Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-79735
FCNB CORP
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
AUGUST 12, 1999
FCNB Corp will hold a Special Meeting of Shareholders on Thursday,
August 12, 1999 at 10:00 A.M. local time, at FCNB's headquarters, 7200 FCNB
Court, Frederick, Maryland, for the following purposes:
(1) To vote on the proposed merger of First Frederick Financial
Corporation, the parent company of First Bank of Frederick, into FCNB.
In the merger each share of First Frederick common stock will be
automatically converted into 1.0434 shares of FCNB common stock, subject to
adjustment as provided in the merger agreement between FCNB and First Frederick,
and each outstanding option and warrant to purchase shares of First Frederick
common stock will be converted into shares of FCNB common stock according to the
formula in the merger agreement. Cash will be paid in lieu of fractional shares.
A copy of the merger agreement is attached as Exhibit A to the combined proxy
statement/prospectus.
(2) To vote on the proposed amendment to the Articles of Incorporation
of FCNB to increase the number of authorized shares of FCNB common stock from
twenty million (20,000,000) to fifty million (50,000,000).
(3) To transact any other business that may properly come before the
meeting or any adjournment or postponement of the meeting.
Holders of FCNB common stock as of the close of business on June 18,
1999 are entitled to notice of the meeting and to vote at the meeting. If your
shares are not registered in your own name, you will need additional
documentation from your recordholder in order to vote personally at the meeting.
The combined proxy statement/prospectus follows this notice, and a
proxy card is enclosed. To ensure that your vote is counted, please complete,
sign, date and return the proxy card in the enclosed, postage-paid return
envelope, whether or not you plan to attend the meeting in person. If you attend
the meeting, you may revoke your proxy and vote your shares in person. However,
attendance at the meeting will not of itself revoke a proxy.
By Order of the Board of Directors
/s/ Helen G. Hahn
Helen G. Hahn, Secretary
June 21, 1999
PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE>
FINANCIAL CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
AUGUST 12, 1999
First Frederick Financial Corporation will hold a Special Meeting of
Shareholders on Thursday, August 12, 1999 at 10:00 A.M. local time, at Holly
Hills Country Club, 5502 Mussetter Road, Ijamsville, Maryland, for the following
purposes:
(1) To vote on the proposed merger of First Frederick into FCNB Corp,
the parent company of FCNB Bank.
In the merger each share of First Frederick common stock will be
automatically converted into 1.0434 shares of FCNB common stock, subject to
adjustment as provided in the merger agreement between First Frederick and FCNB,
and each outstanding option and warrant to purchase shares of First Frederick
common stock will be converted into shares of FCNB common stock according to the
formula in the merger agreement. Cash will be paid in lieu of fractional shares.
A copy of the merger agreement is attached as Exhibit A to the combined proxy
statement/prospectus.
(2) To transact any other business that may properly come before the
meeting or any adjournment or postponement of the meeting.
Holders of First Frederick common stock as of the close of business on
June 18, 1999 are entitled to notice of the meeting and to vote at the meeting.
If your shares are not registered in your own name, you will need additional
documentation from your recordholder in order to vote personally at the meeting.
The combined proxy statement/prospectus follows this notice, and a
proxy card is enclosed. To ensure that your vote is counted, please complete,
sign, date and return the proxy card in the enclosed, postage-paid return
envelope, whether or not you plan to attend the meeting in person. If you attend
the meeting, you may revoke your proxy and vote your shares in person. However,
attendance at the meeting will not of itself revoke a proxy.
By Order of the Board of Directors
/s/ Mary Jo Clark
Mary Jo Clark, Secretary
June 21, 1999
PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
Proxy Statement Proxy Statement
Special Meeting of Shareholders Special Meetings of Shareholders
of of
FCNB CORP FIRST FREDERICK FINANCIAL CORPORATION
August 12, 1999 August 12, 1999
Prospectus
Relating to 1,964,915 shares of FCNB Corp common stock
----------------------------------------
This combined proxy statement and prospectus is being sent to holders
of the common stock of First Frederick Financial Corporation, and to holders of
the common stock of FCNB Corp. The Board of Directors of First Frederick is
seeking proxies from its shareholders for use at the Special Meeting of
Shareholders of First Frederick to be held on August 12, 1999, or at any
postponement or adjournment of the meeting, and the Board of Directors of FCNB
is seeking proxies from its shareholders for use at the Special Meeting of
Shareholders of FCNB to be held on August 12, 1999, or at any postponement or
adjournment of the meeting. This proxy statement/prospectus is first being
mailed on or about June 21,1999.
The purposes of the special meetings are: (1) To vote on the proposed
merger of First Frederick into FCNB under the Agreement and Plan of Merger
between First Frederick and FCNB dated as of March 12, 1999. In the merger, each
share of First Frederick common stock will be converted into 1.0434 shares of
FCNB common stock and each outstanding option and warrant to purchase shares of
First Frederick common stock will be converted into shares of FCNB common stock
according to the formula in the merger agreement. A copy of the merger agreement
is attached as Exhibit A to this proxy statement/prospectus.
(2) At the FCNB shareholder meeting, to vote on a proposal to amend the
Articles of Incorporation of FCNB to increase the number of authorized shares of
FCNB common stock from twenty million (20,000,000) to fifty million
(50,000,000).
(3) To transact any other business that may properly come before the
meetings or any adjournment or postponement of the meetings.
The date, time and place of the special meetings are as follows:
FCNB FIRST FREDERICK
Thursday, August 12, 1999 Thursday, August 12, 1999
10:00 A.M. 10:00 A.M.
FCNB Corp Holly Hills Country Club
7200 FCNB Court 5502 Mussetter Road
Frederick, Maryland 21703 Ijamsville, Maryland 21754
This proxy statement/prospectus is also the prospectus for to the
issuance of up to 1,964,915 shares of FCNB common stock to be issued under the
merger agreement. FCNB common stock is listed on The Nasdaq National Market with
the symbol of "FCNB."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE SECURITIES
COMMISSION OF ANY STATE NOR THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
OR ANY OTHER FEDERAL REGULATORY AGENCY HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR THE MERGER DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS, OR
DETERMINED IF THE DISCLOSURES IN THIS PROXY STATEMENT/PROSPECTUS ARE ACCURATE OR
ADEQUATE, OR IF THE MERGER IS FAIR. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SECURITIES DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE MARYLAND COMMISSIONER OF FINANCIAL
REGULATION OR ANY OTHER REGULATORY AGENCY OF ANY STATE, NOR HAS THE COMMISSIONER
OR ANY SUCH AGENCY PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is June 18, 1999
<PAGE>
ADDITIONAL INFORMATION ABOUT FCNB CORP
FCNB files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, proxy statements and other information FCNB files with the
Commission at the Public Reference Room of the Commission, 450 Fifth Street, NW,
Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. Copies of FCNB's
filings can also be obtained from commercial document retrieval services and
from the website maintained by the Commission at http://www.sec.gov.
FCNB has filed a registration statement on Form S-4 with the
Commission, to register the FCNB common stock to be issued in connection with
the merger. This combined proxy statement/prospectus, which is part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits.
The Commission allows companies which file information with it to
provide information by "incorporating by reference" into a proxy statement or
prospectus. This means that important information can be disclosed by referring
you to another document that is filed separately with the Commission.
Information incorporated by reference is considered to be part of this proxy
statement/prospectus, except for any information that is superseded either by
information in a document with a later date, or by information in this proxy
statement/prospectus.
The following documents filed by FCNB with the Commission, which
contain important information about FCNB and its finances, are incorporated by
reference in this proxy statement/prospectus:
(1) FCNB's Annual Report on Form 10-K for the year ended December 31,
1998;
(2) FCNB's Current Reports on Form 8-K dated January 21, 1999,
January 28, 1999, February 24, 1999 and March 16, 1999;
(3) FCNB's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999; and
(4) The description of FCNB common stock contained in FCNB's
registration statement on Form 8-A filed April 24, 1987.
All other documents filed by FCNB pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the date of this proxy
statement/prospectus and prior to final adjournment of the meetings are also
incorporated by reference in this proxy statement/prospectus and considered to
be part of this proxy statement/prospectus from their dates of filing.
FCNB WILL PROVIDE COPIES OF ANY OF THE FCNB DOCUMENTS INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS AND NOT DELIVERED (NOT INCLUDING
EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
THOSE DOCUMENTS), TO ANY PERSON RECEIVING A COPY OF THIS PROXY
STATEMENT/PROSPECTUS, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST TO:
MARK A. SEVERSON, SENIOR VICE PRESIDENT AND TREASURER
FCNB CORP
7200 FCNB COURT
FREDERICK, MARYLAND 21703
(301) 662-2191
IN ORDER TO INSURE TIMELY DELIVERY OF DOCUMENTS INCORPORATED BY
REFERENCE, DOCUMENT REQUESTS SHOULD BE RECEIVED BY FCNB NO LATER THAN AUGUST 5,
1999.
Neither FCNB nor First Frederick has authorized anyone to give any
information or make any representation about the merger or the FCNB common stock
that differs from, or adds to, the information in this proxy
statement/prospectus or in FCNB's documents that are publicly filed with the
Commission. Therefore, if anyone does give you different or additional
information, you should not rely on it. The delivery of this proxy
statement/prospectus and/or the issuance of shares of FCNB common stock do not
mean that there have not been any changes in the
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<PAGE>
condition of FCNB since the date of this proxy statement/prospectus. If you are
in a jurisdiction where it is unlawful to offer to sell, or to ask for offers to
buy, the securities offered by this proxy statement/prospectus, or if you are a
person to whom it is unlawful to direct offers or requests for offers to buy,
then the offer presented by this proxy statement/prospectus does not extend to
you. This proxy statement/prospectus speaks only as of its date except where it
indicates that another date applies. Documents that are incorporated by
reference in this proxy statement/prospectus speak only as of their date, except
where they specify that other dates apply.
