118,271 $ 116,387 $ 103,553
Obligations of states and political subdivisions.............. 125,347 102,545 100,272
Mortgage-backed securities.................................... 154,848 89,544 103,632
Other securities.............................................. 22,055 18,217 8,512
--------- --------- ---------
Total......................................................... $ 420,521 $ 326,693 $ 315,969
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Reflects the cost of securities purchased, adjusted for amortization of
premiums and accretion of discounts, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments
made in accordance with Financial Accounting Standards Board Statement No.
115.
17
<PAGE>
TABLE 6. INVESTMENT PORTFOLIO ANALYSIS--DECEMBER 31, 1998
<TABLE>
<CAPTION>
MATURING IN:
-----------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ----- --------- ----- --------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:(1)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 13,016 5.29% $ 56,065 5.72% $ 49,190 6.46% $ --
Obligations of states and
political subdivisions(2)....... 250 6.21 5,082 6.87 16,285 6.60 19,973
Other bonds....................... -- -- 2,328 5.51 -- -- --
Mortgage-backed securities(3)..... 5,862 7.24 61,979 6.19 23,186 6.49 49,347
Equity securities................. -- -- -- -- -- -- 19,727
----------- --- --------- --- --------- --- ---------
Total available-for-sale.......... 19,128 5.90 125,454 5.99 88,661 6.50 89,047
----------- --- --------- --- --------- --- ---------
Held-to-maturity:
Obligations of states and
political subdivisions(2)....... 7,471 7.75 29,868 7.22 25,855 6.97 20,563
Mortgage-backed securities(3)..... -- -- 2,355 6.78 10,932 7.11 1,187
----------- --- --------- --- --------- --- ---------
Total held-to-maturity.............. 7,471 7.75 32,223 7.19 36,787 7.01 21,750
----------- --- --------- --- --------- --- ---------
Total investment securities......... $ 26,599 6.42% $ 157,677 6.24% $ 125,448 6.65% $ 110,797
----------- --- --------- --- --------- --- ---------
----------- --- --------- --- --------- --- ---------
<CAPTION>
TOTAL
YIELD AMOUNT YIELD
----- --------- -----
<S> <C> <C> <C>
Available-for-sale:(1)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... --% $ 118,271 5.98%
Obligations of states and
political subdivisions(2)....... 6.56 41,590 6.61
Other bonds....................... -- 2,328 5.51
Mortgage-backed securities(3)..... 6.44 140,374 6.37
Equity securities................. 5.42 19,727 5.42
--- --------- ---
Total available-for-sale.......... 6.24 322,290 6.19
--- --------- ---
Held-to-maturity:
Obligations of states and
political subdivisions(2)....... 6.62 83,757 7.04
Mortgage-backed securities(3)..... 6.40 14,474 7.00
--- --------- ---
Total held-to-maturity.............. 6.61 98,231 7.04
--- --------- ---
Total investment securities......... 6.31% $ 420,521 6.39%
--- --------- ---
--- --------- ---
</TABLE>
- ------------------------------
(1) Reflects the cost of securities purchased, adjusted for amortization of
premiums and accretion of discounts, which differs from the amounts
reflected in the 1998 consolidated balance sheet due to fair value
adjustments made in accordance with Financial Accounting Standards Board
Statement No. 115.
(2) Yields are presented on a fully taxable equivalent basis using the federal
statutory rate of 35%.
(3) Estimated prepayment assumptions have been incorporated into the maturities
for mortgage-backed securities based upon historical trends.
Table 5, Investment Portfolio Distribution, displays the year-end amortized
cost of the investment securities portfolio, which increased 29% in 1998 to
$420.5 million at December 31. The most significant change was evidenced by a
$65.3 million, or 73% increase in mortgage-backed securities as yields and terms
were relatively attractive in 1998.
As shown in Table 6, Investment Portfolio Analysis, the amortized cost of
AFS securities totaled $322.3 million and represented 77% of the total
securities portfolio and 22% of consolidated total assets at December 31, 1998.
AFS securities provide substantial liquidity, chiefly for unexpected loan growth
or deposit withdrawal requirements. Conversely, HTM securities, which amounted
to $98.2 million, or 23% of the total portfolio at December 31, 1998, are
expected to be held until their scheduled maturities and are composed of
longer-term, tax-exempt state and municipal obligations and mortgage-backed
securities.
In management's opinion, no securities presented any material risk
characteristics at December 31, 1998. Approximately 99% of all obligations of
states and political subdivisions were rated A or higher by either Moody's
Investors Service or Standard and Poors, and approximately 83% were rated AAA at
December 31, 1998.
LOANS
As presented in Table 4, Sources and Uses of Funds, average loans increased
2% in 1998, whereas total loans at December 31, 1998 increased 1% to $891.7
million from $882.6 million at December 31, 1997 as shown in Table 7, Loan
Portfolio Mix. The table reveals an $18.2 million, or 7% reduction in consumer
loans, primarily lower-yielding indirect automobile loans, and a $27.4 million,
or 16% increase in higher-
18
<PAGE>
yielding commercial mortgage loans. The mix change improved the overall quality
and yield of the total loan portfolio.
Management believes that its underwriting standards are conservative and
consistently applied. Although geographically focused on its growing primary
marketplace, which has proven to be economically vibrant and stable over the
years, Bancorp's credit risk is well diversified as to loan type and average
loan size.
TABLE 7. LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- -------------------- -------------------- -------------------- ---------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development............. $ 61,328 6.9% $ 67,026 7.6% $ 65,453 7.9% $ 53,149 6.9% $ 56,808
Secured by farmland....... 8,452 0.9 8,479 1.0 9,006 1.1 8,633 1.1 8,645
Residential mortgage...... 265,394 29.8 257,121 29.1 241,275 29.1 232,543 30.4 225,185
Other mortgage............ 198,131 22.2 170,742 19.3 161,284 19.4 155,754 20.4 173,153
Agricultural................ 560 0.1 819 0.1 985 0.1 1,690 0.2 2,183
Commercial and industrial... 92,091 10.3 99,043 11.2 84,569 10.2 80,957 10.6 71,348
Consumer.................... 257,968 28.9 276,134 31.3 258,493 31.2 227,764 29.8 226,802
Other loans................. 7,817 0.9 3,186 0.4 8,164 1.0 4,821 0.6 5,737
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total loans................. $ 891,741 100.0% $ 882,550 100.0% $ 829,229 100.0% $ 765,311 100.0% $ 769,861
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
%
---------
<S> <C>
Real estate:
Construction and land
development............. 7.4%
Secured by farmland....... 1.1
Residential mortgage...... 29.3
Other mortgage............ 22.5
Agricultural................ 0.3
Commercial and industrial... 9.3
Consumer.................... 29.4
Other loans................. 0.7
---------
Total loans................. 100.0%
---------
---------
</TABLE>
Loans are classified according to security, borrower or purpose.
TABLE 8. LOAN MATURITIES AND INTEREST SENSITIVITY(1)AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
MATURING IN:
-----------------------------------------------
<S> <C> <C> <C> <C>
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS(2) FIVE YEARS YEARS TOTAL
----------- ----------- --------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate:
Construction and land development................................. $ 24,485 $ 23,585 $ 13,258 $ 61,328
Secured by farmland............................................... 1,367 6,599 486 8,452
Agricultural........................................................ 167 394 -- 561
Commercial and industrial........................................... 38,582 39,997 13,511 92,090
Other loans......................................................... 6,064 547 1,206 7,817
----------- ----------- --------- ----------
Total............................................................. $ 70,665 $ 71,122 $ 28,461 $ 170,248
----------- ----------- --------- ----------
----------- ----------- --------- ----------
Rate sensitivity:
Predetermined rate................................................ $ 54,117 $ 22,959
Floating rate..................................................... 17,005 5,502
----------- ---------
----------- ---------
Total............................................................. $ 71,122 $ 28,461
----------- ---------
----------- ---------
</TABLE>
- ------------------------
(1) Excludes real estate mortgage loans and consumer loans.
(2) Includes demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts.
19
<PAGE>
DEPOSITS
Representing the principal source of funds for loans and investments,
average total deposits, as shown in Table 9, Average Deposits and Rates Paid,
increased by 4% in 1998 over 1997, with increases in every major deposit type
except Savings. However, owing to the strong inflow of deposits in the fourth
quarter of 1998, total deposits for the year increased 8% to $1.138 billion at
December 31 from $1.054 billion at December 31, 1997. The Bank's new money
market deposit account called T-Bill Plus, introduced in the last half of 1997,
increased 250%, or $31.0 million in 1998, from $12.4 million at December 31,
1997, to $43.4 million at December 31, 1998. The yield on T-Bill Plus re-sets
weekly with the 13-week Treasury Bill providing a tangible, money market rate of
return to depositors. Of further significance, both noninterest-bearing and
interest-bearing checking balances increased by 10% during 1998 contributing to
Bancorp's overall lower cost of deposits for the year compared with 1997.
Table 10, Maturity of Time Deposits $100,000 and Over, reflects a growth
rate of 45% for 1998, most notably in the popular six- through twelve-month
maturities. Generally the highest cost source of deposits, they are also a
relatively stable source coming largely from local municipalities. Bancorp does
not expect to see this category exceed recent levels of 5-7% of total deposits.
TABLE 9. AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits...... $ 134,457 $ 131,769 $ 127,323
--------- --------- ---------
Interest-bearing deposits:
Checking............................... 138,948 1.92% 130,624 2.03% 116,971 2.14%
Money market........................... 146,577 3.27 126,654 3.04 127,497 3.03
Savings................................ 154,762 2.52 163,897 2.63 172,101 2.74
Time................................... 502,458 5.46 482,398 5.48 464,991 5.55
--------- --- --------- --- --------- ---
Total interest-bearing deposits.... 942,745 4.12 903,573 4.12 881,560 4.18
--------- --- --------- --- --------- ---
Total average deposits................. $1,077,202 3.60% $1,035,342 3.60% $1,008,883 3.65%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
TABLE 10. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Maturing in:
3 months or less............................................... $ 23,793 $ 15,543 $ 15,318
Over 3 months through 6 months................................. 13,092 9,887 12,781
Over 6 months through 12 months................................ 20,830 10,849 7,738
Over 12 months................................................. 13,308 12,568 14,592
--------- --------- ---------
Total............................................................ $ 71,023 $ 48,847 $ 50,429
--------- --------- ---------
--------- --------- ---------
</TABLE>
BORROWINGS
Table 4, Sources and Uses of Funds, reveals a shift from short-term
borrowings, which are composed principally of federal funds purchased and
securities sold under agreements to repurchase, to long-term borrowings.
Short-term borrowings decreased $30.5 million to an average of $75.8 million for
1998, and
20
<PAGE>
long-term borrowings, which are mainly composed of Federal Home Loan Bank
advances maturing beyond one year, increased $49.6 million to an average of
$74.0 million for 1998. As a member of the Federal Home Loan Bank of Atlanta,
Bancorp takes advantage of a wide variety of attractively priced funding options
supported by residential mortgage lending and community reinvestment activities.
Table 11, Short-Term Borrowings, discloses continued growth, largely in repo
relationships with commercial business customers, to $57.6 million at December
31, 1998. Short-term advances from the Federal Home Loan Bank declined to $23.9
million at December 31, 1998 as Bancorp locked in some attractive longer-term
spreads during the year.
TABLE 11. SHORT-TERM BORROWINGS
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
End of period outstanding........................................................ $ 57,626 $ 45,051 $ 41,876
Highest month-end balance........................................................ 62,266 61,745 52,079
Average balance.................................................................. 49,095 44,280 38,565
Average rate of interest:
At end of year................................................................. 4.13% 5.33% 5.03%
During year.................................................................... 4.89 5.11 4.95
</TABLE>
SHORT-TERM ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
End of period outstanding........................................................ $ 14,228 $ 54,051 $ 62,728
Highest month-end balance........................................................ 50,051 68,551 64,808
Average balance.................................................................. 23,858 58,745 36,452
Average rate of interest:
At end of year................................................................. 5.62% 5.95% 5.92%
During year.................................................................... 5.63 5.91 6.15
</TABLE>
RISK ELEMENTS
NONPERFORMING ASSETS
Table 12, Nonperforming Assets and Contractually Past-Due Loans, displays a
five-year history of steadily declining nonperforming assets. Totaling just $5.9
million, or 0.41% of total consolidated assets at December 31, 1998, Bancorp
resolved its historical loan problems at an annual rate of 33% over the period
shown, largely reflecting substantial progress by the Savings Bank in dealing
with a legacy of the late-1980s. Furthermore, as nonaccrual loans have continued
to decline, the coverage ratio of the allowance-to-nonperforming loans increased
to a five-year high of 305%.
Loans that were past due 90 days or more and not classified as nonperforming
totaled $2.0 million at December 31, 1998, or 0.22% of year-end total loans,
compared with $1.3 million one year earlier, or 0.15% of total loans at December
31, 1997. Historically, there has been no direct correlation between loans past
due 90 days or more and nonperforming loans or loan losses.
21
<PAGE>
TABLE 12. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans(1)....................................... $ 4,196 $ 7,357 $ 8,074 $ 8,212 $ 18,271
Other real estate owned net of valuation allowance(2)..... 1,705 5,192 8,113 10,737 10,287
--------- --------- --------- --------- ---------
Total nonperforming assets.................................. $ 5,901 $ 12,549 $ 16,187 $ 18,949 $ 28,558
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loans past due 90 or more days as to interest or
principal(3).............................................. $ 1,991 $ 1,298 $ 2,977 $ 1,121 $ 1,379
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans to total loans.......................... 0.47% 0.83% 0.97% 1.07% 2.37%
Nonperforming assets to total loans plus other real estate
owned..................................................... 0.66% 1.41% 1.93% 2.44% 3.66%
Nonperforming assets to total assets........................ 0.41 0.94 1.27 1.55 2.54
Allowance for credit losses times nonperforming loans....... 3.05X 1.64X 1.45X 1.42X 0.73X
Allowance for credit losses times nonperforming assets...... 2.17 0.96 0.73 0.62 0.47
</TABLE>
- ------------------------
(1) Loans are placed on nonaccrual status when, in the option of management,
reasonable doubt exists as to the full, timely collection of interest or
principle or a specific loan meets the criteria for nonaccrual status
established by regulatory authorities. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed
against current period interest income. No interest is taken into income on
nonaccrual loans unless received in cash or until such time the borrower
demonstrates sustained performance over a period of time in accordance with
contractual terms.
(2) Other real estate owned includes: banking premises no longer used for
business purposes, real estate acquired by foreclosure (in partial or
complete satisfaction of debt) or otherwise surrendered by by the borrower
to Bancorp's possession. Other real estate owned is recorded at the lower of
cost or fair value on the date of acquisition or transfer from loans.
Write-downs to fair value at the date of acquisition are charged to the
allowance for credit losses. Subsequent to transfer, these assets are
adjusted through a valuation allowance to the lower of the net carrying
value or the fair value (net of estimated selling expenses) based on
periodic appraisals.
(3) Nonaccrual loans are not included.
POTENTIAL PROBLEM LOANS
At December 31, 1998, there were $23.1 million in loans that management had
reasonable concerns might become contractually past due or be classified as a
nonperforming asset. This amount includes $5.1 in loans to borrowers who may not
be able to meet the contractual terms of their obligations because of
uncertainties pertaining to their state of readiness for Year 2000 issues as
disclosed under the caption, Year 2000 Computer Readiness, which follows.
These loans are subject to the same close attention and regular credit
reviews as extended to loans past due 90 days or more and nonperforming assets.
22
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
Provisions charged to earnings are made to the allowance for credit losses
in periodic amounts determined by management as necessary to absorb possible
future loan losses. Bancorp's policy regarding the maintenance of an adequate
allowance is set forth in Note 1, Notes to Consolidated Financial Statements, on
page 39.
Table 13, Analysis of Allowance for Credit Losses, shows a five-year history
of activity reflecting relative stability in both the annual charge-off ratio
and the level of the allowance related to total loans. Of particular
significance is that net consumer loan losses, which had been increasing
annually to a peak of $2.0 million in 1997, declined substantially in 1998 to
$1.5 million. Stringent credit standards pertaining to indirect consumer loans
have resulted in a substantial decrease in losses and a recovery ratio of 57%
for 1998.
Table 14, Allocation of Allowance for Credit Losses, discloses management's
allocation of the allowance to various loan categories, notably a re-allocation
from consumer and construction loans to commercial and commercial real estate
loans, with a substantial increase in the unallocated portion. This reflects the
underlying trends in loan growth and the change in mix discussed earlier. As
they are estimates, this allocation is not intended to limit the amount of the
allowance available to absorb losses from any type of loan and should not be
viewed as an indicator of the specific amount or specific loan category in which
future charge-offs may ultimately occur.
See Note 4, Loans, Notes to Consolidated Financial Statements, for
disclosures pertaining to impaired loans and the specific allowance related
thereto.
While management believes the allowance for credit losses was adequate at
December 31, 1998, the estimate of losses and related allowance may change in
the near term due to economic and other uncertainties inherent in the estimation
process.
TABLE 13. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Average loans outstanding less average unearned
income(1).......................................... $ 875,196 $ 860,585 $ 788,669 $ 777,394 $ 707,837
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for credit losses at beginning of year..... $ 12,069 $ 11,739 $ 11,700 $ 13,336 $ 13,705
---------- ---------- ---------- ---------- ----------
Charge-offs:
Real estate........................................ 1,053 849 605 2,855 1,000
Commericial and industrial......................... 273 168 10 570 332
Consumer........................................... 4,010 4,426 3,629 2,942 2,215
---------- ---------- ---------- ---------- ----------
Total charge-offs.................................... 5,336 5,443 4,244 6,367 3,547
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate........................................ 430 431 462 435 79
Commercial and industrial.......................... 104 7 2 63 18
Consumer........................................... 2,494 2,425 1,997 1,697 1,206
---------- ---------- ---------- ---------- ----------
Total recoveries..................................... 3,028 2,863 2,461 2,195 1,303
---------- ---------- ---------- ---------- ----------
Net charge-offs...................................... 2,308 2,580 1,783 4,172 2,244
---------- ---------- ---------- ---------- ----------
Additions charged to operating expense............... 3,056 2,910 1,822 2,536 1,875
---------- ---------- ---------- ---------- ----------
Allowance for credit losses at end of year........... $ 12,817 $ 12,069 $ 11,739 $ 11,700 $ 13,336
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net charge-offs to average loans outstanding......... 0.26% 0.30% 0.23% 0.54% 0.32%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for credit losses to year-end loans........ 1.44% 1.37% 1.42% 1.53% 1.73%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
(1) Excludes loans held for sale.
23
<PAGE>
TABLE 14. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------------ ------------------------ ------------------------ ------------------------
% GROSS % GROSS % GROSS % GROSS
(DOLLARS IN THOUSANDS) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development........ $ 1,767 6.9% $ 2,193 7.6% $ 2,121 7.9% $ 2,617 6.9%
Residential
mortgage........... 920 29.8 737 29.1 570 29.1 554 30.4
Other mortgage....... 3,419 22.2 2,936 19.3 2,987 19.4 2,670 20.4
Commercial and
industrial........... 1,764 10.3 1,088 11.2 1,105 10.2 1,396 10.6
Consumer............... 3,599 28.9 4,167 31.3 2,837 31.2 2,449 29.8
Unallocated............ 1,348 1.9 948 1.5 2,119 2.2 2,014 1.9
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total allowance for
credit losses........ $ 12,817 100.0% $ 12,069 100.0% $ 11,739 100.0% $ 11,700 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1994
------------------------
% GROSS
(DOLLARS IN THOUSANDS) AMOUNT LOANS(1)
----------- -----------
<S> <C> <C>
Real estate:
Construction and land
development........ $ 3,055 7.4%
Residential
mortgage........... 1,048 29.3
Other mortgage....... 4,189 22.5
Commercial and
industrial........... 1,647 9.3
Consumer............... 2,643 29.4
Unallocated............ 754 2.1
----------- -----
Total allowance for
credit losses........ $ 13,336 100.0%
----------- -----
----------- -----
</TABLE>
(1) Reflects the percentage of loans in each category to total loans.
YEAR 2000 COMPUTER READINESS
This disclosure is provided pursuant to the Securities and Exchange
Commission's Interpretation entitled "Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies and
Municipal Securities Issuers" effective August 4, 1998.
The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year (such
as "98" for the year 1998). Bancorp and its subsidiaries have undertaken to
review their operating and information technology systems and other mechanical
equipment such as elevators to identify systems in which the Year 2000 issue
exists and to undertake the necessary renovation or replacement of these systems
so that the companies will continue to operate as usual after January 1, 2000.
In July 1997, Bancorp established a Year 2000 issue task force comprised of
representatives across functional lines representing all of its subsidiaries.
The Year 2000 issue task team developed a Year 2000 issue assurance plan to
coordinate and direct its efforts. The plan was approved by the board of
directors on September 11, 1997. The task force provides quarterly reports to
the board outlining the status of its efforts and its anticipated work in the
coming quarter.
The assurance plan is composed of five phases: 1) awareness; 2) assessment;
3) renovation; 4) validation; and, 5) implementation, which mirror guidelines
developed by the Federal Financial Institutions Examination Council ("FFIEC") to
deal with the Year 2000 issue. The assurance plan includes a timeline for
completion of all tasks identified. As of December 31, 1998, all critical tasks
are current to the timeline. Activities under each of the phases are ongoing as
new vendor and customer relationships are created, including specifically, as
the result of Bancorp's November 30, 1998 acquisition of Monocacy Bancshares,
Inc. and its principal subsidiary, Taneytown Bank & Trust Company.
The task team has undertaken the education of all associates regarding the
Year 2000 issue both for internal systems and as the problem may affect
customers. Education of customers has begun through periodic information in the
form of brochures and seminars. The task team has also received guidance from
various regulators including the OCC, Securities and Exchange Commission
("SEC"), OTS, and FFIEC.
24
<PAGE>
All vendors who supply hardware, software and/or services of any type which
may be affected by this issue have been identified and contacted. A total of
four hundred and eighty-seven (487) products and services are represented by
this vendor listing and have been categorized as either mission critical (those
that directly impact daily operations), concern (those that can be replaced with
manual processes), or low priority (little or no impact on daily operations).
Vendors have been surveyed as to their Year 2000 issue readiness. The task team
has confirmed vendor responses by testing products and services where possible
to verify their readiness.
Of the one hundred and eighteen (118) products and services identified as
mission critical:
A. Thirty-eight (38) are not date sensitive and are deemed Year 2000
issue ready.
B. Twenty-one (21) cannot be tested internally. The progress of these
service providers' efforts addressing the Year 2000 issue are being
closely monitored. All twenty-one (21) advise that their products
and/or services are either Year 2000 issue ready now or will be in
advance of January 1, 2000. Examples of products and/or services that
are not capable of internal testing include utilities and
communications services.
C. Forty-six (46) have been successfully tested.
D. One (1) has been tested and failed. A Year 2000 issue ready
replacement system has been identified and is being installed
currently.
E. Twelve (12) have not yet been tested. Testing on these twelve (12)
was suspended because of vendor commitments to either update existing
products and/or services or to support testing. Bancorp anticipates
that these twelve (12) remaining products and/or services will be
tested by March 31, 1999. Of the twelve (12), six (6) are the same
make and model ATM machine.
Bancorp relies on Kirchman Corporation's Dimension 3000 software for
maintaining customer accounting records. Kirchman is a provider of accounting
systems for more than 1,000 banking clients worldwide. Kirchman's internal
methodologies addressing Year 2000 issues have been reviewed and have received
ITAA*2000 certification by the Information Technology Association of America, an
independent non-profit organization. Further, Kirchman systems have passed all
internal tests and testing is complete. Conversion of the Monocacy Bancshares,
Inc. core processing system, also Kirchman, to Bancorp's system is scheduled for
February, 1999.
The task team has developed procedures for assessing Year 2000 issue risk
for its funds providers including depositors, which are intended to manage and
limit potential risks associated with large or significant concentrations of
retail and commercial deposits. The Year 2000 issue readiness of providers of
lines of credit have been reviewed.
The task team has also established procedures, utilizing the standard risk
classifications employed to manage credit risk, for reviewing the Year 2000
issue readiness of borrowers. Loan relationships with balances exceeding
$250,000 or which are particularly computer reliant have been reviewed. Fifteen
(15) relationships totaling $4,916,400 have been risk rated "watch" one (1)
totaling $689,500 has been risk rated "OLEM" and one (1) totaling $1,720,000 has
been risk rated "substandard". The total value of these seventeen (17)
relationships is $7,325,900. The increase over the last quarter reflects loan
relationships acquired through the Monocacy Bancshares, Inc. transaction. These
credits are being reviewed further to determine borrower progress in becoming
Year 2000 issue ready.
The internal audit department is performing progress audits of the work of
the Year 2000 issue task force and reporting those results to Bancorp's audit
committee quarterly.
During the last quarter, efforts have been made to enhance Bancorp's
existing contingency plan for Year 2000 issues. The contingency planning
committee adopted the four phase model as recommended by the FFIEC and OCC
advisory letter 98-7. Phase 1, organization and planning, and Phase 2, business
impact
25
<PAGE>
analysis, were complete at September 30, 1998 as required by regulators. Phase
3, the contingency plan itself, and Phase 4, designing a method of validation,
were completed at December 31, 1998, also as required by the regulators. Testing
of business resumption plans will be complete by March 31, 1999.
To date, Bancorp has spent a total of $102,000 addressing Year 2000 issues
and anticipates additional out-of-pocket expenses of $177,000 to complete. Work
is done predominantly by existing associates as part of their normal work
responsibilities. Bancorp has hired one additional associate whose primary
responsibility is testing. Bancorp does not separately track these internal
costs which are principally payroll related.
Bancorp believes its efforts, and those of its third-party providers will
effectively address Year 2000 issues before January 1, 2000. Because Bancorp is
so reliant on third-party providers (which products and services cannot be
effectively tested) for support, normal business operations could be disrupted
in the event one or more third-party providers fail to provide products and
services as contracted. The most reasonably likely worst case Year 2000 issue
scenario identified to date involves Bancorp's inability, for short periods, to
provide services to customers. The worst case scenario is mitigated somewhat by
an ability to manually process customer transactions, by the geographic
penetration of the branch network, and by alternative service delivery methods,
which include both proprietary and network ATMs, PC banking, telephone banking,
and Express Bank, a full-service mobile branch. Power and telecommunication
services are critical but might be interrupted for only a part of the branch
network. Bancorp has a generator to provide power to operate computer systems
and, by contract, has geographically-remote facilities served by alternative
sources of power to process work, if needed. Longer periods of disruption could
affect Bancorp's ability to develop new business and could increase costs of
operation and decrease revenues.
ASSET AND LIABILITY MANAGEMENT
The primary objectives for ALM are to identify opportunities to maximize net
interest income while ensuring adequate liquidity and carefully managing
interest rate risk. ALM policies are approved by the Board of Directors and
administered by the Asset/Liability Management Committee ("ALCO"), which is
primarily composed of executive officers. ALCO's principal responsibilities
include:
- Monitoring corporate financial performance.
- Determining liquidity requirements.
- Establishing interest rates, indices, and terms for loan and deposit
products.
- Assessing and evaluating the competitive rate environment.
- Reviewing and ratifying investment portfolio transactions under
established policy guidelines.
- Monitoring and measuring interest rate risk.
LIQUIDITY
Liquidity management involves the ability to meet the demand for funds from
both depositors and borrowers with either balance sheet assets or access to
incremental borrowings. These needs are met with cash on hand, the sale of
non-cash assets, or with funds received from depositors or lenders. The primary
focus of liquidity management is to match the cash inflows and outflows within
Bancorp's natural market for loans and deposits. The primary cash and liquidity
management tools are short-term investments, FHLB borrowings and repurchase
agreements. Secondary liquidity is provided by the investment securities
portfolio.
Asset liquidity includes monitoring the amount of available cash on hand and
assets maturing in the near term, limiting the amount of securities that may be
pledged, and maintaining relatively short duration of investment securities.
Tables 6 and 8 show a combined total of $97.3 million of investment securities
and certain loans coming due within 12 months, or approximately 7% of total
assets at December 31, 1998.
26
<PAGE>
Funding liquidity is monitored primarily by the ratio of loans to deposits.
As deposit growth resumed in 1998, the loan-to-deposit ratio declined sharply to
78% at December 31, 1998 from 84% one year earlier. Funding liquidity is also
augmented by a wide variety of borrowing sources including the FHLB and credit
lines available through correspondent banking relationships.
MARKET RISK
Market risk is defined as the future changes in market prices that increase
or decrease the value of financial instruments, i.e., cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign
currency exchange risk, commodity price risk, and other relevant market risks.
The primary source of market risk is interest rate risk. Market risk-sensitive
financial instruments are entered into for purposes other than trading.
Interest rate risk refers to the exposure of earnings and capital to changes
in interest rates. The magnitude of the effect of changes in market rates
depends on the extent and timing of such changes and on Bancorp's ability to
adjust. The ability to adjust is controlled by the time remaining to maturity on
fixed-rate obligations, the contractual ability to adjust rates prior to
maturity, competition, and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on earnings and capital.
Re-pricing risk arises largely from timing differences in the pricing of assets
and liabilities. Reinvestment risk refers to the reinvestment of cash flows from
interest payments and maturing assets at lower rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same
time or in the same magnitude such that assets and liabilities with the same
maturity are not affected equally. Yield curve risk refers to unequal movements
in interest rates across a full range of maturities.
In determining the appropriate level of interest rate risk, Bancorp
considers the impact on earnings and capital of the current outlook for interest
rates, potential changes in interest rates, regional economies, liquidity,
business strategies, and other factors. To effectively measure and manage
interest rate risk, traditional cumulative gap and simulation analyses are used
to determine the impact on net interest income and the market value of portfolio
equity ("MVE"). Bancorp attempts to manage interest rate sensitivity on the
basis of when assets and liabilities WILL reprice as opposed to when they CAN
reprice.
Cumulative gap analysis presents the net amount of assets and liabilities
that will most likely reprice through specified periods if there are no changes
in balance sheet mix. Using that analysis, the effect of changes in market
interest rates, both rising and falling, on net interest income can be
calculated. Because of inherent limitations in traditional cumulative gap
analysis, however, ALCO also employs more sophisticated interest rate risk
measurement techniques. Simulation analysis is used to subject the current
re-pricing conditions to rising and falling interest rates in increments and
decrements of 100, 200, and 300 basis points, and to determine how net interest
income varies under alternative interest rate and business activity scenarios.
ALCO also measures the effects of changes in interest rates on the MVE, i.e.,
the net present value of all future cash flows from financial instruments
expressed as the percentage change in portfolio value of equity for any given
change in prevailing interest rates. Table 15 presents MVE at December 31, 1998.
27
<PAGE>
TABLE 15. EFFECTS OF CHANGES IN INTEREST RATES ON MVE AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PERCENT CHANGE
HYPOTHETICAL ----------------------------
MARKET VALUE CHANGE HYPOTHETICAL
CHANGE IN OF PORTFOLIO INCREASE INCREASE BOARD
INTEREST RATES EQUITY (DECREASE) (DECREASE) LIMIT(1)
- ---------------------------------------------------------- ------------ ------------ ------------- -------------
300 bp rise............................................... $ 155,454 $ (27,830) (15.2)% (30.0)%
200 bp rise............................................... 174,011 (9,273) (5.1)% (20.0)%
100 bp rise............................................... 179,247 (4,037) (2.2)% (10.0)%
Base scenario............................................. 183,284 -- -- --
100 bp decline............................................ 179,426 (3,858) (2.1)% (10.0)%
200 bp decline............................................ 173,618 (9,666) (5.3)% (20.0)%
300 bp decline............................................ 168,261 (15,023) (8.2)% (30.0)%
</TABLE>
(1) Established by Bancorp's Board of Directors
Computations of prospective effects of hypothetical interest rate changes
are based on many assumptions, including relative levels of market interest
rates, loan prepayments and changes in deposit levels. They are not intended to
be a forecast and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate certain actions that management
could take in response to changes in interest rates. At December 31, 1998 and
1997, the changes in net interest income and or MVE calculated under these
alternative methods were within limits established by the Board of Directors and
monitored by ALCO.
CAPITAL RESOURCES
It is Bancorp's policy to maintain a level of capital sufficient to protect
the company's depositors, creditors, and shareholders, and to support Bancorp's
growth. The principal source of capital is retained earnings.
The Board, the OCC and the OTS maintain capital adequacy guidelines
applicable to Bancorp, the Bank, and the Savings Bank, respectively, as
disclosed in Note 15, Shareholders' Equity, Notes to Consolidated Financial
Statements. Under each measure, Bancorp and its subsidiaries were substantially
in excess of the minimum regulatory requirements and, by definition, were "well
capitalized" at December 31, 1998 and 1997.
In accordance with regulatory guidelines, fair value adjustments to
shareholders' equity for changes in the fair value of investment securities
classified as available-for-sale are excluded from the calculations.
EFFECTS OF CHANGING PRICES
Inasmuch as virtually all of a financial institution's assets and
liabilities are monetary in nature, changes in interest rates, or the price paid
for money, may have a significant effect on earnings performance. Interest
rates, though affected by inflation, do not necessarily move in the same
direction, or in the same magnitude, as the prices of other goods and services.
Movements in interest rates are a result of the perceived changes in the rate of
inflation and the effects of monetary and fiscal policies. Reference to NET
INTEREST INCOME and MARKET RISK in this section will assist the reader's
understanding of how Bancorp is positioned to address changing interest rates.
Several major categories of noninterest expense are more directly affected
by inflationary factors such as salaries and employee benefits and other
operating expenses. Management endeavors to overcome, or mitigate, the effects
of inflation by seeking opportunities to improve operating efficiency and
productivity, and by developing strategies for growth that will exceed the
projected rate of inflation.
28
<PAGE>
1997 COMPARED TO 1996
OVERVIEW
Net income for 1997 increased 37% to $14.2 million, or $1.64 per share, from
$10.4 million, or $1.21 per share, for 1996, largely reflecting the influence of
special items in both years as set forth in Table 1. Excluding special items in
both years, net (operating) income increased 10% to $14.0 million, or $1.61 per
share, from $12.7 million, or $1.47 per share for 1996.
SPECIAL ITEMS--1997
Special items for 1997, as shown in Table 1 on an after-tax basis, included
a $552 thousand gain on the sale of the credit card merchant processing business
($0.06 per share). Recognizing the difficulty in achieving sufficient economies
of scale over the near term, Bancorp elected to exit this highly competitive
line of business in favor of alternatives expected to produce greater
profitability over the long term. TBT incurred litigation costs of $177 thousand
($0.02 per share) and realized a $110 thousand gain on the sale of loans in 1997
($0.01 per share) and a $59 thousand gain on the sale of investment securities
($0.01).
Pursuant to the provisions of the Plan and Agreement to Merge with Home
Federal, compensatory payments were recognized in 1997 for two executive
officers who elected to resign during the year. Such compensation expense
totaled $294 thousand ($0.03 per share) and was to be paid over a 24-month
period.
SPECIAL ITEMS--1996
Special items for 1996, as shown in Table 1 on an after-tax basis, included
merger-related expenses of $1.2 million ($0.14 per share) and securities losses
of $203 thousand ($0.02 per share) incurred in Bancorp's acquisition of the
Savings Bank. A one-time assessment by the FDIC on deposits insured by the
Savings Association Insurance Fund amounted to $724 thousand ($0.08 per share).