CAUTIONARY STATEMENTS ABOUT FORWARD LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, about the
financial condition, results of operations and business of FCNB and First
Frederick prior to the merger; about the financial condition, results of
operations and business of FCNB following consummation of the merger, including
statements relating to cost savings and business enhancements anticipated to be
realized as a result of the merger; and the impact of the merger on FCNB's
financial performance, and also including statements of goals, intentions, and
expectations, regarding or based upon general economic conditions, interest
rates, developments in national and local markets, and other matters, and which,
by their nature, are subject to significant uncertainties.
Factors which may cause actual results to differ from those
contemplated by these forward looking statements include, but are not limited
to, the following: expected cost savings may not be fully realized; customer
loss and revenue loss following the merger may be greater than anticipated; the
cost of, or difficulties related to integration of First Frederick into FCNB may
be greater than anticipated; and changes in the general interest rate
environment, reduced interest rate margins, or changes in economic conditions in
general, nationally or regionally, may result in a deterioration of credit
quality, among other things. In addition, FCNB's future financial performance
may be adversely affected if FCNB or First Frederick is unable to cause its
information, communications and other systems and equipment to correctly
recognize and process dates after December 31, 1999 as planned. Factors that may
cause actual results to differ from current "Year 2000" compliance plans include
increased costs of achieving Year 2000 compliance, delayed timeframes for
implementing and testing Year 2000 compliance measures, and delays by FCNB's or
First Frederick's vendors in becoming Year 2000 compliant, or the inability of
such vendors to become Year 2000 compliant by January 1, 2000. FCNB's and/or
First Frederick's performance may also be adversely affected by the failure of
its customers or governmental authorities to become Year 2000 compliant by
January 1, 2000. Because of these uncertainties and the assumptions on which
forward looking statements in this proxy statement/prospectus are based, actual
future results may differ materially from the results contemplated.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Additional Information About FCNB Corp............................................................................2
Cautionary Statements About Forward Looking Statements............................................................3
Summary Information...............................................................................................5
Selected Consolidated Financial and Other Data....................................................................9
The Meetings.....................................................................................................14
The Merger.......................................................................................................16
FCNB Corp........................................................................................................26
Comparison of Shareholder Rights and Certain Provisions of the Articles of Incorporation
of FCNB and First Frederick.................................................................................28
First Frederick Financial Corporation............................................................................31
Amendment to the Articles of Incorporation of FCNB...............................................................47
Legal Matters....................................................................................................47
Experts..........................................................................................................47
Index to First Frederick Consolidated Financial Statements.......................................................49
First Frederick Consolidated Financial Statements...............................................................F-1
Exhibit A - Agreement and Plan of Merger........................................................................A-1
Exhibit B - Title 3, Subtitle 2 of the Maryland General Corporation Law.........................................B-1
</TABLE>
4
<PAGE>
SUMMARY
The following summary does not contain all of the information about FCNB, First
Frederick and the merger contained in this proxy statement/prospectus. You
should read this summary together with the more detailed information and
financial statements appearing elsewhere in this proxy statement/prospectus and
the documents incorporated by reference. You should carefully read the entire
proxy statement/prospectus.
THE PARTIES TO THE MERGER
FCNB CORP
7200 FCNB Court
Frederick, Maryland 21703
(301) 662-6191
FCNB is a registered bank holding company. As of March 31, 1999 FCNB
had approximately $1.29 billion in total assets and $89.72 million of
shareholders' equity. FCNB's principal subsidiary, FCNB Bank, currently operates
thirty-two offices in Frederick, Anne Arundel, Baltimore, Carroll, Howard,
Montgomery and Prince George's Counties, Maryland, the District of Columbia and
Fairfax County, Virginia.
As of June 18, 1999 there were 10,074,273 shares of FCNB common stock
outstanding. FCNB common stock is quoted on The Nasdaq National Market under the
symbol "FCNB".
For additional information concerning FCNB, its business, financial
condition, and results of operations, see "Additional Information About FCNB
Corp" (page 2); "Selected Consolidated Financial and Other Data" (page 9) and
"FCNB Corp" (page 26).
FIRST FREDERICK FINANCIAL CORPORATION
22 West Patrick Street
Frederick, Maryland 21701
(301) 694-5500
First Frederick is the registered bank holding company for its sole
bank subsidiary, First Bank of Frederick. First Bank operates five offices, in
Frederick County, Maryland and one office in Carroll County, Maryland. As of
March 31, 1999, First Frederick had approximately $123.55 million in total
assets and $8.97 million of shareholders' equity.
As of June 18, 1999 there were 1,525,215 shares of First Frederick
common stock outstanding, and options and warrants to purchase 357,967 shares of
First Frederick common stock.
For additional information concerning First Frederick, its business,
financial condition, and results of operations, see "Selected Consolidated
Financial and Other Data" (page 9), "First Frederick Financial Corporation"
(page 31) and "Consolidated Financial Statements of First Frederick Financial
Corporation" (page F-1)..
THE MERGER
General. First Frederick and FCNB have entered into an Agreement and
Plan of Merger under which First Frederick will be merged into FCNB. As a result
of the merger, each outstanding share of common stock of First Frederick will
automatically be converted into 1.0434 shares FCNB common stock.
Each warrant to purchase shares of First Frederick common stock and
each option under First Frederick's employee and director option plans to
purchase First Frederick common stock will, subject to the agreement of the
holders, be converted into the number of shares of FCNB common stock determined
by dividing the exercise price per share of the option or warrant by 20.125, and
subtracting the quotient from 1.0434.
Additionally, it is expected that First Bank, First Frederick's
subsidiary bank, will be merged into
FCNB Bank simultaneously with the effectiveness of the merger of First Frederick
into FCNB, with FCNB Bank being the surviving institution.
Option Agreement. In order to induce FCNB to enter into the merger
agreement, First Frederick has granted FCNB an option to purchase up to 378,923
shares of First Frederick common stock at an exercise price of $15.00 per share,
subject to adjustment and limitation in certain circumstances. These shares
represent 19.9% of the outstanding First Frederick common stock following
exercise of the option. The option is exercisable only if events described in
the option agreement occur. See "The Merger -- The Stock Option Agreement" (page
17).
Closing Date. Under the merger agreement, the closing of the merger
will occur within thirty (30) days after the last condition to the consummation
of the
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<PAGE>
merger contained in the merger agreement has been fulfilled or waived. See "The
Merger -- Conditions to the Merger" (page 19).
Exchange of First Frederick Stock Certificates. The conversion of First
Frederick common stock options and warrants into FCNB common stock will occur
automatically upon effectiveness of the merger. However, until First Frederick
securityholders surrender their First Frederick certificates in exchange for
FCNB common stock certificates, they will not be entitled to receive dividends
or other distributions on FCNB common stock. Promptly after the effectiveness of
the merger, FCNB or FCNB's exchange agent will mail each First Frederick
securityholder information regarding the exchange of his or her securities.
FIRST FREDERICK SECURITYHOLDERS SHOULD NOT FORWARD THEIR CERTIFICATES
TO FCNB, THE EXCHANGE AGENT OR FIRST FREDERICK UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS. SECURITYHOLDERS SHOULD NOT RETURN CERTIFICATES WITH THE
ENCLOSED FORM OF PROXY.
Each share of FCNB common stock outstanding immediately prior to the
merger will be unchanged by the merger, and will continue to represent one share
of FCNB common stock. See "The Merger -- Surrender of Certificates" (page 21), "
- -- Consideration to be Received by Shareholders of First Frederick" (page 16),
and "FCNB Corp -- Description of FCNB Common Stock" (page 26).
If the merger had been effective as of December 31, 1998, it would have
had the following effect on FCNB's per share earnings:
<TABLE>
<CAPTION>
Earnings per share
---------------------------
Actual Pro Forma
----------- -----------
<S> <C> <C>
Basic $0.80 $0.81
Diluted $0.80 $0.79
Basic (before merger related
expenses $1.12 $1.08
Diluted (before merger related
expenses $1.11 $1.06
</TABLE>
Based upon FCNB's expectations of the earnings of First Frederick following the
merger, it is anticipated that the merger will be accretive to FCNB's earnings
within twelve months after completion of the merger. This expectation is based
on assumptions regarding cost savings, operating efficiencies and growth
opportunities to be achieved as a result of the merger. There can be no
assurance that these expectations will be realized. Current FCNB shareholders
will have a smaller percentage ownership of FCNB, and their relative voting
power will be reduced, because of the shares being issued to First Frederick
shareholders.
REASONS FOR THE MERGER
The Boards of Directors of FCNB and First Frederick are in unanimous
agreement that the proposed merger of First Frederick into FCNB is in the best
interests of each of their respective companies. The acquisition of First
Frederick and its subsidiary, First Bank, will increase FCNB's deposit market
shares, as of December 31, 1998, in the Frederick City market to 34% (the
highest in the market) from 26%, and to 28% from 23% in the Frederick County
market. FCNB believes it will be able to achieve significant cost savings as a
result of the proximity of all of First Bank's branches to branches of FCNB Bank
and the ability to consolidate locations. The merger will enable FCNB to provide
First Frederick's commercial and consumer customers with a substantially broader
array of loan, deposit, insurance, investment, securities and trust services
products than First Frederick currently offers. This will benefit First
Frederick's customers and offer FCNB the opportunity to enhance its fee income.
The Board of Directors of First Frederick believes that the merger is
an attractive option at this time in light of the available alternatives for
continued growth (which might in the future have required First Frederick to
have access to additional capital) and enhancement of shareholder value. The
Board of Directors of First Frederick has determined that the merger is
desirable, and in the best interests of its shareholders. In considering the
terms and conditions of the merger, the Board of First Frederick considered,
among other things: the financial terms of the merger; the financial condition
and historical performance of FCNB; the economic impact of the merger on First
Frederick's shareholders; the effect of the merger on the customers and
employees of First Frederick; the reputation and business practices of FCNB;
legal and regulatory issues; and the operational and competitive benefits of the
merger. See "The Merger -- Recommendation of the First Frederick Board; Reasons
for the Merger" (page 18) and "-- Recommendation of the FCNB Board; Reasons for
the Merger" (page 19).
Recommendations of the Board of Directors. The respective Boards of
Directors of FCNB and First Frederick have unanimously approved the proposed
merger and recommend that their shareholders vote "FOR" the proposed merger.
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<PAGE>
AMENDMENT TO THE ARTICLES OF INCORPORATION OF FCNB
As part of its approval of the merger, the Board of Directors of FCNB
has approved a proposal to amend Article SIXTH of the Articles of Incorporation
of FCNB to increase the number of authorized shares of FCNB common stock from
twenty million (20,000,000) to fifty million (50,000,000). The amendment is
necessary to enable FCNB to have sufficient shares of common stock available for
issuance in the future for general corporate purposes, including possible future
stock splits, stock dividends and acquisitions. If the amendment is approved,
the additional authorized shares will be available for issuance without further
shareholder action. THE BOARD OF DIRECTORS OF FCNB UNANIMOUSLY RECOMMENDS THAT
FCNB SHAREHOLDERS VOTE "FOR" THE PROPOSED AMENDMENT.
SPECIAL MEETINGS AND VOTE REQUIRED
First Frederick. The Special Meeting of Shareholders of First Frederick
at which the merger will be considered will be held on Thursday, August 12, 1999
at 10:00 A.M. local time, at Holly Hills Country Club, 5502 Mussetter Road,
Ijamsville, Maryland.
Holders of record of First Frederick common stock as of the close of
business on June 18, 1999 will be entitled to vote at the First Frederick
meeting. At least a majority of the total number of outstanding shares of First
Frederick common stock must be represented at the meeting, in person or by proxy
to conduct business at the First Frederick meeting.
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of First Frederick common stock is required to approve the
merger. Each share of First Frederick common stock is entitled to one vote in
respect of the merger. See "The Meetings -- The First Frederick Shareholder
Meeting" (page 14).
As of the record date for the First Frederick meeting, there were
1,525,215 shares of First Frederick common stock outstanding. Directors and
executive officers of First Frederick having the power to vote 413,270 shares of
First Frederick common stock (27.09% of the outstanding) have agreed that they
will vote all of the shares they have the power to vote in favor of the merger.
See "The Merger -- Certain Related Agreements and Interests of Certain Persons"
(page 23) and "The First Frederick Shareholder Meeting -- Purpose of the First
Frederick Shareholder Meeting and Vote Required" (page 14). Additionally, FCNB
will vote the 51,272 shares (3.36%) of First Frederick Common Stock which it
owns for its own account in favor of the merger. Directors of FCNB owning 99,162
(6.50%) shares of First Frederick Common Stock intend to vote in favor of the
merger.
FCNB. The Special Meeting of Shareholders of FCNB at which the merger
and the proposed amendment to the FCNB Articles of Incorporation will be
considered will be held on Thursday, August 12, 1999 at 10:00 A.M. local time,
at FCNB headquarters, 7200 FCNB Court, Frederick, Maryland.
Holders of record of FCNB common stock as of the close of business on
June 18, 1999 will be entitled to vote at the FCNB meeting. At least a majority
of the total number of outstanding shares of FCNB common stock must be
represented at the meeting, in person or by proxy, to conduct business at the
FCNB meeting.
The affirmative vote of the holders of at least two-thirds of all votes
entitled to be cast at the FCNB meeting is required to approve each of the
merger and the amendment. Each share of FCNB common stock is entitled to one
vote on each matter to be considered. As of the record date for the FCNB
meeting, there were 10,074,273 shares of FCNB common stock outstanding and
entitled to vote. As of June 18, 1999, directors and executive officers of FCNB
having the power to vote 1,052,687 shares (12.57%) of FCNB common stock have
indicated that they intend to vote in favor of the merger and the amendment.
Voting and Revocation of Proxies. Shares of First Frederick common
stock represented by properly executed proxies received from recordholders at or
prior to the First Frederick meeting and not subsequently revoked will be voted
as directed. Shares as to which the "ABSTAIN" box has been marked, and shares
held in street name by brokers for which no voting instructions are given
("broker non-votes"), will be treated as shares present and entitled to vote for
quorum purposes, but will have the effect of a vote against the merger. IN THE
ABSENCE OF SPECIFIC INSTRUCTIONS, PROPERLY EXECUTED PROXIES RECEIVED FROM
RECORDHOLDERS WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE MERGER. If you hold
your shares in street name, please see the voting form provided by your broker
for additional information regarding the voting of your shares. If your shares
are not registered
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<PAGE>
in your name, you will need additional documentation from your recordholder to
vote the shares in person.
Any holder of First Frederick common stock who has delivered a proxy
may revoke it at any time before it is voted by (i) delivering written notice of
revocation to Jacob H. Goldstein, President of First Frederick, prior to the
First Frederick meeting, (ii) granting and delivering a later dated proxy, or
(iii) by attending the First Frederick meeting and voting the shares in person.
Shares of FCNB common stock represented by properly executed proxies
received from recordholders at or prior to the FCNB shareholder meeting and not
subsequently revoked will be voted as directed. Shares as to which the "ABSTAIN"
box has been marked and broker non-votes will be treated as shares present and
entitled to vote for quorum purposes, but will have the effect of a vote against
the merger. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROPERLY EXECUTED PROXIES
RECEIVED FROM RECORDHOLDERS WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE MERGER
AND FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO FCNB'S ARTICLES OF
INCORPORATION. If you hold your shares in street name, please see the voting
form provided by your broker for additional information regarding the voting of
your shares. If your shares are not registered in your name, you will need
additional documentation from your recordholder to vote the shares in person.
Any holder of FCNB common stock who has delivered a proxy may revoke it
at any time prior to the exercise of the authority granted thereby by (i)
delivering written notice of such revocation to Helen G. Hahn, Secretary of
FCNB, prior to the FCNB shareholder meeting, (ii) granting and delivering a
later dated proxy, or (iii) attending the FCNB shareholder meeting and voting
the shares in person.
Conditions to the Merger. Completion of the merger is subject to
numerous conditions, including but not limited to, obtaining the approval by the
required vote of the shareholders of each of First Frederick and FCNB, receipt
of certain regulatory approvals, and the receipt of certain tax and accounting
opinions and letters. See "The Merger -- Conditions to the Merger" (page 19).
Dissenters' Rights. Holders of First Frederick common stock who object
to the merger and comply with certain procedural requirements are entitled to
obtain payment in cash of the fair value of such holder's shares. In order to be
entitled to these "appraisal rights" a shareholder must (a) deliver a written
objection to the merger at or prior to the First Frederick shareholder meeting;
(b) ensure that his or her shares are not voted (or deemed to have been voted)
to approve the merger, and (c) after the merger is consummated, make a written
demand for payment within the required timeframe. If a judicial determination of
the fair value of First Frederick common stock held by such shareholder is
necessary, such determination may result in a value that is more than, less
than, or equal to the consideration which would have been paid by FCNB pursuant
to the merger agreement. FCNB will be entitled to not consummate the merger if
the holders of more than 5% of the outstanding First Frederick common stock
exercise their dissenters' rights. The exercise of dissenters' rights could
result in the merger not qualifying as a "pooling of interests," which would
also entitle FCNB to not consummate the merger. Holders of FCNB common stock
will not be entitled to dissent from the merger or obtain the payment in cash of
the fair value of their shares. See "The Merger -- Dissenters' Rights" (page 24)
and "--Conditions to the Merger" (page 19).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The merger has been structured so that shareholders of First Frederick
will not recognize gain or loss as a result of the conversion of their shares of
common stock into shares of FCNB common stock, except to the extent they receive
cash in lieu of fractional shares of FCNB common stock. Holders of warrants or
options to purchase First Frederick common stock, whose warrants or options are
not exercised and are converted into shares of FCNB Common Stock pursuant to the
merger agreement, may recognize income as a result of the merger. FCNB and First
Frederick have received an opinion of Kevin P. Kennedy, Esquire, special tax
counsel to FCNB, as to certain anticipated federal income tax consequences of
the merger. For a more extensive discussion of the anticipated federal income
tax consequences of the merger to shareholders of First Frederick, see "The
Merger -- Certain Federal Income Tax Consequences" (page 21).
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the management of First Frederick have interests in
the merger that are in addition to their interests as shareholders of First
Frederick. In particular, Mr. Jacob H. Goldstein, President of First Frederick,
will receive payments amounting to $290,000 in connection with the termination
of his employment agreement with First Frederick, and will enter into a
consulting agreement with FCNB. See "The Merger -- Certain Related
8
<PAGE>
Agreements and Interests of Certain Persons" (page 23).
ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a pooling of
interests under generally accepted accounting principles. See "The Merger --
Accounting Treatment" (page22).
COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the merger, holders of First Frederick common
stock and, subject to their agreement, holders of options and warrants to
purchase shares of First Frederick common stock, will become shareholders of
FCNB. Accordingly, their rights will be governed by the Maryland General
Corporation Law as it affects large public companies, and the Articles of
Incorporation, as amended, and Bylaws of FCNB. Certain differences in
shareholders' rights arise from differences between the Articles of
Incorporation and Bylaws of First Frederick and FCNB, including, among other
things, the number of authorized shares of capital stock, the voting rights of
certain shareholders, the notice requirements for nominations of directors and
presentation of new business at meetings of shareholders, the number and term of
directors, removal and vacancies on the Boards of Directors and the
applicability of certain anti-takeover provisions of law. See "Comparison of
Shareholder Rights and Certain Provisions of the Articles of Incorporation of
FCNB" (page 28).
MARKET FOR COMMON STOCK
FCNB common stock is traded by eight market makers and is quoted on The
Nasdaq National Market under the symbol "FCNB". First Frederick common stock has
historically been traded only on a limited basis, generally in privately
negotiated transactions. No dealers offer to make a market in First Frederick
common stock.
The following table sets forth the last trade price per share of FCNB
common stock as reported on Nasdaq on March 11, 1999, the last business day
preceding the public announcement of the merger and the equivalent per share
price of First Frederick common stock. The equivalent per share price shown
below is the product of multiplying the number of shares of FCNB common stock
into which First Frederick common stock will be converted by the last trade
price of FCNB common stock on March 11, 1999, of $19.875 per share.
<TABLE>
<CAPTION>
FCNB COMMON STOCK AT EQUIVALENT PER SHARE PRICE OF
CONVERSION RATIO MARCH 11, 1999 FIRST FREDERICK COMMON STOCK
<S> <C> <C>
1.0434 $19.875 $20.74
</TABLE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables show summarized historical financial data for FCNB
and First Frederick. The information presented is based on historical financial
statements for each company. The financial and other data set forth below is not
complete and should be read together with, and is qualified in its entirety by,
the more detailed information, including the consolidated financial statements
of FCNB and related notes, appearing in its 1998 Annual Report to Shareholders
and Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
incorporated by reference herein, and the consolidated financial statements of
First Frederick included elsewhere in this proxy statement/prospectus.
9
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA FOR FCNB
At or for the three
months ended March 31, At or for the year ended December 31,
------------------------ ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 22,499 $ 19,926 $ 85,421 $ 74,675 $ 63,802 $ 58,463 $ 50,123
Total interest expense (1) 11,943 10,010 43,835 35,978 28,725 25,721 19,132
----------- ----------- ----------- ----------- ---------- ---------- ----------
Net interest income 10,556 9,916 41,586 38,697 35,077 32,742 30,991
Provision for credit losses 408 170 1,770 1,524 408 1,080 705
----------- ----------- ----------- ----------- ---------- ---------- ----------
Net interest income after
provision for
credit losses 10,148 9,746 39,816 37,173 34,669 31,662 30,286
Net securities gains (losses) 382 525 1,481 733 440 123 393
Noninterest income (excluding net
securities gains (losses)) 3,977 2,936 14,184 11,797 10,514 10,498 9,049
Noninterest expenses 10,228 9,154 40,644 34,537 34,856 30,604 28,603
----------- ----------- ----------- ----------- ---------- ---------- ----------
Income before provision for income
taxes 4,279 4,053 14,837 15,166 10,767 11,679 11,125
----------- ----------- ----------- ----------- ---------- ---------- ----------
Provision for income taxes:
Operating activities 1,381 1,333 5,026 5,070 3,891 3,198 3,054
Thrift bad debt reserve recapture - - 1,750 - - - -
Provision for income taxes 1,381 1,333 6,776 5,070 3,891 3,198 3,054
=========== =========== =========== =========== ========== ========== ==========
Net income 2,898 2,720 8,061 10,096 6,876 8,481 8,071
=========== =========== =========== =========== ========== ========== ==========
Other comprehensive income
(loss),net of
taxes (2,304) 510 212 2,919 (34) 2,875 (3,359)
----------- ----------- ----------- ----------- ---------- ---------- ----------
Comprehensive income $ 594 $ 3,230 $ 8,273 $ 13,015 $ 6,842 $ 11,356 $ 4,712
=========== =========== =========== =========== ========== ========== ==========
Net income before merger-related
Expenses $ 2,972 $ 2,720 $ 11,222 $ 10,381 $ 8,787 $ 8,784 $ 8,298
=========== =========== =========== =========== ========== ========== ==========
PER SHARE DATA:
Basic earnings $ 0.29 $ 0.27 $ 0.80 $ 1.01 $ 0.69 $ 0.86 $ 0.83
Diluted earnings 0.29 0.27 0.80 1.01 0.69 0.86 0.83
Basic earnings before
merger-related
Expenses 0.30 0.27 1.12 1.04 0.88 0.90 0.86
Diluted earnings before
merger-related
Expenses 0.29 0.27 1.11 1.03 0.88 0.89 0.85
Cash dividends declared 0.155 0.101 0.436 0.340 0.301 0.301 0.269
Book value at period-end 8.91 9.07 9.01 8.81 7.86 7.56 6.76
Shares outstanding at period-end 10,072,013 10,007,820 10,060,714 9,988,312 9,969,334 9,844,735 9,516,361
Weighted average shares
outstanding:
Basic 10,064,712 9,998,366 10,024,630 9,975,300 9,975,655 9,813,797 9,691,289
Diluted 10,105,033 10,089,348 10,114,648 10,042,062 10,010,423 9,839,105 9,712,245
BALANCE SHEET DATA (AT PERIOD-END):
Total loans, net of unearned
income $ 733,795 $ 677,382 $ 727,566 $ 674,568 $583,826 $ 501,283 $ 445,814
Total assets 1,290,517 1,086,167 1,337,224 1,083,898 911,945 771,038 716,609
Total deposits 837,575 760,890 851,819 745,486 690,710 615,084 576,052
Federal funds purchased and
securities
sold under agreements to
repurchase 52,565 50,419 92,287 84,827 55,203 32,251 29,896
Other short-term borrowings 253,145 175,538 248,155 154,793 78,593 34,253 30,953
Long-term debt 40,250 - 40,250 - - 5,680 7,000
Total shareholders' equity 89,722 90,818 90,610 88,016 78,332 74,382 64,350
PERFORMANCE RATIOS:
Return on average total assets(2) 0.90 % 1.02 % 0.70 % 1.04 % 0.84 % 1.15 % 1.19 %
Return on average total assets
before
merger-related expenses(2) 0.93 1.02 0.98 1.06 1.07 1.19 1.22
Return on average shareholders'
equity(2) 12.92 12.14 8.80 12.35 9.24 12.25 12.97
Return on average shareholders'
equity
before merger-related expenses(2) 13.25 12.14 12.25 12.70 11.81 12.69 13.34
Average equity to average assets 6.99 8.38 7.97 8.39 9.09 9.40 9.16
Cash dividends declared to net
income 53.80 36.95 54.45 34.29 43.00 34.82 31.11
</TABLE>
- ------------------------------------
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) Annualized.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR FIRST FREDERICK
<TABLE>
<CAPTION>
At and for the three
months ended March 31, At and for the years ended December 31,
----------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 2,527 $ 2,097 $ 9,219 $ 8,185 $ 7,006 $ 6,016 $ 4,754
Total interest expense 1,090 946 4,018 3,460 2,924 2,759 2,005
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 1,437 1,151 5,201 4,725 4,082 3,257 2,749
Provision for credit losses 90 25 327 285 275 245 281
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for credit losses
1,347 1,126 4,874 4,440 3,807 3,012 2,468
Net securities gains (losses) - 1 39 (64) (20) (14) 3
Noninterest income (excluding net
securities
gains (losses)) 196 189 1,389 513 441 371 292
Noninterest expenses 962 844 4,342 3,180 2,906 2,592 2,436
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes 581 472 1,960 1,709 1,322 777 327
----------- ---------- ---------- ---------- ---------- ---------- ----------
Provision for income taxes:
Operating activities 212 172 595 637 465 310 5
Thrift bad debt reserve recapture - - - - - - -
----------- ---------- ---------- ---------- ---------- ---------- ----------
Provision for income taxes 212 172 595 637 465 310 5
Net income 369 300 1,365 1,072 857 467 322
Other comprehensive income (loss),
net of taxes
(87) 6 27 139 (13) 307 (323)
----------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income $ 282 $ 306 $ 1,392 $ 1,211 $ 844 $ 774 $ (1)
=========== ========== ========== ========== ========== ========== ==========
Net income before merger-related
expenses $ 369 $ 300 $ 1,365 $ 1,072 $ 857 $ 467 $ 322
=========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings $ 0.24 $ 0.20 $ 0.90 $ $0.71 $ 0.57 $ 0.31 $ 0.22
Diluted earnings 0.21 0.18 0.79 0.64 0.52 0.29 0.20
Basic earnings before merger-related
expenses 0.24 0.20 0.90 0.71 0.57 0.31 0.22
Diluted earnings before
merger-related expenses
0.21 0.18 0.79 0.64 0.52 0.29 0.20
Cash dividends declared 0.100 0.085 0.357 0.232 0.099 - -
Book value at period-end 5.88 5.33 5.77 5.42 4.89 4.42 3.89
Shares outstanding at period-end 1,525,215 1,523,790 1,525,215 1,517,726 1,488,144 1,479,144 1,474,644
Weighted average shares outstanding:
Basic 1,525,215 1,520,758 1,516,529 1,509,359 1,503,114 1,507,342 1,464,459
Diluted 1,732,434 1,704,556 1,728,429 1,676,392 1,647,644 1,630,033 1,637,373
BALANCE SHEET DATA (AT PERIOD-END):
Total loans, net of unearned income $ 95,260 $ 75,869 $ 90,493 $ 74,705 $ 65,813 $ 52,074 $ 46,846
Total assets 123,545 103,644 123,057 95,537 90,065 78,890 73,392
Total deposits 104,521 93,749 110,979 84,840 76,201 71,225 59,190
Federal funds purchased and
securities sold under agreements
to repurchase 1,964 1,292 1,830 1,208 243 545 994
Other short-term borrowings 7,544 148 564 974 5,823 75 7,280
Long-term debt - - - - - - -
Total shareholders' equity 8,970 8,120 8,806 8,220 7,280 6,535 5,737
PERFORMANCE RATIOS:
Return on average total assets(1) 1.23 % 1.20 % 1.27 % 1.14 % 1.01 % 0.58 % 0.49 %
Return on average total assets
before merger-related expenses(1) 1.23 1.20 1.27 1.14 1.01 0.58 0.49
Return on average shareholders'
equity(1) 17.86 15.00 16.87 14.01 12.43 7.24 6.05
Return on average shareholders'
equity before merger-related expenses(1) 17.86 15.00 16.87 14.01 12.43 7.24 6.05
Average equity to average assets 6.91 8.03 7.57 8.15 8.18 8.08 8.08
Cash dividends declared to net income 41.19 43.00 39.63 32.65 17.39 N/A N/A
</TABLE>
- --------------------------------------
(1) Annualized.