NET INTEREST INCOME
Net interest income, on a tax-equivalent basis, increased 7% to $54.4
million for 1997, from $50.9 million for 1996, related principally to a 10%
increase in average loans coupled with effective management of funding sources.
The yield on average earning assets increased four basis points driven by the
increase in average loans and an increase in average rates earned on the
investment securities portfolio. Although there was an increased reliance on
borrowed funds in 1997, the average rate paid on interest-bearing liabilities
declined one basis point assisted by lower average rates paid on core deposit
products. The net interest margin increased to 4.54% for 1997, from 4.49% for
1996.
NONINTEREST INCOME
Noninterest income increased 22% to $18.3 million for 1997, from $15.0
million for 1996. Excluding special items in both years as previously described,
operating noninterest income increased 12% for 1997 over 1996 driven largely by
a 39% increase in trust income and investment management fees, including an
unusually large estate settlement fee realized in 1997. Service charges on
deposit accounts increased 14% to $5.9 million for 1997, from $5.1 million for
1996. The increase was related primarily to service fee adjustments made early
in 1997, but also included fees related to new services and special promotions.
Other components of noninterest income, exclusive of special items, increased
6%.
NONINTEREST EXPENSE
Noninterest expense was virtually flat at $47.7 million for both 1997 and
1996. Excluding merger related expense and other special items in both years as
previously described, noninterest expense increased 5% for 1997 from 1996.
29
<PAGE>
Salaries, the largest component on noninterest expense, increased 10% to
$20.6 million for 1997, from $18.7 million for 1996, attributed to merit
increases, new hires, promotions, and performance-based incentive and bonus
payments. Pension and other employee benefits increased 5% to $4.9 million for
1997, from $4.7 million for 1996, reflecting cost containment initiatives and
favorable experience in medical and health programs.
Occupancy and equipment expense increased 11% to $7.9 million for 1997, from
$7.1 million for 1996 primarily associated with branch and corporate
headquarters expansion and additional investments in computer hardware and
software technology.
Other operating expense, exclusive of special items in both years, declined
4% related principally to the sale of the credit card merchant processing
business.
INCOME TAXES
Income tax expense increased 64% to $5.3 million for 1997, from $3.2 million
for 1996, largely related to a 43% increase in income before taxes. The
effective tax rate was 27% for 1997 compared with 24% for 1996. The ratio of
tax-exempt income on investment securities to income before taxes declined in
1997 to 24.3%, from 37.8% in 1996, thereby accounting for most of the increase
in the effective tax rate.
FINANCIAL CONDITION
Total assets were $1.339 billion at December 31, 1997, up $65.3 million, or
5%, from a year earlier. The increase was principally reflected in loans, which
were funded by a variety of sources, the largest component being short-term
borrowings, closely followed by certificates of deposit and interest-bearing
checking products. The capital position was strengthened as the increase in
average shareholders' equity, 6.9% over 1996, outpaced the 5.4% growth in
average assets leading to an increase in the average equity capital-to-assets
ratio to 9.16% for 1997, from 9.03% for 1996. All capital ratios were
substantially in excess of regulatory minimums for Bancorp and its subsidiaries
at each of the years ended December 31, 1997 and 1996.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses was increased by 60%, to $2.9 million for
1997, from $1.8 million for 1996, due to a $797 thousand increase in net
charge-offs coupled with a 6.4% increase in total loans. The ratio of net
charge-offs to average loans outstanding increased to 0.30% for 1997, from 0.23%
for 1996.
NONPERFORMING ASSETS
Continuing a trend extending over the previous four years, nonperforming
assets declined further in 1997, by 22% to $12.5 million at December 31, 1997,
from $16.2 million at year-end 1996. The ratio of nonperforming assets to total
assets declined to 0.94% at December 31, 1997 from 1.27% one year earlier.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF F&M BANCORP:
We have audited the accompanying consolidated balance sheets of F&M Bancorp
(a Maryland bank holding company) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of Bancorp's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of Monocacy Bancshares, Inc., a bank holding
company acquired during 1998 in a transaction accounted for as a
pooling-of-interests, as discussed in Note 2, for the years ended December 31,
1997 and 1996. Such statements are included in the consolidated financial
statements of F&M Bancorp and reflect 22% of consolidated total assets at
December 31, 1997 and 21% of consolidated total income for 1997 and 1996. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for Monocacy
Bancshares, Inc., is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of F&M Bancorp and subsidiaries as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
[SIGNATURE]
Washington, D.C.
January 19, 1999
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
MONOCACY BANCSHARES, INC.
We have audited the consolidated balance sheet of Monocacy Bancshares, Inc.
and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1997. These consolidated statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monocacy
Bancshares, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
[LOGO]
Baltimore, Maryland
January 23, 1998
32
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
--------- ---------
ASSETS
Cash and due from banks................................................................... $ 47,330 $ 37,281
Federal funds sold........................................................................ 11,652 14,314
Interest-bearing deposits with banks...................................................... 16,737 9,073
--------- ---------
Total cash and cash equivalents..................................................... 75,719 60,668
--------- ---------
Loans held for sale....................................................................... 4,810 5,223
--------- ---------
Investment Securities:
Held-to-maturity, fair value of $100,478 in 1998 and $96,650 in 1997................ 98,231 94,940
Available-for-sale, at fair value................................................... 322,651 232,413
--------- ---------
Total investment securities......................................................... 420,882 327,353
--------- ---------
Loans, net of unearned income of $406 in 1998 and $643 in 1997............................ 891,741 882,550
Less: Allowance for credit losses......................................................... (12,817) (12,069)
--------- ---------
Net loans........................................................................... 878,924 870,481
--------- ---------
Bank premises and equipment, net.......................................................... 31,184 33,127
Other real estate owned, net.............................................................. 1,705 5,192
Interest receivable....................................................................... 9,478 9,545
Intangible assets......................................................................... 4,424 4,737
Other assets.............................................................................. 22,556 22,233
--------- ---------
Total other assets.................................................................. 69,347 74,834
--------- ---------
Total assets.............................................................................. $1,449,682 $1,338,559
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing................................................................. $ 152,076 $ 138,440
Interest-bearing.................................................................... 986,118 915,122
--------- ---------
Total deposits...................................................................... 1,138,194 1,053,562
--------- ---------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase.......... 57,626 45,051
Other short-term borrowings......................................................... 14,776 57,252
Long-term borrowings...................................................................... 94,246 43,862
Accrued interest and other liabilities.................................................... 14,016 13,197
--------- ---------
Total liabilities......................................................................... 1,318,858 1,212,924
--------- ---------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized 50,000,000 shares;
issued and outstanding 8,680,908 in 1998 and 8,324,376 in 1997...................... 43,405 41,622
Surplus................................................................................... 61,980 49,640
Retained earnings......................................................................... 25,220 34,020
Accumulated other comprehensive income.................................................... 219 353
--------- ---------
Total shareholders' equity................................................................ 130,824 125,635
--------- ---------
Total liabilities and shareholders' equity................................................ $1,449,682 $1,338,559
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
--------- --------- ---------
INTEREST INCOME
Interest and fees on loans............................................................ $ 76,894 $ 76,764 $ 70,400
Interest and dividends on investment securities:
Taxable......................................................................... 15,772 14,273 14,039
Tax-exempt...................................................................... 4,645 4,741 5,143
Interest on deposits with banks....................................................... 1,253 339 292
Interest on federal funds sold........................................................ 615 280 599
--------- --------- ---------
Total interest income......................................................... 99,179 96,397 90,473
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits:
Checking........................................................................ 2,670 2,653 2,505
Savings......................................................................... 3,893 4,310 4,707
Money market accounts........................................................... 4,797 3,850 3,860
Certificates of deposit......................................................... 27,439 26,428 25,792
Interest on federal funds purchased and securities sold
under agreements to repurchase.................................................. 2,399 2,264 1,908
Interest on Federal Home Loan Bank borrowings......................................... 5,529 4,907 3,453
Interest on other short-term borrowings............................................... 151 190 153
--------- --------- ---------
Total interest expense........................................................ 46,878 44,602 42,378
--------- --------- ---------
Net interest income................................................................... 52,301 51,795 48,095
Provision for credit losses........................................................... 3,056 2,910 1,822
--------- --------- ---------
Net interest income after provision for credit losses................................. 49,245 48,885 46,273
--------- --------- ---------
NONINTEREST INCOME
Trust income.......................................................................... 2,671 2,715 1,956
Service charges on deposit accounts................................................... 6,007 5,855 5,122
Insurance income...................................................................... 2,326 2,031 2,097
Gains on sales of loans............................................................... 1,968 1,421 1,187
Net gains (losses) on sales of securities............................................. 1,104 76 (550)
Net gains on sales of property........................................................ 450 17 140
Other operating income................................................................ 5,257 6,181 5,031
--------- --------- ---------
Total noninterest income...................................................... 19,783 18,296 14,983
--------- --------- ---------
NONINTEREST EXPENSE
Salaries.............................................................................. 21,643 20,602 18,744
Pension and other employee benefits................................................... 4,880 4,948 4,697
Merger-related expense................................................................ 3,217 480 1,795
Occupancy and equipment expense....................................................... 7,786 7,864 7,105
Other operating expense............................................................... 13,364 13,810 15,318
--------- --------- ---------
Total noninterest expense..................................................... 50,890 47,704 47,659
--------- --------- ---------
Income before provision for income taxes.............................................. 18,138 19,477 13,597
Provision for income taxes............................................................ 5,046 5,251 3,196
--------- --------- ---------
NET INCOME............................................................................ $ 13,092 $ 14,226 $ 10,401
--------- --------- ---------
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized (losses) gains on securities............................................... $ (812) $ 1,274 $ (631)
Reclassification adjustment for gains (losses) included in income..................... 678 47 (338)
--------- --------- ---------
Other comprehensive income (loss)..................................................... (134) 1,321 (969)
--------- --------- ---------
Comprehensive income.................................................................. $ 12,958 $ 15,547 $ 9,432
--------- --------- ---------
--------- --------- ---------
EARNINGS PER COMMON SHARE-BASIC
Based on weighted average shares outstanding of 8,655,895 in 1998,
8,605,660 in 1997, and 8,577,410 in 1996........................................ $ 1.51 $ 1.65 $ 1.21
--------- --------- ---------
--------- --------- ---------
EARNINGS PER COMMON SHARE-DILUTED
Based on weighted average shares outstanding of 8,768,648 in 1998,
8,676,177 in 1997, and 8,626,287 in 1996........................................ $ 1.49 $ 1.64 $ 1.21
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER
---------------------- RETAINED COMPREHENSIVE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES PAR VALUE SURPLUS EARNINGS INCOME (LOSS) TOTAL
--------- ----------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........................ 7,980,786 $ 39,904 $ 40,956 $ 28,363 $ 1 $ 109,224
Net income.......................................... -- -- -- 10,401 -- 10,401
Dividend reinvestment plan.......................... -- -- -- (25) -- (25)
Cash dividends paid ($.49 per share)................ -- -- -- (4,225) -- (4,225)
Stock consideration for options exercised........... (7,448) (37) (40) (137) -- (214)
Stock options exercised............................. 25,133 126 629 -- -- 755
Other comprehensive income.......................... -- -- -- (969) (969)
--------- ----------- ----------- --------- ------ ---------
BALANCE AT DECEMBER 31, 1996........................ 7,998,471 39,993 41,545 34,377 (968) 114,947
Net income.......................................... -- -- -- 14,226 -- 14,226
Dividend reinvestment plan.......................... -- -- -- (80) -- (80)
Cash dividends paid ($.68 per share)................ -- -- -- (5,853) -- (5,853)
Stock consideration for options exercised........... (9,514) (48) (59) (221) -- (328)
Stock options exercised............................. 52,097 260 1,142 -- -- 1,402
Stock dividend...................................... 283,322 1,417 7,012 (8,429) -- --
Other comprehensive income.......................... -- -- -- -- 1,321 1,321
--------- ----------- ----------- --------- ------ ---------
BALANCE AT DECEMBER 31, 1997........................ 8,324,376 41,622 49,640 34,020 353 125,635
Net income.......................................... -- -- -- 13,092 -- 13,092
Dividend reinvestment plan.......................... -- -- -- (121) -- (121)
Cash dividends paid ($1.06 per share)............... -- -- -- (9,190) -- (9,190)
Stock consideration for options exercised........... (3,217) (16) (19) (90) -- (125)
Stock options exercised............................. 56,930 285 1,382 -- -- 1,667
Stock dividend...................................... 302,819 1,514 10,977 (12,491) -- --
Other comprehensive income.......................... -- -- -- -- (134) (134)
--------- ----------- ----------- --------- ------ ---------
BALANCE AT DECEMBER 31, 1998........................ 8,680,908 $ 43,405 $ 61,980 $ 25,220 $ 219 $ 130,824
--------- ----------- ----------- --------- ------ ---------
--------- ----------- ----------- --------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................... $ 13,092 $ 14,226 $ 10,401
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses............................................................ 3,056 2,910 1,822
Provision for other real estate owned.................................................. 2 156 436
Depreciation and amortization.......................................................... 2,701 2,820 3,031
Amortization of intangibles............................................................ 779 758 1,001
Net premium amortization on investment securities...................................... 36 424 615
Decrease (increase) in interest receivable............................................. 67 (905) (448)
Increase in interest payable........................................................... 760 208 197
Deferred income tax benefit............................................................ (452) (413) (316)
Amortization (accretion) of net loan origination costs (fees).......................... (221) (75) 67
Gains on sales of property............................................................. (450) (17) (140)
(Gains) losses on sales/calls of securities............................................ (1,104) (76) 550
(Increase) decrease in loans held for sale............................................. 413 6,347 (8,695)
Increase in other assets............................................................... (568) (282) (3,629)
Increase (decrease) in other liabilities............................................... 59 (1,098) 1,117
Gains on sales of loans................................................................ (1,968) (1,421) (1,187)
Other.................................................................................. (864) 1,021 (1,072)
---------- ---------- ---------
Net cash provided by operating activities.................................................... 15,338 24,583 3,750
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities to be held-to-maturity.................................... (26,729) (7,722) (62,945)
Purchases of investment securities available-for-sale........................................ (426,451) (178,099) (93,704)
Proceeds from calls of securities held-to-maturity........................................... 17,038 8,420 10,728
Proceeds from sales/calls of securities available-for-sale................................... 129,322 58,059 63,197
Proceeds from maturing securities available-for-sale......................................... 209,194 106,889 47,470
Proceeds from maturing securities held-to-maturity........................................... 6,103 3,719 13,023
Net increase in loans........................................................................ (7,999) (54,201) (66,033)
Purchases of premises and equipment.......................................................... (1,660) (3,148) (10,048)
Proceeds from sales of property.............................................................. 4,173 1,699 746
Other investing activities................................................................... (624) (862) 2,022
---------- ---------- ---------
Net cash used in investing activities........................................................ (97,633) (65,246) (95,544)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits, interest-bearing
checking, savings and money market accounts............................................ 49,446 20,515 (189)
Net increase in certificates of deposits..................................................... 35,186 10,533 11,941
Net increase in federal funds purchased and securities sold under
agreements to repurchase............................................................... 12,575 3,175 1,718
Net increase (decrease) in other short-term borrowings....................................... (42,476) (7,926) 36,581
Net increase (decrease) in long-term borrowings.............................................. 50,384 28,691 (8,298)
Cash dividends paid.......................................................................... (9,190) (5,853) (4,225)
Dividend reinvestment plan................................................................... (121) (80) (25)
Proceeds from issuance of common stock....................................................... 1,542 1,074 541
---------- ---------- ---------
Net cash provided by financing activities.................................................... 97,346 50,129 38,044
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................................... 15,051 9,466 (53,750)
Cash and cash equivalents at beginning of year............................................... 60,668 51,202 104,952
---------- ---------- ---------
Cash and cash equivalents at end of year..................................................... $ 75,719 $ 60,668 $ 51,202
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest................................................................... $ 46,554 $ 44,717 $ 42,507
Cash payments for income tax................................................................. 5,989 6,258 4,744
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value adjustment for securities available for sale,
net of income taxes.................................................................... (134) 1,321 (969)
Transfers of securities from the held-to-maturity portfolio to the
available-for-sale portfolio........................................................... -- 24,027 --
Loans originated on sale of real estate owned held for sale.................................. -- 1,320 636
Net transfer to real estate owned held for sale from loans receivable........................ 705 73 716
Transfers of loans to held for sale.......................................................... -- -- 10,118
Retirement of common stock................................................................... 117 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
F&M Bancorp (the "Parent Company") is a bank holding company that provides
its customers with banking and bank-related financial services through its
wholly owned subsidiaries, Farmers & Mechanics National Bank and Subsidiaries
(the "Bank") and Home Federal Savings Bank and Subsidiaries (the "Savings
Bank"). The Bank and the Savings Bank offer various loan, deposit and other
financial products and services to individuals and commercial businesses located
primarily within the State of Maryland. The primary market area encompasses
Frederick, Carroll, Montgomery and Washington Counties, MD, with additional
community office presence in Allegany, Baltimore, and Howard Counties, MD and
Adams County, PA. The Bank and the Savings Bank maintain correspondent banking
relationships with whom they may execute daily federal funds transactions on an
unsecured basis.
The accounting and reporting policies and practices of F&M Bancorp and
Subsidiaries ("Bancorp") conform with generally accepted accounting principles
("GAAP") and with prevailing practice in the banking industry. The following is
a summary of Bancorp's significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent
Company and its wholly owned subsidiaries. All material inter-company accounts
and transactions are eliminated in consolidation. In the Parent Company
financial statements, investment in subsidiaries is accounted for using the
equity method of accounting.
COMPREHENSIVE INCOME
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No.
130, "Reporting Comprehensive Income", effective January 1, 1998. Other
comprehensive income consists entirely of unrealized gains (losses) on
available-for-sale securities. Income taxes allocated to other comprehensive
income amounted to benefits of $84,000 and $609,000 in 1998 and 1996,
respectively, and a provision of $831,000 in 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PRESENTATION OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, cash items in the process of clearing, federal
funds sold, and interest-bearing deposits with banks. Generally, federal funds
are sold for one-day periods.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is estimated to equal the carrying amount due to the
anticipated short holding period of these loans.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Bancorp classifies its investment securities as held-to-maturity ("HTM"),
available-for-sale ("AFS"), or trading.
Securities classified as HTM are those debt securities that Bancorp has both
the positive intent and ability to hold until maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income using the
interest method.
Securities classified as AFS are equity securities with readily determinable
fair values and those debt securities that Bancorp intends to hold for an
indefinite period of time but not necessarily to maturity. These securities may
be sold as part of Bancorp's asset/liability management strategy, in response to
significant movements in interest rates, for liquidity needs, for regulatory
capital considerations, or for other similar purposes. These securities are
carried at fair value, with any unrealized gains and losses included in other
comprehensive income as a separate component of shareholders' equity, net of the
related deferred tax effect.
Securities classified as trading, if any, are those securities bought and
held principally for the purpose of selling them in the near term. These
securities are carried at fair value, with any unrealized gains and losses
included in net income.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
included in interest income in the consolidated statements of income and
comprehensive income. Realized gains and losses, if any, determined based on the
adjusted cost of the specific securities sold, are reported in noninterest
income in the consolidated statements of income and comprehensive income.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
provides accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishment of
liabilities. The standards are based on consistent application of a
financial-components approach that focuses on control, and the appropriate
measurement and allocation of the financial components at fair value, if
practical.
In addition, Statement No. 125 requires that a liability be de-recognized
if, and only if, either (a) the debtor pays the creditor and is relieved of its
obligation for the liability, or (b) the debtor is legally released from being
the primary obligor under the liability either judicially or by the creditor.
Therefore, a liability is not considered extinguished by an in-substance
defeasance.
Statement No. 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which were
delayed until after December 31, 1997 by FASB Statement No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment
of FASB Statement No. 125." The adoption of Statements No. 125 and 127 were not
material to Bancorp's financial statements.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST AND FEES ON LOANS
Interest on loans is accrued at the contractual rate on the principal amount
outstanding. However, the accrual of interest is discontinued when reasonable
doubt exists as to the full, timely collection of interest or principal. Loans
on which the accrual of interest has been discontinued, which includes impaired
loans, are designated as nonaccrual loans. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans only when they are brought
current with respect to interest and principal and when, in management's
judgment, the loans are estimated to be fully collectible as to both principal
and interest.
Loan fees and related direct costs of loan origination are deferred and
recognized over the life of the loan as a component of interest income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (the "allowance") is maintained at a level
which, in management's judgment, is adequate to absorb losses inherent in the
loan portfolio.
The adequacy of the allowance is reviewed regularly by management. Additions
to the allowance are made by charges to the provision for credit losses. On a
quarterly basis, a comprehensive review of the adequacy of the allowance is
performed considering factors such as historical relationships among loans
outstanding, loss experience, delinquency levels, individual loan reviews, and
evaluation of the present and future local and national economic environment.
Management's estimates regarding the allowance are subject to change related to
economic and other uncertainties inherent in the estimation process.
BANK PREMISES AND EQUIPMENT
Bank premises, furniture and equipment, and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed principally by the straight-line method for bank
premises and leasehold improvements, and by accelerated methods for equipment.
The estimated useful lives for computing depreciation and amortization are as
follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Bank premises...................................................................... 15 to 50
Furniture and equipment............................................................ 3 to 10
Leasehold improvements............................................................. 10 to 25
</TABLE>
Leasehold improvements are amortized over the shorter of the terms of the
leases or their estimated useful lives. Major alterations and improvements to
bank premises are capitalized and depreciated over the remaining useful life of
the asset. Gains and losses on dispositions are included in net income in the
year of disposition. Maintenance and repairs are reflected in noninterest
expense as incurred.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") includes: banking premises no longer used
for business operations, real estate acquired in foreclosure (in partial or
complete satisfaction of debt), or otherwise surrendered by the borrower to
Bancorp's possession.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OREO is recorded at the lower of cost or fair value on the date of
acquisition. Write-downs to fair value at the date of acquisition are charged to
the allowance for credit losses. Subsequently, OREO is adjusted through a
valuation allowance to the lower of net carrying value or fair value (net of
estimated selling expenses) based upon periodic appraisals. Adjustments arising
from changes in the valuation allowance and operating expenses are reflected in
noninterest expense, and gains and losses realized on disposition are reflected
in noninterest income.
INTANGIBLE ASSETS
Intangible assets represent the excess of the fair value of liabilities
assumed over the fair value of tangible assets acquired in branch office
acquisitions. These intangible assets are initially amortized over a period of
10 years using the straight-line method subject to periodic review and
acceleration should subsequent events and circumstances dictate.
INCOME TAXES
FASB Statement No. 109, "Accounting for Income Taxes," is applied in
calculating the provision for income taxes. As prescribed therein, provisions
for income taxes are based on taxes payable or refundable for the current year
(after exclusion of nontaxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences between the amount of
taxable income and pre-tax financial income, and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
PER SHARE DATA
Earnings per share ("EPS") are computed and presented in accordance with
FASB Statement No. 128, "Earnings Per Share." As prescribed therein, the
presentation of PRIMARY EPS has been replaced with the dual presentation of
BASIC and DILUTED EPS. Basic EPS excludes dilution and is computed by dividing
net income available to common shareholders ("numerator") by the
weighted-average number of common shares outstanding for the period after giving
retroactive effect to stock dividends and stock splits ("denominator"). Diluted
EPS reflects the potential dilution that could occur if outstanding stock
options or other contracts to issue common stock, if any, were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of Bancorp. Diluted EPS is equal to the numerator
divided by the denominator plus 112,753 shares, 70,720 shares, and 56,004 shares
represented by outstanding stock options assumed to be exercised for the years
ended December 31, 1998, 1997 and 1996, respectively.
TRUST ASSETS AND INCOME
Assets held in an agency or fiduciary capacity are not assets of Bancorp
and, accordingly, are not included in the accompanying consolidated balance
sheets. Trust income is recorded on a cash basis and would not be materially
different using the accrual method.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COMPENSATION
The cost of supplemental retirement benefits (deferred compensation) payable
to certain key employees is accrued over their service periods to the date such
employees, or their beneficiaries, are fully eligible for benefits.
STOCK COMPENSATION
Employee stock options are recorded under the intrinsic value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25, and
disclosures pertaining to fair value-based accounting of stock options under the
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
are included in Note 9, Employee Benefits, Notes to Consolidated Financial
Statements. Statement No. 123 provides for a fair value-based method of
accounting for stock options and similar equity transactions to be reported in
the financial statements, or alternatively, disclosure of the fair-value impact
on net income and EPS, on a pro forma basis, in the notes to consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications to prior year amounts have been made to conform
with the current year presentation.
2. ACQUISITIONS
On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. ("MNOC"), headquartered in Taneytown, MD, in a tax-free
exchange of stock, and the merger of its principal subsidiary, Taneytown Bank &
Trust Company ("TBT"), into the Bank. Shareholders of MNOC received 1.251 newly
issued shares of Bancorp Common Stock, or a total of 2,267,790 shares, for all
1,812,777 outstanding shares of MNOC and cash in lieu of each fractional share
at the rate of $33.696. At closing, TBT had reported total assets of $304.3
million, loans of $167.0 million, and deposits of $243.8 million.
On May 29, 1998, Bancorp completed the acquisition of Keller-Stonebraker
Insurance, Inc. ("K-S"), a Hagerstown, MD-based independent insurance agency, in
a tax-free exchange of 52,117 shares of newly issued Bancorp Common Stock for
all outstanding shares of K-S.
On November 15, 1996, Bancorp completed its merger with Home Federal
Corporation ("HF"), Hagerstown, MD, in a tax-free exchange of stock.
Shareholders of HF received .49535 shares of newly issued Bancorp Common Stock,
or a total of 1,247,791 shares, for all 2,519,010 shares of HF Common Stock and
cash in lieu of each fractional share at the rate of $23.90. At closing, the
Savings Bank, HF's principal subsidiary, had total assets of $230.1 million,
loans of $154.0 million, and deposits of $162.7 million.
All three acquisitions are accounted for as poolings of interest.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments at December 31,
1998 and 1997, summarized by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay obligations with, or without, call or prepayment
penalties.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
Proceeds from sales/calls of investment securities available-for-sale during
1998 were $129,322,000. Gross gains of $1,162,000 and gross losses of $83,000
were realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1998 were $17,038,000. Gross gains of $25,000 were
realized on those calls.
Proceeds from sales/calls of investment securities available-for-sale during
1997 were $58,059,000. Gross gains of $128,000 and gross losses of $58,000 were
realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1997 were $8,420,000. Gross gains of $6,000 were
realized on those calls.
Proceeds from sales/calls of investment securities available-for-sale during
1996 were $63,197,000. Gross gains of $89,000 and gross losses of $380,000 were
realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1996 were $10,728,000. Gross losses of $259,000 were
realized on those calls.
The carrying value of investment securities pledged to secure public
deposits, securities sold under repurchase agreements, Federal Home Loan Bank
(the "FHLB") advances, and for other purposes as required and permitted by law,
totaled $158,458,000 at December 31, 1998, and $148,888,000 at December 31,
1997.
Interest earned on obligations of states and political subdivisions is
exempt from federal income taxes. However, the federal interest expense
deduction is limited for interest deemed to be incurred to purchase or carry
tax-exempt obligations. Such tax-exempt securities composed 29.9% and 31.6% of
the total carrying value of the investment portfolio at December 31, 1998 and
1997, respectively.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies:
Within 1 year.............................................. $ 13,016 $ 29 $ 1 $ 13,044
After 1 but within 5 years................................. 56,065 301 13 56,353
After 5 but within 10 years................................ 49,190 288 96 49,382
---------- ----------- ----------- ----------
118,271 618 110 118,779
---------- ----------- ----------- ----------
Obligations of states and political subdivisions:
Within 1 year.............................................. 250 1 -- 251
After 1 but within 5 years................................. 5,082 94 -- 5,176
After 5 but within 10 years................................ 16,285 323 19 16,589
After 10 years............................................. 19,973 136 214 19,895
---------- ----------- ----------- ----------
41,590 554 233 41,911
---------- ----------- ----------- ----------
Other bonds:
After 1 but within 5 years................................. 2,328 9 -- 2,337
---------- ----------- ----------- ----------
Mortgage-backed securities..................................... 140,374 275 485 140,164
---------- ----------- ----------- ----------
Total debt securities............................................ 302,563 1,456 828 303,191
Equity securities................................................ 19,727 -- 267 19,460
---------- ----------- ----------- ----------
Total securities available-for-sale.............................. $ 322,290 $ 1,456 $ 1,095 $ 322,651
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Held-to-maturity:
Obligations of states and political subdivisions:
Within 1 year.............................................. $ 7,471 $ 72 $ -- $ 7,543
After 1 but within 5 years................................. 29,868 953 -- 30,821
After 5 but within 10 years................................ 25,855 925 -- 26,780
After 10 years............................................. 20,563 216 140 20,639
---------- ----------- ----------- ----------
83,757 2,166 140 85,783
---------- ----------- ----------- ----------
Mortgage-backed securities..................................... 14,474 221 -- 14,695
---------- ----------- ----------- ----------
Total securities held-to-maturity................................ $ 98,231 $ 2,387 $ 140 $ 100,478
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
---------- ----------- ------------- ----------
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies:
Within 1 year.............................................. $ 14,570 $ 14 $ 14 $ 14,570
After 1 but within 5 years................................. 50,318 103 109 50,312
After 5 but within 10 years................................ 46,532 368 7 46,893
---------- ----------- ----- ----------
111,420 485 130 111,775
---------- ----------- ----- ----------
Obligations of states and political subdivisions:
Within 1 year.............................................. 2,101 8 -- 2,109
After 1 but within 5 years................................. 4,027 24 4 4,047
After 5 but within 10 years................................ 28,338 596 4 28,930
---------- ----------- ----- ----------
34,466 628 8 35,086
---------- ----------- ----- ----------
Mortgage-backed securities..................................... 67,650 276 441 67,485
---------- ----------- ----- ----------
Total debt securities............................................ 213,536 1,389 579 214,346
Equity securities................................................ 18,217 -- 150 18,067
---------- ----------- ----- ----------
Total securities available-for-sale.............................. $ 231,753 $ 1,389 $ 729 $ 232,413
---------- ----------- ----- ----------
---------- ----------- ----- ----------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies:
After 1 but within 5 years................................. $ 4,967 $ 33 $ -- $ 5,000
---------- ----------- ----- ----------
4,967 33 -- 5,000
---------- ----------- ----- ----------
Obligations of states and political subdivisions:
Within 1 year.............................................. 4,073 33 -- 4,106
After 1 but within 5 years................................. 33,293 713 2 34,004
After 5 but within 10 years................................ 30,607 697 8 31,296
After 10 years............................................. 106 1 -- 107
---------- ----------- ----- ----------
68,079 1,444 10 69,513
---------- ----------- ----- ----------
Mortgage-backed securities..................................... 21,894 243 -- 22,137
---------- ----------- ----- ----------
Total securities held-to-maturity................................ $ 94,940 $ 1,720 $ 10 $ 96,650
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
---------- ----------
<S> <C> <C>
Real estate loans:
Construction and land development................................... $ 61,328 $ 67,026
Secured by farmland................................................. 8,452 8,479
Residential mortgage................................................ 265,394 257,121
Other mortgage...................................................... 198,131 170,742
Agricultural.......................................................... 560 819
Commercial and industrial loans....................................... 92,091 99,043
Consumer.............................................................. 257,968 276,134
Other loans........................................................... 7,817 3,186
---------- ----------
Total loans........................................................... $ 891,741 $ 882,550
---------- ----------
---------- ----------
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds are
included in other loans and in total loans in the consolidated balance sheet.
Interest income from these loans is included in interest and fees on loans in
the consolidated statements of income and comprehensive income.
Transactions in the allowance for credit losses were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year................................. $ 12,069 $ 11,739 $ 11,700
Provision for credit losses.................................. 3,056 2,910 1,822
Recoveries of loans previously charged-off................... 3,028 2,863 2,461
Loans charged off............................................ (5,336) (5,443) (4,244)
--------- --------- ---------
Balance at end of year....................................... $ 12,817 $ 12,069 $ 11,739
--------- --------- ---------
--------- --------- ---------
</TABLE>
In the ordinary course of business, directors and officers of the Bank, the
Savings Bank, and their affiliates, were customers of, and had other
transactions with the Bank and/or the Savings Bank. Loan transactions with
directors and officers were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons, and neither
involved more than normal risk of collectibility nor presented other unfavorable
features. The aggregate dollar amount of all loans to officers, directors, and
their affiliates was $16,592,027 and $19,246,376 at December 31, 1998 and 1997,
respectively. During 1998, $46,939,657 of new loans were made, or became
reportable, and repayments and other decreases totaled $49,594,006.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
The loan portfolio includes loans that are not currently accruing interest
income. The total outstanding principal amount of these loans at December 31,
1998, 1997, and 1996, and the effect on interest income for the years then
ended, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Principal balance................................................ $ 4,196 $ 7,357 $ 8,074
--------- --------- ---------
--------- --------- ---------
Gross amount of interest which would have been recorded under
original terms................................................. $ 468 $ 847 $ 754
--------- --------- ---------
--------- --------- ---------
Recorded interest income on these loans.......................... $ 167 $ 246 $ 188
--------- --------- ---------
--------- --------- ---------
</TABLE>
The net reduction in interest income on renegotiated loans was not material
in 1998, 1997, and 1996. At December 31, 1998, there were no material
commitments to lend additional funds to borrowers whose loans had been modified
in troubled debt restructurings or were in a nonaccrual status.
Loans amounting to approximately $2,508,000 and $8,105,000 at December 31,
1998 and 1997, respectively, were specifically classified as impaired and are
included in nonaccrual loans disclosed above. The average balance of impaired
loans amounted to $9,083,000 and $7,081,000 for the years ended December 31,
1998 and 1997, respectively. Cash receipts totaling $2,512,000 and $3,965,000
during 1998 and 1997, respectively, were applied to reduce the principal balance
of those impaired loans, and no interest income was recognized. The specific
allowance for credit losses related to these impaired loans was $296,000 and
$732,000 at December 31, 1998 and 1997, respectively.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Bank premises and land.................................................. $ 28,978 $ 29,184
Furniture and equipment................................................. 24,224 23,272
Leasehold improvements.................................................. 2,908 2,901
--------- ---------
56,110 55,357
Less accumulated depreciation and amortization.......................... 24,926 22,230
--------- ---------
Bank premises and equipment, net........................................ $ 31,184 $ 33,127
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization related to premises and equipment in the
consolidated statements of income and comprehensive income amounted to
$2,701,000 in 1998, $2,820,000 in 1997, and $3,031,000 in 1996.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEPOSITS
The carrying amounts of deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(IN THOUSANDS) 1998 1997
------------ ------------
<S> <C> <C>
Noninterest-bearing............................................... $ 152,076 $ 138,440
Interest-bearing:
Checking........................................................ 152,609 138,868
Savings......................................................... 151,970 156,327
Money market accounts........................................... 160,071 133,645
Certificates of deposits:
Under $100,000................................................ 450,445 437,435
$100,000 and over............................................. 71,023 48,847
------------ ------------
Total deposits.................................................... $ 1,138,194 $ 1,053,562
------------ ------------
------------ ------------
</TABLE>
7. BORROWINGS
SHORT-TERM BORROWINGS
Short-term borrowings include securities sold under agreements to
repurchase, which are secured transactions with customers and generally mature
in one day. Short-term borrowings may also include balances in the treasury tax
and loan account, federal funds purchased, which are unsecured overnight
borrowings from other financial institutions, and advances from the FHLB, which
are secured either by 1-4 family residential properties, FHLB Stock, or other
mortgage-related assets.