11
<PAGE>
PRO FORMA COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At or for the three
months ended March 31, At or for the years ended December 31, 1999
----------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 25,026 $ 22,023 $ 94,640 $ 82,860 $ 70,808 $ 64,479 $ 54,877
Total interest expense (1) 13,033 10,956 47,853 39,438 31,649 28,480 21,137
---------- ----------- ---------- ---------- ---------- ---------- -----------
Net interest income 11,993 11,067 46,787 43,422 39,159 35,999 33,740
Provision for credit losses 498 195 2,097 1,809 683 1,325 986
---------- ----------- ---------- ---------- ---------- ---------- -----------
Net interest income after provision
for credit losses 11,495 10,872 44,690 41,613 38,476 34,674 32,754
Net securities gains (losses) 382 526 1,520 669 420 109 396
Noninterest income (excluding net
securities gains (losses)) 4,173 3,125 15,573 12,310 10,955 10,869 9,341
Noninterest expenses 11,190 9,998 44,986 37,717 37,762 33,196 31,039
---------- ----------- ---------- ---------- ---------- ---------- -----------
Income before provision for income
taxes 4,860 4,525 16,797 16,875 12,089 12,456 11,452
---------- ----------- ---------- ---------- ---------- ---------- -----------
Provision for income taxes:
Operating activities 1,593 1,505 5,621 5,707 4,356 3,508 3,059
Thrift bad debt reserve recapture - - 1,750 - - - -
---------- ----------- ---------- ---------- ---------- ---------- -----------
Provision for income taxes 1,593 1,505 7,371 5,707 4,356 3,508 3,059
---------- ----------- ---------- ---------- ---------- ---------- -----------
Net income 3,267 3,020 9,426 11,168 7,733 8,948 8,393
Other comprehensive income (loss),
net of taxes (2,391) 516 239 3,058 (47) 3,182 (3,682)
---------- ----------- ---------- ---------- ---------- ---------- -----------
Comprehensive income $ 876 $ 3,536 $ 9,665 $ 14,226 $ 7,686 $ 12,130 $ 4,711
========== =========== ========== ========== ========== ========== ===========
Net income before merger-related
expenses $ 3,341 $ 3,020 $ 12,587 $ 11,453 $ 9,644 $ 9,251 $ 8,620
========== =========== ========== ========== ========== ========== ===========
PER SHARE DATA: (2)(3)
Basic earnings $ 0.28 $ 0.26 $ 0.81 $ 0.97 $ 0.67 $ 0.79 $ 0.75
Diluted earnings 0.27 0.25 0.79 0.95 0.66 0.78 0.73
Basic earnings before
merger-related expenses 0.29 0.26 1.08 0.99 0.84 0.81 0.77
Diluted earnings before
merger-related expenses 0.28 0.25 1.06 0.97 0.82 0.80 0.75
Cash dividends declared 0.147 0.098 0.425 0.330 0.269 0.259 0.224
Book value at period-end 8.46 8.55 8.53 8.32 7.43 7.11 6.34
Shares outstanding at period-end 11,663,422 11,597,742 11,652,123 11,571,907 11,522,063 11,388,074 11,055,005
Weighted average shares outstanding:
Basic 11,656,121 11,585,125 11,606,976 11,550,165 11,544,004 11,386,558 11,219,306
Diluted 11,912,655 11,867,882 11,918,091 11,791,209 11,729,575 11,539,881 11,420,680
BALANCE SHEET DATA (AT PERIOD-END):
Total loans, net of unearned income $ 829,055 $ 753,251 $ 818,059 $ 749,273 $ 649,639 $ 553,357 $ 492,660
Total assets 1,414,062 1,189,811 1,460,281 1,179,435 1,002,010 849,928 790,001
Total deposits 942,096 854,639 962,798 830,326 766,911 686,309 635,242
Federal funds purchased and
securities
sold under agreements to
repurchase 54,529 52,458 94,117 86,035 55,446 32,796 30,890
Other short-term borrowings 260,689 174,939 248,719 155,767 84,416 34,328 38,233
Long-term debt 40,250 - 40,250 - - 5,680 7,000
Total shareholders' equity 98,692 99,131 99,416 96,236 85,612 80,917 70,087
PERFORMANCE RATIOS:
Return on average total assets(4) 0.93 % 1.03 % 0.75 % 1.05 % 0.86 % 1.10 % 1.13 %
Return on average total assets
before merger-related expenses(4) 0.95 1.03 1.00 1.07 1.07 1.13 1.16
Return on average shareholders'
equity(4) 13.34 12.38 9.46 12.49 9.51 11.82 12.43
Return on average shareholders'
equity before merger-related
expenses(4) 13.64 12.38 12.63 12.81 11.87 12.22 12.76
Average equity to average assets 6.99 8.34 7.94 8.37 9.01 9.25 9.06
Cash dividends declared to net
income 52.37 37.55 52.30 34.13 40.17 33.00 29.92
</TABLE>
- -------------------------------------
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) The amounts shown reflect the conversion of First Frederick common stock at
the conversion ratio of 1.0434 shares of FCNB common stock per share of
First Frederick common stock.
(3) For additional information regarding the impact on pro forma combined and
pro forma equivalent per share cash dividends and book value see
"Comparative Pro Forma and Historical Data."
(4) Annualized.
12
<PAGE>
COMPARATIVE PRO FORMA AND HISTORICAL DATA
<TABLE>
<CAPTION>
Three months ended
March 31, Years ended December 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FCNB Common Stock
Basic Earnings per Common Share
Historical $ 0.29 $ 0.27 $ 0.80 $ 1.01 $ 0.69 $ 0.86 $ 0.83
Pro forma combined - 1.0434 Conversion Ratio 0.28 0.26 0.81 0.97 0.67 0.79 0.75
Diluted Earnings per Common Share
Historical 0.29 0.27 0.80 1.01 0.69 0.86 0.83
Pro forma combined - 1.0434 Conversion Ratio 0.27 0.25 0.79 0.95 0.66 0.78 0.73
Dividends per Common Share:
Historical 0.15 0.10 0.44 0.34 0.30 0.30 0.27
Pro forma combined - 1.0434 Conversion Ratio 0.15 0.10 0.42 0.33 0.27 0.26 0.22
Book value per Common Share (period end)
Historical 8.91 9.07 9.01 8.81 7.86 7.56 6.76
Pro forma combined - 1.0434 Conversion Ratio 8.46 8.55 8.53 8.32 7.43 7.11 6.34
First Frederick Common Stock (1)
Basic Earnings per Common Share
Historical $ 0.24 $ 0.20 $ 0.90 $ 0.71 $ 0.57 $ 0.31 $ 0.22
Pro forma equivalent - 1.0434 Conversion
Ratio 0.29 0.27 0.85 1.01 0.70 0.82 0.78
Diluted Earnings per Common Share
Historical 0.21 0.18 0.79 0.64 0.52 0.29 0.20
Pro forma equivalent - 1.0434 Conversion
Ratio 0.28 0.26 0.83 0.99 0.69 0.81 0.76
Dividends per Common Share:
Historical 0.10 0.08 0.36 0.23 0.10 - -
Pro forma equivalent - 1.0434 Conversion
Ratio 0.15 0.10 0.44 0.34 0.28 0.27 0.23
Book value per Common Share (period end)
Historical 5.88 5.33 5.77 5.42 4.89 4.42 3.89
Pro forma equivalent - 1.0434 Conversion Ratio 8.83 8.92 8.90 8.68 7.75 7.41 6.61
- ------------------------------------------------
</TABLE>
(1) The pro forma equivalent amount per common share for earnings, dividends,
and book value are based on a formula that multiplies the appropriate pro
forma combined amounts by the conversion ratio of 1.0434.
13
<PAGE>
THE MEETINGS
THE FIRST FREDERICK SHAREHOLDER MEETING
General. The special meeting of shareholders of First Frederick will be
held at Holly Hills Country Club, 5502 Mussetter Road, Ijamsville, Maryland, on
Thursday, August 12, 1999, at 10:00 A.M. local time.
The Board of Directors of First Frederick has chosen the close of
business on June 18, 1999 as the record date for purposes of determining the
shareholders entitled to notice of, and to vote at, the First Frederick
shareholder meeting. As of the record date for the First Frederick shareholder
meeting there were 1,525,215 shares of First Frederick common stock issued and
outstanding and entitled to vote. Shareholders of First Frederick are entitled
to one vote on all matters to be acted on at the meeting for each share held of
record by them on the First Frederick record date. The presence at the meeting,
in person or by proxy, of the holders of a majority of the total number of
outstanding shares of common stock of First Frederick is necessary to constitute
a quorum. In the event that there are not sufficient votes for a quorum or to
approve the merger at the meeting, the meeting may be adjourned in order to
permit further solicitation of proxies.
Purpose of the First Frederick Shareholder Meeting and Vote Required.
The purpose of the First Frederick meeting is to consider and vote on the
proposal to approve the merger pursuant to which First Frederick will be merged
into FCNB and each outstanding share of First Frederick common stock and,
subject to the agreement of the holders, each option and warrant to purchase
shares of First Frederick common stock, will automatically, and without further
action, be converted into shares of FCNB common stock, and to transact such
other business as may properly come before the meeting or any adjournment or
postponement thereof. See "The Merger -- Consideration to be Received by First
Frederick Shareholders."
The affirmative vote of the holders of two-thirds of the outstanding
shares of First Frederick common stock is required to approve the merger.
Directors and executive officers of First Frederick having the power to vote
413,270 shares (27.09%) of First Frederick common stock have indicated that they
will vote in favor of the merger. FCNB and directors of FCNB intend to vote the
150,434 shares (9.86%) of First Frederick common stock owned by them in favor of
the merger.
THE BOARD OF DIRECTORS OF FIRST FREDERICK HAS UNANIMOUSLY APPROVED THE
MERGER AND UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL AND ADOPTION OF THE
MERGER.
Voting and Revocation of Proxies. If the enclosed form of proxy is
properly executed and returned in time to be voted at the First Frederick
meeting, the shares represented thereby will be voted as specified by the
shareholder executing the proxy. In the absence of specific instructions,
properly executed proxies received will be voted in favor of the proposal to
approve the merger. Management does not know of any matters that will be brought
before the meeting, other than as described herein. If other matters are
properly brought before the meeting, the persons named in the proxy intend to
vote such shares to which the proxies relate in accordance with their best
judgment, unless such authority is withheld. A proxy may be revoked at any time
prior to the exercise of the authority granted thereby by (i) delivering written
notice of such revocation to Jacob H. Goldstein, President of First Frederick,
prior to the meeting, (ii) granting and delivering a later dated proxy with
respect to such shares, or (iii) by attending the First Frederick meeting in
person and voting the shares. If your shares are not registered in your name,
you will need additional documentation from your recordholder in order to vote
personally at the meeting.
Votes cast by proxy or in person at the First Frederick meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the shareholders for a vote, proxies are marked as abstentions (or
shareholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Broker non-votes will also be considered
present for purposes of determining a quorum. Since approval of the merger
requires the affirmative vote of the holders of two-thirds of the outstanding
First Frederick shares, an abstention or broker non-vote will have the effect of
a vote against the merger. If your shares are held in street name, please see
the voting form provided by your broker for additional information about the
voting of your shares.
14
<PAGE>
The enclosed proxy is being solicited on behalf of the Board of
Directors of First Frederick, and First Frederick will bear the cost of such
solicitation. In addition to solicitation by mail, officers, directors and
employees of First Frederick may solicit proxies by telecopier, telegram, in
person or otherwise. Such persons will not receive any additional or special
remuneration or payment for such solicitation. Additionally, officers, directors
or employees of FCNB may solicit proxies by mail, telecopier, telegram, in
person or otherwise. FCNB will pay all expenses of printing and distributing
this proxy statement/prospectus.
THE FCNB SHAREHOLDER MEETING
General. The FCNB shareholder meeting will be held at FCNB's
headquarters, 7200 FCNB Court, Frederick, Maryland, on Thursday, August 12,
1999, at A.M. local time.
The Board of Directors of FCNB has chosen the close of business on June
18, 1999 as the record date for purposes of determining the shareholders
entitled to notice of, and to vote at, the FCNB meeting. As of the record date
for the FCNB meeting, 10,074,273 shares of FCNB common stock were issued and
outstanding. Shareholders of FCNB are entitled to one vote on all matters to be
acted on at the FCNB shareholder meeting for each share of FCNB common stock
held of record by them on the record date. The presence at the FCNB shareholder
meeting, in person or by proxy, of a majority of the total number of outstanding
shares of FCNB common stock is necessary to constitute a quorum.
Purpose of the FCNB Shareholder Meeting and Vote Required. The purpose
of the FCNB meeting is to (i) consider and vote on the proposal to approve the
merger, pursuant to which First Frederick will be merged into FCNB and each
outstanding share of First Frederick common stock and, subject to the agreement
of the holders, each outstanding warrant and option to purchase First Frederick
common stock, will be converted into shares of FCNB common stock; (ii) consider
and vote upon an amendment to FCNB's Articles of Incorporation which would
increase the number of authorized shares of common stock to fifty million; and
(iii) transact such other business as may properly come before the FCNB meeting
or at any adjournment or postponement thereof.
FCNB is not required to obtain the approval of FCNB shareholders in
order to effect the merger under Maryland law or the rules of The Nasdaq
National Market. Given the number of shares to be issued in connection with the
merger, however, the FCNB Board of Directors believes that it is important to
permit FCNB shareholders the opportunity to vote on the merger.
The affirmative vote of the holders of two-thirds of the votes entitled
to be cast at the FCNB shareholder meeting is required to approve each of the
merger and the amendment to FCNB's Articles of Incorporation. Directors of FCNB
owning or having the power to vote or direct the voting of 1,052,687 shares of
FCNB common stock have indicated their intention to vote in favor of the merger
and the amendment.
THE FCNB BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE AMENDMENT
AND RECOMMENDS THAT HOLDERS OF FCNB COMMON STOCK VOTE "FOR" THE MERGER AND THE
AMENDMENT.
Voting and Revocation of Proxies. If the enclosed form of proxy is
properly executed and returned in time to be voted at the FCNB shareholder
meeting, the shares represented thereby will be voted as specified by
shareholders. In the absence of specific instructions, properly executed proxies
received will be voted in favor of the proposal to approve the merger and the
proposal to approve the amendment to FCNB's Articles of Incorporation.
Management does not know of any matters that will be brought before the FCNB
shareholder meeting, other than as described herein. If other matters are
properly brought before the FCNB shareholder meeting, the persons named in the
proxy intend to vote such shares to which the proxies relate in accordance with
their best judgment unless such authority is withheld. A proxy may be revoked at
any time prior to the exercise of the authority granted thereby by (i)
delivering written notice of such revocation to Helen G. Hahn, Secretary of
FCNB, prior to the FCNB shareholder meeting, (ii) granting and delivering a
later dated proxy with respect to such shares, or (iii) attending the FCNB
shareholder meeting in person and voting the shares. If your shares are held in
street name, please see the voting form provided by your broker for additional
information about the voting of your shares.
Votes cast by proxy or in person at the FCNB shareholder meeting will
be tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
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to the FCNB shareholders for a vote, proxies are marked as abstentions (or FCNB
shareholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Broker non-votes will also be considered
present for purposes of determining a quorum. Since approval of the merger
requires the affirmative vote of the holders of two-thirds of the votes entitled
to be cast, an abstention or broker non-vote will have the effect of a vote
against the merger.
The enclosed proxy is being solicited on behalf of the FCNB Board of
Directors, and FCNB shall bear the entire cost of such solicitation. In addition
to solicitation by mail, officers, directors and employees of FCNB may solicit
proxies by telecopier, telegram, in person or otherwise. Such persons will not
receive any additional or special remuneration or payment for such solicitation.
FCNB may engage a paid proxy solicitation firm to assist it in obtaining proxies
from FCNB shareholders on a timely basis. As of the date hereof, FCNB has not
engaged such a firm, and has not committed itself to the payment of any fees in
connection therewith.
THE MERGER
FCNB and First Frederick entered into the Agreement on March 12, 1999.
Following shareholder approval of the merger, and the satisfaction or waiver of
other conditions to the merger, First Frederick will be merged into FCNB. The
following brief description of the merger and the merger agreement does not
purport to be a comprehensive description of all facets of the merger or the
documents prepared in connection therewith, and is qualified in its entirety by
reference to the merger agreement in the form of Exhibit A attached hereto and
made a part hereof, to which shareholders are urged to refer, and the other
documents referred to herein.
THE MERGER AGREEMENT
The merger agreement provides that First Frederick will be merged into
FCNB with FCNB surviving the merger. Upon effectiveness of the merger, each of
the outstanding shares of First Frederick common stock and, subject to the
agreement of the holders, all outstanding warrants and options to purchase
shares of First Frederick common stock, will automatically be converted into
shares of FCNB common stock. See "The Merger -- Consideration to be Received by
Shareholders of First Frederick" and "FCNB Corp -- Description of FCNB Capital
Stock." Each share of FCNB common stock outstanding prior to the effectiveness
of the merger will be unchanged, and will continue to represent one share of
FCNB common stock.
THE BOARDS OF DIRECTORS OF FCNB AND FIRST FREDERICK HAVE
UNANIMOUSLY APPROVED THE MERGER AND RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS
VOTE "FOR" THE MERGER.
CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS OF FIRST FREDERICK
Conversion of First Frederick Common Stock, Warrants and Options. Upon
effectiveness of the merger, each outstanding share of First Frederick common
stock, except for shares of First Frederick held by First Frederick in treasury
or by any First Frederick subsidiary (other than in a fiduciary capacity),
shares of First Frederick held by FCNB or a FCNB subsidiary (other than in a
fiduciary capacity), and dissenting shares, will automatically, and without
further action, be converted into 1.0434 shares of FCNB common stock. See "The
Merger -- Dissenter's Rights"
Each warrant and option to purchase First Frederick common stock (other
than the stock option granted to FCNB in connection with the merger) will
automatically, subject to the agreement of the holders, and without further
action, be converted into the number of shares of FCNB common stock determined
by dividing the exercise price of the warrant or option by 20.125, and
subtracting that quotient from 1.0434.