Unused lines of credit for short-term borrowings totaled approximately
$210,313,000 at December 31, 1998.
The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1998 1997
---------- ----------
<S> <C> <C>
Maximum balance at any month end during the year...................... $ 100,259 $ 122,663
Average balance for the year.......................................... 74,872 105,415
Weighted average rate for the year.................................... 5.47% 5.55%
Weighted average rate at year end..................................... 4.42% 5.66%
Estimated fair value.................................................. $ 72,402 $ 102,303
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS (CONTINUED)
LONG-TERM BORROWINGS
The table below presents a summary of long-term advances from the FHLB:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Due within 1 to 5 years................................................. $ 37,121 $ 39,726
Due after 5 years through 10 years...................................... 56,991 3,998
Due after 10 years...................................................... 134 138
--------- ---------
$ 94,246 $ 43,862
--------- ---------
--------- ---------
</TABLE>
These advances had weighted average interest rates of 5.29% and 5.90% at
December 31, 1998 and 1997, respectively. These advances are secured either by a
blanket floating lien on all real estate mortgage loans secured by 1-4 family
residential properties, FHLB Stock, or other mortgage-related assets. All
advances carry a fixed rate. In 1999, 2000 and 2003, $38.5 million, $25.0
million and $10.0 million, respectively, of advances are convertible at the
FHLB's option to a variable rate based on LIBOR.
8. INCOME TAXES
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowances for credit and other real estate owned losses................. $ 4,805 $ 4,227
Deferred compensation.................................................... 1,645 1,591
Intangibles.............................................................. 1,202 941
Other.................................................................... 883 624
--------- ---------
Total deferred tax assets.............................................. 8,535 7,383
Valuation allowance for deferred tax assets.............................. (474) (474)
--------- ---------
Total deferred tax assets after valuation allowance.................... 8,061 6,909
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................................ 1,144 721
Unrealized gains on securities available for sale........................ 83 165
Other.................................................................... 354 77
--------- ---------
Total deferred tax liabilities......................................... 1,581 963
--------- ---------
Net deferred tax assets................................................ $ 6,480 $ 5,946
--------- ---------
--------- ---------
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of the statutory income tax rate to the provision for
income taxes attributed to continuing operations included in the consolidated
statements of income and comprehensive income, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income before income tax..................................... $ 18,138 $ 19,477 $ 13,597
Tax rate..................................................... 35% 35% 35%
--------- --------- ---------
Income tax at statutory rate................................. 6,348 6,817 4,759
Increases (decreases) in tax resulting from:
Tax-exempt interest income................................. (1,787) (1,778) (1,362)
State income taxes, net of federal income tax benefit...... 272 326 152
Other...................................................... 213 (114) (237)
Change in valuation allowance.............................. -- -- (116)
--------- --------- ---------
Actual tax expense........................................... $ 5,046 $ 5,251 $ 3,196
--------- --------- ---------
--------- --------- ---------
Effective tax rate........................................... 27.8% 27.0% 23.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the provision for income taxes attributed to
continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current payable:
Federal........................................................ $ 5,258 $ 5,074 $ 3,221
State.......................................................... 240 590 291
--------- --------- ---------
Total currently payable...................................... 5,498 5,664 3,512
--------- --------- ---------
Deferred tax benefit............................................. (452) (413) (200)
--------- --------- ---------
Change in valuation allowance.................................. -- -- (116)
--------- --------- ---------
Provision for income taxes....................................... $ 5,046 $ 5,251 $ 3,196
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the provision for deferred tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Provision for credit losses......................................... $ (578) $ (166) $ 46
Amortization of intangibles......................................... (261) (128) (213)
Other............................................................... 387 (119) (33)
--------- --------- ---------
Deferred tax benefit.............................................. $ (452) $ (413) $ (200)
--------- --------- ---------
--------- --------- ---------
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS
THE BANK PROFIT SHARING PLAN
Retirement benefits are provided through a Section 401(k) profit sharing
plan (the "Plan") to employees meeting certain age and service eligibility
requirements. The annual profit sharing contribution to the Plan is
discretionary, based primarily on earnings, and amounted to $468,000 for 1998,
$540,000 for 1997, and $430,000 for 1996. The Plan also provides for employer
matching contributions equal to 2% for the first 2% of eligible compensation,
and an additional 1% for the next 2% of eligible compensation for a maximum
total matching contribution of 3% for the first 4% of eligible compensation.
Employer matching contributions totaled $343,000 in 1998, $268,000 in 1997, and
$234,000 in 1996.
TBT, which was merged with and into the Bank on November 30, 1998, had a
401(k) contributory thrift plan which was terminated in conjunction with the
merger. Contributions to this plan, included in pension and other employee
benefits expense, were $79,000 for 1998, $75,000 for 1997, and $61,000 for 1996.
THE SAVINGS BANK PROFIT SHARING PLAN
The Savings Bank provides a retirement savings plan and trust, which is a
deferred compensation plan (401(k)) and a profit sharing plan (the "Savings
Plan") for all employees who meet certain age and eligibility requirements. The
Savings Plan permits eligible participants to defer up to 15% of their annual
salary and the Savings Bank to contribute to the 401(k) part of the Savings Plan
on a matching basis. The Savings Bank may also elect to contribute a portion of
its profits to the profit sharing portion of the Savings Plan.
Contributions are made based on matching $0.50 of every dollar up to 5% of
the employee's salary. The Savings Bank's additional matching contribution
amounted to $57,000 in 1998, $58,000 in 1997, and $52,000 in 1996. In addition,
the Savings Bank made profit sharing contributions of $180,000, $135,000, and
$185,000, in 1998, 1997, and 1996, respectively.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
Supplemental retirement benefits (deferred compensation) for certain key
employees are provided under an Executive Supplemental Income Plan (the "ESIP").
Benefits payable under the ESIP are integrated with other retirement benefits
expected to be received by ESIP participants, including those under the 401(k)
profit sharing plan. Amounts paid under the ESIP will be partially or fully
recovered through life insurance policies purchased on the lives of the
participants.
Deferred compensation costs charged to expense for the years ended December
31, 1998, 1997, and 1996 were $372,000, $344,000, and $292,000, respectively.
OTHER BENEFITS
Both the Savings Bank and Bancorp maintain a director's deferred
compensation program pursuant to which directors may elect to defer their fees
for attending meetings in order to provide retirement benefits. The expense for
these benefits was $117,000, $128,000, and $242,000, for 1998, 1997, and 1996,
respectively.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Bancorp has an Employee Stock Purchase Plan (the "ESPP") whereby eligible
employees may authorize payroll deductions ranging from $120 to $2,400 per year
for the purpose of acquiring Bancorp Common Stock at current market prices. To
encourage employee participation in the ESPP, Bancorp contributes an additional
20% of each participant's voluntary payroll deduction. Bancorp's contributions
amounted to $17,000, $11,000, and $9,000, for 1998, 1997, and 1996,
respectively. Contributions to the ESPP are typically transmitted to Bancorp's
designated agent to acquire Bancorp Common Stock in the open market. Under the
terms of the ESPP, shares may also be purchased directly from Bancorp at current
market prices. A total of 60,775 shares of Bancorp Common Stock are reserved for
this purpose. Bancorp pays all administrative costs of the ESPP and, at its
discretion, reserves the right to amend, modify, suspend, or terminate the ESPP
at any time.
STOCK OPTION PLANS
Bancorp has a 1983 Stock Option Plan and a 1995 Stock Option Plan (the
"Plans") which are coordinated in their administration and similar in their
terms and conditions for key employees. The Plans permit the granting of both
incentive stock options and nonqualified stock options to purchase Bancorp
Common Stock. The exercise price per share for incentive stock options and
nonqualified stock options shall not be less than 100% and 85%, respectively, of
the fair market value of a share of Common Stock on the date of grant and may be
exercised in increments commencing after one year from the date of grant.
Options are fully exercisable after four years from the date of grant and expire
after 10 years.
<TABLE>
<CAPTION>
OPTIONS ISSUED
AND OUTSTANDING PRICE
--------------- -------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.............................................. 266,817 $ 10.66 to $ 25.59
Exercised............................................................... (27,657) 10.66 to 25.59
Granted................................................................. 38,263 13.98 to 26.42
Terminated.............................................................. (12,772) 10.66 to 26.42
------- --------- ---------
Balance, December 31, 1996.............................................. 264,651 10.66 to 26.42
Exercised............................................................... (55,716) 10.66 to 26.42
Granted................................................................. 88,036 14.54 to 24.38
Terminated.............................................................. (6,309) 18.44 to 26.42
------- --------- ---------
Balance, December 31, 1997.............................................. 290,662 10.66 to 26.42
Exercised............................................................... (58,750) 10.66 to 26.42
Granted................................................................. 45,330 19.59 to 33.69
Terminated.............................................................. (5,873) 19.33 to 33.69
------- --------- ---------
Balance, December 31, 1998.............................................. 271,369 $ 10.66 to $ 33.69
------- --------- ---------
------- --------- ---------
</TABLE>
At December 31, 1998, there were 207,133 options exercisable at prices
ranging from $10.66 to $26.42. Shares reserved for future grants totaled 86,195
at December 31, 1998.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED)
The Plans are accounted for pursuant to the provisions of APB Opinion No.
25. Had compensation cost for the Plans been determined in accordance with the
provisions of FASB Statement No. 123 (see Note 1), net income and earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net Income: As reported...................................................... $ 13,092 $ 14,226 $ 10,401
Pro forma........................................................ 12,855 13,682 10,179
EPS: As reported, basic............................................... 1.51 1.65 1.21
As reported, diluted............................................. 1.49 1.64 1.21
Pro forma, basic................................................. 1.49 1.59 1.19
Pro forma, diluted............................................... 1.47 1.58 1.18
</TABLE>
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of the cost to be expected in future years.
Additionally, the pro forma amounts include a de minimus amount related to the
purchase discount offered under the Employee Stock Purchase Plan.
A summary of the status of the Plans at December 31, 1998 and 1997, and
changes during the years then ended, is presented as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..................................... 290,662 $ 18.58 264,651 $ 17.82
Granted.............................................................. 45,330 28.40 88,036 19.44
Exercised............................................................ (58,750) 17.10 (55,716) 16.11
Forfeited............................................................ (5,873) 25.51 (2,116) 24.01
Expired.............................................................. -- -- (4,193) 18.44
Outstanding at end of year........................................... 271,369 20.39 290,662 18.58
Exercisable at end of year........................................... 207,133 17.77 212,620 16.36
Weighted average fair value of options granted
during the year.................................................... -- 33.97 -- 28.54
</TABLE>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE
EXERCISE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- ----------------- ------------ ------------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$10.66--$15.00.... 79,737 4.78 $ 13.35 79,737 $ 13.35
15.01-- 20.00... 82,098 7.61 17.82 82,098 17.28
20.01-- 25.00... 27,663 8.20 24.30 11,867 24.19
25.01-- 30.00... 55,021 6.72 25.98 33,431 25.92
30.01-- 33.69... 26,850 9.06 33.69 -- --
------------ --- ------ ------------ ------
$10.66--$33.69.... 271,369 6.80 $ 20.39 207,133 $ 17.77
------------ --- ------ ------------ ------
------------ --- ------ ------------ ------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively: risk-free
interest rates of 5.0%, 4.8%, and 4.3%; expected dividend yields of 3.2%, 3.2%,
and 3.2%; expected lives of 3.26, 3.38, and 3.55 years; and expected volatility
of 19%, 15%, and 12%.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER OPERATING INCOME AND EXPENSE
Other operating income in the consolidated statements of income and
comprehensive income includes the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Bank card income................................................................. $ 877 $ 1,341 $ 1,714
Miscellaneous.................................................................... 4,380 4,840 3,317
--------- --------- ---------
Total other operating income..................................................... $ 5,257 $ 6,181 $ 5,031
--------- --------- ---------
--------- --------- ---------
</TABLE>
Other operating expense in the consolidated statements of income and
comprehensive income includes the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Insurance (including FDIC)....................................................... $ 626 $ 542 $ 2,396
Stationery and supplies.......................................................... 1,095 1,117 1,294
Advertising...................................................................... 974 998 894
Professional services............................................................ 2,383 2,069 1,571
Credit card processing........................................................... 203 623 1,465
Postage.......................................................................... 848 904 906
Director fees.................................................................... 329 334 276
Telephone........................................................................ 1,021 957 758
Computer software and maintenance................................................ 705 503 625
Other real estate owned expense.................................................. 262 199 531
Amortization of intangibles...................................................... 779 758 1,001
Miscellaneous.................................................................... 4,139 4,806 3,601
--------- --------- ---------
Total other operating expense.................................................... $ 13,364 $ 13,810 $ 15,318
--------- --------- ---------
--------- --------- ---------
</TABLE>
Transactions in the allowances for other real estate owned are summarized as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of of year...................................................... $ 1,792 $ 2,016 $ 2,218
Provision for decline in value and selling expenses.................................. 2 156 436
Losses charged to the allowances..................................................... (1,369) (380) (638)
--------- --------- ---------
Balance at end of year............................................................... $ 425 $ 1,792 $ 2,016
--------- --------- ---------
--------- --------- ---------
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
F&M BANCORP BALANCE SHEETS (PARENT COMPANY)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
(IN THOUSANDS) 1998 1997
---------- ----------
ASSETS
Cash and cash equivalents................................................................. $ 4,351 $ 1,851
Investment securities
Available-for-sale, at fair value................................................... 2,882 2,012
Investment in subsidiaries................................................................ 123,819 121,759
Other assets.............................................................................. 1,967 282
---------- ----------
Total assets.............................................................................. $ 133,019 $ 125,904
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities......................................................................... $ 2,195 $ 269
---------- ----------
Common stock.............................................................................. 43,405 41,622
Surplus................................................................................... 61,980 49,640
Retained earnings......................................................................... 25,220 34,020
Accumulated other comprehensive income.................................................... 219 353
---------- ----------
Total shareholder's equity................................................................ 130,824 125,635
---------- ----------
Total liabilities and shareholders' equity................................................ $ 133,019 $ 125,904
---------- ----------
---------- ----------
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED)
F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
INCOME
Interest on investment securities................................................ $ 246 $ 150 $ 123
Interest expense on borrowings................................................... -- -- 101
--------- --------- ---------
Net interest income........................................................ 246 150 22
Dividends from subsidiaries...................................................... 11,207 5,887 5,487
--------- --------- ---------
Total income..................................................................... 11,453 6,037 5,509
EXPENSE.......................................................................... 618 436 696
--------- --------- ---------
Income before income tax benefits and
equity in undistributed earnings
of subsidiaries............................................................ 10,835 5,601 4,813
Income tax benefit............................................................... (112) (95) (164)
--------- --------- ---------
Income before equity in undistributed
earnings of subsidiaries................................................... 10,947 5,696 4,977
Equity in undistributed earnings
of subsidiaries............................................................ 2,145 8,530 5,424
--------- --------- ---------
Net income....................................................................... $ 13,092 $ 14,226 $ 10,401
--------- --------- ---------
--------- --------- ---------
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED)
F&M BANCORP STATEMENTS OF CASH FLOWS (PARENT COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income....................................................................... $ 13,092 $ 14,226 $ 10,401
Adjustments to reconcile net
income to net cash provided by
operating activities
(Increase) decrease in other assets........................................ (1,685) 61 --
Increase (decrease) in other expenses payable.............................. 1,926 (6) (60)
Equity in undistributed earnings of subsidiaries........................... (2,145) (8,530) (5,424)
--------- --------- ---------
Net cash provided by operating activities........................................ 11,188 5,751 4,917
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
available-for-sale........................................................... (994) (1,992) (4)
Distribution of undivided profits of
Bank subsidiary.............................................................. -- -- 868
--------- --------- ---------
Net cash (used in) provided by investing activities.............................. (994) (1,992) 864
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid.............................................................. (9,190) (5,853) (4,225)
Other financing activities....................................................... 1,496 997 510
Repayments of debt............................................................... -- -- (3,000)
--------- --------- ---------
Net cash used in financing activities............................................ (7,694) (4,856) (6,715)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. 2,500 (1,097) (934)
Cash and cash equivalents at beginning of year................................... 1,851 2,948 3,882
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 4,351 $ 1,851 $ 2,948
--------- --------- ---------
--------- --------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available-for-sale, net of income taxes..... $ (134) $ 1,321 $ (969)
--------- --------- ---------
--------- --------- ---------
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
LEASES
Bancorp conducts part of its branch banking operations from leased
facilities. The initial terms of the leases range from a period of 1-25 years.
Most of the existing leases contain options which allow renewals for periods up
to 20 years. In addition to minimum rentals, certain leases have escalation
clauses based upon various price indexes and include provisions for the payment
of taxes, insurance and maintenance.
Total rental expense was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Year ended December 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Bank premises.................................................... $ 1,094 $ 1,079 $ 978
Equipment........................................................ 43 46 92
--------- --------- ---------
Total rental expense............................................. $ 1,137 $ 1,125 $ 1,070
--------- --------- ---------
--------- --------- ---------
</TABLE>
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1998 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
1999.......................................................................... $ 1,036
2000.......................................................................... 1,062
2001.......................................................................... 966
2002.......................................................................... 883
2003.......................................................................... 786
Later years................................................................... 3,363
------
Total minimum payments required............................................... $ 8,096
------
------
</TABLE>
CONTINGENCIES
Bancorp is subject to various legal proceedings which are incidental to the
ordinary course of business. It is management's opinion that there were no legal
matters pending as of December 31, 1998 which would have a material effect on
the consolidated financial statements.
CREDIT EXTENSION COMMITMENTS
Bancorp is a party to financial instruments in the normal course of business
to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit, which
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated financial statements.
Exposure to credit loss, in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit, is represented by the contractual amount of those instruments. The
same credit policies are applied to commitments and conditional obligations as
are applied to on-balance sheet instruments.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
A summary of the contractual amount of exposure under these financial
instruments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
---------- ----------
<S> <C> <C>
Financial instruments whose contractual amounts represent credit risk:
Commitments to extend credit........................................ $ 177,751 $ 168,476
Stand-by letters of credit.......................................... 14,048 15,949
</TABLE>
Commitments to extend credit are agreements to lend to customers as long as
there are no violations of any conditions established in the contracts. Certain
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon. Accordingly, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's credit worthiness is
evaluated on a case-by-case basis, and the amount of collateral or other
security obtained, if any, is based upon management's assessment of credit risk.
Collateral varies, but may include deposits held in financial institutions, U.S.
Treasury or other marketable securities, accounts receivable, inventory,
property and equipment, personal residences, income-producing commercial
properties, and land under development. Personal guarantees are also obtained to
provide added security for certain commitments.
Stand-by letters of credit are conditional commitments issued to guarantee
the performance of a contract to a third party and are used primarily to
guarantee the installation of real property infrastructure and similar
transactions. Credit risk involved in issuing letters of credit is essentially
the same as that involved in lending and may involve collateral and personal
guarantees as deemed appropriate.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and fair value estimates
of financial instruments at December 31, 1998 and 1997. All fair value estimates
were made at a specific point in time and were based on existing on- and
off-balance sheet financial instruments without consideration of the value of
anticipated future business or the value of assets and liabilities that were not
considered financial instruments. These estimates do not reflect any premium or
discount that could result from a block sale of a particular instrument. Because
of the absence of a genuine market for a significant portion of these financial
instruments, fair value estimates were based on judgments regarding risk
characteristics, economic conditions, and other subjective factors and
uncertainties that do not allow such estimates to be
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
made with precision. Changes in assumptions or methodologies could have a
significant effect on the estimates.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.............................. $ 75,719 $ 75,719 $ 60,668 $ 60,668
Loans held for sale.................................... 4,810 4,810 5,223 5,223
Investment securities held-to-maturity................. 98,231 100,478 94,940 96,650
Investment securities available-for-sale............... 322,651 322,651 232,413 232,413
Net loans.............................................. 878,924 888,529 870,481 894,593
Interest receivable.................................... 9,478 9,478 9,545 9,545
Financial liabilities:
Deposits............................................... 1,138,194 1,030,336 1,053,562 1,053,514
Short-term borrowings.................................. 72,402 72,402 102,303 102,303
Long-term borrowings................................... 94,246 95,346 43,862 42,464
Interest payable....................................... 2,864 2,864 2,375 2,375
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
Because of the short-term nature of these financial instruments, carrying
amounts were deemed to approximate fair value.
LOANS HELD FOR SALE
Fair value was deemed equal to the carrying amounts because of the
anticipated short holding period of these instruments.
INVESTMENT SECURITIES
Fair value for obligations of state and political subdivisions was estimated
by an independent pricing service using a pricing matrix, and the fair value for
all other debt securities was based on quoted market prices or dealer quotes.
LOANS
Fair value was estimated by segregating the portfolio into categories having
similar financial characteristics. Each loan category was then further segmented
into fixed-rate and variable-rate interest terms and by their status as
performing or nonperforming.
The fair value of performing loans was estimated by discounting estimated
future cash flows using discount rates equal to the current rates at which
similar loans would be made with similar credit ratings
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
and for the same remaining maturity except that, in the absence of increased
credit risk, the carrying amount was generally deemed to approximate fair value
for variable-rate loans because of the frequent re-pricing of these instruments
at market rates.
The fair value of nonperforming loans was based principally on recent
external appraisals. If appraisals were not available, estimated cash flows were
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
were judgmentally determined using available market information and specific
borrower information.
INTEREST RECEIVABLE
Because of the short-term nature of interest receivable, fair value was
deemed to approximate carrying amounts.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing deposits, interest-bearing checking, savings, and money
market accounts, was equal to the carrying amount. Carrying amount approximates
fair value for variable-rate certificates of deposit, and fixed-rate
certificates of deposit with original maturities of 12 months or less, because
of the frequent re-pricing of these instruments at market rates. The fair value
for all other fixed-rate certificates of deposit was estimated by discounting
contractual cash flows using discount rates equal to the rates currently offered
for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
Because of the frequent re-pricing of these instruments at current market
rates, fair value was deemed to approximate the carrying amounts.
LONG-TERM BORROWINGS
Fair value was estimated by discounting contractual cash flows using
discount rates equal to the current rates for long-term borrowings with similar
remaining maturities.
INTEREST PAYABLE
Because of the short-term nature of interest payable, fair value was deemed
to approximate carrying amounts.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Carrying amounts for commitments to extend credit and standby letters of
credit represent the deferred income attributed to these unrecognized financial
instruments. The majority of commitments to extend credit and standby letters of
credit are at variable rates and/or have relatively short maturities. Therefore,
fair value of these financial instruments were deemed to closely approximate
their carrying amounts, which were immaterial.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY RESTRICTIONS
RESTRICTIONS ON DIVIDENDS
Approval of the Comptroller of the Currency is required to pay dividends
which exceed the Bank's net profits for the current year plus its retained net
profits for the preceding two years. Amounts available for the payment of
dividends during 1998 aggregated $22,383,000. The rules and regulations of the
OTS require prenotification of dividend payments by the Savings Bank, and such
payments may not exceed prescribed formulas without OTS approval. Also, the
Savings Bank's earnings appropriated to loan loss reserves and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the then current income tax rates on the amount used.
RESTRICTIONS ON LENDING FROM AFFILIATES TO PARENT
Section 23A of the Federal Reserve Act prohibits affiliates from
transferring funds to the Parent Company in the form of loans or advances
exceeding 10% of its capital stock and surplus, as defined in the Act. In
addition, all loans or advances to nonbank affiliates must be secured by
specific collateral. Based on this limitation, there was approximately
$13,671,000 available for loans or advances to the Parent Company as of December
31, 1998, at which time there were no material loans or advances outstanding.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average daily reserve balances with the
Federal Reserve Bank. The amount of these required reserves, calculated based on
percentages of certain deposit balances, was $7,889,000 at December 31, 1998.
15. SHAREHOLDERS' EQUITY
CAPITAL REQUIREMENTS
Bancorp, the Bank, and the Savings Bank are required by regulation to
maintain specified minimum levels of capital. Under the regulatory framework
pertaining to prompt corrective action, each entity is considered to be
"well-capitalized" at December 31, 1998, as disclosed in the following table:
<TABLE>
<CAPTION>
BANCORP
-----------------------------------
<S> <C> <C> <C>
COMPONENTS ACTUAL REQUIRED
(DOLLARS IN THOUSANDS) OF CAPITAL RATIO RATIO
----------- --------- -----------
Tangible capital............................................. $ 124,922 8.81% 3.00%
Core capital................................................. 124,922 12.55 4.00
Core and supplementary capital............................... 132,047 13.80 8.00
</TABLE>
<TABLE>
<CAPTION>
THE BANK
-----------------------------------
<S> <C> <C> <C>
COMPONENTS ACTUAL REQUIRED
OF CAPITAL RATIO RATIO
----------- --------- -----------
Tangible capital............................................. $ 99,536 8.33% 3.00%
Core capital................................................. 99,536 11.75 4.00
Core and supplementary capital............................... 109,569 12.94 8.00
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
THE SAVINGS BANK
-----------------------------------
<S> <C> <C> <C>
COMPONENTS ACTUAL REQUIRED
OF CAPITAL RATIO RATIO
----------- --------- -----------
Tangible capital............................................. $ 18,304 8.13% 1.50%
Core capital................................................. 18,304 8.13 3.00
Core and supplementary capital............................... 20,074 14.25 8.00
</TABLE>
DIVIDEND REINVESTMENT PLAN
Registered shareholders are eligible to participate in Bancorp's Dividend
Reinvestment and Stock Purchase Plan (the "DRP"). The DRP allows participants to
purchase additional shares of Bancorp Common Stock, at a 5% discount to the
market price, through the automatic reinvestment of cash dividends.
Additionally, shareholders may make optional cash payments of $25 to $3,000 in a
single calendar quarter to purchase additional shares at 100% of the market
price. Typically, DRP shares are purchased in the open market by Bancorp's
agent, but the DRP also provides for purchases directly from Bancorp at current
market prices. A total of 60,775 shares are reserved for direct purchase.
Bancorp absorbs all costs of administering the DRP and reserves the right to
amend, modify, suspend, or terminate the DRP at its discretion.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
1998 THREE MONTHS ENDED
(DOLLARS IN THOUSANDS, --------------------------------------------
EXCEPT PER SHARE AMOUNTS) DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Interest income................................... $ 25,005 $ 24,838 $ 24,661 $ 24,675
Interest expense.................................. 12,172 11,768 11,562 11,376
Net interest income............................... 12,833 13,070 13,099 13,299
Provision for credit losses....................... 1,275 625 525 631
Income before income taxes........................ 1,318 5,671 5,222 5,927
Net income........................................ 1,058 4,059 3,786 4,189
Earnings per common share:
Net income, basic............................... 0.12 0.47 0.44 0.48
Net income, diluted............................. 0.12 0.46 0.43 0.48
</TABLE>
62
<PAGE>
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1997 THREE MONTHS ENDED
(DOLLARS IN THOUSANDS, --------------------------------------------
EXCEPT PER SHARE AMOUNTS) DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Interest income................................... $ 25,072 $ 24,573 $ 23,668 $ 23,084
Interest expense.................................. 11,748 11,460 10,783 10,611
Net interest income............................... 13,324 13,113 12,885 12,473
Provision for credit losses....................... 500 850 930 630
Income before income taxes........................ 4,779 5,323 4,802 4,573
Net income........................................ 3,550 3,821 3,494 3,361
Earnings per common share:
Net income, basic............................... 0.41 0.44 0.41 0.39
Net income, diluted............................. 0.41 0.44 0.40 0.39
</TABLE>
17. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", which calls for derivatives to be
recognized in the consolidated balance sheet at fair value and for subsequent
changes in fair value to be recognized in the consolidated statement of income.
However, because non-derivative and non-financial transactions are still
measured using a mix of historical and current prices, the Statement keeps
special accounting for gains and losses when derivatives are used in qualifying
hedges of assets, liabilities, and future transactions. The Statement unifies
qualifying criteria for hedges involving all kinds of derivatives, requiring
that a company document, designate, and assess the effectiveness of its hedges.
For hedges that meet the Statement's criteria, the derivative's gains and losses
will be allowed to offset gains and losses on, or forecasted cash flows of, the
hedged item.
Among a number of other provisions, the Statement will also allow entities
to reclassify available-for-sale and held-to-maturity securities without calling
into question management's intent for the remainder of its securities
portfolios.
For calendar-year companies such as Bancorp, the Statement will take effect
beginning January 1, 2000. Historically, Bancorp has not made use of hedges and
other financial derivatives and is unable to predict the impact, if any, that
the application of Statement No. 133 will have on consolidated financial
statements issued after 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants on accounting
and financial disclosure.
63
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS.
Information set forth under the caption "Election of Directors" on pages 4
through 6 of Bancorp's definitive 1999 Proxy Statement furnished to shareholders
in connection with its Annual Meeting on April 20, 1999 (the "1999 Proxy
Statement") with respect to the name of each nominee or director, that person's
age, positions and offices with Bancorp, business experience, directorships in
other public companies, service on Bancorp's Board and certain family
relationships, and information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 17 of the 1999 Proxy
Statement with respect to Section 16 matters, is hereby incorporated by
reference.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS.
Following are the names and ages of all executive officers of Bancorp, the
Bank and the Savings Bank as of December 31, 1998 and all persons chosen to
become executive officers since that date. All executive officers are elected to
serve a one-year period. There are no arrangements or understandings between
such persons and any other person pursuant to which they were selected as an
officer.
FAYE E. CANNON, age 49, President of Bancorp and the Bank since 1993 and
Chief Executive Officer of Bancorp and the Bank since 1996.
DAVID R. STAUFFER, age 51, Vice President of Bancorp since 1990 and Senior
Executive Vice President and Chief Operating Officer of the Bank since 1999;
previously Executive Vice President of the Bank since 1990.
RICHARD W. PHOEBUS, age 60, Vice President of Bancorp since 1996, when
Savings Bank was acquired by Bancorp, and President and Chief Executive Officer
of the Savings Bank since 1981.
DAVID L. SPILMAN, age 56, Treasurer of Bancorp and Senior Vice President and
Chief Financial Officer of the Bank since 1997; served as Investor
Relations/Financial Communications Consultant to Bancorp from 1996 to 1997; and
was President and Chief Operating Officer of Trust Company of America,
Washington, DC from 1995 to 1996. He is a Certified Public Accountant with over
30 years of management experience in banking with responsibility for accounting,
financial and regulatory reporting, strategic planning, budgeting,
asset/liability management, corporate finance, investor and media relations, and
financial communications. Mr. Spilman previously held senior management
positions with Baltimore Bancorp (1994), MNC Financial (1990) and Equitable
Bancorporation (1982), in Baltimore.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
Pursuant to specific instructions related hereto, this section is
inapplicable to Bancorp.
(D) FAMILY RELATIONSHIPS.
There is no family relationship between any director, executive officer, or
person nominated or chosen to become a director or executive officer.
(E) BUSINESS EXPERIENCE.
All executive officers have been employed by Bancorp, the Bank, or the
Savings Bank more than five years, except Mr. Spilman whose prior business
experience and responsibilities are disclosed in Item 10 (b) above.
64
<PAGE>
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
Pursuant to specific instructions related hereto, none of the events
identified have occurred during the past five years as would be applicable to
any director, person nominated to become a director, or executive officer of
Bancorp.
(G) PROMOTERS AND CONTROL PERSONS.
Pursuant to specific instructions related hereto, this section is
inapplicable to Bancorp.
ITEM 11. EXECUTIVE COMPENSATION
Information in the section under "Compensation Committee Report on Executive
Compensation" located on pages 6 and 7, and "Directors' Fees and Deferred
Compensation Plan" located on page 11 of the 1999 Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in the section under "Security Ownership of Management" and the
notes thereto located on page 1, and "Security Ownership of Certain Beneficial
Owners" located on page 3 of the 1999 Proxy Statement is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in the section under "Certain Transactions with Directors and
Officers" located on page 11 of the 1999 Proxy Statement is hereby incorporated
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Filed documents:
(1) Financial Statements:
See listing in Item 8.
(2) Financial Statement Schedules:
Schedules I and II, inclusive, are omitted because of the absence of
the conditions under which they are required.
(3) Exhibits:
<TABLE>
<S> <C>
2 Agreement and Plan of Merger by and between F&M Bancorp and Monocacy
Bancshares, Inc. Filed as Appendix A to Registration Statement on Form
S-4 (File #333-65727) and incorporated herein by reference. Post
effective Amendment #1 to Deregister 13,963 shares was filed December
31, 1998, (File # 333-65727).
3.1 Articles of Incorporation of F&M Bancorp with all Articles of Amendment.
Filed as exhibit 3.1 of the company's quarterly report on Form 10-Q for
the period ended September 30, 1997 and incorporated herein by
reference.
3.2 By-Laws of F&M Bancorp with all amendments. Filed as Exhibit 3.2 of the
Company's quarterly report on Form 10-Q for the period ended September
30, 1997 and incorporated herein by reference.
4 Description of F&M Bancorp common stock and rights of security holders.
Filed as Exhibit 4 of the Company's quarterly report on Form 10-Q for
the period ended September 30, 1997 and incorporated herein by
reference.
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
10.1 1983 Stock Option Plan of F&M Bancorp as amended in April, 1996. Filed
as Exhibit 10.1 to Registration Statement on Form S-8 (File #002-88390)
and incorporated herein by reference.
10.2 Unfunded Deferred Compensation Plan for Non-Employee Directors of F&M
Bancorp as amended and restated effective August 18, 1998. Filed as an
exhibit hereto and incorporated herein by reference.
10.3 Farmers and Mechanics National Bank Executive Supplemental Income Plan
as amended and restated effective August 18, 1998. Filed as an Exhibit
hereto and incorporated herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan. Filed as Prospectus to
Registration Statement on Form S-8 (File #33-39941) and incorporated
herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock Purchase Plan. Filed as
Prospectus to Registration Statement on Form S-3 (File #33-39940) and
incorporated herein by reference.
10.6 1995 Stock Option Plan of F&M Bancorp. Filed as Exhibit 10.1 to
Registration Statement on Form S-8 (File #333-02433) and incorporated
herein by reference.
10.7 Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
Richard W. Phoebus, Sr. Filed on Exhibit 10.7 to the Annual Report on
Form 10K for the year ended December 31, 1996 and incorporated herein by
reference.
10.8 Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
Steven G. Hull. Filed on Exhibit 10.8 to the Annual Report on Form 10K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.9 Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
Salvatore M. Savino. Filed on Exhibit 10.9 to the Annual Report on Form
10K for the year ended December 31, 1996 and incorporated herein by
reference.
10.10 Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
Celia S. Ausherman. Filed on Exhibit 10.9 to the Annual Report on Form
10K for the year ended December 31, 1996 and incorporated herein by
reference.
10.11 Form of F&M Bancorp Stock Options substituted for Home Federal
Corporation Stock Options granted under the Home Federal Corporation
1988 Stock Option and Stock Appreciation Rights Plan filed as Exhibit
99.3 to Registration Statement on Form S-8 (File #333-16709) and
incorporated herein by reference.
10.12 F&M Bancorp stock options substituted for Monocacy Bancshares,Inc. stock
options issued under the Monocacy Bancshares, Inc. 1994 Stock Incentive
plan and the Monocacy Bancshares's Inc, 1997 Independent Director Stock
Option Plan. Registration Statement on Form S-8 (File #333-68473) and
incorporated herein by reference.
10.13 F&M Bancorp Executive Deferred Compensation Plan adopted April 21, 1998.
Filed as an exhibit hereto and incorporated herein by reference.
10.14 F&M Bancorp Change in Control Employment Agreement. Filed as Exhibit
hereto and incorporated herein by reference.
10.15 Employment Agreement for Michael K. Walsch dated as of July 31,1998.
Copy attached and incorporated as an Exhibit hereto.
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
10.16 Supplemental Retirement Plan Agreement dated November 17, 1994 by and
between Taneytown Bank & Trust Company and Michael K. Walsch.
10.17 Taneytown Bank & Trust Company Key Employee life insurance program.
10.18 Home Federal Corporation Deferred Compensation Plan for Non-Employee
Directors.
11 Statement re: computation of per share earnings.
21 Subsidiaries of F&M Bancorp. Filed as an Exhibit hereto an incorporated
herein by reference.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<S> <C>
1. A report on Form 8-K, Item 5. Other Event, was filed on November 20,
1998 to announce an anticipated date for the merger of Monocacy
Bancshares Inc. with and into F&M Bancorp (File #000-12638)
2. A report on Form 8-K Item 2. Acquisition and Disposition of Assets was
filed on December 15, 1998 to announce the completion of the Monocacy
Bancshares, Inc. acquisition, effective November 30, 1998. (File
#000-12638)
3. A Report on Form 8-K/A Item 2. Acquisition and Disposition of Assets was
filed on December 31, 1998 to publish financial statements, pro forma
financial statements and required exhibits related to the Company's
acquisition of Monocacy Bancshares, Inc. effective November 30, 1998
(File #000-12638).
4. A report on Form 8-K Item 5. Other event was filed on January 20, 1999
to publish 30 days of post-merger combined operations to satisfy the
risk-sharing rules set forth in SEC Accounting Series Release 135. (File
#000-12638).
</TABLE>
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
F&M BANCORP
(Registrant)
Dated: March 16, 1999 By: /s/ FAYE E. CANNON
-----------------------------------------
Faye E. Cannon
PRESIDENT & CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive
Officers:
March 16, 1999 /s/ CHARLES W. HOFF, III
---------------------------
Charles W. Hoff, III
CHAIRMAN OF THE BOARD
March 16, 1999 /s/ FAYE E. CANNON
---------------------------
Faye E. Cannon
PRESIDENT & CHIEF EXECUTIVE
OFFICER
Principal Financial &
Accounting Officer:
March 16, 1999 /s/ DAVID L. SPILMAN
---------------------------
David L. Spilman
TREASURER
A Majority of the Board of
Directors
March 16, 1999 /s/ R. CARL BENNA
---------------------------
R. Carl Benna
DIRECTOR
March 16, 1999 /s/ HOWARD B. BOWEN
---------------------------
Howard B. Bowen
DIRECTOR
68
<PAGE>
<TABLE>
<S> <C>
March 16, 1999 /s/ JOHN D. BRUNK
---------------------------
John D. Brunk
DIRECTOR
March 16, 1999 /s/ BEVERLY B. BYRON
---------------------------
Beverly B. Byron
DIRECTOR
March 16, 1999 /s/ FAYE E. CANNON
---------------------------
Faye E. Cannon
DIRECTOR
March 16, 1999 /s/ MARTHA E. CHURCH
---------------------------
Martha E. Church
DIRECTOR
March 16, 1999 /s/ ALBERT H. COHEN
---------------------------
Albert H. Cohen
DIRECTOR
March 16, 1999 /s/ MAURICE A. GLADHILL
---------------------------
Maurice A. Gladhill
DIRECTOR
March 16, 1999 /s/ ERIC E. GLASS
---------------------------
Eric E. Glass
DIRECTOR
March 16, 1999 /s/ CHARLES W. HOFF
---------------------------
Charles W. Hoff, III
DIRECTOR
March 16, 1999 /s/ DONALD R. HULL
---------------------------
Donald R. Hull
DIRECTOR
March 16, 1999 /s/ JAMES K. KLUTTZ
---------------------------
James K. Kluttz
DIRECTOR
March 16, 1999 /s/ CHARLES A. NICODEMUS
---------------------------
Charles A. Nicodemus
DIRECTOR
March 16, 1999 /s/ RICHARD W. PHOEBUS,
SR.
---------------------------
Richard W. Phoebus, Sr.
DIRECTOR
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
March 16, 1999 /s/ H. DEETS WARFIELD,
JR.
---------------------------
H. Deets Warfield, Jr.
DIRECTOR
March 16, 1999 /s/ JOHN C. WARFIELD
---------------------------
John C. Warfield
DIRECTOR
March 16, 1999 /s/ THOMAS R. WINKLER
---------------------------
Thomas R. Winkler
DIRECTOR
</TABLE>
70
<PAGE>
Exhibit 10.2
MODIFICATION, RESTATEMENT, AND CONSOLIDATION
OF UNFUNDED DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
AMENDED AND RESTATED AS OF AUGUST 18, 1998
This Modification, Restatement, and Consolidation of Unfunded Deferred
Compensation Plan for Non-Employee Directors (hereinafter "Plan") is made as of
the 18th day of August, 1998 by F&M Bancorp (hereinafter the "Company").
WHEREAS, the Company presently has in place an Unfunded Deferred
Compensation Plan for Non-employee Directors; and,
WHEREAS, the Company has determined to make certain amendments to the
Plan and to simplify the administration of the Plan by consolidating all
amendments into one document which restates the Plan;
NOW, THEREFORE, and in consideration of the premises and of other good
and valuable consideration the receipt of which is hereby acknowledged by each
of the parties hereto, the parties hereto do hereby covenant and agree as
follows:
I. CONSOLIDATION.
CONSOLIDATION OF AMENDMENT. From and after the date hereof, the Plan
evidenced by the Unfunded Deferred Compensation Plan for Non-Employee Directors
as amended shall be consolidated into this single Plan document.
II. MODIFIED AND RESTATED TEXT: UNFUNDED DEFERRED COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
THIS PLAN is adopted as of the 18th day of August 1998 by F&M Bancorp
(hereinafter the "Company").
INTRODUCTION
To encourage Directors to remain a member of the Company's Board of
Directors, the Company is willing to provide to Directors a deferred fee
opportunity. The Company will pay the benefits from its general assets.
ARTICLE 1
DEFINITIONS
1.1. DEFINITIONS. Whenever used in this Plan, the following
words and phrases shall have the meanings specified:
<PAGE>
1.1.1. "Change-in-Control" of the Employers. Change-in-Control shall be
deemed to have occurred if the event set forth in any one of the following
paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities
acquired directly from the Company or its Affiliates)
representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person
who becomes such a Beneficial Owner in connection with a
transaction described in clause (A) of paragraph (iii) below;
or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving on the Board;
individuals who, on the date hereof, constitute the Board and
any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
(not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or
its Affiliates) representing 25% or more of the
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combined voting power of the Company's then outstanding
securities.
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by shareholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale;
(v) the Company ceases to own, directly or indirectly, securities
of any subsidiary representing 50% or more of the combined
voting power of the subsidiary's then outstanding securities;
or
(vi) there is consummated an agreement for the sale or disposition
by the Company of all or substantially all of a subsidiary's
assets, other than a sale or disposition by the Company of all
or substantially all of the subsidiary's assets to an entity,
at least 60% of the combined voting power of the voting
securities of which are owned by shareholders of the Company
in substantially the same proportions as their ownership of
the subsidiary immediately prior to such sale; provided
however, that such a sale or disposition should only be
effective for those Executives, if any, employed by the
subsidiary whose assets are so sold or otherwise disposed of,
and not all participating Executives.
"Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
"Board" shall mean the board of directors of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
"Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the
Company or any of its subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or
indirectly, by the shareholders of
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the Company in substantially the same proportions as their
ownership of stock of the Company.
A "Potential Change-in-Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change-in-Control;
(ii) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated,
would constitute a Change-in-Control;
(iii) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or
more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or
(iv) the Board adopts a resolution to the effect that a Potential
Change-in-Control has occurred.
1.1.2. "Company" means each of F&M Bancorp, its direct or
indirect wholly-owned subsidiaries, and its other direct or indirect
subsidiaries that adopt this Plan.
1.1.3. "Code" means the Internal Revenue Code of 1986, as
amended. References to a Code section shall be deemed to be to that
section as it now exists and to any successor provisions.
1.1.4. "Disability" means the Director's inability to perform
substantially all normal duties of a Director, as determined by the
Company's Board of Directors in its sole discretion. As a condition to
any benefits, the Company may require the Director to submit to such
physical or mental evaluations and tests as the Board of Directors
deems appropriate.
1.1.5. "Election Form" means the Form attached as Exhibit 1.
1.1.6. "Fees" means any and all of the total director's fees
payable to the Director.
1.1.7. "Mandatory Termination Date" means the annual meeting
at which the Director's term expires first occurring following the
Director attaining age 70, except for those Directors serving in that
capacity on March 11, 1975, for whom no Mandatory Termination Date
exists.
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1.1.8. "Termination of Service" means the Director is ceasing
to be a member of the Company's Board of Directors for any reason
whatsoever.
ARTICLE 2
DEFERRAL ELECTION
2.1. INITIAL ELECTION. Current Directors shall have made an
initial deferral election under this Plan by filing with the Company a
signed Election Form prior to July 1, 1996. Directors commencing
service after July 1, 1996 will make an initial deferral election by
filing with the Company a signed Election Form within 30 days of
commencing service. The Election Form shall, in all instances, set
forth the amount of Fees to be deferred and the form of benefit
payment. The Election Form shall be effective to defer only Fees earned
after the date the Election Form is received by the Company.
2.2. ELECTION CHANGES
2.2.1. ANNUAL. Directors will be required to make an election
annually in December by filing a signed Election Form with the Company.
The Election Form shall be effective for the following calendar year.
2.2.2. HARDSHIP. If an unforeseeable financial emergency
arising from the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Director
occurs, the Director, by written instructions to the Company may reduce
future deferrals under this Plan.
ARTICLE 3
DEFERRAL ACCOUNT
3.1. ESTABLISHING AND CREDITING. The Company shall establish a
deferral account ("Deferral Account") on its books for the Director,
and shall credit to the Deferral Account the following amounts:
3.1.1. DEFERRALS. The Fees specified to be deferred by the
Director (including fees deferred under earlier versions of this Plan)
as of the time the Fees would have otherwise been paid to the Director.
3.1.2. INTEREST RATE. For each calendar year, interest shall
be calculated at a rate equal to the "prime rate" as published in the
Wall
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Street Journal's Money Rates Table, or the highest rate if more than
one rate is published on December 15 of the immediately preceding year,
or if the 15th is not a business day, then the next business day. For
example, for calendar year 1997, the interest rate shall be the prime
rate as published in the Wall Street Journal on December 15, 1996.
Notwithstanding the foregoing, the interest rate to be paid on the
balance of the Deferral Account from July 1 through December 31, 1996
shall be the prime rate as published in the Wall Street Journal's Money
Rates Table on July 1, 1996.
3.1.3. INTEREST ACCRUAL. Interest will be compounded daily at
the rate specified in paragraph 3.1.2. and credited to the Deferral
Account monthly and immediately prior to the payment of any benefits.
3.2. STATEMENT OF ACCOUNTS. The Company shall provide to the
Director, within one hundred twenty (120) days after each calendar year
end, a statement setting forth the Deferral Account balance.
3.3. ACCOUNTING DEVICE ONLY. The Deferral Account is solely a
device for measuring amounts to be paid under this Plan. The Deferral
Account is not a trust fund of any kind. The Director is a general
unsecured creditor of the Company for the payment of benefits. The
benefits represent the mere Company promise to pay such benefits. The
Director's rights are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by the Director's creditors.
ARTICLE 4
LIFETIME BENEFITS
4.1. NORMAL TERMINATION BENEFIT. Upon the Director's
Termination of Service at the Director's Mandatory Retirement Date, or
for those Directors for whom no Mandatory Retirement Date exists, when
such a Director's Termination of Service occurs after such Director has
attained age 70, the Company shall pay to the Director the benefit
described in this Section 4.1.
4.1.1. AMOUNT OF BENEFIT. The benefit under this Section 4.1
is the Deferral Account balance at the Director's Termination of
Service.
4.1.2. PAYMENT OF BENEFIT. The Company shall pay the benefit
to the Director in the form elected by the Director on the Election
Form. If the ten (10) year payment is elected, the amount of the
accrued benefit payment will be calculated by using the ten (10) year
annuity rate
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<PAGE>
determined using the sum of the mid-term Applicable Federal Rate (AFR)
for the previous month as published monthly by the Internal Revenue
Service, plus 1% rounded to the nearest 1/2 of 1%. Payment shall be
made (or payments shall commence, depending on the Director's election)
on the 1st day of the month following the Director's Termination of
Service.
4.2. EARLY TERMINATION BENEFIT. If the Director terminates
service as a Director before the Mandatory Termination Date, the
Company shall pay to the Director the benefit described in this Section
4.2.
4.2.1. AMOUNT OF BENEFIT. The benefit under this Section 4.2
shall be the Deferral Account balance at the Director's Termination of
Service.
4.2.2. PAYMENT OF BENEFIT. The Company shall pay the benefit
to the Director in the form elected by the Director on the Election
Form. Payment shall be made (or payments shall commence, depending on
the Director's election) on the 1st day of the month following the
Director's Termination of Service. If the ten (10) year payment is
elected, the amount of the accrued benefit payment will be calculated
by using the ten (10) year annuity rate determined using the sum of the
mid-term Applicable Federal Rate (AFR) for the previous month as
published monthly by the Internal Revenue Service, plus 1% rounded to
the nearest 1/2 of 1%.
4.3. DISABILITY BENEFIT. If the Director terminates service as
a Director for Disability prior to the Mandatory Termination Date, the
Company shall pay to the Director the benefit described in this Section
4.3.
4.3.1. AMOUNT OF BENEFIT. The benefit under this Section 4.3
is the Deferral Account balance at the Director's Termination of
Service.
4.3.2. PAYMENT OF BENEFIT. The Company shall pay the benefit
to the Director in the form elected by the Director on the Election
Form. Payment shall be made (or payments shall commence, depending on
the Director's election) on the 1st day of the month following the
Director's Termination of Service. If the ten (10) year payment is
elected, the amount of the accrued benefit payment will be calculated
by using the ten (10) year annuity rate determined using the sum of the
mid-term Applicable Federal Rate (AFR) for the previous month as
published monthly by the Internal Revenue Service, plus 1% rounded to
the nearest 1/2 of 1%.
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4.4. CHANGE OF CONTROL BENEFIT. Upon a Change of Control while
the Director is in the active service of the Company, the Company shall
pay to the Director the benefit described in this Section in lieu of
any other benefit under this Plan.
4.4.1. AMOUNT OF BENEFIT. The benefit under this Section 4.4.
is the Deferral Account balance at the date of the Director's
Termination of Service.
4.4.2. PAYMENT OF BENEFIT. The Company shall pay the benefit
to the Director in a lump sum within ninety (90) days after the
Director's Termination of Service.
4.5. HARDSHIP DISTRIBUTION. Upon the Company's determination
(following petition by the Director) that the Director has suffered an
unforeseeable financial emergency as described in Section 2.2.2., the
Company shall distribute to the Director all or a portion of the
Deferral Account balance as determined by the Director, but in no event
shall the distribution be greater than is necessary to relieve the
financial hardship. The Director expressly accepts the responsibility
for all income tax implications resulting from Director's exercise of
Director's rights under this Section.
ARTICLE 5
DEATH BENEFITS
5.1. DEATH DURING ACTIVE SERVICE. If the Director dies while
in the active service of the Company, the Company shall pay to the
Director's beneficiary the benefit described in this Section 5.1.
5.1.1. AMOUNT OF BENEFIT. If Company owned life insurance is
in force on the life of the Director on the date of the Director's
death, the benefit under Section 5.1 is the projected age 70 benefit
based on the Deferred Account balance and projected further deferrals
until age 70. If Company owned life insurance is not in force on the
life of the Director on the date of Director's death, the benefit will
be the Deferral Account balance on the date of death of the Director.
5.1.2. PAYMENT OF BENEFIT. The Company shall pay the benefit
to the beneficiary in one hundred twenty (120) equal monthly
installments commencing on the first day of the month following the
Director's death.
5.2. DEATH DURING BENEFIT PERIOD. If the Director dies after
benefit payments have commenced under this Plan but not before
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receiving all such payments, the Company shall pay the remaining
benefits to the Director's beneficiary at the same time and in the same
amounts they would have paid to the Director had the director survived.
ARTICLE 6
BENEFICIARIES
6.1. BENEFICIARY DESIGNATIONS. The Director shall designate a
beneficiary by filing a written designation with the Company. The
Director may revoke or modify the designation at any time by filing a
new designation. However, designations will only be effective if signed
by the Director and accepted by the Company during the Director's
lifetime. The Director's beneficiary designation shall be deemed
automatically revoked if the beneficiary predeceases the Director, or
if the Director names a spouse as beneficiary and the marriage is
subsequently dissolved. If the Director dies without a valid
beneficiary designation, all payments shall be made to the Director's
surviving spouse, if any, and if none, to the Director's surviving
children and the descendants of any deceased child by right of
representation, and if no children or descendants survive, to the
Director's estate.
6.2. FACILITY OF PAYMENT. If a benefit is payable to a minor,
to a person declared incompetent, or to a person incapable of handling
the disposition of his or her property, the Company may pay such
benefit to the guardian, legal representative or person having the care
or custody of such minor, incompetent person or incapable person. The
Company may require proof of incompetency, minority or guardianship as
it may deem appropriate prior to distribution of the benefit. Such
distribution shall completely discharge the Company from all liability
with respect to such benefit.
ARTICLE 7
CLAIMS AND REVIEW PROCEDURE
7.1. CLAIMS PROCEDURE. The Company shall notify the Director's
beneficiary in writing, within ninety (90) days of his or her written
application for benefits, of his or her eligibility or non-eligibility
for benefits under the Plan . If the Company determines that the
beneficiary is not eligible for benefits or full benefits, the notice
shall set forth (1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Plan on which the denial is
based, (3) a description of any additional information or material
necessary for the claimant to perfect his or her claim, and a
description of why it is needed, and (4) an explanation of the Plan's
claims review procedure and other appropriate
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<PAGE>
information as to the steps to be taken if the beneficiary wishes to
have the claim reviewed. If the Company determines that there are
special circumstances requiring additional time to make a decision, the
Company shall notify the beneficiary of the special circumstances and
the date by which a decision is expected to be made, and may extend the
time for up to an additional ninety-day period.
7.2. REVIEW PROCEDURE. If the beneficiary is determined by the
Company not to be eligible for benefits, or if the beneficiary believes
that he or she is entitled to greater or different benefits, the
beneficiary shall have the opportunity to have such claim reviewed by
the Company by filing a petition for review with the Company within
sixty (60) days after receipt of the notice issued by the Company. Said
petition shall state the specific reasons which the beneficiary
believes entitles him or her to benefits or to greater or different
benefits. Within sixty (60 days after receipt by the Company of the
petition, the Company shall afford the beneficiary (and counsel, if
any) an opportunity to present his or her position to the Company
orally or in writing, and the beneficiary (or counsel) shall have the
right to review the pertinent documents. The Company shall notify the
beneficiary of its decision in writing within the sixty-day period,
stating specifically the basis of its decision, written in a manner
calculated to be understood by the beneficiary and the specific
provisions of the Plan on which the decision is based. If, because of
the need for a hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day period at the
election of the Company, but notice of this deferral shall be given to
the beneficiary.
ARTICLE 8
AMENDMENTS AND TERMINATION
The Plan may be amended or terminated at any time by the
Company but no modification or termination shall effect the rights of
any Director who is at the time or had previously elected to defer Fees
unless such Director and the Company shall mutually agree in writing.
ARTICLE 9
MISCELLANEOUS
9.1. BINDING EFFECT. This Plan shall bind the Director and the
Company and their beneficiaries, survivors, executors, administrators
and transferees.
9.2. NO GUARANTY OF EMPLOYMENT. This Plan is not a contract
for services. It does not give the Director the right to remain a
Director
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of the Company, nor does it interfere with any rights to replace the
Director. It also does not require the Director to remain a Director
nor interfere with the Director's right to terminate services at any
time.
9.3. NON-TRANSFERABILITY. Benefits under this Plan cannot be
sold, transferred, assigned, pledge, attached or encumbered in any
manner.
9.4. APPLICABLE LAW. The Plan and all rights hereunder shall
be governed by the Laws of the State of Maryland, except to the extent
preempted by the Laws of the United States of America.
9.5. UNFUNDED ARRANGEMENT. The Director and beneficiary are
general unsecured creditors of the Company for the payment of benefits
under this Plan. The benefits represent the mere promise by the Company
to pay such benefits. The rights to benefits are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors. Any insurance on
the Director's life is a general asset of the Company to which the
Director and Beneficiary have no preferred or secured claim.
11
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FARMERS & MECHANICS NATIONAL BANK
EXECUTIVE SUPPLEMENTAL INCOME PLAN
AMENDED AND RESTATED
August 18, 1998
TABLE OF CONTENTS
Page
----
ARTICLE I
Purpose of the Plan - Effective Date of the Plan
1.01 Purpose 1
1.02 Effective Date of Amendment and Restatement 1
ARTICLE II
DEFINITIONS
2.01 Accrued Benefit 1
2.02 Active Participant 1
2.03 Administrative Guidelines 2
2.04 Bank's 401(k) Plan 2
2.05 Beneficiary 2
2.06 Board of Directors 2
2.07 Change-in-Control 2
2.08 Committee 5
2.09 Compensation 5
2.10 Contingent Annuitant 5
2.11 Early Retirement Date 5
2.12 Employee 5
2.13 Employee Bonus or Year End Bonus 5
2.14 Employer 5
2.15 Executive 5
2.16 Farmers & Mechanics 5
2.17 Final Average Monthly Compensation 6
2.18 Final Salary 6
2.19 Insurance Company 6
2.20 Merit Bonus 6
2.21 Normal Retirement Date 6
2.22 Participant 6
2.23 Participation Agreement 6
2.24 Plan 6
<PAGE>
2.25 Policy 6
2.26 Primary Social Security Benefit 6
2.27 Retirement Benefit 7
2.28 Total Disability 7
ARTICLE III
ADMINISTRATION
3.01 Administration 7
ARTICLE IV
ELIGIBILITY FOR PARTICIPATION
4.01 Selection of Executives to be Included in the Plan 8
ARTICLE V
BENEFITS
5.01 Retirement Benefits 8
5.02 Offsets to Benefits 8
5.03 Payment Options 9
5.04 Disability Prior to Normal Retirement Date 10
5.05 Death After Retirement 10
5.06 Vesting: Change-in-Control 10
5.07 Excise Tax Payment Provision 11
ARTICLE VI
DEATH BENEFITS
6.01 Pre-Retirement 13
ARTICLE VII
DISCRETIONARY PURCHASE OF POLICIES
7.01 Discretionary Purchase of Policies 13
7.02 Interest of Participant 14
<PAGE>
ARTICLE VIII
EFFECTIVE DATE OF PARTICIPATION:
TERMINATION AND AMENDMENT
8.01 Effective Date of Participation; Termination and Amendment 14
ARTICLE IX
CLAIMS PROCEDURE
9.01 Determination 15
9.02 Review 15
9.03 Decision Binding 16
ARTICLE X
MISCELLANEOUS PROVISIONS
10.01 No Guarantee of Employment 16
10.02 Nonalienation of Benefits 16
10.03 Withholding 17
10.04 Governing Law 17
10.05 Separability Clause 17
10.06 Construction 17
10.07 Successors 17
<PAGE>
FARMERS & MECHANICS NATIONAL BANK
EXECUTIVE SUPPLEMENTAL INCOME PLAN
AMENDED AND RESTATED
EFFECTIVE AUGUST 18, 1998
ARTICLE I
PURPOSE OF THE PLAN - EFFECTIVE DATE OF THE PLAN
SECTION 1.01 - PURPOSE
This Plan is known as the "Farmers & Mechanics Executive Supplemental
Income Plan." Its purpose is to provide payment of death and supplemental
retirement benefits for certain highly compensated and key management Executives
of Farmers & Mechanics National Bank and its participating affiliates. This Plan
is intended to assist Farmers & Mechanics National Bank in attracting and
retaining Executives of outstanding ability.
SECTION 1.02 - EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT
This Plan was originally effective September 1, 1983 and amended and
restated effective December 28, 1989 (the "Predecessor Plan"). It is now amended
and restated effective August 18, 1998 as set forth below. However, this
amendment is not intended to diminish any benefit in pay status on August 18,
1998, any Accrued Benefit as of August 18, 1998 or any right to benefits under
Section 5.09 of the Predecessor Plan, and if such benefits would have been
greater for an Executive who was a Participant in the Predecessor Plan on August
18, 1998, then such Participant shall be entitled to those benefits which
existed on August 18, 1998 under the Predecessor Plan instead of the benefits
provided by the Plan as amended and restated below.
ARTICLE II
DEFINITIONS
SECTION 2.01 - ACCRUED BENEFIT - means the benefit under Section 5.01 to which a
Participant would be entitled at the Participant's Retirement Date.
SECTION 2.02 - ACTIVE PARTICIPANT - means as an Executive covered under this
Plan. Once an Executive becomes covered, the Executive shall remain
<PAGE>
covered until (i) retirement or other termination of employment with the
Employer, (ii) the termination of this Plan or (iii) the termination of
participation herein as provided in the Participation Agreement.
SECTION 2.03 - ADMINISTRATIVE GUIDELINES - means those rules and guidelines for
the administration of the Plan which are adopted by the Board of Directors or
the Committee pursuant to Article III.
SECTION 2.04 - BANK'S 401(K) PLAN - means the tax qualified retirement plan
maintained by the Farmers & Mechanics National Bank under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the Code) and any successor plan.
SECTION 2.05 - BENEFICIARY - means unless a Participant designates otherwise in
form satisfactory to and filed with the Committee, a Participant's spouse or, if
the Participant does not have a spouse at the time of his death, the
Participant's estate. A Participant may revoke a designation of Beneficiary at
any time, without the consent of any Beneficiary, by written instrument filed
with the Committee.
SECTION 2.06 - BOARD OF DIRECTORS - means individually and collectively the
Boards of Directors of Farmers & Mechanics National Bank and F&M Bancorp.
SECTION 2.07 - CHANGE-IN-CONTROL OF THE EMPLOYERS - "Change-of-Control" shall be
deemed to have occurred if the event set forth in any one of the following
paragraphs shall have occurred relative to either or both of the Employers:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Employers (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Employers or their Affiliates) representing 25% or
more of the combined voting power of the Employers' then outstanding
securities, excluding any Person who becomes such a Beneficial Owner
in connection with a transaction described in clause (A) of
paragraph (iii) below; or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving on the Board;
individuals who, on the date hereof, constitute the Board and any
new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating
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to the election of directors of the Employers) whose appointment or
election by the Board or nomination for election by the Employers'
shareholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either
were directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or recommended;
or
(iii) there is consummated a merger or consolidation of the Employers or
any direct or indirect subsidiary of the Employers with any other
corporation, other than (A) a merger or consolidation which would
result in the voting securities of the Employers outstanding
immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the
Employers or any subsidiary of the Employers, at least 60% of the
combined voting power of the securities of the Employers or such
surviving entity or any parent thereof outstanding immediately after
such merger or consolidation, or (B) a merger or consolidation
effected to implement a recapitalization of the Employers (or
similar transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Employers (not
including in the securities Beneficially Owned by such Person any
securities acquired directly from the Employers or their Affiliates)
representing 25% or more of the combined voting power of the
Employers' then outstanding securities.
(iv) the shareholders of the Employers approve a plan of complete
liquidation or dissolution of the Employers or there is consummated
an agreement for the sale or disposition by the Employers of all or
substantially all of the Employers' assets, other than a sale or
disposition by the Employers of all or substantially all of the
Employers' assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by shareholders of
the Employers in substantially the same proportions as their
ownership of the Employers immediately prior to such sale;
(v) the Employers ceases to own, directly or indirectly, securities of
any subsidiary representing 50% or more of
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the combined voting power of the subsidiary's then outstanding
securities; or
(vi) there is consummated an agreement for the sale or disposition by the
Employers of all or substantially all of a subsidiary's assets,
other than a sale or disposition by the Employers of all or
substantially all of the subsidiary's assets to an entity, at least
60% of the combined voting power of the voting securities of which
are owned by shareholders of the Employers in substantially the same
proportions as their ownership of the subsidiary immediately prior
to such sale; provided however, that such a sale or disposition
should only be effective for those Executives, if any, employed by
the subsidiary whose assets are so sold or otherwise disposed of,
and not all participating Executives.
"Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
"Board" shall mean the boards of directors of either or both of the
Employers as applicable.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the
Employers or any of their subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Employers or any of their Affiliates, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly,
by the shareholders of the Employers in substantially the same
proportions as their ownership of stock of the Employers.
A "Potential Change-in-Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have
occurred:
(i) the Employers enters into an agreement, the consummation of which
would result in the occurrence of a Change-in-Control;
(ii) the Employers or any Person publicly announces an intention to take
or to consider taking actions which, if consummated, would
constitute a Change-in-Control;
(iii) any Person becomes the Beneficial Owner, directly or indirectly, of
securities of the Employers representing 15% or more of either the
then outstanding shares of common stock of the
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Employers or the combined voting power of the Employers' then
outstanding securities (not including in the securities beneficially
owned by such Person any securities acquired directly from the
Employers or their affiliates); or
(iv) the Board adopts a resolution to the effect that a Potential
Change-in-Control has occurred.
SECTION 2.08 - COMMITTEE - means the Compensation Committee of the Board of
Directors or other committee designated by the Board of Directors to administer
this Plan.
SECTION 2.09 - COMPENSATION - means (i) salary plus (ii) bonus paid or declared
pursuant to the Incentive Compensation Program, originally adopted in 1996 for
services rendered during the preceding twelve months. Compensation shall not
include fringe benefits such as automobiles or other perquisites but shall
include any pretax reduction for contributions to any tax qualified retirement
plan, deferred compensation plan, or flexible benefits plan.
SECTION 2.10 - CONTINGENT ANNUITANT - means the person to whom benefits will be
paid under Section 5.05 after a Participant's death.
SECTION 2.11 - EARLY RETIREMENT DATE - means any date after a Participant has
attained age 55 and had been credited with at least seven years of service with
the Employer. For purposes of the preceding sentence, years of service shall be
credited in the same manner as years of service for vesting purposes under the
Bank's 401(k) plan.
SECTION 2.12 - EMPLOYEE - means a person employed by the Employer.
SECTION 2.13 - EMPLOYEE BONUS OR YEAR END BONUS - means the annual bonus paid to
Employees pursuant to the Incentive Compensation Program, originally adopted in
1996.
SECTION 2.14 - EMPLOYERS - means Farmers & Mechanics National Bank and F&M
Bancorp, individually and collectively, and those affiliates of both, which
employs one or more Participants covered under this Plan.
SECTION 2.15 - EXECUTIVE - means an officer of an Employer or other Employee of
an Employer who is designated by the Committee as an Executive.
SECTION 2.16 - FARMERS & MECHANICS - means Farmers & Mechanics National Bank and
its successors.
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SECTION 2.17 - FINAL AVERAGE MONTHLY COMPENSATION - means 1/12 of the greater of
(i) the average annual amount of an Executive's Compensation for the three
consecutive calendar years of employment with the Employer which yield the
highest such average or (ii) an Executive's Compensation for the twelve-month
period ending on the date Final Average Monthly Compensation is being
determined. If the Executive has worked for less than three consecutive calendar
years with the Employer prior to the date Final Average Monthly Compensation is
being determined, item (i) in the preceding sentence shall mean the monthly
average of Compensation for the complete period of employment with the Employer,
except that Compensation for any period of employment preceding a break in the
Executive's employment with the Employer of more than two years shall be
disregarded.
SECTION 2.18 - FINAL SALARY - means an Executive's Compensation during that
twelve month period prior to death or preceding retirement which produces the
highest amount.
SECTION 2.19 - INSURANCE COMPANY - means any legal reserve life insurance
company which shall issue a Policy.
SECTION 2.20 - MERIT BONUS - means the bonus paid to Executives pursuant to the
Incentive Compensation Program
originally adopted in 1996.
SECTION 2.21 NORMAL RETIREMENT DATE - means the Participant's Normal Retirement
Date as defined under the Bank's 401(k) Plan.
SECTION 2.22 - PARTICIPANT - means an Executive designated for participation in
the Plan by the Committee and approved for participation in the Plan by the
Board of Directors.
SECTION 2.23 - PARTICIPATION AGREEMENT - means the agreement between an
Executive and Farmers & Mechanics evidencing the Executive's participation in
this Plan.
SECTION 2.24 - PLAN - means this restated and amended Farmers & Mechanics
National Bank Executive Supplemental Income Plan.
SECTION 2.25 - POLICY - means any life insurance policy purchased by the
Employer on the life of a Participant.
SECTION 2.26 - PRIMARY SOCIAL SECURITY BENEFIT - means the benefit under Title
II of the Social Security Act payable to a Participant at the termination of
employment with the Employer or, if the later, at age 62. The Primary Social
Security Benefit offset under Section 5.01(b) will be determined and applied
when benefits under this Plan begin. If benefits under this Plan begin
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before a Participant attains age 62, the Participant's Primary Social
Security Benefit shall be calculated based on the law in effect on the date
benefits begin and assuming that the Participant will have no additional
earnings from the date of actual termination or retirement to the date the
Participant attains age 62. Once a Participant's Primary Social Security
Benefit has been calculated under the preceding sentence, and the
Participant's benefit under this Plan determined accordingly, the
Participant's Primary Social Security Benefit shall not be subject to any
further adjustment to reflect the amount of the Participant's actual benefits
under Social Security.
SECTION 2.27 - RETIREMENT BENEFIT - means the benefit to which a Participant is
entitled under this Plan upon termination of employment after attaining the
Participant's Early Retirement Date, as described more fully in Section 5.01.
SECTION 2.28 - TOTAL DISABILITY - means disability entitling a Participant to
receive disability payments under any long term disability program maintained by
the Employer for the benefit of the Participant.
ARTICLE III
ADMINISTRATION
SECTION 3.01 - ADMINISTRATION
This Plan will be administered by and under the direction of the
Committee, subject to the oversight of the Board of Directors. The Board of
Directors and/or the Committee shall adopt, and may from time to time modify or
amend, such Administrative Guidelines consistent herewith as they may deem
necessary or appropriate to carry out the provisions and purposes of the Plan.