No fractional shares of FCNB common stock will be issued in connection
with the merger. Holders of First Frederick common stock entitled to receive
fractional shares of FCNB common stock will receive cash in lieu of such
fractional shares, without interest, based upon the value of a share of FCNB
common stock equal to the average closing price of FCNB common stock during a
twenty (20) trading day period preceding the closing of the merger.
Each share of FCNB common stock outstanding immediately prior to the
merger will be unchanged by the merger, and will continue to represent one share
of FCNB common stock. See "FCNB Corp -- Description of FCNB Capital Stock."
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If the merger had been effective as of December 31, 1998, it would have
had the following effect on FCNB's per share earnings:
<TABLE>
<CAPTION>
Earnings per share
---------------------------
Actual Pro Forma
----------- -----------
<S> <C> <C>
Basic $0.80 $0.81
Diluted $0.80 $0.79
Basic (before merger related
expenses) $1.12 $1.08
Diluted (before merger related
expenses) $1.11 $1.06
</TABLE>
It is anticipated that the merger will be accretive to FCNB's earnings within
twelve months after consummation, based upon FCNB's expectations of the earnings
of First Frederick following the merger. These expectations include assumptions
regarding cost savings, operating efficiencies and growth opportunities to be
achieved as a result of the merger. There can be no assurance that these
expectations will be realized. FCNB shareholders will experience dilution of
their percentage ownership interest in FCNB, and in their relative voting power.
There can be no assurance as to the market, trading or intrinsic value
of shares of FCNB common stock received by shareholders of First Frederick in
exchange for their shares or by holders of First Frederick options and warrants
to purchase First Frederick common stock. There can be no assurance as to the
level at which shares of FCNB common stock can be sold, or as to whether an
active and liquid market in FCNB common stock can be maintained, following the
merger.
THE STOCK OPTION AGREEMENT
In connection with the merger agreement, First Frederick has granted
FCNB an option (the "option"), exercisable only in certain circumstances that
have not yet occurred, to acquire up to 378,923 shares of First Frederick common
stock, or 19.9% of the aggregate shares of First Frederick common stock that
would be outstanding immediately after the issuance of shares upon exercise of
the option (and without reference to other options, warrants or rights to
acquire First Frederick common stock outstanding as of the date of grant of the
option), at an exercise price of $15.00 per share.
The option is exercisable in whole or in part, but subject to any
required regulatory approvals, at any time after a "Purchase Event" occurs. A
Purchase Event, as defined in the option agreement, is any of the following: (1)
First Frederick without having received FCNB's prior written consent, which may
be withheld in the sole discretion of FCNB, enters into an agreement with any
person to, publicly proposes or recommends any offer of any person to (i)
acquire, merge or consolidate, or enter into any similar transaction, with First
Frederick; (ii) purchase, lease or otherwise acquire all or substantially all of
the assets of First Frederick; or (iii) purchase or otherwise acquire securities
representing 15% or more of the voting power of First Frederick; (2) any person
acquires beneficial ownership or the right to acquire beneficial ownership of
15% or more of the outstanding shares of First Frederick common stock (the term
"beneficial ownership," for purposes of the option agreement has the meaning
assigned thereto in Section 13(d) of the Securities Exchange Act of 1934 and the
regulations promulgated thereunder); or (3) any person shall have made a bona
fide proposal to First Frederick by public announcement or written communication
that is or becomes the subject of public disclosure to acquire First Frederick
by merger, share exchange, consolidation, purchase of all or substantially all
of its assets or any other similar transaction, and following such bona fide
proposal: (i) the shareholders of First Frederick vote not to approve the merger
agreement with FCNB at the First Frederick shareholder meeting or the Board of
Directors of First Frederick withdraws, modifies or changes it recommendation
regarding the merger into FCNB to the shareholders of First Frederick as set
forth in this proxy statement/prospectus in a manner detrimental to approval of
the merger by shareholders of First Frederick; or (ii) the First Frederick
shareholder meeting is not held prior to the termination of the merger
agreement.
If a Purchase Event occurs, and First Frederick has entered into an
agreement with respect to the acquisition, merger or consolidation of First
Frederick, the sale of all or substantially all of the assets of First
Frederick, or similar business combination transaction, or other transaction
inconsistent with the consummation of the merger (an "other transaction"), then,
at the election of FCNB, and in lieu of the exercise of the option, and subject
to the receipt of any required regulatory approvals, notices or certifications,
FCNB may require the purchase of the option from FCNB at any time before or
after the effectiveness of such other transaction, by payment in cash of an
amount equal to the excess of the per share value of the other transaction over
the exercise price multiplied by the number of shares subject
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<PAGE>
to the option. First Frederick has agreed that it will cause the other party,
and its parent company, if any, to the other transaction to expressly assume as
an obligation of such other party the obligation to make the described payment.
The option will expire and terminate, to the extent not previously
exercised, upon the earlier of: (i) the effective time of the merger; (ii)
termination of the merger agreement in accordance with the provisions thereof,
other than a termination based upon, following or in connection with either: (a)
a material breach by First Frederick of a Specified Covenant (as defined below);
or (b) the failure of First Frederick to obtain shareholder approval of the
merger agreement by the vote required under applicable law, if either (a) or (b)
follows the occurrence of a Purchase Event; or (iii) 12 months after termination
of the merger agreement based upon a material breach by First Frederick of a
Specified Covenant or the failure of First Frederick to obtain shareholder
approval of the merger agreement by the vote required under applicable law, in
either case following the occurrence of a Purchase Event. "Specified Covenant"
means any material representation, warranty, covenant or agreement contained in
the merger agreement.
The grant of the option by First Frederick was a condition and
inducement to FCNB's willingness to enter into the merger agreement. Exercise of
the option may tend to make the acquisition of a controlling interest in First
Frederick more expensive to any prospective acquiror of First Frederick, other
than FCNB, and therefore may decrease the likelihood that another prospective
acquiror will seek a business combination with First Frederick, and may increase
the probability that the merger will be consummated, even if another business
combination would be beneficial to holders of First Frederick common stock.
RECOMMENDATION OF THE FIRST FREDERICK BOARD; REASONS FOR THE MERGER
The First Frederick Board believes that the merger is in the best
interests of the First Frederick shareholders and has authorized consummation of
the merger agreement, subject to the approval of the shareholders and certain
other conditions set forth in the merger agreement.
In September 1998, First Frederick's management and Board of Directors
concluded that the long range interests of its shareholders would be best served
by considering the following strategic alternatives: (i) internal growth through
branching; (ii) external growth through acquisition; (iii) exploring
opportunities of a "merger of equals"; and (iv) a sale to, or merger with, a
larger financial institution. The First Frederick Board evaluated each strategic
alternative into the fourth quarter of 1998, although the Board did not pursue
any single strategy.
Based on its evaluation of conditions in the securities markets and
bank merger activities in late 1998, the First Frederick Board determined in
January 1999, that the sale or merger option would be the most beneficial to
shareholders. Thereafter, the Board authorized management to contact potential
merger partners identified by the Board's Executive Committee. Of the various
potential merger partners identified, the Board determined that a merger with
FCNB would be most beneficial to shareholders in light of, among other factors,
(i) the overall economic effect, both immediate and long term, on the
shareholders; (ii) the historical and then current operating results and
financial condition of First Frederick; (iii) the proposed exchange ratio to
convert First Frederick common stock into FCNB common stock; (iv) the
possibility of obtaining a more favorable price for First Frederick's common
stock in the future; (v) FCNB's reputation and operating record; (vi) FCNB's
banking philosophy and customer relationships; (vii) FCNB's dividend payment
record; (viii) FCNB's listing on The Nasdaq National Market; (ix) future
appreciation potential of FCNB's common stock; (x) any antitrust or other legal
and regulatory issues arising out of the merger; and (ix) the social and
economic effect on First Frederick's employees, depositors and customers.
The First Frederick Board also believes that the merger will permit
greater flexibility in responding to the expanding financial needs of First
Frederick's customers and in meeting the increasing competition for furnishing
financial services. The merger will make the considerable commercial lending
resources and expertise of FCNB directly available to commercial customers of
First Frederick, including FCNB's higher legal lending limit. As a part of FCNB,
First Frederick customers will be offered some services not presently offered by
First Frederick.
The merger will give First Frederick's customers access to FCNB's
banking system with its 32 full service branches in Frederick, Carroll,
Montgomery, Baltimore, Howard, Anne Arundel and Prince George's counties in
Maryland, Washington D.C. and Fairfax County, Virginia.
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<PAGE>
The Board of Directors of First Frederick believes that the merger is
desirable, and in the best interest of, First Frederick and its shareholders.
ACCORDINGLY, THE FIRST FREDERICK BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER AND UNANIMOUSLY RECOMMENDS THAT FIRST FREDERICK'S SHAREHOLDERS VOTE "FOR"
THE APPROVAL OF THE MERGER.
RECOMMENDATION OF THE FCNB BOARD; REASONS FOR THE MERGER
The Board of Directors of FCNB believes that the proposed merger of
First Frederick with and into FCNB is in the best interests of FCNB and its
shareholders. The acquisition of First Frederick will increase FCNB's deposit
share in the Frederick City market to 34% (the highest in the market) from 26%,
and to 28% from 23% in the Frederick County market. The merger will also present
FCNB with substantial opportunities to increase income, as a result of the
ability to provide additional products not currently provided by First Bank, to
customers of First Bank. FCNB also expects significant cost savings to be
derived from the merger, as a result of the consolidation of five of First
Bank's six branches with nearby FCNB Bank branches, and the reduction of
administrative overhead. There can be no assurance, however, that FCNB will be
able to successfully retain and integrate First Frederick's business and
customers with its own, that FCNB will recognize the anticipated cost savings,
or that FCNB's income or earnings will increase as a result of the merger.