Any Administrative Guidelines, upon their adoption and so long as in effect,
shall be deemed a part hereof to the same extent as if set forth in the Plan. In
addition to its other duties, the Committee or the Board shall determine all
questions arising under the Plan, the Administrative Guidelines, or any
Participation Agreement and shall be solely responsible for the construction and
interpretation of such documents. In carrying out its duties in connection with
the Plan, the Committee shall have discretion to exercise all powers and to make
all determinations, consistent with the terms of the Plan, in all matters
entrusted to it, and its determinations shall be given deference and shall be
final and binding on all interested parties.
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ARTICLE IV
ELIGIBILITY FOR PARTICIPATION
SECTION 4.01 - SELECTION OF EXECUTIVES TO BE INCLUDED IN THE PLAN
Employees included in the Plan will be those Executives who are
selected by the Committee and approved by the Board of Directors. It is intended
that Participants in the Plan will include only those Executives who, in the
opinion of the Committee, are most likely to make a substantial contribution to
the success of the Employer. Participation in the Plan shall be evidenced by a
Participation Agreement between Farmers & Mechanics and the Executive, in such
form and substance as shall be approved from time to time by the Committee.
ARTICLE V
BENEFITS
SECTION 5.01 - RETIREMENT BENEFITS
(a) Upon a Participant's termination of employment with the
Employer for any reason except death or disability after the
Participant has attained Early Retirement Date, the
Participant shall be entitled to a Retirement Benefit under
this Plan in the form provided in Section 5.03. The monthly
amount of the Participant's Retirement Benefit shall be equal
to the percentage of the Participant's Final Average Monthly
Compensation specified in the Participant's Participation
Agreement, actuarially reduced, if necessary, to account for
the election of a contingent annuitant option as described in
Section 5.03.
(b) The first installment of Retirement Benefits under this Plan
shall be paid on the first day of the month coincident with or
next following the date on which retirement occurs, and
subsequent installments shall be paid on the first day of each
subsequent month.
SECTION 5.02 - OFFSETS TO BENEFITS
Retirement Benefits otherwise payable to a Participant under this Plan
shall be reduced by the following:
(a) The balance in a Participant's account under the Bank's 401(k)
Plan on the date of retirement, excluding, however, amounts
which are attributable to pre-tax and after-tax contributions
by
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the participant and investment earnings, thereon, expressed
as a life annuity with 120 months certain, and using for that
purpose the immediate annuity interest rate and other
assumptions in effect on the date Retirement Benefits begin
under regulations of the Pension Benefits Guaranty
Corporation;
(b) Fifty percent (50%) of the Participant's Primary Social
Security Benefit; and
(c) Any other reductions specified in the Participant's
Participation Agreement.
SECTION 5.03 - PAYMENT OPTIONS
Retirement benefits under this Plan normally shall be paid in the form
of a life annuity with 120 months certain. A Participant may elect instead,
however, that the Participant's retirement benefits be paid in the form of a
contingent annuitant option under which the Participant will receive an
actuarially reduced benefit (determined using the interest rate and other
assumptions in effect on the date benefits begin under regulations of the
Pension Benefit Guaranty Corporation) during the Participant's lifetime after
retirement and 100%, 66 2/3% or 50% of such reduced amount will be continued to
a person (the "Contingent Annuitant") designated by him for the duration of the
Contingent Annuitant's lifetime, with 120 monthly payments guaranteed as
provided in Section 5.05. If a Participant who has elected a contingent
annuitant option dies before the Participant's Normal Retirement Date and
without having retired, the election of a contingent annuitant option shall be
void, no benefit will be paid under that option, and the only benefits payable
with respect to the Participant shall be those provided by Section 6.01 below.
If a Participant's Contingent Annuitant dies before retirement benefits to the
Participant have begun, and also prior to the Participant's Normal Retirement
Date, the contingent annuitant option shall be void, and the Participant will
receive benefits in the normal form. If a Participant's Contingent Annuitant
dies after the Participant's Normal Retirement Date or after the commencement of
retirement benefits, the Participant will receive only the reduced amount of
benefit provided for him or her under the elected option, and benefits will
cease upon the Participant's death (subject, however, to the guarantee of 120
monthly payments under Section 5.05). Once payments to a Participant under an
optional form of benefits have begun, the form of payment cannot be changed. The
optional benefits outlined in this Section must be elected by the Participant on
forms prescribed by the Committee and in accordance with rules prescribed by the
Committee from time to time.
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SECTION 5.04 - DISABILITY PRIOR TO NORMAL RETIREMENT DATE
No disability benefits are payable under this Plan. However, if a
Participant incurs a Total Disability prior to the Participant's Normal
Retirement Date and either during the Participant's employment or while on a
leave of absence approved by the Employer, the Participant will continue to be
eligible for all retirement benefits provided by this Plan. Such benefits shall
be computed based on the Participant's Final Average Monthly Compensation
calculated as of the date Total Disability occurs; however, the period of the
Participant's disability shall be considered as active participation in this
Plan for purposes of Section 5.01.
SECTION 5.05 - DEATH AFTER RETIREMENT.
If a Participant (or, where appropriate, a Contingent Annuitant) dies
after the payment of benefits under this Plan has begun before the Employer has
made 120 monthly payments, the Employer shall pay to the Participant's
Beneficiary the remaining benefits payable until the balance of 120 payments
have been made.
SECTION 5.06 - VESTING: CHANGE-IN-CONTROL
Except as provided by this Section 5.06, a Participant whose employment
with the Employer terminates for any reason, other than death or Total
Disability, before the Participant has attained an Early Retirement Date, will
not receive any benefits from this Plan. If, however, there is a
Change-in-Control, followed by the termination of the employment of a
Participant for any reason, the following benefits shall be paid to that
Participant:
(a) If the Participant terminates employment before the third
anniversary of a Change-in-Control, the Participant shall
receive a monthly benefit, beginning on the first day of the
month following termination of employment and continuing to
and including the first day of the month following the third
anniversary of the Change-in-Control, equal to 1/12 of the
greater of (i) total Compensation paid or accrued to the
Participant during the twelve month period ending on the date
of the Change-in-Control or (ii) total Compensation paid or
accrued to the Participant during the twelve month period
ending on the date the Participant's employment terminates. If
a Participant who receives benefits under this subsection (a)
dies before benefits under subsection (b) below have begun,
benefits shall be paid to the Participant's Beneficiary as
provided in Section 6.01.
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(b) Beginning on the first day of the month following the
expiration of payments under (a) above, or, if the Participant
terminates employment after the third anniversary of the
Change-in-Control, beginning on the first day of the month
following the Participant's termination of employment, the
Participant shall begin to receive benefits in the amount
determined under Section 5.01, without any reduction to
reflect the fact that benefits are being provided before the
Participant has attained an Early Retirement Date. Benefits
payable under this subsection (b) shall be paid as a life
annuity with 120 months certain or in the form of a contingent
annuitant option as described in Section 5.03. In applying
Section 5.03 to a Participant entitled to benefits under this
Section 5.06, the Participant's retirement benefits shall not
be deemed to have commenced until benefits under this
subsection (b) have commenced, notwithstanding the fact that
benefits have begun under subsection (a) above.
SECTION 5.07 - EXCISE TAX PAYMENT PROVISION
A. 1. Whether or not the Executive becomes entitled to payments
under this Agreement, if any of the payments or benefits
received or to be received by the Executive in connection with
a Change-in-Control or the Executive's termination of
employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Employers,
any Person whose actions result in a Change-in-Control or any
Person affiliated with the Employers or such Person) (such
payments or benefits, excluding the Excise Tax Payment, being
hereinafter referred to as the "Total Payments") will be
subject to any excise tax imposed under Section 4999 of the
Code (the "Excise Tax"), the Employers shall pay to the
Executive an additional amount (the "Excise Tax Payment")
equal to the Excise Tax imposed.
2. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be
treated as "parachute payments" (within the meaning of section
280G(b)(2) of the Code) unless, in the opinion of tax counsel
("Tax Counsel") reasonably acceptable to the Executive and
selected by the accounting firm which was, immediately prior
to the Change-in-Control, the Employers' independent auditor
(the "Auditor"), such payments or benefits (in whole or in
part) do not constitute parachute payments, including by
reason of
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section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code
shall be treated as subject to the Excise Tax unless, in the
opinion of Tax Counsel, such excess parachute payments (in
whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of section
280G(b)(4)(B) of the Code) in excess of the Base Amount
(within the meaning of Section 280G(b)(3) of the Code)
allocable to such reasonable compensation, or are otherwise
not subject to the Excise Tax, and (iii) the value of any
noncash benefits or any deferred payment or benefit shall be
determined by the Auditor in accordance with the principles of
sections 280G(d)(3) and (4) of the Code.
3. In the event that the Excise Tax is finally determined to
be less than the amount taken into account hereunder in
calculating the Excise Tax Payment, the Executive shall repay
to the Employers, within five (5) business days following the
time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Excise Tax Payment
attributable to such reduction. In the event that the Excise
Tax is determined to exceed the amount taken into account
hereunder in calculating the Excise Tax Payment (including by
reason of any payment the existence or amount of which cannot
be determined at the time of the Excise Tax Payment), the
Employers shall make an additional Excise Tax Payment in
respect of such excess (plus any interest, penalties or
additions payable by the Executive with respect to such
excess) within five (5) business days following the time that
the amount of such excess is finally determined. The Executive
and the Employers shall each reasonably cooperate with the
other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability
for Excise Tax with respect to the Total Payments.
B. The payments provided in Section 5.07A shall be made not later
than the fifth (5th) day following the Date of Termination;
PROVIDED, HOWEVER, that if the amounts of such payments cannot
be finally determined on or before such day, the Employers
shall pay to the Executive on such day an estimate of the
minimum amount of such payments to which the Executive is
clearly entitled and shall pay the remainder of such payments
(together with interest on the unpaid remainder (or on all
such payments to the extent the Employers fail to make such
payments when due) at 120% of the rate provided in section
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1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th)
day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall
constitute a loan by the Employers to the Executive, payable
on the fifth (5th) business day after demand by the Employers
(together with interest at 120% of the rate provided in
section 1274(b)(2)(B) of the Code.) At the time that payments
are made under this Agreement , the Employers shall provide
the Executive with a written statement setting forth the
manner in which such payments were calculated and the basis
for such calculations including, without limitation, any
opinions or other advice the Employers has received from Tax
Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached
to the statement).
ARTICLE VI
DEATH BENEFITS
SECTION 6.01 - PRE-RETIREMENT
If a Participant: (a) dies before his actual retirement or termination
of employment; (b) dies while the Participant is on a leave of absence approved
by the Employer; (c) dies while the Participant is on Total Disability, or (d)
dies while the Participant is receiving benefits under Section 5.06(a), Farmers
& Mechanics shall pay to the Participant's Beneficiary an annual benefit equal
to 50% of the Participant's Final Salary. Such benefit shall be payable monthly
beginning on the first day of the month next following the month in which the
Participant's death occurs, and shall continue for a period of 10 years or, if
longer, for a period extending until the date on which the Participant would
have attained age 65.
ARTICLE VII
DISCRETIONARY PURCHASE OF POLICIES
SECTION 7.01 - DISCRETIONARY PURCHASE OF POLICIES
Farmers & Mechanics may, but shall not be required to, offset its
obligations under this Plan through the purchase of life insurance on the life
of each Participant. Each Participant, as a condition of participating herein,
13
<PAGE>
shall cooperate in the securing of such life insurance on the Participant's life
by furnishing such information as Farmers & Mechanics and the Insurance Company
may require, taking such physical examinations as may be necessary, and taking
any other action as may be requested by Farmers & Mechanics and the Insurance
Company to obtain such insurance coverage. If a Participant refuses to cooperate
in the securing of such life insurance, Farmers & Mechanics shall have not
further obligation to such Participant under this Plan.
SECTION 7.02 - INTEREST OF PARTICIPANT
Neither the Participant nor any Beneficiary shall have any interest in
any Policy purchased as aforesaid nor in any other particular assets of Farmers
& Mechanics. The Participant's and Beneficiary's only interest hereunder shall
be the right to receive the benefits set forth herein. Nothing in this Plan
shall be construed as the creation by Farmers & Mechanics of an escrow account
or trust fund or as any other form of asset segregation, it being the intention
and understanding of the parties that Farmers & Mechanics' obligations under
this Plan shall be unfunded and that the Participant and any Beneficiary shall,
as to claims under this Plan, be general creditors of Farmers & Mechanics.
ARTICLE VIII
Effective Date of Participation;
TERMINATION AND AMENDMENT
SECTION 8.01 - EFFECTIVE DATE OF PARTICIPATION; TERMINATION AND AMENDMENT
An Executive's participation in this Plan shall become effective as of
the date set forth in his executed Participation Agreement and shall continue
until the Executive's retirement or other termination of employment with the
Employer or until the Plan is terminated by the Board of Directors.
The Board of Directors reserves in its sole and exclusive discretion
the right at any time, and from time to time, to amend this Plan in any respect
or to terminate this Plan without restriction and without the consent of any
Participant or Beneficiary; provided, however, that neither termination nor any
amendment of the Plan may, without the written approval of a Participant (or, if
the Participant is no longer living, the Participant's Contingent Annuitant or
Beneficiary, as the case may be), (i) reduce or terminate any benefit then in
pay status, (ii) reduce or terminate the rights of a Participant who has
attained an Early Retirement Date, incurred Total Disability, or died to
benefits earned or to be earned under this Plan or (iii)
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once a Change-in-Control has occurred, and whether or not a Participant has
attained an Early Retirement Date, reduce or terminate a Participant's right to
benefits under Section 5.06.
ARTICLE IX
CLAIMS PROCEDURE
SECTION 9.01 - DETERMINATION
Except as provided in Section 3.01, the Committee shall be responsible
for determining all claims for benefits under this Plan. Any person claiming a
benefit under the Plan (a "Claimant") shall present the claim, in writing, to
the Committee, and the Committee shall respond in writing. If the claim is
denied, the written notice of denial shall state, in a manner calculated to be
understood by the Claimant:
(a) The specific reason or reasons for denial, with specific
references to the Plan provisions on which the denial is
based;
(b) A description of any additional material or information
necessary for the Claimant to perfect his or her claim and an
explanation of why such material or information is necessary;
and
(c) An explanation of the Plan's claims review procedure. The
written notice denying or granting the Claimant's claim shall
be provided to the Claimant within 90 days after the
Committee's receipt of the claim, unless special circumstances
require an extension of time for processing the claim. If such
an extension is required, written notice of the extension
shall be furnished by the Committee to the claimant within the
initial 90 day period and in no event shall such an extension
exceed a period of 90 days from the end of the initial 90 day
period. Any extension notice shall indicate the special
circumstances requiring the extension and the date on which
the Committee expects to render a decision on the claim. Any
claim not granted or denied within the period noted above
shall be deemed to have been denied.
SECTION 9.02 - REVIEW
Any Claimant whose claim is denied, or deemed to be denied under the
preceding sentence, (or such Claimant's authorized representative) may, within
60 days after the Claimant's receipt of notice of the denial, or after
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the date of the deemed denial, request a review of the denial by notice given,
in writing, to the Committee. Upon such a request for review, the claim shall be
reviewed by the Committee (or its designated representative) which may, but
shall not be required to, grant the Claimant a hearing. In connection with the
review, the Claimant may have representation, may examine pertinent documents,
and may submit issues and comments in writing.
The decision on review normally shall be made within 60 days of the
Committee's receipt of the request for review. If an extension of time is
required due to special circumstances, the Claimant shall be notified, in
writing, by the Committee, and the time limit for the decision on review shall
be extended to 120 days. The decision on review shall be in writing and shall
state, in a manner calculated to be understood by the Claimant, the specific
reasons for the decision and shall include references to the relevant Plan
provisions on which the decision is based. The written decision on review shall
be given to the Claimant within the 60 day (or, if applicable, the 120 day) time
limit discussed above. If the decision on review is not communicated to the
Claimant within the 60 day (or, if applicable, the 120 day) period discussed
above, the claim shall be deemed to have been denied upon review.
SECTION 9.03 - DECISION BINDING
The decision of the Committee after such review shall be made in the
Committee's sole and absolute discretion, and shall be final and binding upon
Farmers & Mechanics and the claimant and all other persons.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.01 - NO GUARANTEE OF EMPLOYMENT
Nothing contained herein shall be deemed to give any individual the
right to be retained in the service of any Employer or to interfere with the
rights of the Employer to discharge any individual at any time with or without
cause.
SECTION 10.02 - NONALIENATION OF BENEFITS
No benefits payable hereunder may be assigned, pledged, mortgaged or
hypothecated and, to the extent permitted by law, no such benefits shall be
subject to legal process or attachment for the payment of any claims
16
<PAGE>
against any person entitled to receive the same. Regardless of the preceding
sentence, if at any time payments are to be made in accordance with the
provisions of this Plan and the Participant or the Beneficiary or both are in
default under any indebtedness to the Employer, then the payment remaining to be
made to the Participant or the Beneficiary or both may, at the discretion of the
Board of Directors, be reduced by the amount of such indebtedness; provided,
however, that the failure of the Board of Directors to reduce any such payment
or payments shall not constitute a waiver of such indebtedness.
SECTION 10.03 - WITHHOLDING
Retirement payments made by Farmers & Mechanics under the Plan shall be
subject to withholding at the time of such payment if such withholding is
required under any income tax or other law of the United States or any other
jurisdiction
SECTION 10.04 - GOVERNING LAW
This Plan shall be interpreted according to the laws of the State of
Maryland and, to the extent the laws of the State of Maryland are preempted, by
the laws of the United States of America.
SECTION 10.05 - SEPARABILITY CLAUSE
The invalidity or unenforceability of any provision of this Plan shall
not affect the validity or enforceability of any other provision.
SECTION 10.06 - CONSTRUCTION
This Plan is intended to be an "unfunded" plan for the benefit of a
"select group of management or highly compensated employees," as those terms are
used in the Employee Retirement Income Security Act of 1974, and this Plan shall
be so construed.
SECTION 10.07 - SUCCESSORS
This Plan shall be binding upon Farmers & Mechanics and its successors
and assigns, including without limitation any successor by merger and any
purchaser of all or substantially all of the assets of Farmers & Mechanics.
<PAGE>
17
SCHEDULE I TO
FARMERS & MECHANICS NATIONAL BANK
EXECUTIVE SUPPLEMENTAL INCOME PLAN
AMENDED AND RESTATED
The following persons participate in the Executive Supplemental Income
Plan.
Faye E. Cannon
Michael M. Cooney
Charles W. Hoff, III
David R. Stauffer
<PAGE>
Exhibit 10.13
F&M BANCORP
EXECUTIVE DEFERRED COMPENSATION PLAN
THIS PLAN is adopted this ______day of ___________, 1998, by F&M
Bancorp, located in Frederick, Maryland (the "Company").
INTRODUCTION
To encourage Executives to remain employees of the Company or one or
more of its subsidiaries, the Company is willing to provide to certain
Executives a deferred compensation opportunity. The Company will pay an
Executive's benefits from the Company's general assets.
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. Whenever used in this Plan, the following words and
phrases shall have the meanings specified:
1.1.1 "ANNIVERSARY DATE" means December 31 of each year.
1.1.2 "CHANGE OF CONTROL" shall be deemed to have occurred if the event
set forth in any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities
acquired directly from the Company or its Affiliates)
representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person
who becomes such a Beneficial Owner in connection with a
transaction described in clause (A) of paragraph (iii) below;
or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving on the Board;
individuals who, on the date hereof, constitute the Board and
any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the
<PAGE>
directors then still in office who either were directors on
the date hereof or whose appointment, election or nomination
for election was previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
(not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or
its Affiliates) representing 25% or more of the combined
voting power of the Company's then outstanding securities.
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by shareholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale;
(v) the Company ceases to own, directly or indirectly, securities
of any subsidiary representing 50% or more of
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the combined voting power of the subsidiary's then outstanding
securities; or
(vi) there is consummated an agreement for the sale or disposition
by the Company of all or substantially all of a subsidiary's
assets, other than a sale or disposition by the Company of all
or substantially all of the subsidiary's assets to an entity,
at least 60% of the combined voting power of the voting
securities of which are owned by shareholders of the Company
in substantially the same proportions as their ownership of
the subsidiary immediately prior to such sale; provided
however, that such a sale or disposition should only be
effective for those Executives, if any, employed by the
subsidiary whose assets are so sold or otherwise disposed of,
and not all participating Executives.
"Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
"Board" shall mean the board of directors of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
"Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the
Company or any of its subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or
indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock
of the Company.
A "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs
shall have occurred:
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(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
(ii) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(iii) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or
more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or
(iv) the Board adopts a resolution to the effect that a Potential
Change in Control has occurred.
1.1.3 "CODE" means the Internal Revenue Code of 1986, as amended.
1.1.4 "DEFERRAL ACCOUNT" means the Company's accounting of the
Executive's accumulated Deferrals plus accrued interest.
1.1.5 "DEFERRALS" means the amount of the Executive's Compensation
which the Executive elects to defer according to this Plan.
1.1.6 "DISABILITY" means the Executive's inability to perform
substantially all normal duties of the Executive, as determined by the Company's
Board of Directors, in its sole discretion. As a condition to any benefits, the
Company may require the Executive to submit to such physical or mental
evaluations and tests as the Board of Directors deems appropriate.
1.1.7 "EFFECTIVE DATE" means the date first written above.
1.1.8 "ELECTION FORM" means the Form attached as Exhibit 1.
1.1.9 "COMPENSATION" means the total salary and bonus paid to the
Executive during a Plan Year.
1.1.10"PLAN YEAR" means the calendar year. The initial Plan Year shall
be a short Plan Year commencing on the Effective Date and ending on December 31
of the same year.
4
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1.1.11"INTEREST RATE" means a rate equal to the "prime rate" as
published in the Wall Street Journal's Money Rates Table, or the highest rate if
more than one rate is published on December 15 of the immediately preceding
year, or if the 15th is not a business day, then the next business day. For
example, for calendar year 1997, the interest rate shall be the prime rate as
published in the Wall Street Journal on December 15, 1996.
1.1.12."TERMINATION OF EMPLOYMENT" means the Executive ceasing to be
employed by the Company for any reason whatsoever.
ARTICLE 2
DEFERRAL ELECTION
2.1 INITIAL ELECTION. The Executive shall make an initial deferral
election under this Plan by filing with the Company a signed Election Form
within thirty (30) days after the Effective Date of this Plan. The Election Form
shall set forth the amount of Compensation to be deferred and the form of
benefit payment; however, the Executive is limited to deferring 50% of
Compensation in any Plan Year. The Election Form shall be effective to defer
only Compensation earned after the date the Election Form is received by the
Company.
2.2 ELECTION CHANGES
2.2.1 GENERALLY. The Executive will be required to make an election of
the amount of Compensation to be deferred annually in December by filing a
signed Election Form with the Company. The Election Form shall be effective for
the following calendar year.
2.2.2 HARDSHIP. If an unforeseeable financial emergency arising from
the death of a family member, divorce, sickness, injury, catastrophe or similar
event outside the control of the Executive occurs, the Executive, by written
instructions to the Company, may reduce future deferrals under this Plan.
ARTICLE 3
DEFERRAL ACCOUNT
3.1 ESTABLISHING AND CREDITING. The Company shall establish a Deferral
Account on its books for the Executive and shall credit to the Deferral Account
the following amounts:
3.1.1 DEFERRALS. The Compensation specified to be deferred by the
Executive as of the time the Compensation would have otherwise been paid to the
Executive.
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3.1.2 INTEREST ACCRUAL. Interest will be compounded daily at the rate
specified in paragraph 1.1.11 and credited to the Deferral Account monthly and
immediately prior to the payment of any benefits.
3.2 STATEMENT OF ACCOUNTS. The Company shall provide to the Executive,
within one hundred twenty (120) days after each calendar year end, a statement
setting forth the Deferral Account balance.
3.3 ACCOUNTING DEVICE ONLY. The Deferral Account is solely a device for
measuring amounts to be paid under this Plan. The Deferral Account is not a
trust fund of any kind. The Executive is a general unsecured creditor of the
Company for the payment of benefits. The benefits represent the mere Company
promise to pay such benefits. The Executive's rights are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by the Executive's creditors.
ARTICLE 4
LIFETIME BENEFITS
4.1 Upon Termination of Employment for any reason other than death, the
Company shall pay to the Executive the benefit described in this Section 4.1 in
lieu of any other benefit under this Plan.
4.1.1 AMOUNT OF BENEFIT. The benefit under this Section 4.1 is the
Deferral Account balance at the Executive's Termination of Employment.
4.1.2 PAYMENT OF BENEFIT. The Company shall pay the benefit to the
Executive in the form elected by the Executive on the Election Form. If the
Executive elected to receive his benefit in the form of installments, the
Company shall continue to credit interest on the remaining account balance
during any applicable installment period floating at the rate in effect under
Section 3.1.2 on the date of the Executive's Termination of Employment.
4.1.3 CHANGE IN CONTROL. In the event of a Change of Control or a
Potential Change in Control, the Company shall establish a Rabbi Trust and shall
place in the Rabbi Trust an amount equal to the sum of all compensation deferred
by the Executive plus interest accrued thereon to date, reduced by amounts, if
any, which have been paid to the Executive (or his beneficiary) in accordance
with the Plan.
4.2 HARDSHIP DISTRIBUTION. Upon the Board of Director's determination
(following petition by the Executive) that the Executive has suffered an
unforeseeable financial emergency as described in Section 2.2.2,
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the Company shall distribute to the Executive all or a portion of the Deferral
Account balance as determined by the Executive, but in no event shall the
distribution be greater than is necessary to relieve the financial hardship.
Executive expressly accepts the responsibility for all tax implications
resulting from Executive's exercise of Executive's rights under this section.
ARTICLE 5
DEATH BENEFITS
5.1 DEATH DURING ACTIVE SERVICE. If the Executive dies while in the
active service of the Company, the Company shall pay to the Executive's
beneficiary the benefit described in this Section 5.1 in lieu of any other
benefit under this Plan.
5.1.1. AMOUNT OF BENEFIT. The benefit under Section 5.1 is the Deferral
Account balance on the date of death.
5.1.2 PAYMENT OF BENEFIT. The Company shall pay the benefit to the
Executive's designated beneficiary in the form elected by the Executive on the
Election Form. If the Executive elected to receive his benefit in the form of
installments, the Company shall continue to credit interest on the remaining
account balance during any applicable installment period floating at the rate in
effect under Section 3.1.2 on the date of the Executive's death.
5.2 DEATH DURING BENEFIT PERIOD. If the Executive dies after benefit
payments have commenced under this Plan but before receiving all such payments,
the Company shall pay the remaining benefits to the Executive's beneficiary at
the same time and in the same amounts they would have been paid to the Executive
had the Executive survived.
ARTICLE 6
BENEFICIARIES
6.1 BENEFICIARY DESIGNATIONS. The Executive shall designate a
beneficiary by filing a written designation with the Company. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Company during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's spouse,
if any, and if none, to the Executive's surviving children and the descendants
of any deceased child by
7
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right of representation and if no children or descendants survive, to the
Executive's estate.
6.2 FACILITY OF PAYMENT. If a benefit is payable to a minor, to a
person declared incompetent, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incompetent person or incapable person. The Company may require proof of
incompetence, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
ARTICLE 7
CLAIMS AND REVIEW PROCEDURES
7.1 CLAIMS PROCEDURE. The Company shall notify any person or entity
that makes claim against the Plan (the "Claimant") in writing, within ninety
(90) days of his or her written application for benefits, of his or her
eligibility or non-eligibility for benefits under the Plan. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Plan on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim, and a description of why it is needed, and (4) an
explanation of the Plan's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
7.2 REVIEW PROCEDURE. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that he or she is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Claimant believes entitle him or her to benefits or to greater or different
benefits. Within sixty (60) days after receipt by the Company of the petition,
the Company shall afford the Claimant (and counsel, if any) an opportunity to
present his or her position to the Company orally or in writing, and the
Claimant (or counsel) shall have the right to review the pertinent documents.
The Company shall notify the Claimant of its decision in writing within the
sixty-day period, stating specifically the basis of its decision,
8
<PAGE>
written in a manner calculated to be understood by the Claimant and the specific
provisions of the Plan on which the decision is based If, because of the need
for a hearing, the sixty-day period is not sufficient, the decision may be
deferred for up to another sixty-day period at the election of the Company, but
notice of this deferral shall be given to the Claimant.
ARTICLE 8
AMENDMENTS AND TERMINATION
8.1 This Plan may be amended prospectively but not retroactively or
terminated by the Company; however, the Company must give the Executive 10 days
prior written notice and the opportunity to revise Executive's election to defer
compensation. This Plan shall not be terminated under this Section 8.1 without
payment to the Executive of the Deferral Account balance attributable to the
Executive's Deferrals and interest credited on such amounts.
ARTICLE 9
MISCELLANEOUS
9.1 BINDING EFFECT. This Plan shall bind the Executive and the Company,
and their beneficiaries, survivors, executors, administrators and transferees.
9.2 NO GUARANTEE OF EMPLOYMENT. This Plan is not a contract for
employment. It does not give the Executive the right to remain an employee of
the Company, nor does it interfere with the directors' rights to replace the
Executive. It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at any time.
9.3 NON-TRANSFERABILITY. Benefits under this Plan cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
9.4 TAX WITHHOLDING. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Plan.
9.5 APPLICABLE LAW. The Plan and all rights hereunder shall be governed
by the laws of the State of Maryland, except to the extent preempted by the laws
of the United States of America.
9.6 UNFUNDED ARRANGEMENT. The Executive and the Executive's beneficiary
are general unsecured creditors of the Company for the payment of benefits under
this Plan. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge,
9
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encumbrance, attachment, or garnishment by creditors. Any insurance on the
Executive's life is a general asset of the Company to which the Executive and
the Executive's beneficiary have no preferred or secured claim.
9.7 REORGANIZATION. The Company shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm, or person unless such succeeding or continuing company,
firm, or person agrees to assume and discharge the obligations of the Company
under this Plan.
9.8 ENTIRE PLAN. This Plan constitutes the entire agreement between the
Company and the Executive as to the subject matter hereof. No rights are granted
to the Executive by virtue of this Plan other than those specifically set forth
herein.
9.9 ADMINISTRATION. The Company shall have powers which are necessary
to administer this Plan, including but not limited to the following and shall
delegate responsibility for administration to the Compensation Committee:
9.9.1 Interpreting the provisions of the Plan;
9.9.2 Establishing and revising the method of accounting for the Plan;
9.9.3 Maintaining a record of benefit payments; and,
9.9.4 Establishing rules and prescribing any forms necessary or
desirable to administer the Plan.
9.10 NAMED FIDUCIARY. For purposes of the Employee Retirement Income
Security Act of 1974, if applicable, the Company shall be the named fiduciary
and plan administrator under the Plan. The named fiduciary may delegate to
others certain aspects of the management and operation responsibilities of the
plan including the employment of advisors and the delegation of ministerial
duties to qualified individuals.
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IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have
signed this Plan
COMPANY:
EXECUTIVE: F&M Bancorp
By By
------------------------------ ---------------------------------
Title
11
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EXHIBIT 1
F&M BANCORP
EXECUTIVE DEFERRED COMPENSATION PLAN
DEFERRAL ELECTION
For
-----------------------------
I elect to defer compensation under the Executive Deferred Compensation Plan, as
follows:
AMOUNT OF DEFERRAL
[INITIAL AND COMPLETE]
_____ I elect to defer ___% of my annual salary
_____ I elect to defer ___% of my annual bonus
_____ I elect NOT to defer my annual salary
_____ I elect NOT to defer my annual bonus
I understand that I may change the amount, frequency and
duration of my deferral by filing a new election form with the
Bank; provided, however, that any subsequent election will not
be effective until the calendar year following the year in
which the new election is received by the Bank.
I understand that my total deferral election for any calendar
year may not exceed 50% of the sum of my annual salary and
bonus for that year.
FORM OF BENEFIT
I elect to receive benefits under the Plan in the following
form:
[INITIAL ONE]
_____ Lump Sum
_____ Equal monthly installments for 180 months
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F&M BANCORP
BENEFICIARY DESIGNATION
DESIGNATION
for
------------------------
I designate the following as beneficiary of benefits under the Executive
Deferred Compensation Plan payable following death:
Primary:
------------------------------------
Contingent:
---------------------------------
I understand that I may change these beneficiary designations by filing a new
written designation with the Bank. I further understand that the designations
will be automatically revoked if the beneficiary predeceases me, or, if I have
named my spouse as beneficiary, in the event of the dissolution of our marriage.
Signature
-----------------------------------
Date
----------------------------------------
Accepted by F&M Bancorp this ______ day of ______________________, 1998.
By
-------------------
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SCHEDULE I TO
F&M BANCORP
EXECUTIVE DEFERRED COMPENSATION PLAN
The following person participates in the F&M Bancorp Executive
Deferred Compensation Plan:
Karen Korrell
<PAGE>
Exhibit 10.14
AGREEMENT
BETWEEN
F&M BANCORP
FARMERS & MECHANICS NATIONAL BANK
AND
-------------------------
AGREEMENT, dated as of the 18th day of August 1998, between F&M
Bancorp, a Maryland corporation, Farmers & Mechanics National Bank, a national
bank (together or separately hereinafter referred to as the "Employers") and
_____________________ (the "Executive").
WITNESSETH:
WHEREAS, the Executive is presently an executive officer of the
Employers; and
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that the Executive's employment
with the Employers is terminated under specified circumstances detailed herein:
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) Average Annual Compensation. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to mean the average
level of compensation paid to the Executive by the Employers or any subsidiary
thereof during the three consecutive calendar years preceding the Date of
Termination which yield the highest such average. If the Executive has worked
for less than three consecutive calendar years, the "Average Annual
Compensation" shall mean the sum of total compensation received, divided by the
number of months worked, and multiplied
<PAGE>
by 12. Alternatively, at the Executive's election, the Executive's compensation
for the 12 calendar months prior to the Change-In-Control may be used to
constitute "Average Annual Compensation." Compensation shall include base salary
and bonuses under the Incentive Compensation Program originally adopted in 1996
and any other employee benefit plans of the Employers. Compensation shall not
include fringe benefits such as automobiles or other perquisites, but shall
include any pre-tax reduction for contributions to any tax qualified retirement
plan, deferred compensation plan, or flexible benefits plan.
(b) Cause. Cause shall mean (i) the willful and continued failure by
the Executive to substantially perform the Executive's duties with the Employers
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness) after a written demand for substantial performance
is delivered to the Executive by the Board of Directors of F&M Bancorp, which
demand specifically identifies the manner in which the Board of Directors of F&M
Bancorp believes that the Executive has not substantially performed the
Executive's duties or (ii) the engaging by the Executive in conduct which is
demonstrably and materially injurious to the Employers or their subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that the Executive's act, or failure to act, was
in the best interest of the Employers.
(c) Change-in-Control of the Employers. Change-in-Control shall be
deemed to have occurred if the event set forth in any one of the following
paragraphs shall have occurred relative to either or both of the Employers:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the
Employers (not including in the securities
beneficially owned by such Person any securities
acquired directly from the Employers or their
Affiliates) representing 25% or more of the combined
voting power of the Employers' then outstanding
securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction
described in clause (A) of paragraph (iii) below; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then
serving on the Board; individuals who, on the date
hereof, constitute the Board and any new director
(other than a director whose initial assumption of
office is in connection with an actual or threatened
election contest, including but not limited to a
consent solicitation, relating to the election of
directors of the Employers) whose appointment or
election by the Board or nomination for election by
the Employers' shareholders was approved or
recommended
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<PAGE>
by a vote of at least two-thirds (2/3) of the
directors then still in office who either were
directors on the date hereof or whose appointment,
election or nomination for election was previously so
approved or recommended; or
(iii) there is consummated a merger or consolidation of the
Employers or any direct or indirect subsidiary of the
Employers with any other corporation, other than (A)
a merger or consolidation which would result in the
voting securities of the Employers outstanding
immediately prior to such merger or consolidation
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity or any parent
thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under
an employee benefit plan of the Employers or any
subsidiary of the Employers, at least 60% of the
combined voting power of the securities of the
Employers or such surviving entity or any parent
thereof outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation
effected to implement a recapitalization of the
Employers (or similar transaction) in which no Person
is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Employers (not
including in the securities Beneficially Owned by
such Person any securities acquired directly from the
Employers or their Affiliates) representing 25% or
more of the combined voting power of the Employers'
then outstanding securities.
(iv) the shareholders of the Employers approve a plan of
complete liquidation or dissolution of the Employers
or there is consummated an agreement for the sale or
disposition by the Employers of all or substantially
all of the Employers' assets, other than a sale or
disposition by the Employers of all or substantially
all of the Employers' assets to an entity, at least
60% of the combined voting power of the voting
securities of which are owned by shareholders of the
Employers in substantially the same proportions as
their ownership of the Employers immediately prior to
such sale;
(v) the Employers ceases to own, directly or indirectly,
securities of any subsidiary representing 50% or more
of the combined voting power of the subsidiary's then
outstanding securities; or
(vi) there is consummated an agreement for the sale or
disposition by the Employers of all or substantially
all of a subsidiary's assets, other than a sale or
disposition by the Employers of all or substantially
all of the subsidiary's assets to an entity, at least
60% of the combined voting power of the voting
securities of
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which are owned by shareholders of the Employers in
substantially the same proportions as their ownership
of the subsidiary immediately prior to such sale;
provided however, that such a sale or disposition
should only be effective for those Executives, if
any, employed by the subsidiary whose assets are so
sold or otherwise disposed of, and not all
participating Executives.
"Affiliate" shall have the meaning set forth in Rule
12b-2 promulgated under Section 12 of the Exchange
Act.
"Beneficial Owner" shall have the meaning set forth
in Rule 13d-3 under the Exchange Act.
"Board" shall mean the boards of directors of either
or both of the Employers as applicable.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended from time to time.
"Person" shall have the meaning given in Section
3(a)(9) of the Exchange Act, as modified and used in
Sections 13(d) and 14(d) thereof, except that such
term shall not include (i) the Employers or any of
their subsidiaries, (ii) a trustee or other fiduciary
holding securities under an employee benefit plan of
the Employers or any of their Affiliates, (iii) an
underwriter temporarily holding securities pursuant
to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the
shareholders of the Employers in substantially the
same proportions as their ownership of stock of the
Employers.
A "Potential Change-in-Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(i) the Employers enter into an agreement, the
consummation of which would result in the occurrence
of a Change-in-Control;
(ii) the Employers or any Person publicly announces an
intention to take or to consider taking actions
which, if consummated, would constitute a
Change-in-Control;
(iii) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Employers
representing 15% or more of either the then
outstanding shares of common stock of the Employers
or the combined voting power of the Employers' then
outstanding securities (not including in the
securities beneficially owned by such Person any
securities acquired directly from the Employers or
their affiliates); or
4
<PAGE>
(iv) the Board adopts a resolution to the effect that a
Potential Change-in-Control has occurred.
(d) CODE. Code shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean:
(i) if the Executive's employment is terminated for Cause or
for Disability, the date specified in the Notice of Termination, and (ii) if the
Executive's employment is terminated for any other reason, the date on which a
Notice of Termination is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or, if no
such plan applies, which would qualify the Executive for disability benefits
under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive based on:
(i) without the Executive's express written consent, the
assignment by the Employers to the Executive of any duties which are materially
inconsistent with the Executive's positions, duties, responsibilities and status
with the Employers immediately prior to a Change-in-Control of the Employers, or
a material change in the Executive's reporting responsibilities, titles or
offices as an employee and as in effect immediately prior to such a
Change-in-Control, or any removal of the Executive from or any failure to
re-elect or re-appoint the Executive to any of such responsibilities, titles or
offices, except in connection with the termination of the Executive's employment
for Cause, Disability or Retirement or as a result of the Executive's death or
by the Executive other than for Good Reason, or assignment by the Employers to
the Executive of duties which cannot effectively be performed at the Bank's
principal office at Frederick County, Maryland, (ii) without the Executive's
express written consent, a reduction by the Employers in the Executive's
compensation as in effect on the date of the Change-in-Control of the Employers
or as the same may be increased from time to time thereafter, (iii) without the
Executive's express written consent, a failure by the Employers to provide the
Executive with the same fringe benefits that were provided to the Executive
immediately prior to a Change-in-Control of the Employers, or with a package of
fringe benefits (including paid vacations) that, though one or more of such
benefits may vary from those in effect immediately prior to such
Change-in-Control, is substantially comparable in all material respects to such
fringe benefits taken as a whole, (iv) any purported termination of the
Executive's employment for Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the requirements of paragraph (i)
below; or (v) the failure by the Employers
5
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to obtain the assumption of and agreement to perform this Agreement by any
successor as contemplated in Section 6 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination by the Employers
for Cause, Disability or Retirement or by the Executive for Good Reason shall be
communicated by written "Notice of Termination" to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which:
(i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more than ninety (90)
days after such Notice of Termination is given, except in the case of the
Employers' termination of Executive's employment for Cause, and (iv) is given in
the manner specified in Section 7 hereof.
2. BENEFITS UPON TERMINATION. If the Executive's employment by the
Employers shall be terminated subsequent to a Change-in-Control or Potential
Change-In-Control of the Employers (i) by the Employers other than for Cause,
Disability, or as a result of the Executive's death, or (ii) by the Executive
for Good Reason, then the Employers shall, subject to the provisions of Section
3 hereof, if applicable, pay to the Executive, in a lump sum within five (5)
business days following the Date of Termination, a cash amount equal to the sum
of 3.0 times the Executive's Average Annual Compensation plus the cash value of
the Executive's unused vacation calculated by multiplying the number of unused
hours by the Executive's hourly compensation expressed as a fraction the
numerator of which is the Executive's Average Annual Compensation and the
denominator of which is 2080, plus a pro-rata bonus for the year of termination
based on the amount of the prior year's bonus multiplied by the fraction of the
year concluded between January 1 and the Date of Termination.
3. EXCISE TAX PAYMENT PROVISION
A. 1. Whether or not the Executive becomes entitled to payments
under this Agreement, if any of the payments or benefits
received or to be received by the Executive in connection with
a Change-in-Control or the Executive's termination of
employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Employers,
any Person whose actions result in a Change-in-Control or any
Person affiliated with the Employers or such Person) (such
payments or benefits, excluding the Excise Tax Payment, being
hereinafter referred to as the "Total Payments") will be
subject to any excise tax imposed under Section 4999 of the
Code (the "Excise Tax"), the
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<PAGE>
Employers shall pay to the Executive an additional amount (the
"Excise Tax Payment") equal to the Excise Tax imposed.
2. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be
treated as "parachute payments" (within the meaning of section
280G(b)(2) of the Code) unless, in the opinion of tax counsel
("Tax Counsel") reasonably acceptable to the Executive and
selected by the accounting firm which was, immediately prior
to the Change-in-Control, the Employers' independent auditor
(the "Auditor"), such payments or benefits (in whole or in
part) do not constitute parachute payments, including by
reason of section 280G(b)(4)(A) of the Code, (ii) all "excess
parachute payments" within the meaning of section 280G(b)(1)
of the Code shall be treated as subject to the Excise Tax
unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the
meaning of section 280G(b)(4)(B) of the Code) in excess of the
Base Amount (within the meaning of Section 280G(b)(3) of the
Code) allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (iii) the value
of any noncash benefits or any deferred payment or benefit
shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
3. In the event that the Excise Tax is finally determined to
be less than the amount taken into account hereunder in
calculating the Excise Tax Payment, the Executive shall repay
to the Employers, within five (5) business days following the
time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Excise Tax Payment
attributable to such reduction. In the event that the Excise
Tax is determined to exceed the amount taken into account
hereunder in calculating the Excise Tax Payment (including by
reason of any payment the existence or amount of which cannot
be determined at the time of the Excise Tax Payment), the
Employers shall make an additional Excise Tax Payment in
respect of such excess (plus any interest, penalties or
additions payable by the Executive with respect to such
excess) within five (5) business days following the time that
the amount of such excess is finally determined. The Executive
and the Employers shall each reasonably cooperate with the
other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability
for Excise Tax with respect to the Total Payments.
B. The payments provided in Section 3A. shall be made not later
than the fifth (5th) day following the Date of Termination;
PROVIDED, HOWEVER, that if the amounts of such payments cannot
be finally determined on or
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before such day, the Employers shall pay to the Executive on
such day an estimate of the minimum amount of such payments to
which the Executive is clearly entitled and shall pay the
remainder of such payments (together with interest on the
unpaid remainder (or on all such payments to the extent the
Employers fails to make such payments when due) at 120% of the
rate provided in section 1274(b)(2)(B) of the Code) as soon as
the amount thereof can be determined but in no event later
than the thirtieth (30th) day after the Date of Termination.
In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such
excess shall constitute a loan by the Employers to the
Executive, payable on the fifth (5th) business day after
demand by the Employers (together with interest at 120% of the
rate provided in section 1274(b)(2)(B) of the Code.) At the
time that payments are made under this Agreement, the
Employers shall provide the Executive with a written statement
setting forth the manner in which such payments were
calculated and the basis for such calculations including,
without limitation, any opinions or other advice the Employers
has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in
writing shall be attached to the statement).
4. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
5. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
6. ASSIGNABILITY. The Employers may assign this Agreement and their
rights hereunder in whole, but not in part, to any corporation, bank or other
entity with or into which the Employers may hereafter merge or consolidate or to
which the Employers may transfer all or substantially all of their assets, if in
any such case said corporation, bank or other entity shall by operation of law
or expressly in writing assume all obligations of the Employers hereunder as
fully as if it had been originally
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made a party hereto, but may not otherwise assign this Agreement or their rights
hereunder. The Executive may not assign or transfer this Agreement or any rights
or obligations hereunder.
7. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: F&M Bancorp
Attn: Faye E. Cannon, President
P.O. Box 518
Frederick, Maryland 21705
To the Executive:
---------------------
---------------------
---------------------
8. AMENDMENT; WAIVER. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
9. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Maryland.
10. NATURE OF EMPLOYMENT AND OBLIGATIONS.
(a) Nothing contained herein shall be deemed to create other than a
terminable at will employment relationship between the Employers and the
Executive, and the Employers may, subject to such other arrangements as may
exist between the Employers and the Executive, terminate the Executive's
employment at any time, subject to providing any payments specified herein in
accordance with the terms hereof.
(b) Nothing contained herein shall create or require the Employers to
create a trust of any kind to fund any benefits which may be payable hereunder,
and to the extent that the Executive acquires a right to receive benefits from
the Employers hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employers.
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(c) The obligations of the Employers under the terms of this Agreement
shall be enforceable by the Executive on the basis of the respective Employers'
joint and severable liability.
11. TERM OF AGREEMENT. This Agreement shall terminate three (3) years
after the date first above written; provided that on or prior to the first
anniversary of the date first above written and each anniversary thereafter, the
Boards of Directors of the Employers shall consider (with appropriate corporate
documentation thereof, and after taking into account all relevant factors,
including Executive's performance as an employee) renewal of the term of this
Agreement for an additional one (1) year, and the term of this Agreement shall
be so extended unless the Boards of Directors of Employers do not approve such
renewal and provide written notice to the Executive, or the Executive gives
written notice to the Employers, thirty (30) days prior to the date of any such
anniversary, or such party's or parties' election not to extend the term beyond
their then scheduled expiration date; and provided further that, notwithstanding
the foregoing to the contrary, this Agreement shall be automatically extended
for an additional one (1) year upon a Change-in-Control of the Employers.
12. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, the obligations of the Employers and the Executive
hereunder shall be suspended or limited, as the case may be, in the event that
the FDIC prohibits or limits, by regulation or order, any payment hereunder
pursuant to Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)).
10
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: F&M BANCORP
By:
- ---------------------- ------------------------------
Faye E. Cannon, President
and Chief Executive Officer
Attest: FARMERS & MECHANICS
NATIONAL BANK
By:
- ---------------------- ------------------------------
Faye E. Cannon, President
and Chief Executive Officer
- ---------------------- ---------------------------------------
Witness Executive
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SCHEDULE I TO
F&M BANCORP
CHANGE IN CONROL EMPLOYMENT AGREEMENT
The following persons participate in the F&M Bancorp Change in Control
Employment Agreement.
Gordon M. Cooley
Karen L. Korrell
David L. Spilman
Alice E. Stonebreaker
Patti A. Stuckey
<PAGE>
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement")
is made as of the 30th day of July, 1998 (the "Effective Date"), by and between
TANEYTOWN BANK & TRUST COMPANY, a Maryland banking corporation (hereinafter
referred to as the "Employer") and MICHAEL K. WALSCH (hereinafter referred to as
"Employee").
WITNESSETH
WHEREAS, the Board of Directors of the Employer (the "Board of
Directors") has determined that it is to the advantage and interest of the
Employer to continue to avail itself of Employee's services in connection with
the business of the Employer; and
WHEREAS, the Board of Directors has determined that it is to the
advantage and interest of the Employer to assure that the Employer will have the
continued dedication of Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Employer. The Board
of Directors believes it is imperative to diminish the inevitable distraction of
Employee by virtue of the personal uncertainties and risks created by a pending
or threatened Change of Control and to encourage Employee's full attention and
dedication to the Employer currently and in the event of any threatened or
pending Change of Control, and to provide Employee with compensation and
benefits arrangements upon a Change of Control which ensure that the
compensation and benefits expectations of Employee will be satisfied and are
competitive with those of other employers; and
WHEREAS, Employee desires to continue employment with the
<PAGE>
Employer upon the terms and conditions contained herein.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties do hereby covenant and agree as follows:
1. AGREEMENT.
This Agreement constitutes the entire understanding of the
parties relating to the transactions outlined herein and conclusively supersedes
all prior writings and understandings, whether oral or written, with respect
hereto; provided, however, that notwithstanding the foregoing, this Agreement
does not supersede that certain Supplemental Retirement Plan Agreement dated
November 17, 1994 by and between the Employer and Employee (the "Supplemental
Retirement Plan Agreement"), which shall continue in full force and effect in
accordance with its terms.
2. DEFINITIONS.
Unless otherwise expressly stated herein, the following words
or phrases shall be defined as set forth below:
A. CHANGE DATE. The "Change Date" shall mean the first date on
which a Change of Control (as defined in Section 2.B.) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
Employee's employment with the Employer is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by Employee
that such termination of employment (i) was at the request of a third party who
has taken steps reasonably
2
<PAGE>
calculated to effect a Change of Control or (ii) otherwise arose in connection
with or anticipation of a Change of Control, then for all purposes of this
Agreement the "Change Date" shall mean the date immediately prior to the date of
such termination of employment.
B. CHANGE OF CONTROL. For the purpose of this Agreement, a
"Change of Control" shall mean:
(1) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty-five percent (25%) or more of either (i) the then
outstanding shares of common stock of the Employer (for purpose of this Section
2.B., the term Employer shall mean Monocacy Bancshares, Inc.) (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Employer entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this section (1), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the Employer,
(ii) any acquisition by the Employer, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Employer or any
Person controlled by the Employer or (iv) any acquisition by any Person pursuant
3
<PAGE>
to a transaction which complies with clauses (i), (ii) and (iii) of section (2)
of this Section 2.B.; or
(2) Consummation by the Employer of a reorganization,
merger or consolidation or sale or other disposition of all or substantially all
of the assets of the Employer or the acquisition of assets of another Person (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Stock and
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than fifty percent
(50%) of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the Person
resulting from such Business Combination (including, without limitation, a
Person which as a result of such transaction owns the Employer or all or
substantially all the Employer's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan (or related trust) of the Employer
or such Person resulting from such Business
4
<PAGE>
Combination) beneficially owns, directly or indirectly, twenty-five percent
(25%) or more of, respectively, the then outstanding shares of common stock of
the Person resulting from such Business Combination or the combined voting power
of the then outstanding voting securities of such Person except to the extent
that such ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board of directors of the Person resulting from
such Business Combination were members of the Board of Directors of Monocacy
Bancshares at the earlier of the time of execution of the initial agreement, or
of the action of the Board of Directors, providing for such Business
Combination; or
(3) Approval by the shareholders of the Employer of a
complete liquidation or dissolution of the Employer.
C. DISABILITY. For purposes of this Agreement, "Disability"
shall be defined as Employee's inability to perform the substantial duties he is
required to perform as provided in Section 3 of this Agreement by reason of
illness or incapacity for a continuous period of thirty (30) days, as determined
by the Board of Directors in its reasonable discretion; provided that Employee
shall be considered disabled for purposes hereof as of the onset of the illness
or incapacity if he is reasonably anticipated, as of such date of onset, to be
unable, by reason of such illness or incapacity, to perform full-time services
for a period in excess of thirty (30) consecutive days.
5
<PAGE>
D. GOOD CAUSE. "Good Cause" shall be deemed to exist upon
written notice from the Board of Directors to Employee of the occurrence of any
of the following, as determined in the reasonable discretion of the Board of
Directors:
(1) Employee's negligence or willful misconduct which
is clearly injurious to the Employer's business affairs;
(2) Employee's breach of any material provision of
this Agreement or any other agreement to which he and the Employer are parties;
(3) Employee's conviction of or guilty plea to a
criminal act, potentially punishable by imprisonment of one (1) year or more;
(4) Employee's failure to satisfactorily perform the
duties as provided in Section 3 hereof;
(5) Employee's failure to follow policies, rules and
procedures established from time to time by the Board of Directors which
materially impact Employer's operations and which policies, rules and procedures
are otherwise not in conflict with the job description as provided in Section 3
hereof;
(6) Employee's suspension or other formal
disciplinary action presented in writing to the Board by any duly constituted
governmental or other authority regulating the banking industry; or
(7) Employee's acts or omissions which are in
violation of or cause the Employer not to be in compliance with
6
<PAGE>
any law, rule, regulation or other requirement of any duly constituted
governmental or other authority regulating the banking industry.
Notwithstanding anything herein to the contrary, in the event of
Employee's negligence as provided in Section 2.D(1) and for purposes of Sections
2.D(2), (4) and (5), Good Cause shall be deemed to exist only upon thirty (30)
days prior written notice from the Employer of the occurrence of such events and
Employee's failure to cure the same to the satisfaction of the Board of
Directors within the thirty (30) day period subsequent to the said notice.
Notwithstanding the foregoing, no such prior notice shall be required to be
given where to do so would be impractical, such as where the action giving rise
to Good Cause is not reasonably capable of being cured.
E. GOOD REASON. In the event of a Change of Control, "Good
Reason" shall mean:
(1) The assignment to Employee of any duties
substantially inconsistent in any respect with Employee's duties or
responsibilities as contemplated by Section 3 of this Agreement, or any other
action by the Employer which results in a diminution in Employee's duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Employer
promptly after receipt of notice thereof given by Employee; or
(2) Any failure by the Employer to comply with
7
<PAGE>
any of the provisions of Section 5 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Employer promptly after receipt of notice thereof given by
Employee; or
(3) The Employer's requiring Employee to be based at
any office or location outside a forty (40) mile radius from Employee's current
residence as set forth in Section 17, below, or the Employer's requiring
Employee to travel on Employer business outside of the foregoing radius to a
substantially greater extent than required immediately prior to the Change Date;
or
(4) Any failure by the Employer to comply with and
satisfy the second paragraph of Section 22 of this Agreement. Anything in this
Agreement to the contrary notwithstanding, a termination by Employee for any
reason during the thirty (30) day period immediately following the first
anniversary of the Change Date shall be deemed to be a termination for Good
Reason for all purposes of this Agreement.
3. EMPLOYMENT AND DUTIES.
The Employer hereby employs Employee and Employee hereby
accepts continued employment upon the terms and conditions hereinafter set
forth. Employee agrees to devote his best efforts and full business time to
rendering services as Executive Vice-President/Chief Operating Officer of the
Employer or in such other positions as he may hold with the Employer. Employee
shall perform those duties assigned by the Employer that are customarily
8
<PAGE>
associated with the foregoing positions. Employer may change the duties and
responsibilities of the position from time to time provided that such changed
duties and responsibilities, when taken together with the other duties and
responsibilities then required of the Employee, do not constitute a DE FACTO
demotion. Employee agrees that he will not engage in any other gainful
occupation during the term of this Agreement without the prior written consent
of the Employer. Nothing contained herein shall be construed, however, to
prevent Employee from trading, for his own account and benefit, in stocks,
bonds, securities, real estate, commodities or other forms of investments.
Employee shall perform assigned work in a competent, professional and timely
manner. Employee, in the discharge of his responsibilities, will at all times
act in good faith and use his best efforts to comply with applicable provisions
of federal and Maryland law and regulations. In addition, Employee agrees to
comply with the Employer's policies, rules and regulations, as determined from
time to time by the Board of Directors.
4. TERM.
(a) The initial term ("Initial Term") of this Agreement shall
begin on the Effective Date hereof and shall continue until terminated as
provided herein (including as set forth in Section 10 hereof).
(b) Notwithstanding anything to the contrary contained herein,
in the event of a Change of Control, the then current term
9
<PAGE>
of this Agreement shall be deemed to have begun on the "Change Date" and shall
continue for a period of three (3) years thereafter (the "Change Term"). The
Initial Term and the Change Term (if applicable) shall be referred to
collectively as the "Term."
5. COMPENSATION.
In consideration of and for the services rendered by Employee
under this Agreement, the Employer shall pay Employee a base salary of One
Hundred Forty Thousand and 00/100 Dollars ($140,000.00) per annum; provided,
however, that the Employer may, but shall not be required to, increase the base
salary of Employee otherwise payable hereunder from time to time, and any such
increased compensation shall become Employee's base salary for the purposes of
this Agreement ("Base Salary"). For purposes of this Agreement (i) "Total Cash
Compensation" shall mean the highest annual Base Salary, plus cash bonuses, as
reported on Form W-2 by Employer for the three (3) years prior to termination,
plus an amount equal to any supplemental retirement plan contribution made by
Employer on behalf of Employee for the prior calendar year, and (ii) "Total
Compensation" shall mean Total Cash Compensation plus the Employer's normal
annual contribution of premiums to Employee's split-dollar life insurance
program then in effect.
6. FRINGE BENEFITS.
During the Term of this Agreement, Employee shall be entitled
to all fringe benefits offered generally to the
10
<PAGE>
Employer's executive employees, as determined by the Board of Directors from
time to time, subject to the rules and regulations in effect regarding
participation in such benefit plans.
7. BUSINESS EXPENSES.
Employee is authorized to incur reasonable expenses in
connection with the business of the Employer, including dues and subscriptions
for professional organizations and periodicals, travel and entertainment
expenses. Any such expenses shall be subject to any requirements or limitations
imposed by the Board of Directors from time to time. To the extent practicable,
fees for professional seminars and post-graduate courses, expenses incurred in
attending professional meetings and conventions as necessary in order to be
fully and currently informed as to new developments in the field of banking and
other similar items shall be approved in advance by the Chairman of the Board of
Directors or the Chairman of the Executive Committee of the Employer.
The Employer will reimburse Employee for the expenses incurred
pursuant to this Section 7, unless such expenses have been paid directly by the
Employer, upon presentation by Employee of an itemized account of such
expenditures in a manner prescribed and authorized by the Employer.
8. VACATION.
Employee shall be entitled to twenty (20) working days (or
such greater amount as may be provided pursuant to the Employer's policy) per
calendar year paid vacation, to be taken at
11
<PAGE>
such times as determined by Employee and approved by the Board of Directors;
provided that if Employee fails to fully take such vacation in any calendar
year, any unused vacation time may only be carried forward from year to year
with the prior written approval of the Employer's Chairman of the Board or
Chairman of the Executive Committee. Upon termination of Employee's employment,
Employee shall be paid for any accrued but unused vacation time, except in the
event that Employee terminates his employment with Employer or fails to renew
this Agreement or Employer terminates the employment of Employee due to
circumstances or for reasons constituting Good Cause, as determined by the Board
of Directors in its reasonable discretion. Attendance at seminars approved in
advance by the Board of Directors shall not be chargeable against the vacation
time provided for hereinabove.
9. DEATH AND DISABILITY.
(a) If Employee is unable to perform his services by reason of
Disability, as defined in Section 2.C. hereof, he shall be entitled to receive
salary continuation payments (but only for so long as he shall remain so
disabled) as follows:
(1) During the first six (6) months of Disability,
Employee shall receive (i) an amount equal to One Hundred Percent (100%) of the
Base Salary to which he would have otherwise been entitled as hereinabove
provided in Section 5, reduced by any insurance benefits received by Employee
from
12
<PAGE>
disability insurance purchased by the Employer, and (ii) the fringe benefits to
which he would have otherwise been entitled as hereinabove provided in Section
6.
(2) After six (6) months of Disability, Employee
shall no longer receive any compensation from the Employer.
If Employee is unable to perform the services
required hereunder by reason of Disability for a period exceeding six (6)
continuous months, this Agreement may be terminated at the end of such six (6)
month period in the sole and absolute discretion of the Board of Directors
without further liability on the part of either of the parties hereto; provided,
however, that for purposes of this Section 9, the restrictions set forth in
Section 11 hereinbelow shall remain in full force and effect.
(b) Upon the death of Employer, if it occurs during Employee's
Disability, the Employer shall pay the amounts set forth in section (a)(1)(i),
above, allocated to the date of death.
(c) Upon the death of Employee, if it does not occur during
Employee's Disability, the Employer shall pay Employee's Base Salary otherwise
payable hereunder and accrued vacation, allocated to the date of death.
(d) In the case of Employee's death, the payments to be made
pursuant to section (b) or (c), above, as applicable, shall be made to the
person named by Employee in a written notice to the Employer, or, if none, to
Employee's spouse, if any, or if not, then to Employee's estate. In the event of
Employee's death,
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<PAGE>
no payments shall be made pursuant to Section 13, below, unless Employee, at the
time of his death, was receiving Change of Control Payments (hereinafter
defined).
10. TERMINATION.
(a) Notwithstanding any provision of this Agreement to the
contrary, this Agreement may be terminated by the Employer (acting through its
Board of Directors) effective immediately for Good Cause, as defined herein.
(b) Upon the termination of this Agreement for Good Cause or
otherwise, Employee shall return all records, files, documents and other
tangible or written materials of the Employer and shall have no further
involvement in or access to the Employer's customer files, records or affairs.
He shall thereafter have no further professional duties to perform for the
Employer or any of its customers. Employee shall thereupon immediately remove
himself and his personal effects from the Employer's premises.
(c) Notwithstanding anything to the contrary contained herein,
Employee may elect to terminate his employment hereunder (1) during the Change
Term (if applicable) for Good Reason upon not less than thirty (30) days prior
written notice to the Employer, or (2) for any reason whatsoever as of the
anniversary of the Effective Date during the Change Term upon written notice to
the Employer not less than one hundred twenty (120) days prior to such
anniversary.
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(d) Notwithstanding anything to the contrary contained herein,
the Employer may elect to terminate the employment of Employee hereunder during
the Change Term, for any reason, upon not less than thirty (30) days prior
written notice to Employee; provided however, that in the event of such
termination, Employee's sole and exclusive remedy shall be the payment and
provision by the Employer of the benefits set forth in Section 13, below. In the
event that the termination of Employee's employment described in the foregoing
sentence of this section (d) is effective as of a date which is less than twelve
(12) months prior to the end of the Change Term, then for purposes of Section
13, the Change Term shall be deemed to extend to that date which is twelve (12)
months after the effective date of such termination of Employee's employment.
(e) Notwithstanding anything to the contrary contained herein,
the Employer may elect to terminate the employment of Employee hereunder during
the Initial Term for any reason immediately upon written notice to Employee;
provided, however, that in the event of termination for a reason other than for
Good Cause, Employee's sole and exclusive remedy shall be the payment of the
Total Compensation set forth in Section 5, plus a sum equal to the Employer's
amount of payment for Employee's medical coverage premiums at the time of
termination, for a period of two (2) years from the date of such termination and
if termination is for Good Cause no compensation will be due from Employer to
15
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Employee.
(f) Notwithstanding anything to the contrary contained herein,
Employee may elect to terminate his employment hereunder during the Initial
Term, for any reason, upon not less than one hundred eighty (180) days prior
written notice to the Employer; provided however, that upon the giving of the
foregoing notice, Employee shall waive all rights to receive any sums hereunder
other than Base Salary as provided in Section 5 prorated to the effective date
of such termination.
(g) If Employee's employment is terminated as provided for
herein, Employee shall not be entitled to any sums other than those expressly
provided for hereunder or under the terms of any employee benefit plan or other
agreement to which Employee is a party or participant.
11. RESTRICTIVE COVENANT.
(a) COVENANT NOT TO COMPETE. During the Term of this
Agreement, and for a period of one (1) year after termination of employment by
Employer for Good Cause or such other termination for which Employee is entitled
to receive Change of Control Payments, Employee will not, directly or
indirectly, either as an individual or as a proprietor, stockholder, partner,
officer, director, employee, agent, consultant or independent contractor of any
individual, partnership, limited liability company, corporation or other entity
(excluding an ownership interest of one percent (1%) or less in the stock of a
publicly traded
16
<PAGE>
company):
(i) become employed by, participate in, or be
connected in any manner with the ownership, management, operation, or control of
any bank, savings and loan or other similar financial institution if Employee's
responsibilities will include providing banking or other financial services in
Carroll County or Frederick County, Maryland; or
(ii) participate in any way in hiring or otherwise
engaging, or assist any other person or entity in hiring or otherwise engaging,
on a temporary, part-time or permanent basis, any individual who was employed by
the Employer during the one (1) year period immediately prior to the termination
of Employee's employment; or
(iii) assist, advise, or serve in any capacity,
representative or otherwise, any third party in any action against the Employer
or transaction involving the Employer; or
(iv) sell, offer to sell, provide banking or other
financial services, assist any other person in selling or providing banking or
other financial services, or solicit or otherwise compete for, either directly
or indirectly, any orders, contracts, or accounts for services of a kind or
nature like or substantially similar to the services performed or products sold
by the Employer (the preceding hereinafter referred to as "Services"), to or
from any person or entity from whom Employee or the Employer provided banking or
other financial services, sold,
17
<PAGE>
offered to sell or solicited orders, contracts or accounts for Services during
the one (1) year period immediately prior to the termination of Employee's
employment.
(b) CONFIDENTIALITY. At all times during the Term of this
Agreement and after termination of this Agreement for any reason, Employee shall
not divulge, disclose, or communicate to others in any manner whatsoever, any
confidential information of the Employer, including, but not limited to, the
names and addresses of customers of the Employer, as they may have existed from
time to time or of any of the Employer's prospective customers, work performed
or services rendered for any customer, any method and/or procedures relating to
projects or other work developed for the Employer, earnings or other information
concerning the Employer. The restrictions contained in this Section 11(b) apply
to all information regarding the Employer, regardless of the source who provided
or compiled such information.
(c) REMEDIES. In the event of a breach or a threatened breach
by Employee of any provision of the restrictions set forth in Sections 11(a) and
(b), Employee recognizes the substantial and immediate harm that a breach or
threatened breach will impose upon the Employer, and further recognizes that in
such event monetary damages may be inadequate to fully protect the Employer.
Accordingly, in the event of a breach or threatened breach of this Agreement,
Employee consents to the Employer's entitlement to such
18
<PAGE>
EX PARTE, preliminary, interlocutory, temporary or permanent injunctive, or any
other equitable relief, protecting and fully enforcing the Employer's rights
hereunder and preventing Employee from further breaching any of his obligations
set forth herein. Employee expressly waives any requirement, based on any
statute, rule of procedure, or other source, that Employer post a bond as a
condition of obtaining any of the above-described remedies. Nothing herein shall
be construed as prohibiting the Employer from pursuing any other remedies
available to the Employer at law or in equity for such breach or threatened
breach, including the recovery of damages from Employee. Employee expressly
acknowledges and agrees that: (i) the restrictions set forth in this Section 11
are reasonable, in terms of scope, duration, geographic area, and otherwise,
(ii) the protections afforded Employer in this Section 11 are necessary to
protect its legitimate business interest, (iii) the restrictions set forth in
this Section 11 will not be materially adverse to Employee's ability to obtain
gainful employment comparable to Employee's employment with the Employer, and
(iv) Employee's agreement to observe such restrictions forms a material part of
the consideration for this Agreement.
(d) OVERBREADTH OF RESTRICTIVE COVENANT. It is the intention
of the parties that if any restrictive covenant in this Agreement is determined
by a court of competent jurisdiction to be overly broad, then the court should
enforce such restrictive
19
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covenant to the maximum extent permitted under the law as to area, breadth and
duration.
(e) SURVIVAL. Except as otherwise expressly set forth herein,
the provisions of this Section 11 shall survive termination of this Agreement
and termination of the employment of Employee.
12. EMPLOYEE COVENANTS.
(a) DISPARAGING COMMUNICATIONS. Employee shall not during the
Term of this Agreement or at any time thereafter divulge, disclose or
communicate to others in any manner whatsoever, information or statements which
disparage or are intended to disparage the Employer and its business reputation.
(b) NOTIFICATION. For a period of two (2) years after the date
of termination of Employee's employment, Employee shall provide immediate
written notice to the Employer of each instance of ownership, employment, agency
or consultancy in which Employee becomes involved, including, but not limited
to, the nature and location of the services rendered and the person on whose
behalf the services are rendered and Employee consents to the Employer's
notification of Employee's new employer of Employee's rights and obligations
under this Agreement.
20
<PAGE>
13. OBLIGATION OF THE EMPLOYER UPON TERMINATION DURING CHANGE
TERM.
If, during the Change Term the Employer shall terminate
Employee's employment for reasons other than for Good Cause or Employee shall
terminate his employment for Good Reason, the following provisions shall apply:
(a) The Employer shall calculate the aggregate of the
following amounts (the "Change of Control Payments"):
(1) the sum of (i) Employee's annual Base
Salary through the date of termination to the extent not theretofore paid and
(ii) any compensation previously deferred by Employee (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid; and
(2) the amount equal to the product of (i)
the number of months remaining in the Change Term as of the date of termination
divided by twelve (12) and (ii) Employee's Total Cash Compensation.
(b) The Employer shall pay to the Employee the Change
of Control Payments as follows:
(1) One-third (1/3) of the Change of Control
Payments shall be paid to Employee in a lump sum in cash on the first (1st) day
of the second (2nd) month after the date of termination.
(2) The remaining balance of the Change of
21
<PAGE>
Control Payments shall be paid to Employee in equal monthly consecutive
installments, without interest, with the first such payment to be made on the
first (1st) day of the third (3rd) month after the date of termination and
continuing on the first day of each month thereafter until the first (1st) day
of the first (1st) month after the end of the Change Term.
(3) Notwithstanding the terms of paragraphs
13(b)(1) and (2), above, in the event that the date of termination is less than
twelve (12) months prior to the end of the Change Term, the Change of Control
Payments shall be paid to Employee in full in a lump sum in cash within thirty
(30) days after the date of termination.
(c) For that number of months remaining in the Change Term as
of the date of termination, or such longer period as may be provided by the
terms of the appropriate plan, program, practice or policy, the Employer shall
continue health insurance, split dollar and group life insurance and disability
insurance benefits (but not any automobile allowance, gasoline reimbursement or
any other fringe benefit) to Employee and/or Employee's family at least equal to
those which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 6 of this Agreement if
Employee's employment had not been terminated or, if more favorable to Employee,
as in effect generally at any time thereafter with respect to other peer
executives of the Employer and their families; provided, however,
22
<PAGE>
that if Employee becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another employer-provided plan,
the medical and other welfare benefits described herein shall be secondary to
those provided under such other plan during such applicable period of
eligibility, and for purposes of determining eligibility (but not the time of
commencement of benefits) of Employee for retiree benefits pursuant to such
plans, practices, programs and policies, Employee shall be considered to have
remained employed for that number of months remaining in the Change Term as of
the date of termination and to have retired on the last day of such period; and
(d) To the extent not heretofore paid or provided, the
Employer shall timely pay or provide to Employee any other amounts or benefits
required to be paid or provided or which Employee is eligible to receive under
any plan, program, policy or practice or contract or agreement of the Employer.
(e) It is the intention of the Employer that no portion of the
payments made or benefits provided under this Section 13, or payments to or for
Employee under any other agreement or plan with the Employer, be deemed to be an
"excess parachute payment" as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") to the extent (and only to the extent)
that Section 280G of the Code shall apply to such payments. The present value of
the Change of Control
23
<PAGE>
Payments and other payments and benefits under this Section 13 and any other
payment to or for the benefit of Employee in the nature of compensation, receipt
of which is contingent on a change of control as determined under Section 280G
of the Code, and to which Section 280G of the Code applies (in the aggregate,
"Total Payments") shall not exceed an amount equal to one dollar less than the
maximum amount which Employee may receive without becoming subject to the tax
imposed by Section 4999 of the Code or which the Employer may pay without loss
of deduction under Section 280G of the Code. The determination of the amount and
present value of the Total Payments shall be made in accordance with the
proposed regulations issued under Section 280G of the Code.
(f) In the event that Section 280G of the Code shall apply to
the payments referred to in Section 13(a) and there is any dispute regarding the
application of the limitation in Section 13(e) regarding the amount of such
payments, the Employer shall deposit the amount in dispute into an escrow
account with the Employer and give notice to Employee of the Employer's belief
that there is a payment or benefit due to Employee which will result in an
excess parachute payment as defined in Section 280G of the Code. Within ten (10)
business days after Employee's receipt of such notice, Employee and the Employer
shall obtain the opinion of legal counsel to the Employer or a mutually
acceptable firm of certified public accountants, the expense of which opinion
shall be paid by the Employer, which opinion need not be unqualified,
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<PAGE>
which sets forth the "base amount" as defined in Section 280G of the Code of
Employee, (ii) the amount and present value of Total Payments, and (iii) the
amount and present value of any excess parachute payments (the "Opinion"). In
the event the Opinion determines that there would be an excess parachute
payment, the payment under Section 13(b) hereunder and any other payment
determined by such legal counsel or firm of certified public accountants to be
includible in Total Payments shall be reduced or eliminated as specified by
Employee in a written notice delivered to the Employer within five (5) business
days after his receipt of the Opinion, or, if Employee fails to provide such
written notice to the Employer, then as the Employer shall reasonably determine,
so that under the bases of calculation set forth in the Opinion there will be no
excess parachute payment. The provisions of this Section 13(f), including the
calculations, notices and opinions provided for herein, shall be based upon the
conclusive presumption that the following are reasonable: (x) the compensation
and benefits provided herein and (y) any other compensation (including, but not
limited to, any accrued benefits earned prior to Employee's termination of
employment pursuant to the Employer's compensation programs), if payments of
such compensation would have been made in the future in any event, even though
the timing of such payments is triggered by a change of control as determined
under Section 280G of the Code. Notwithstanding the foregoing, in the event such
legal counsel or
25
<PAGE>
firm of certified public accountants so requests in connection with the Opinion
required by this Section 13(f), Employee and the Employer shall obtain, at the
Employer's expense, the advice of a firm of recognized executive compensation
consultants as to the reasonableness of any item of compensation to be received
by Employee, and such legal counsel or firm of certified public accounts may
rely on such advice in rendering the Opinion. In the event that the provisions
of Sections 280G and 4999 of the Code are repealed without succession, this
Section 13(f) shall be of no further force and effect.
(g) Notwithstanding anything in Section 13 to the contrary, in
the event that Employee's employment is terminated during the Change Term due to
his death or Disability, no payments shall be due Employee under the provisions
of this Section 13.
14. INSURANCE.
The Employer may purchase life insurance and/or disability
insurance on Employee to protect its interests hereunder. All policies so
purchased shall name the Employer as beneficiary. Employee shall cooperate with
the Employer in obtaining such insurance, including, but not limited to, by
completing such applications and documents as are required by the insurers and
submitting to physical examinations, if necessary.
15. ENFORCEMENT OF PROVISIONS.
The failure of the Employer or Employee at any time to enforce
any of the provisions of this Agreement, or any right with
26
<PAGE>
respect thereto, will in no way be construed to be a waiver of such provisions
or rights or in any way to affect the validity of this Agreement. The exercise
by either party hereto of any rights under the terms or covenants herein shall
not preclude or prejudice the exercising thereafter of the same or any other
rights under this Agreement.
16. RECORDS.
All records pertaining to the business and customers of
Employer, including but not limited to work papers, receipts, financial reports
and statements, applications, statements, records of fees, billings and payment
of fees and all personnel records pertaining to compensation and expenses of
Employee within the scope of his employment shall at all times be the property
of the Employer.
17. NOTICES.
All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an individual party or to an
executive officer of a corporate party or when deposited in the United States
mail, certified or registered mail, postage prepaid, return receipt requested,
and addressed as follows, unless and until any of such parties notifies the
others in accordance with this Section 17 of a change of address:
If to Employer: Eric E. Glass, Chairman of the Board
Taneytown Bank & Trust Company
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<PAGE>
c/o The Taney Corporation
5130 Allendale Lane
Taneytown, Maryland 21787
Donald Hull, Vice Chairman of the Board
Taneytown Bank & Trust Company
c/o Hull Company Accountants, Inc.
526 Baltimore Boulevard
Westminster, Maryland 21157
With a copy to: Ronald S. Schimel, Esquire
Miles & Stockbridge P.C.
Woodmere I, Suite 400
9881 Broken Land Parkway
Columbia, Maryland 21046-1153
If to Employee: Michael K. Walsch
2122 Misty Meadow Road
Finksburg, Maryland 21048
18. INVALID PROVISION.
The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions hereof, and the
Agreement shall be construed in all respects as though such invalid or
unenforceable provisions were omitted.
19. INTERPRETATION.
This Agreement shall be interpreted in accordance with the
laws of the State of Maryland, exclusive of its conflicts of law provisions.
20. MODIFICATION.
This Agreement may be changed, modified or amended only by an
agreement in writing signed by each of the parties hereto.
21. HEADINGS.
The section headings herein are for reference purposes only
and shall not affect in any way the meaning or interpretation
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<PAGE>
of this Agreement.
22. ASSIGNMENT.
The rights and obligations of the Employer under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Employer. Without limiting the foregoing, the Employer may assign
its rights under this Agreement to Monocacy Bancshares, Inc. or to any entity
directly or indirectly controlled by Monocacy Bancshares, Inc. This Agreement
being for the personal services of Employee, shall not be assignable nor
delegable by him.
The Employer shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employer to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place.
23. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same document.
24. ARBITRATION.
Any question or controversy arising under this Agreement shall
be settled by arbitration, except any action
29
<PAGE>
seeking equitable relief initiated by the Employer pursuant to Section 11 or
Section 12, above, under the then existing rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding upon
the parties (including an award of costs of the arbitration which shall be paid
by the non-prevailing party, as determined by the arbitrator). The arbitration
shall be conducted by a single arbitrator in Carroll County, Maryland.
25. COSTS OF BREACH.
The parties agree that the non-breaching party shall be
entitled to all attorneys' fees, court costs and other expenses incurred by the
non-breaching party as a result of any breach by the Employer or Employee of any
covenant, agreement, term, condition or obligation contained in this Agreement.
30
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26. WITHHOLDING FUNDS; RIGHT TO OFFSET AND APPLY PAYMENTS.
In the event that Employee shall owe an obligation of any type
whatsoever to the Employer at any time during the Term or after termination
hereof, and shall not have paid such obligation as and when the same became due
and payable, Employee hereby expressly authorizes the Employer to withhold or
deduct an amount equal to said obligation from any wages due to Employee from
the Employer. For purposes of this provision, wages shall mean any remuneration,
compensation, bonus, commission, and/or fringe benefit provided in return for
services provided by Employee. In addition, notwithstanding the terms of any
other agreement or obligation between the Employer and Employee, any amounts due
under any agreement or obligation to Employee, including under the terms set
forth herein, including wages shall first be applied and offset against any
money owed by Employee to the Employer.
27. SURVIVAL.
Except as otherwise expressly set forth herein, the provisions
of Sections 11, 12, 13, 16, 24, 25 and 26 of this Agreement shall survive the
termination of this Agreement for any reason.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal the day and year first above written.
ATTEST: TANEYTOWN BANK & TRUST COMPANY
By:
- ------------------------------- ---------------------------------------
(SEAL)
Eric E. Glass, Chairman of the Board
By:
- ------------------------------- ---------------------------------------
(SEAL)
Donald Hull, Vice Chairman of the Board
WITNESS:
- ------------------------------- ---------------------------------------
Michael K. Walsch
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<PAGE>
Exhibit 10.16
SUPPLEMENTAL RETIREMENT PLAN AGREEMENT
THIS SUPPLEMENTAL RETIREMENT PLAN AGREEMENT ("Agreement") is made this
_____ day of __________, 1994, by and between TANEYTOWN BANK & TRUST COMPANY
(the "Bank") and MICHAEL K. WALSCH ("Employee").
WITNESSETH
WHEREAS, Employee is expected to play a key role in the future growth
and profitability of the Bank; and
WHEREAS, the Bank desires to establish for Employee's benefit a
performance-based supplemental retirement plan on the terms and conditions set
forth herein, in order to provide additional incentives for Employee to
strengthen the financial condition of the Bank.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and undertakings hereinafter set forth, and other good and valuable
consideration, receipt of which is hereby acknowledged, the parties hereto agree
as follows:
_. 1. SUPPLEMENTAL RETIREMENT PLAN AWARDS. In addition to any payments of
current compensation for his services which may be paid by the Bank to Employee
from time to time, the Bank agrees to make to, or on behalf of, Employee, the
following supplemental retirement plan awards on the terms and conditions set
forth herein.
2. DEFINITIONS. Unless otherwise expressly stated herein, the following
words or phrases shall be defined as set forth below:
<PAGE>
A. GOOD CAUSE. "Good Cause" shall be deemed to exist upon written
notice from the Board of Directors of the Bank to Employee of the occurrence of
any of the following, as determined in the sole and absolute discretion of the
Board of Directors:
(1) Employee's negligence or willful misconduct which is
clearly injurious to the Bank's business affairs;
(2) Employee's breach of any material provision of this
Agreement or any other agreement to which he and the Bank are parties;
(3) Employee's conviction of or guilty plea to a criminal act,
potentially punishable by imprisonment of one (1) year or more;
(4) Employee's failure to satisfactorily perform his duties as
an employee of the Bank;
(5) Employee's failure to follow directions, policies, rules
or procedures established from time to time by the Board of Directors of the
Bank; or
(6) Employee's suspension or other disciplinary action by any
duly constituted governmental or other authority regulating the banking
industry.
Notwithstanding anything herein to the contrary, for purposes of
subsections (2), (4) and (5) of this Section 2.A., Good Cause shall be deemed to
exist only upon thirty (30) days prior written notice from the Bank of the
occurrence of such events and Employee's failure to cure the same to the
satisfaction of the Board of Directors within the thirty (30) day period.
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<PAGE>
Notwithstanding the foregoing, no such prior notice shall be required to be
given where to do so would be impractical, such as where the action giving rise
to Good Cause is not reasonably capable of being cured.
B. DISABILITY. For purposes of this Agreement, "Disability" shall be
defined as Employee's inability to perform the duties he is required to perform
as an employee of the Bank by reason of illness or incapacity, as determined by
the Board of Directors of the Bank in its sole and absolute discretion.
C. RETIREMENT. For purposes of this Agreement, "Retirement" shall be
defined as the termination of Employee's employment with the Bank at any time
after the Restriction Period (as hereinafter defined) for any reason except due
to circumstances and for reasons related to Good Cause, or Employee's death or
Disability.
3. DEFERRED CASH ACCOUNT.
A. ESTABLISHMENT OF DEFERRED CASH ACCOUNT. The Bank hereby agrees to
establish, fund and maintain an account (hereinafter referred to as the
"Deferred Cash Account") to which the Bank shall allocate an annual amount equal
to 0.2275% of the pre-tax net income of the Bank for each fiscal year of the
Bank commencing with the 1994 Fiscal Year ("Annual Cash Award"); provided,
however, that the allocation of an Annual Cash Award shall be conditioned upon
the achievement by the Bank during such fiscal year of such goals, conditions
and criteria as are set by the Board of Directors pursuant to Section 5 of this
Agreement and
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<PAGE>
that the calculation of the amount of the Annual Cash Award to be made each year
shall be based upon such percentage of pre-tax net income as is set each year by
the Board of Directors. The pre-tax net income of the Bank for each fiscal year
shall be based upon the audited financial statements of the Bank prepared for
such fiscal year.
B. INVESTMENT. At Employee's request, the funds in the Deferred Cash
Account shall be invested by the Bank each year in such investment vehicles as
are proposed in writing by Employee and approved by the Board of Directors.
Earnings, losses or other fluctuations in value on such investments as are made
by the Bank of the Deferred Cash Account shall be credited to or debited from
Employee's cumulative Deferred Cash Account. The Board of Directors shall not be
required to make any proposed investment and may at any time terminate its prior
approval of any investment (i) if such investment would violate any federal or
state regulatory rules or requirements applicable to the Bank or (ii) if the
Board of Directors, in its sole and absolute discretion, determines that such
investment is imprudent or otherwise inadvisable. In the event that the Bank
determines that it will not make a proposed investment or terminates its prior
approval of an investment, and so notifies Employee, Employee shall designate an
alternate investment. If at any time Employee has not requested an investment
vehicle which the Board of Directors has approved, the funds in the Deferred
Cash Account shall be increased by crediting the Deferred Cash Account with an
annual
4
<PAGE>
rate of return equal to the Bank's one (1) year certificate of deposit rate of
interest (based on the then value of the cumulative Deferred Cash Account) as of
the date hereof and adjusted as of each January 1st thereafter.
The Board of Directors shall not be liable to Employee for the performance
of or results with respect to any investments undertaken or not approved
pursuant to the terms hereof. Employee expressly acknowledges and agrees that he
will bear any and all risk and will hold the Board of Directors harmless with
respect to the performance of any investment made by the Board of Directors at
the request of Employee pursuant to the terms of this Agreement.
C. TIMING OF ALLOCATIONS. In the event that the goals, conditions
and criteria as set by the Board have been met for the prior fiscal year, the
Bank shall, within thirty (30) days after the availability of the information
necessary to make those determinations, make an allocation of the Annual Cash
Award to Employee's Deferred Cash Account. At the time of each such allocation,
the Bank shall provide Employee with a written statement (the "Statement")
indicating the amount that has been credited to the Deferred Cash Account, the
investments made, the results with respect to such investments and the
cumulative balance in the Deferred Cash Account. The Bank shall make investments
from funds in the Deferred Cash Account as soon as is practicable after Employee
submits a written selection of investment and the Board of Directors approves
such selection.
5
<PAGE>
For purposes of crediting the annual rate of return, if applicable, the
allocation of funds attributable to each fiscal year shall be credited to the
Deferred Cash Account as of the first day of the succeeding fiscal year.
D. CHANGE TO ANNUAL CASH AWARD FORMULA. The Board of Directors may,
in its sole discretion, increase or decrease at any time during any fiscal year
the current percentage of pre-tax net income upon which the Annual Cash Award
for such fiscal year is based in the event of a fundamental change in the nature
of and/or operations of the Bank, such as might result from a merger or a public
offering of stock.
4. RESTRICTED STOCK PLAN.
A. In addition to establishing the Deferred Cash Account, the Bank
shall cause to be issued to Employee, for each fiscal year of the Bank
commencing with the 1994 Fiscal Year, common stock of Monocacy Bancshares, Inc.
("Bank Stock"), valued at 5.75% of Employee's base salary as of the end of such
fiscal year ("Annual Stock Award"); provided, however, that the issuance of the
Annual Stock Award shall be conditioned upon the achievement by the Bank during
such fiscal year of such goals, conditions and criteria as are set by the Board
of Directors pursuant to the provisions of Section 5 of this Agreement and that
the determination of the Annual Stock Award to be made each year shall be based
upon such percentage of base salary as is set each year by the Board of
Directors.
B. TIMING OF STOCK ISSUANCE. In the event that the
6
<PAGE>
goals, conditions and criteria set by the Board have been met for the prior
fiscal year, the Bank shall cause to be issued to Employee, within thirty (30)
days after the availability of the information necessary to make that
determination, the appropriate number of shares of Bank Stock constituting the
Annual Stock Award. At the time of each such issuance of Bank Stock, the Bank
shall include in the Statement the number of shares of Bank Stock which are
being issued to Employee.
C. VALUATION. Each share of Bank Stock issued to Employee pursuant
to this Agreement shall be valued as of the date of the issuance of such Bank
Stock to Employee at that value for Bank Stock established pursuant to a
dividend reinvestment plan adopted for Bank Stock by the Board of Directors of
Monocacy Bancshares, Inc. In the event that no value has been established for
Bank Stock pursuant to a dividend reinvestment plan, Bank Stock issued to
Employee pursuant to this Agreement shall be valued at one and one-half (1.5)
times the book value of such shares as of the end of the fiscal year for which
the Annual Stock Award is issued.
D. RESTRICTIONS ON TRANSFER. Employee shall not, until such time
that Employee's interest in the Bank Stock acquired by Employee under this
Agreement has fully vested as set forth in Section 6.A., sell, hypothecate,
pledge, assign, or otherwise transfer, with or without consideration, any or all
of such Bank Stock to any person, corporation, partnership, association, trust
or any other entity whatsoever, except pursuant
7
<PAGE>
to the terms of this Agreement. Any attempt at transfer made in contravention of
this Agreement shall be null and void and of no force and effect.
E. VOTING AND DIVIDEND RIGHTS. Employee shall have the right to vote
all shares of Bank Stock which he receives pursuant to this Agreement. In the
event that a dividend reinvestment plan has been established by the Board of
Directors of Monocacy Bancshares, Inc., Employee shall participate in such
dividend reinvestment plan with respect to all shares of Bank Stock received
pursuant to this Agreement and all shares of Bank Stock received pursuant
thereto shall be subject to the restrictions imposed on the underlying Bank
Stock awarded pursuant to this Agreement. In the event that no dividend
reinvestment plan has been established, Employee will receive and retain any
cash dividends (free of restrictions) declared and paid with respect to shares
of Bank Stock awarded pursuant to this Agreement. In the event of a stock
dividend, stock split, issuance of additional stock or recapitalization,
Employee shall receive the additional Bank Stock subject to the same
restrictions imposed on the underlying Bank Stock awarded pursuant to this
Agreement.
F. PREPAYMENT RIGHTS. The Board of Directors may, in its sole
discretion, cause the prepayment to Employee of any number of shares of Bank
Stock to be applied toward future Annual Stock Awards to which Employee may
become entitled. All shares of Bank Stock that are prepaid to Employee shall be
subject to the
8
<PAGE>
same restrictions imposed on the shares distributed with respect to the Annual
Stock Awards.
5. GOALS FOR ALLOCATION OF ANNUAL CASH AWARDS AND ISSUANCE OF ANNUAL STOCK
AWARDS. Prior to the beginning of each fiscal year, the Board of Directors shall
adopt a budget and such other financial goals as it deems advisable. The Board
shall then provide Employee with a written description of those certain goals,
conditions and criteria within the budget and financial goals which must be met
in order for him to earn the Annual Cash Award and Annual Stock Award,
respectively. The Board of Directors shall have absolute discretion to (i)
identify and determine the goals, conditions and criteria which must be met,
(ii) change the goals, conditions and criteria from year to year, and (iii) set
different goals, conditions and criteria to be met to earn the Annual Cash Award
and the Annual Stock Award, respectively. In addition, the Board of Directors
shall be the sole and final arbiter in connection with any dispute as to whether
the goals, conditions and criteria set by the Board have been met. In the event
that the Board of Directors does not establish any goals, conditions and
criteria for purposes of the Annual Cash Award and/or the Annual Stock Award in
any year, the Bank shall not make an Annual Cash Award and/or an Annual Stock
Award, as appropriate, for any such year.
6. VESTING.
A. GENERAL RULE. For each full year that Employee is employed by the
Bank after the end of the Restriction Period (as
9
<PAGE>
hereinafter defined), Employee shall become conditionally vested with respect to
an amount equal to ten percent (10%) of (i) the Deferred Cash Account and (ii)
the aggregate of the Annual Stock Awards.
B. VESTING IN THE EVENT OF PREPAYMENT. In the event of a prepayment
of Bank Stock as described in Section 4.F., above, Employee shall become vested
in the Bank Stock not based upon the amount of any prepayment, but based upon
the aggregate of the Annual Stock Awards that Employee has earned pursuant to
the terms of this Agreement. For example, assume that the Bank causes the
prepayment to Employee of $250,000 in Bank Stock. If thereafter Employee earns
$20,000 in Bank Stock each year for ten (10) years, Employee shall, at the end
of year ten (10), have earned a total of $200,000. His rights vest twenty
percent (10%) per year in each of years eight (8), nine (9), and ten (10), so
that at the end of year ten (10) Employee will be thirty percent (30%) vested.
At that time, however, Employee will be thirty percent (30%) vested in the
$200,000 that Employee has earned, not the $250,000 that was prepaid.
C. VESTING IN THE EVENT OF CHANGE OF CONTROL. In the event that the
controlling interest in Monocacy Bancshares, Inc. is transferred in a merger,
consolidation, corporate takeover or similar transaction or related series of
transactions, notwithstanding any other provision of this Agreement to the
contrary, the employee shall become conditionally vested with respect to an
amount equal to 100% of (i) the Deferred Cash
10
<PAGE>
Account and (ii) the aggregate of the Annual Stock Awards. Thereafter, for
purposes of Section 7, below, any termination of Employee's employment shall be
deemed to have occurred after the Restriction Period.
7. TERMINATION.
A. TERMINATION DURING RESTRICTION PERIOD. If, during the period
ending on December 31, 2001 (the "Restriction Period"), Employee's employment is
terminated for any reason except death or Disability, whether by Employee or the
Bank, and whether for Good Cause or without Good Cause, Employee shall forfeit
all rights to the Deferred Cash Account and shall sell, and the Bank shall cause
to be purchased, upon the terms hereinafter set forth, all Bank Stock awarded to
Employee pursuant to this Agreement.
B. TERMINATION FOR GOOD CAUSE AFTER RESTRICTION PERIOD. If after the
Restriction Period, Employee's employment with the Bank is terminated for Good
Cause, Employee shall forfeit all rights to the Deferred Cash Account and shall
sell, and the Bank shall cause to be purchased, upon the terms hereinafter set
forth, all Bank Stock awarded to Employee pursuant to this Agreement.
C. RETIREMENT. In the event Employee's Retirement occurs after the
Restriction Period but prior to such time that Employee has become fully vested,
Employee shall forfeit his rights to that portion of the Deferred Cash Account
in which he is not vested and shall sell, and the Bank shall cause to be
purchased, upon to the terms hereinafter set forth, that amount of
11
<PAGE>
Bank Stock awarded to him in which he is not vested. In the event Employee's
Retirement occurs after Employee has become fully vested, Employee shall retain
all rights to the amount accrued in the Deferred Cash Account and to all Bank
Stock awarded to Employee pursuant to this Agreement as of the date of his
Retirement.
D. DEATH OR DISABILITY. Notwithstanding anything to the contrary
contained herein, in the event Employee's employment with the Bank terminates by
reason of Employee's death or Disability at any time, Employee or his estate, as
the case may be, shall retain all rights to the amount accrued in the Deferred
Cash Account and to all Bank Stock awarded to Employee pursuant to this
Agreement as of the date of his death or Disability.
E. NO AWARDS AFTER TERMINATION. Allocations to the Deferred Cash
Account and issuances of the Annual Stock Awards shall continue (provided the
requisite conditions are met) until the date of the termination of Employee's
employment. No awards shall be made to or for the benefit of Employee on or
after the termination of his employment with the Bank for any reason, including
with respect to any part of a fiscal year preceding such termination.
12
<PAGE>
8. PAYMENT TERMS.
A. DISTRIBUTION OF DEFERRED CASH ACCOUNT. Upon Employee's death or
Disability, the amount in the Deferred Cash Account shall be paid in full, to
Employee or his estate, as appropriate, within sixty (60) days after the date of
death or Disability unless the Bank and Employee (or his estate) mutually agree
otherwise. Upon Employee's Retirement, the vested portion of the Deferred Cash
Account shall be paid in full, to Employee within sixty (60) days after the date
of Employee's Retirement unless the Bank and Employee mutually agree otherwise.
The Bank may, in its sole and absolute discretion, make the payments described
in this Section 8.A to Employee in cash or by transferring the assets in which
the Deferred Cash Account is invested. Employee shall have no right, title or
interest in or to any of the investment assets purchased by the Board of
Directors with funds from the Deferred Cash Account.
B. REPURCHASE OF BANK STOCK. The purchase price payable to Employee
upon a purchase and sale of Bank Stock pursuant to the terms of Sections 7.A.,
7.B., and 7.C., above, shall be one cent ($.01) per share for each share of Bank
Stock being purchased, which amount shall be payable to Employee within sixty
(60) days after the date of Employee's termination of employment. The effective
date of the purchase of the Bank Stock shall be the date of payment ("Effective
Date") and all rights of Employee as a stockholder of Monocacy Bancshares, Inc.
with respect to the shares of Bank Stock being transferred shall
13
<PAGE>
terminate at such time. Employee hereby agrees to transfer, convey and assign
the shares of Bank Stock immediately on the Effective Date and hereby appoints
any officer of the Bank as his attorney-in-fact for the purpose of executing an
assignment of the shares of Bank Stock in the event Employee fails to do so
immediately upon the request of the Bank and in accordance with this Agreement.
9. THE BANK'S OBLIGATIONS TO BE UNSECURED. It is understood and agreed
that the Bank's obligations with respect to the Deferred Cash Account shall not
be secured in any manner. No asset of the Bank shall be placed in trust or in
escrow or otherwise physically or legally segregated for the benefit of
Employee, and the eventual payment of the Deferred Cash Account described in
this Agreement to Employee shall not be secured to him by the issuance of any
negotiable instrument of the Bank. Employee shall not be deemed to have any
property interest, legal or equitable, in any specific asset of the Bank and, to
the extent that any person acquires any right to receive Deferred Cash Account
payments under the provisions of this Agreement, such right shall be no greater
than, nor shall it have any preference or priority over, the right of any
unsecured general creditor of the Bank.
10. ALIENATION OR ENCUMBRANCE. No payments, benefits or rights under this
Agreement shall be subject in any manner to anticipation, sale, transfer,
assignment, mortgage, pledge, encumbrance, charge or alienation by Employee. If
any person
14
<PAGE>
entitled to any payments under this Agreement has become insolvent, bankrupt, or
has attempted to anticipate, sell, transfer, assign, mortgage, pledge, encumber,
charge or otherwise in any manner alienate any amount payable to him under this
Agreement or there is any danger of any levy, attachment or other court process
or encumbrance on the part of any creditor of such person entitled to payments
hereunder, against any benefit or other amounts payable to such person, the Bank
may, in its discretion, at any time, withhold any or all such payments or
benefits and apply the same for the benefit of such person, in such manner and
in such proportion as the Bank may deem proper.
11. NON-GUARANTEE OF EMPLOYMENT. The parties hereto expressly acknowledge
that Employee is employed by the Bank as an employee at-will. Nothing contained
in this Agreement shall be construed as a contract of employment between the
Bank and Employee, or as a right of Employee to be continued in the employment
of the Bank or as a limitation of the right of the Bank to discharge Employee,
with or without cause.
12. NOTICES. All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an individual party or to an
executive officer of a corporate party or when deposited in the United States
mail, certified or registered mail, postage prepaid, return receipt requested,
and addressed as follows, unless and until any of such parties notifies the
others in accordance with this Section 12 of
15
<PAGE>
a change of address:
If to the Bank: Donald Hull, Chairman of the Board
Taneytown Bank & Trust Company
c/o Hull Company Accountants, Inc.
526 Baltimore Boulevard
Westminster, Maryland 21157
Eric E. Glass, Vice Chairman of the Board
Taneytown Bank & Trust Company
c/o The Taney Corporation
5130 Allendale Lane
Taneytown, Maryland 21787
With a copy to: David M. Abramson, Esquire
Levan, Schimel, Belman & Abramson, P.A.
Woodmere I, Suite 400
9881 Broken Land Parkway
Columbia, Maryland 21046-1153
If to Employee: Michael K. Walsch
---------------------
--------------------- -----
13. STOCK CERTIFICATES. All Bank Stock acquired by Employee under the
terms of this Agreement shall conspicuously bear the following legend:
The shares of stock represented by this certificate are restricted
as to transfer by the terms, conditions and covenants of a
Supplemental Retirement Plan Agreement between the stockholder and
Taneytown Bank & Trust Company dated the day of 1994,
a copy of which is on file with the Corporation. The Corporation
will gratuitously furnish a copy of said Agreement to any party
having a valid interest therein. Any attempted transfer of stock
other than in accordance with said Agreement shall be absolutely
null and void.
14. CHOICE OF LAW AND VENUE. This Agreement shall be subject to and
governed by the laws of the State of Maryland.
15. PARTIES TO BE BOUND. All the provisions hereof shall be binding upon,
and shall inure to the benefit of, the parties themselves and their respective
heirs, personal representatives,
16
<PAGE>
successors and assigns. In addition, the obligation of the Bank shall become the
obligation of any other entity which constitutes the transferee of a substantial
portion of the assets and/or business of the Bank or any other entity which is a
successor to the Bank in a merger of or consolidation of the Bank with or into
such other entity.
16. INTEGRATION. This Agreement sets forth (and is intended to be an
integration of) all the promises, agreements, conditions, understandings,
warranties and representations among the parties hereto with respect to the
terms of Employee's supplemental retirement plan, and there are no promises,
agreements, conditions, understandings, warranties or representations, oral or
written, express or implied, among them other than as set forth herein.
17. ALTERATION, AMENDMENT, OR TERMINATION. No change or modification of
this Agreement shall be valid unless the same is in writing and signed by all
the parties hereto. No waiver of any provision of this Agreement shall be valid
unless in writing and signed by the person against whom it is sought to be
enforced. The failure of any party at any time to insist upon strict performance
of any condition, promise, agreement or understanding set forth herein shall not
be construed as a waiver or relinquishment of the right to insist upon strict
performance of the same condition, promise, agreement or understanding at a
future time.
18. ARBITRATION. Except as otherwise set forth herein, any
17
<PAGE>
question or controversy arising under this Agreement shall be settled by
arbitration under the then existing rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding upon
the parties (including an award of costs of the arbitration which shall be paid
by the non-prevailing party, as determined by the arbitrator). The arbitration
shall be conducted by a single arbitrator in Carroll County, Maryland.
19. CONSTRUCTION. Any titles, captions or paragraph headings contained
herein are inserted for purposes of convenience and reference only, and shall
not operate to define or modify the portions of the text to which they relate.
20. SEVERABILITY. In case any provision of this Agreement shall be held
illegal, invalid or void, such illegality or invalidity shall not affect the
remaining provisions of this Agreement, but shall be fully severable, and the
Agreement shall be construed and enforced as if said illegal or invalid
provisions had never been inserted herein.
21. FURTHER ASSURANCES. At any time and from time to time after the date
hereof, Employee shall be obligated to take all reasonable steps and execute and
deliver such consents, documents and instruments which may be reasonably
necessary or desirable to effectuate or evidence the assumption of obligations
hereunder or to perform the agreement contemplated hereby. Without limiting the
generality of the foregoing, Employee shall execute and deliver such consents or
other documents as may be necessary to
18
<PAGE>
register shares of Bank Stock under a dividend reinvestment plan established by
Monocacy Bancshares, Inc.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the day and year first above written. WITNESS/ATTEST: TANEYTOWN
BANK & TRUST COMPANY
By: (SEAL)
- ------------------------------- ------------------------
Donald R. Hull
Chairman of the Board
By: (SEAL)
- ------------------------------- ------------------------
Eric E. Glass
Vice-Chairman of the Board
WITNESS:
(SEAL)
- ------------------------------- ------------------------
Michael K. Walsch
19
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 10.17
KEY EMPLOYEE
LIFE INSURANCE
PROGRAM
[LOGO]
- --------------------------------------------------------------------------------
<PAGE>
PLAN OVERVIEW
- --------------------------------------------------------------------------------
PLAN OVERVIEW Taneytown Bank & Trust Company's Key
Employee Life Insurance Program provides
designated employees with a life insurance
benefit for their beneficiaries.
The following is a summary of the provisions
of the Key Employee Insurance Program. As
with any plan summary, the official
controlling provisions of the plan are
contained in the Split Dollar Assignment
Agreement. In the case of any discrepancies,
the Split Dollar Assignment Agreement will
govern.
The highlights of the Plan are as follows:
- Your beneficiaries will receive a
benefit equal to 4x's your salary
pre- and post-retirement according
to your Split Dollar Assignment
Agreement. This benefit will change
as your compensation changes.
- You will be the owner of a
Universal Life Insurance policy
that the Bank will make premium
payments on according to the Split
Dollar Assignment Agreement.
- You will assign a portion of the
death benefit and cash value of the
policy to the Bank equal to
cumulative premiums plus a cost of
money.
- Cash value will accumulate to each
participant over and above what has
been assigned to the Bank based on
your Split Dollar Assignment
Agreement.
<PAGE>
PLAN OVERVIEW
- --------------------------------------------------------------------------------
ELIGIBILITY Executives are eligible to participate in
the Plan if you have more than one year of
service at the vice president level or above
as approved by the compensation committee.
Your eligibility as a participant will be
determined based on your contribution to the
growth and success of the Bank. Entry into
the Plan will occur once at the beginning of
each calendar year.
ENROLLMENT In order to participate in the Plan you
must:
- Complete a life insurance
application
- Complete a medical examination
- Sign the Split Dollar Assignment
Agreement
YOUR BENEFIT Your benefit is determined annually based on
a 4x's your current salary as indicated in
your Split Dollar Assignment Agreement.
PLAN PARTICIPATION Participation in the plan is based on
insurability.
RETIREMENT AGE Normal retirement for purposes of the plan
is age 65.
POST-RETIREMENT You will continue to accumulate cash value
and your beneficiaries will be entitled to
receive a survivor benefit post-retirement
equal to 4x's your final salary.
TERMINATION Upon termination, the Bank will continue to
pay premiums in exchange for your payment of
the difference between the Bank's cumulative
premium payments and the Bank's cash value
in the insurance policy. This payment must
occur within 30 days after termination. In
addition, you will have the opportunity to
acquire a loan from the bank for such
payment. The term of the note shall be five
years and on such additional terms that
comply with the then applicable standards
set forth in Regulation O of the Board of
Governors of the Federal Reserve System.
Upon termination if a participant elects to
pay the difference between premium and cash
value, they will retain their life insurance
coverage post-termination at 4x's final
salary and the amount of cash value owned by
the participant will be frozen at
termination if termination occurs during the
premium paying years. The participant will
not have access to any cash value prior to
age 62 unless approved by the Board of
Directors.
2
<PAGE>
PLAN OVERVIEW
- --------------------------------------------------------------------------------
BENEFICIARY DESIGNATION You may name one or more beneficiaries in
your application for insurance, and you may
change your beneficiary at any time, unless
an irrevocable beneficiary has been named.
According to your Split Dollar Assignment
Agreement, the Bank will receive a portion
of the total death benefit equal to
cumulative premium payments plus a cost of
money and your beneficiary will receive a
death benefit equal to a multiple of your
salary.
TERMINATION OF COVERAGE According to your Split Dollar Assignment
Agreement, if the Bank elects to terminate
the plan, you will have the option to
maintain your policy by making minimum
premium payments. The participant would
receive and have immediate access to any
cash value that has accumulated in excess of
the Bank's cumulative premium payment plus a
cost of money.
PARTICIPANT COSTS An economic benefit is created for
participant due to the Bank's part in
providing life insurance coverage. This
economic benefit is determined by the
carrier's term rates below multiplied by the
amount of coverage provided divided by
$1,000. For example, a 45 year old with a
$100,000 benefit would have an economic
benefit of $60 ($100,000 *.60 / $1,000).
This amount is subject to income tax in
compliance with income tax regulations.
<TABLE>
<CAPTION>
AGE COST PER $1,000 AGE COST PER $1,000
--- --------------- --- ---------------
<S> <C> <C> <C>
34 .39 50 .80
35 .40 51 .85
36 .41 52 .91
37 .42 53 .97
38 .43 54 1.03
39 .44 55 1.10
40 .45 56 1.19
41 .47 57 1.32
42 .50 58 1.47
43 .53 59 1.63
44 .56 60 1.80
45 .60 61 1.97
46 .63 62 2.15
47 .67 63 2.35
48 .71 64 2.57
49 .75 65 2.80
</TABLE>
3
<PAGE>
PLAN OVERVIEW
- --------------------------------------------------------------------------------
FORFEITURE AND RESTRICTIVE There will be a risk of forfeiture of split
COVENANT dollar benefits including the cash surrender
value owned by the executive if the cash
surrender value exceeds $5,000 and the
participant is in violation of the
restrictive covenant as defined in the plan
document.
In the event that the participant has been
engaged in fraud, embezzlement, theft or
commission of a felon or dishonesty in the
course of his or her employment by the Bank
that has damaged it; or that the participant
has disclosed trade secrets of the Bank or
its affiliates; or the participant is
removed or prohibited from from being an
institutional-affiliated party be a final
order of an appropriate federal banking
agency pursuant to Section 8(e) of the
Federal Deposit Insurance Act or by Maryland
Banking Commissioner pursuant to state law,
the participant shall forfeit all rights to
the policy.
4
<PAGE>
PLAN OVERVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sample Executive
----------------------------------------------------------------------------------------------------------------------
Cumulative Corporate Executive Cash Executive Executive
Age Premium Premium Cash Value Value Salary @ 3% Death Benefit
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
49 32,973 32,973 31,623 0 84,000 336,000
50 32,973 65,946 63,814 0 86,520 346,080
51 32,973 98,919 97,499 0 89,116 356,462
52 32,973 131,892 131,522 0 91,789 367,156
53 32,973 164,865 167,524 0 94,543 378,171
54 32,973 197,838 202,031 2,723 97,379 389,516
55 32,973 230,811 236,414 7,764 100,300 401,202
56 0 230,811 237,832 19,060 103,309 413,238
57 0 230,811 239,259 31,322 106,409 425,635
58 0 230,811 240,695 44,639 109,601 438,404
59 0 230,811 242,139 61,258 112,889 451,556
60 0 230,811 243,592 78,864 116,276 465,103
61 0 230,811 245,053 97,483 119,764 479,056
62 0 230,811 245,524 117,279 123,357 493,427
63 0 230,811 248,003 138,346 127,058 508,230
64 0 230,811 248,003 160,712 130,869 523,476
65 0 230,811 248,003 184,565 134,795 523,476
</TABLE>
SITUATION 1 - If the executive terminates in YEAR 3 and elects to continue life
insurance coverage (4x's salary), they would pay the Bank $1,420 and their
portions of cash value and death benefit would be frozen at $0 and $356,462
respectively. In addition, the executive would not be subject to the restrictive
covenant. If the executive chooses to buy-out the policy from the bank in its
entirety, they will pay the bank e.g. $97,499 and assume premium payments moving
forward.
SITUATION 2 - If the executive terminates in YEAR 6 and elects to continue life
insurance coverage (4x's salary), they would not be required to make any
payments to the Bank and their portions of cash value and death benefit will be
frozen at $2,723 and $389,516 respectively. In addition, the executive would not
be subject to the restrictive covenant. If the executive chooses to buy-out the
policy from the bank in its entirety, they will pay the bank e.g. $202,031 and
assume premium payments moving forward.
SITUATION 3 - If the executive terminates in YEAR 7 and elects to continue life
insurance coverage (4x's salary), they would not be required to make any
payments to the Bank and their portions of cash value and death benefit will be
frozen at $7,764 and $401,202 respectively. In addition, the executive would be
subject to the restrictive covenant. If the executive chooses to buy-out the
policy from the bank in its entirety, they will pay the bank e.g. $236,414 and
assume premium payments moving forward.
SITUATION 4 - If the executive terminates in YEAR 10 and elects to continue life
insurance coverage (4x's salary), they would not be required to make any
payments to the Bank. Their portion of cash value (e.g. $44,639) will continue
to grow and the death benefit will be frozen at $438,404. In addition, the
executive would be subject to the restrictive covenant. If the executive chooses
to buy-out the policy from the bank in its entirety, they will pay the bank e.g.
$240,695 and assume premium payments moving forward if any.
5
<PAGE>
SPLIT DOLLAR ASSIGNMENT AGREEMENT
---------------------------------
WHEREAS, Taneytown Bank & Trust Company has instituted a key employee
split dollar insurance program ("Key Employee Insurance Program") designed to
retain the employment of key employees;
WHEREAS, Taneytown Bank & Trust Company caused the John Hancock Mutual
Life Insurance Company ("John Hancock") through its agent,
____________________________, to issue a universal life insurance policy, Policy
Number __________ ("Policy"), with a contract date of ________________ to
____________________ as a part of the Key Employee Insurance Program;
WHEREAS, _____________________, hereinafter referred to as "Owner" or
"Insured" had initially received on ________________ a universal life insurance
policy in the specified amount of $_______ , the Insured, and as may be
hereinafter adjusted.
WHEREAS, Taneytown Bank & Trust Company of 222 East Baltimore Street,
Taneytown, Maryland, hereinafter referred to as "Assignee-Owner or Bank" desires
to assist Owner in maintaining the above-described policy on the life of
____________________________, and further desires to own and receive an amount
as hereinafter described as key employee protection. Therefore, Assignee-Owner
agrees to receive, by way of this Assignment, a limited policy ownership as
hereinafter described in this Assignment; and
WHEREAS, ____________________ has been given an illustration of said
policy prior to its issuance showing the split of net death and net cash value
in said policy based on certain assumptions and using Current Rates contained in
the illustration (a copy of which is attached to this Assignment);
NOW THEREFORE, in consideration of the premises and mutual covenants,
agreements, representations, and warranties herein contained, the parties,
intending to be legally bound, do hereby agree as follows:
<PAGE>
1. DEFINITIONS.
"CASH VALUE": shall mean the policy's cash value as that term is
defined in the policy.
2. OWNERSHIP OF POLICY. The insured of the Policy is_________________.
3. PAYMENT OF PREMIUMS. Bank shall pay the annual premium set forth in
policy . Bank shall pay the annual premium for as long as it maintains the Key
Employee Insurance Program and the Insured is a full-time employee as of each
annual premium date. In the event Assignee-Owner discontinues the Key Employee
Insurance Program, it will promptly notify the Insured.
4. LIMITED POLICY OWNERSHIP RIGHT.
(a) Assignee-Owner shall at any point in time have an interest
in said policy in an amount equal to the premiums payments and costs of funds
made on behalf of the Insured.
(b) Assignee-Owner alone will, to the extent of its policy
interest, receive from the Owner an amount equal to such interest upon surrender
or cancellation of the policy by the Owner or receive such interest from the
death proceeds, upon the death of the Insured.
(c) The Assignee-Owner shall have the right to borrow against
the Cash Value to the extent of its interest without the written consent of
Insured provided such borrowing does not cause the policy to lapse or otherwise
be canceled.
5. OWNER'S RETAINED INCIDENTS OF OWNERSHIP. Except as to the limited
policy ownership rights specifically granted Assignee-Owner herein, or as
provided in Section 9, Owner retains all incidents of ownership (including the
right to surrender or cancel the policy) except Owner shall give Assignee-Owner
ninety (90) days' notice prior to surrendering or canceling the policy. Owner
shall not generally have the right to borrow or withdraw against the policy
without the prior written consent of the Assignee-Owner or as provided in
Paragraph 8.
-2-
<PAGE>
However, if the Owner is at least sixty-two (62) years old and the
Cash Value exceeds the Bank's interest as provided in Paragraph 4, the Owner,
without the consent of the Bank, may borrow according to the terms of the Policy
an amount up to the difference between the Cash Value and the Bank's interest.
6. ASSIGNEE-OWNER'S COOPERATION. If the above-described policy is in
the possession of the Assignee-Owner, Assignee-Owner will, upon notice and
request, forward the policy without reasonable delay to the Insurer, if required
by the Insurer for any policy transaction or change.
7. INSURER ACTION. The Insurer is hereby authorized to recognize either
the Assignee-Owner or the Owner's claims to rights as defined hereunder without
investigating the reason for such action or the validity or the amount of their
respective interest hereunder. The Insurer provides this assignment form solely
for the convenience of its policyholders and their counsel and is not
responsible for its legal or tax validity or effect. Insurer shall not be
responsible to account for the actual premium contributions of the parties
hereunder, but shall rely solely upon the written declaration of the parties in
any distribution or settlement of the policy's lifetime or death values.
8. RELEASE OF ASSIGNEE-OWNER'S LIMITED OWNERSHIP INTEREST. Upon Owner's
request and upon full payment to the Assignee-Owner of its policy interest, as
earlier defined at Paragraph 4 herein, Assignee-Owner agrees to release and
reassign its then current ownership rights to the Owner. In the alternative, the
Owner may pay the Bank the difference between the Bank's cumulative premium
payment and the cash value of the Policy. In the event the Owner elects to pay
to the Bank the difference between the Bank's cumulative premium payment and the
cash value of the Policy, the Bank shall retain an interest in the Policy equal
to its cumulative costs of funds. In the event the Owner voluntarily
relinquishes his key employee position, Bank shall offer to lend the Owner an
amount equal to Assignee-Owner's interest in the policy, which amount shall be
accepted as full payment for Assignee-Owner's interest in the policy, or an
amount equal to the difference between the Bank's cumulative premium payment and
the cash value of the Policy. The term of the note shall be five years and on
such additional terms that comply with the then applicable standards set forth
in Regulation O of the Board of Governors of the Federal Reserve System. In the
event that the Owner,
-3-
<PAGE>
within 30 days after voluntarily relinquishing his key employee position, does
not either borrow monies or otherwise reimburse the Bank in an amount equal to
Assignee-Owner's interest in the policy, or the difference between the Bank's
cumulative premium payment and the cash value of the Policy, the Bank may
surrender the policy and recoup its interest in the policy from the Cash Value
or, in its sole discretion, continue to maintain the policy for the purpose of
recouping its interest as set forth in Paragraph 4(a). Upon the expiration of
the 30- day period, Owner consents to and authorizes at any time the surrender
of the policy, without further action whatsoever being required by the Owner. In
the event of involuntary termination, Bank shall have the option in its sole
discretion to surrender the policy and recoup its interest in the policy from
the Cash Value. Any amounts received from John Hancock in excess of the Owner's
interest shall promptly be paid to the Owner, unless a forfeiture has occurred
as provided in Paragraph 9(a).
9. FORFEITURE AND RESTRICTIVE COVENANT.
(a) Notwithstanding anything to the contrary in this
Agreement, if the Board of Directors of the Bank finds after full consideration
of the facts presented on behalf on the Bank and the Insured; that the Insured
has been engaged in activities or omissions constituting fraud, embezzlement,
theft or the commission of a felony or dishonesty in the course of his or her
employment by the Bank that has damaged it; or that the Insured has disclosed
trade secrets of the Bank or its affiliates; the Insured is removed or
prohibited from being an institutional-affiliated party by a final order of an
appropriate federal banking agency pursuant to Section 8(e) of the Federal
Deposit Insurance Act or by Maryland Banking Commissioner pursuant to state law
or the insured has violated the restrictive covenant set forth in Section 9(b),
the Insured shall thereupon forfeit all rights to the Policy. The decision of
the Bank's Board of Directors as to the cause of the Insured's discharge or
resignation from employment from the Bank shall be final for purposes of this
Agreement, but shall not affect the finality of the Insured's discharge or
resignation from employment by the Bank for any other purpose.
(b) In the event the Insured retired or otherwise voluntarily
terminated his or her employment with the Bank, and the Insured has an
-4-
<PAGE>
ownership interest in the Policy with a cash value in excess of $5,000, the
Insured shall not, for a period of two (2) years after termination either
directly or indirectly, either as an individual or as a proprietor, stockholder,
partner, officer, director, employee, agent, consultant or independent
contractor of any individual, partnership, corporation or other entity
(excluding an ownership interest of one percent (1%) or less in the stock of a
publicly traded company):
(i) become employed by, participate in, or be connected in any
manner with the ownership, management, operation, or control of any bank,
savings and loan or other similar financial institution if Insured's
responsibilities will include providing banking or other financial services in
Carroll County or Howard County or any other county or city in which the Bank
maintains an office as of the date of the termination of the Insured's
employment or if Insured regularly conducts business in or from an office or
branch in Carroll County or Howard County or any other county or city in which
Bank has an office or branch as of the date of the termination of the Insured's
employment; or
(ii) participate in any way in hiring or otherwise engaging,
or assist in any other person or entity in hiring or otherwise engaging, on a
temporary, part-time or permanent basis, any individual who was employed by Bank
during the one (1) year period immediately prior to the termination of the
Insured's employment; or
(iii) assist, advise, or serve in any capacity, representative
or otherwise, any third party in any action against the Bank or transaction
involving the Bank; or
(iv) sell, offer to sell, provide banking or other financial
services, assist any other person in selling or providing banking or other
financial services, or solicit or otherwise compete for, either directly or
indirectly, any orders, contract, or accounts for services of a kind or nature
like or substantially similar to the services performed or products sold by the
Bank (the preceding hereinafter referred to as "Services"), to or from any
person or entity from whom Insured or the Bank provided banking or other
financial services, sold, offered to sell or solicited orders, contracts or
accounts for Services during the two (2) year period immediately prior to the
termination of the Insured's employment; or
-5-
<PAGE>
(v) divulge, disclose, or communicate to others in any manner
whatsoever, any confidential information of the Bank, including, but not limited
to, the names and addresses of customers of the Bank, as they may have existed
from time to time or of any of the Bank's prospective customers, work performed
or services rendered for any customer, any method and/or procedures relating to
projects or other work developed for the Bank, earnings or other information
concerning the Bank. The restrictions contained in this subparagraph (v) apply
to all information regarding the Bank, regardless of the source who provided or
compiled such information. Notwithstanding anything to the contrary, the terms
of this subparagraph (v) shall not be limited to the two (2) year restriction
set forth above and all information referred to herein shall not be disclosed
unless and until it becomes known to the general public from sources other than
Insured.
(c) JUDICIAL REMEDIES. In the event of a breach or a
threatened breach by Insured of any provision of these restrictions, Insured
recognizes the substantial and immediate harm that a breach or threatened breach
will impose upon the Bank, and further recognizes that in such event monetary
damages may be inadequate to fully protect Bank. Accordingly, in the event of a
breach or threatened breach of this Agreement, Insured consents to Bank's
entitlement to such EX PARTE, preliminary, interlocutory, temporary or permanent
injunctive, or any other equitable relief, protecting and fully enforcing Bank's
rights hereunder and preventing Insured from further breaching any of his
obligations set forth herein. Insured expressly waives any requirement, based on
any statute, rule of procedure, or other source, that Bank post a bond as a
condition of obtaining any of the above-described remedies. Nothing herein shall
be construed as prohibiting Bank from pursuing any other remedies available to
Bank at law or in equity for such breach or threatened breach, including the
recovery of damages from Insured. Insured expressly acknowledges and agrees
that: (i) the restrictions set forth in this Section 9 are reasonable, in terms
of scope, duration, geographic area, and otherwise, (ii) the protections
afforded Bank in this Section 9 are necessary to protect its legitimate business
interest, (iii) the restrictions set forth in this Section 9 will not be
materially adverse to Insured's ability to obtain gainful employment comparable
to Insured's employment with the Bank, and (iv) his agreement to observe such
restrictions forms a material part of the consideration for this Agreement.
-6-
<PAGE>
(d) OVERBREADTH OF RESTRICTIVE COVENANT. It is the intention
of the parties that if any restrictive covenant in this Agreement is determined
by a court of competent jurisdiction to be overly broad, then the court should
enforce such restrictive covenant to the maximum extent permitted under the law
as to area, breadth and duration.
10. PREMIUM NOTICES. Notices are to be sent to the Assignee-Owner,
unless otherwise specified below:
11. STATE LAW. This Agreement shall be subject to and governed by
Maryland Law.
12. AMENDMENT. This Agreement may only be amended by written agreement
of the Owner and Assignee-Owner.
IN WITNESS WHEREOF, the undersigned Owner and Assignee-Owner have
executed this Assignment this _______ day of _________________, 1998, at______.
WITNESS:
- ------------------------------ --------------------------------
Owner
- ------------------------------ --------------------------------
Assignee-Owner
Policy # ,
-------------------------- -----------------------
Insured:
----------------------------------------------------
Owner:
----------------------------------------------------
Assignee-Owner:
---------------------------------------------
-7-
<PAGE>
This Assignment was approved and recorded by ___________________ on
___________________, 19_____. By: _________________________.
-8-
<PAGE>
SCHEDULE I
TANEYTOWN BANK AND TRUST COMPANY
KEY EMPLOYEE LIFE INSURANCE PROGRAM
The following persons participate in the Taneytown Bank and Trust
Company Key Employee Life Insurance Program:
Brenda Anders
Brian Etzler
Harold Eyler
Cindy Joynes
Donna Oliver
Mike Walsch
-9-
<PAGE>
Exhibit 10.18
HOME FEDERAL SAVINGS BANK
EXECUTIVE COMPENSATION PLAN
FOR DIRECTORS
AMENDED AND RESTATED PLAN AGREEMENT
WHEREAS, Home Federal Savings Bank, formerly Home Federal Savings & Loan
Association of Hagerstown, Maryland, desires to retain and reward the services
of certain members of its Board of Directors who elect to participate and
recognizes that the loss of services of any member of such group would result
in a substantial loss to the Bank; and
WHTREAS, Home Federal Savings Bank established an Executive Compensation Plan
for Directors to recognize the services rendered in the past and to be
rendered in the future by the members of such group until the respective dates
of their retirement; and
WHEREAS, The Home Federal Savings Bank Executive Compensation Plan for
Directors provides and allows for the amendment of any existing Plan
agreement;
NOW, THEREFORE, Home Federal Savings Bank hereby amends the Executive
Compensation Plan for Directors as hereinafter set forth.
ARTICLE 1 - DEFINITIONS
1.1 BANK: Home Federal Savings Bank, any subsidiary thereof which employs a
Participant, any predecessor corporation or business, and any
corporation or business which has merged into or consolidated with or
substantially all of whose assets were acquired by Home Federal Savings
Bank or any successor corporation.
1.2 PARTICIPANT: A participant shall be a Director of the Bank who is so
designated by the Board of Directors and who has executed an
application for participation pursuant to Article 2.1.
1.3 PLAN: The Plan shall consist of this document and any amendments
thereto.
<PAGE>
1.4 INSURER: John Hancock Mutual Life Insurance Company or another insurer
chosen by the Bank for any substandard risk classification.
1.5 BENEFICIARY: Any person or persons, as designated pursuant to Article
4.4, to whom any benefits may be payable upon the death of a
Participant pursuant to Article 3.1 or 3.3.
1.6 NORMAL RETIREMENT DATE: The first day of the month following the 65th
or 72nd birthday of the Participant, depending on the option selected
by the individual Director. In no event will payments be made prior to
the fifth anniversary of said Director's participation in the Plan
regardless of age. Retirement shall not be postponed beyond age 72 for
purposes of this Agreement and Plan. At the request of the Participant,
and if the Bank agrees, service may continue beyond the Participant's
Normal Retirement Date; however, payment of benefits under this Plan
will commence at the Normal Retirement Date.
1.7 CONSTRUCTION: The masculine gender shall be deemed to include the
feminine and neuter genders; the feminine to include the masculine; the
singular to include the plural; and the plural to include the singular;
in each case where appropriate.
1.8 TOTAL DISABILITY: Disability or incapacity of a Participant hereunder
during his or her term of service as a Director deemed "total
disability" shall constitute such incapacity of a Participant as a
result of bodily injury or disease or mental disease that he or she is
unable to perform the routine duties as a Director of the Bank.
However, no such "total disability" shall be deemed to exist if such
"total disability" results wholly or partially from willfully and
intentionally self-inflicted injury.
1.9 ORIGINAL EFFECTIVE DATE OF PLAN: July 1, 1982
1.10 EFFECTIVE DATE OF THIS PLAN AMENDMENT & RESTATEMENT: January 1, 1993
ARTICLE 2 - PARTICIPATION
2.1 Eligibility for participation in this Plan shall be restricted to those
Directors who are designated as Participants in this Plan by the Board
of Directors. A Director so eligible shall become a Participant BY
filing with the Bank a written application for participation in form
satisfactory to the Bank within sixty (60) days of the
<PAGE>
date when he is first notified in writing that he is eligible to
participate. Said application may, at the option of the Bank, be in the
form of an application for insurance coverage pursuant to Article 4.1.
If such application is not filed within such sixty (60) day period,
participation thereafter shall not be permitted except with the written
approval of the Board of Directors.
2.2 A Participant shall continue to be covered by the Plan until the
earliest date on which any of the following events occur:
a. A Participant notifies the Bank in writing that he no longer
wishes to participate;
b. Termination of service other than by retirement, disability,
or death, except as set forth in Section 2.4 herein;
2.3 Should a Participant's participation be terminated under Article 2.2,
he will be entitled to receive a benefit commencing at the earlier of
his death or his Normal Retirement Date. Such benefit shall be an
amount determined based upon the actual number of years of
participation under this Plan.
2.4 In the event of the merger or acquisition of the Bank by a successor,
all benefits outlined on Schedule A hereof will be provided regardless
of years of participation to all Directors deemed as Participants on
the effective date of such merger or acquisition, irrespective of
whether or not the Bank retains its Board of Directors thereafter.
2.5 In the event a Participant is granted one or more leaves of absence
exceeding in the aggregate twenty-four (24) consecutive months, his
service will be deemed to have terminated under Article 2.2 on the
first date such leave or leaves commence unless specifically waived by
the Board of Directors.
2.6 Should a Participant's participation be terminated under Article 2.2,
he may not thereafter be covered by the Plan, except upon approval by
the Board of Directors.
<PAGE>
ARTICLE 3 - BENEFITS
3.1 DEATH BENEFITS (PRIOR TO PARTICIPANT'S RETIREMENT): If a Participant
should die prior to his retirement, a benefit shall be payable to the
Participant's Beneficiary in such amount as shall be endorsed on
Schedule A of this Plan. Said benefit shall be payable on a monthly
basis at one-twelfth the annual amount and shall be payable for ten
(10) years certain and continuous.
At the Bank's sole discretion, a lump sum settlement may be made which
will be the equivalent of such payments due said Beneficiary.
3.2 NORMAL RETIREMENT BENEFIT (NORMAL RETIREMENT): If a Participant has at
least five years of participation under the Plan, commencing on his
Normal Retirement Date, he shall be paid by the Bank an annual normal
retirement benefit in such amount as shall be endorsed on Schedule A of
this Plan. Said benefit shall be payable on a monthly basis at
one-twelfth the annual amount and shall be payable during his lifetime
for a maximum of ten (10) years. At the Bank' s sole discretion, but
only at the request of the Participant, an optional form of settlement
may be made which will be the equivalent of said benefit.
3.3 DEATH BENEFITS (SUBSEQUENT TO PARTICIPANT'S RETIREMENT): In the event
that a Participant dies prior to receiving all of the payments to
which he is entitled under Article 3.2, any installments still due
will be continued to his designated Beneficiary.
At the Bank's solo discretion, a lump sum settlement may be made which
will be the equivalent of such payments due said Beneficiary.
3.4 BENEFITS IN THE EVENT OF DISABILITY: Should a Participant suffer a
"Total Disability" as hereinabove defined, benefits under the Plan
shall become fixed in such amount as shall be endorsed on Schedule A of
this Plan. Should the disabled Participant die prior to reaching age
65, his or her Beneficiary shall be entitled to death benefits as
provided in 3.1. If the disabled Participant should survive to age 65,
he or she shall be entitled to the benefits as provided under Articles
3.2 and 3.3.
In the event of such "Total Disability," the five (5) years of
participation under the Plan normally required of the Participant in
Article 3.2 will be waived.
<PAGE>
3.5 EXCLUSIONS: In the event a Participant commits suicide, while sane or
insane, within two (2) years from the date of issue of any life
insurance policy(ies) purchased on the life of said Participant
pursuant to Article 4.1, the portion of benefits funded by such
policy(ies) will not be payable if, within said two-year period,
fraudulent misrepresentations of any facts material to the application
for insurance hereunder are discovered.
ARTICLE 4 - INSURANCE
4.1 The death benefits provided for under Articles 3.1 and 3.3 will be
provided by the purchase of insurance from the Insurer. The Participant
shall cooperate fully with the Bank by submitting to all necessary
medical examinations and by submitting such information to the Bank or
to the Insurer as may be required.
4.2 No Participant shall have any rights in, or under any insurance policy
purchased by the Bank pursuant to this Plan so long as the Bank is the
owner thereof.
4.3 The Insurer shall not be a party to this Plan and shall be governed and
bound only by the terms of insurance contracts issued by it. Nothing in
this Plan shall be construed to require the Insurer to take action that
is inconsistent with its rule and administrative practices.
4.4 Upon applying for participation in the Plan, each Participant shall
designate on a form satisfactory to the Bank a Beneficiary or
Beneficiaries for any benefits which may become payable hereunder in
the event of his death. Any such Beneficiary can be changed by a
Participant upon giving written notice to the Bank.
The Beneficiary will be the person or persons named on the Beneficiary
Designation Form most recently filed with the Bank at the time of the
Participant's death.
ARTICLE 5 - AMENDMENT AND TERMINATION
5.1 Although the Bank intends to continue this Plan, its continuance is not
guaranteed to persons with whom there is not an executed Participation
Agreement in existence. The Bank reserves the right to amend or
terminate the Plan at any time except in respect to persons with whom
there is in existence an executed Participation Agreement.
<PAGE>
5.2 The Bank shall have the right to amend, discontinue, sell, assign,
surrender or cancel any insurance policy(ies) purchased pursuant to
Article 4.1.
5.3 Notwithstanding the provisions of Articles 5.1 and 5.2 above, if the
Bank has commenced payment of the Normal Retirement Benefit to any
Participant under Article 3.1 or if any Participant should die while
this Plan is in effect, then the Bank shall continue to make the
payments called for under Articles 3.1, 3.2, 3.3, and/or 3.4 to such
Participant or his Beneficiary.
ARTICLE 6 - MISCELLANEOUS
6.1 The Plan shall under no circumstances be deemed to have any effect upon
the terms or conditions of service as a Director of the Bank whether or
not he is a Participant hereunder. The establishment and maintenance of
this Plan shall not be construed as creating or modifying any contract
between the Bank and any of its Directors, nor is it in lieu of any
other benefits. This Plan shall under no circumstances be deemed to
constitute a contract of insurance or employment.
6.2 Participation by any Director in this Plan shall not give such person
the right to be employed by the Bank or any right or interest in this
Plan other than as provided herein.
6.3 Benefits under this Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge or
encumbrance by any Participant or Beneficiary and any attempt to do so
shall be null and void. Benefits under this Plan shall not be subject
to or liable for the debts, contracts, liabilities, engagements or
torts of any Participant or of any Beneficiary, nor may the same be
subject to attachment or seizure by any creditor or any Participant or
any Beneficiary under any circumstances.
6.4 In the event of a Participant's retirement or death, he or his
Beneficiary, as the case may be, should notify the Bank promptly and
the Bank will the provide a claimant's statement form for completion
which should be returned to the Bank, together with an official death
certificate, if applicable. In the event that any claim hereunder is
denied, the Bank will provide adequate notice in writing to such
Participant or Beneficiary, setting forth the specific reasons for such
denial and, in addition, the Bank will afford reasonable opportunity
for a full and fair review of those reasons.
<PAGE>
Attest to Signature HOME FEDERAL SAVINGS BANK
and Corporate Seal:
By:
- ---------------------- ----------------------
Secretary - Cashier
<PAGE>
SCHEDULE I TO
HOME FEDERAL SAVINGS BANK
EXECUTIVE COMPENSATION PLAN
FOR DIRECTORS
AMENDED AND RESTATED PLAN AGREEMENT
The following persons participate in the Home Federal Savings Bank
Executive Compensation Plan for Directors Amended and Restated Plan Agreement.
J.A. Abott
G.W. Bushey
M.W. Dutton, Jr.
M.C. Foltz, II
W.H. Gelbach, Jr.
L.S. Harrison
B.B. Kunkelman
J.Snyder
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Earnings per share ("EPS") is calculated on a Basic EPS and Diluted EPS
basis. Basic EPS is calculated by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) during the period. Income available to common
shareholders is Net Income in the table below and as reported in Bancorp's
Consolidated Statement of Income. No adjustments were required to net income for
any EPS calculations.
Diluted EPS is calculated by adjusting the denominator for all dilutive
potential common shares that were outstanding during the period. Bancorp had
stock options outstanding during the periods presented below which had a
dilutive effect on EPS. Therefore, the number of additional common shares that
would have been outstanding if the options had been exercised is added to the
denominator to arrive at the dilutive number of shares.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income................................................................. $ 13,092 $ 14,226 $ 10,401
---------- ---------- ----------
---------- ---------- ----------
Basic EPS
Shares................................................................... 8,655,895 8,605,660 8,577,410
EPS...................................................................... $ 1.51 $ 1.65 $ 1.21
Dilutive shares
Stock options............................................................ 112,753 70,720 56,004
EPS...................................................................... $ 0.02 $ 0.01 $ 0.01
Diluted EPS
Shares including options................................................. 8,768,648 8,676,380 8,633,414
EPS...................................................................... $ 1.49 $ 1.64 $ 1.20
</TABLE>
71
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following list sets forth the name of the Registrant and each of its
subsidiaries, the states or other jurisdictions under which they are organized,
and the percentage ownership of the voting securities of each corporation by its
immediate parent.
<TABLE>
<CAPTION>
NAME OF CORPORATION AND STATE PERCENTAGE OF VOTING SECURITIES
UNDER WHICH ORGANIZED OWNED BY IMMEDIATE PARENT(1)
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
F&M BANCORP (MD)
FARMERS & MECHANICS NATIONAL BANK
- Key Holdings, Inc.
- Key Management, Inc.
- MD General Insurance Agency, Inc.
- Keller-Stonebraker Insurance Co.
- Charles S. Gardner, Inc. Agency, Inc.
- Hagerstown Financial Planners, Inc.
- JRH Insurance, Inc.
- TBT Insurance, Inc.
- TBT Investments, Inc.
- TBT Title Holdings, Inc.
- TBT Title I, Inc.
- TBT Title II, Inc.
- TBT Title III, Inc.
- TBT Title IV, Inc.
- TBT Title V, Inc.
- TBT Title VI, Inc.
- TBT Title VII, Inc.
- TBT Title VIII, Inc.
- TBT Title IX, Inc.
- TBT Title X, Inc.
- TBT Title XI, Inc.
- TBT Title XII, Inc.
- TBT Title XIII, Inc.
HOME FEDERAL SAVINGS BANK
- RLC Associates, Inc.
- CLC Associates, Inc.
- Keystone General Partnership
- Family Home Insurance Agency, Inc.
- Ronald Harris Parker and Associates, Inc.
- Home Appraisals, Inc.
- TJW Associates, Inc.
DMP, INC.
</TABLE>
(1) Each company owns 100% of the outstanding common stock (or partnership
interest(s) as the case may be) of each of its subsidiaries except CLC
Associates, Inc., which owns an 80% general partnership interest in Keystone
General Partnership.
72
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 47,330
<INT-BEARING-DEPOSITS> 16,737
<FED-FUNDS-SOLD> 11,652
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 322,651
<INVESTMENTS-CARRYING> 98,231
<INVESTMENTS-MARKET> 100,478
<LOANS> 891,741
<ALLOWANCE> 12,817
<TOTAL-ASSETS> 1,449,682
<DEPOSITS> 1,138,194
<SHORT-TERM> 72,402
<LIABILITIES-OTHER> 14,016
<LONG-TERM> 94,246
0
0
<COMMON> 43,405
<OTHER-SE> 87,419
<TOTAL-LIABILITIES-AND-EQUITY> 1,449,682
<INTEREST-LOAN> 76,894
<INTEREST-INVEST> 20,417
<INTEREST-OTHER> 1,868
<INTEREST-TOTAL> 99,179
<INTEREST-DEPOSIT> 38,799
<INTEREST-EXPENSE> 46,878
<INTEREST-INCOME-NET> 52,301
<LOAN-LOSSES> 3,056
<SECURITIES-GAINS> 1,104
<EXPENSE-OTHER> 50,890
<INCOME-PRETAX> 18,138
<INCOME-PRE-EXTRAORDINARY> 13,092
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,092
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 4.34
<LOANS-NON> 5,901
<LOANS-PAST> 1,991
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 23,118
<ALLOWANCE-OPEN> 12,069
<CHARGE-OFFS> 5,336
<RECOVERIES> 3,028
<ALLOWANCE-CLOSE> 12,817
<ALLOWANCE-DOMESTIC> 11,469
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,348
</TABLE>