In considering the merger, the Board of Directors reviewed information
prepared by FCNB's personnel, who were assisted by independent analysts having
expertise in the valuation and acquisition of banking institutions.
ACCORDINGLY, THE FCNB BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF FCNB COMMON STOCK VOTE "FOR"
THE APPROVAL OF THE MERGER.
CONDITIONS TO THE MERGER
The obligation of First Frederick to consummate the merger is subject
to various conditions, including the following: (i) the continued accuracy of
the representations and warranties of FCNB; (ii) the performance, in all
material respects, of all of the covenants and agreements of FCNB under the
merger agreement; (iii) the approval of the merger by the shareholders of each
of First Frederick and FCNB; (iv) the effectiveness of the registration
statement (of which this proxy statement/prospectus forms a part) on Form S-4
relating to the FCNB common stock to be issued to securityholders of First
Frederick in the merger; (v) the approval for quotation on The Nasdaq National
Market, upon notice of issuance, of the shares of FCNB common stock to be issued
to First Frederick securityholders in connection with the merger; (vi) the
absence of a material adverse change in the business, operations, assets,
financial condition, prospects or results of operations of FCNB; (vii) the
absence of any order, decree, or injunction (or proceeding seeking any of the
foregoing) enjoining or prohibiting consummation of the merger and the
transactions contemplated by the merger agreement; and (viii) the receipt of
certain legal and tax opinions from counsel to FCNB.
The obligation of FCNB to consummate the merger is subject to various
conditions, including the following: (i) the continued accuracy of the
representations and warranties of First Frederick; (ii) the performance, in all
material respects, of the obligations of First Frederick under the merger
agreement; (iii) the receipt of all requisite regulatory approvals, which
approvals shall not contain conditions other than those as are generally
imposed, and which are not, in the opinion of FCNB, unduly burdensome; (iv) the
approval of the merger by the shareholders of each of First Frederick and FCNB;
(v) the receipt of an opinion of FCNB's independent accountants, or FCNB's
otherwise satisfying itself, that the merger can be accounted for as a pooling
of interests; (vi) the absence of any material adverse change in the business,
operations, assets, financial condition, prospects or results of operations of
First Frederick; (vii) the absence of any injunction, proceeding, statute or
regulation preventing consummation of the merger or making it unlawful, or in
the reasonable judgment of FCNB, inadvisable, to consummate the merger; (viii)
the absence of litigation which, if successful, would in the reasonable
judgement of FCNB, have a material adverse effect on the financial condition,
operations, business or prospects of First Frederick; (ix) the execution of
noncompetition agreements by the directors of First Frederick; (x) the receipt
of the tax opinion from counsel to FCNB; and (xi) the receipt of a satisfactory
letter from First Frederick's outside accountants, and an opinion of counsel to
First Frederick.
See "The Merger -- Termination," "-- Certain Related Agreements and
Interests of Certain Persons" and "-- Accounting Treatment."
19
<PAGE>
Pending effectiveness of the merger, First Frederick is required to
conduct its business in the ordinary course, and in substantially the same
manner as it has conducted business to date. Additionally, First Frederick has
agreed not to take certain actions without the prior consent of FCNB, including,
but not limited to, paying dividends; redeeming, repurchasing or issuing any
shares of common stock; incurring any obligations or liabilities except in the
ordinary course of business; granting any salary increases; effecting any
merger, sale of assets or other transaction not in the ordinary course of
business; or soliciting or authorizing any inquiries or proposals with respect
to any extraordinary transactions other than the merger.
Pending effectiveness of the merger, FCNB is required to use its best
efforts to preserve its business organization intact in all material respects;
maintain good relationships with its employees; and preserve the goodwill of its
customer and other business relationships. FCNB has agreed not to take certain
actions without the prior written consent of First Frederick, including actions
which would adversely affect (i) the ability to obtain the necessary approvals
of governmental authorities required for the merger; (ii) the status of the
merger as a tax free reorganization; (iii) the eligibility of the merger for
treatment as a pooling of interests; or (iv) its ability to perform the
covenants and agreements under the merger agreement.
The merger agreement provides that as promptly as practicable after the
date of the merger agreement and First Frederick furnishing any information
regarding First Frederick required to be included, FCNB will file the
registration statement with the Commission and applications or notices with the
Board of Governors of the Federal Reserve (the "Federal Reserve"), the Maryland
Commissioner of Financial Regulation, and any other appropriate state or federal
regulatory agency for approval of the merger. The approval of the Federal
Reserve has been received and the mandatory waiting period has expired, and the
approval of the Maryland Commissioner of Financial Regulation for FCNB to
acquire First Fredrick has been received.
TERMINATION
The merger agreement may be terminated, and the merger abandoned, at
any time prior to the effectiveness of the merger, whether or not such
termination occurs before or after approval of the merger by the shareholders of
First Frederick and FCNB, and without further action by shareholders of First
Frederick and FCNB, in the following circumstances: (i) by mutual consent of
First Frederick and FCNB; (ii) unilaterally by either FCNB or First Frederick,
at any time after December 31, 1999, except that if First Frederick engages in
communications related to an "unsolicited acquisition proposal" (as defined
below) First Frederick may not terminate under this provision; (iii)
unilaterally, by either First Frederick or FCNB in the event of a material
breach by the other of any representation, warranty or agreement contained in
the merger agreement; (iv) unilaterally, by either First Frederick or FCNB, in
the event that any of the conditions to the obligation of such party to
consummate the merger cannot be satisfied by December 31, 1999, provided that
the terminating party is not in material breach of a material representation,
warranty or agreement at the time of termination; (v) unilaterally, by FCNB, if
the merger is not approved at the FCNB shareholder meeting; (vi) unilaterally,
by First Frederick, if the merger is not approved at the First Frederick
shareholder meeting; or (vii) unilaterally, by either First Frederick or FCNB,
if any governmental or regulatory approval required for the merger and the
transactions contemplated by the merger agreement is denied by final
non-appealable order, or the time for appeal has expired, except that the denial
of an application relating to the merger of First Bank and FCNB Bank will not
entitle First Frederick to terminate the merger. If the merger agreement is
terminated under any of the foregoing circumstances, no party shall have any
liability or obligation to the other relating to the merger agreement, other
than with respect to confidentiality of documents and expenses, and except in
the event of a willful breach of a material provision.
For purposes of the merger agreement, an "unsolicited acquisition
proposal" is defined as any proposal for a merger, consolidation, share purchase
or exchange, purchase and assumption or similar extraordinary transaction
involving First Frederick or First Bank or all of their respective assets, which
is received by First Frederick without violation of its agreement not to further
seek or encourage any proposals for such transactions.
AMENDMENT AND WAIVER
Any of the terms and conditions of the merger agreement may be amended
or modified by First Frederick and FCNB in writing, at any time before or after
approval by shareholders, except that no amendment or modification after
approval by the shareholders of First Frederick may reduce the value or change
the form of consideration to be received
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<PAGE>
by shareholders of First Frederick. Any term or condition of the merger
agreement may be waived at any time, in writing, by the party which, or the
shareholders of which, is entitled to the benefit of such waived term or
condition. See "The Merger -- Conditions to the Merger."
EFFECTIVENESS OF THE MERGER
The closing of the merger shall take place within 30 days of the
receipt of all required approvals and authorizations of government and
regulatory authorities and the expiration of all applicable waiting periods, and
the satisfaction or waiver of all conditions to the merger. The merger shall
become effective upon the later of the filing of Articles of Merger with the
Maryland Department of Assessments and Taxation or the date indicated in such
Articles of Merger. It is expected that the merger will become effective within
one business day of the closing.
SURRENDER OF CERTIFICATES
Upon effectiveness of the merger, certificates which formerly
represented shares of First Frederick common stock, options to purchase First
Frederick common stock or warrants to purchase First Frederick common stock will
represent the number of shares of FCNB common stock into which such shares,
options or warrants, as the case may be, shall have been converted, except that
until exchanged for FCNB common stock certificates, the holders of First
Frederick common stock certificates, options or warrants, as the case may be,
will not be entitled to receive dividends or other distributions or payments on
FCNB common stock.
Promptly following effectiveness of the merger, FCNB or American Stock Transfer
& Trust Company, FCNB's transfer agent (the "Exchange Agent"), will mail to each
First Frederick shareholder and each holder of First Frederick options and
warrants information regarding the exchange of his or her shares of First
Frederick common stock, options or warrants, as the case may be, including
procedures to be followed in the event that certificates representing First
Frederick common stock, options or warrants have been lost. HOLDERS OF FIRST
FREDERICK COMMON STOCK, OPTIONS AND WARRANTS SHOULD NOT DELIVER THEIR
CERTIFICATES UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS, AND SHOULD NOT RETURN
CERTIFICATES WITH THE ENCLOSED FORM OF PROXY. Upon surrender of certificates
representing shares of First Frederick common stock, options and warrants, as
the case may be, the Exchange Agent will issue to such holder one or more
certificates representing the number of whole shares of FCNB common stock into
which such holder's shares, options and/or warrants shall have been converted,
together with a check representing payment, without interest, of cash in lieu of
any fractional share of FCNB common stock to which such holder may be entitled,
and, if appropriate, a check representing payment, without interest, of any
dividend or other cash payment or distribution on such holder's shares of FCNB
common stock which may have been withheld as a result of such holder's failure
to earlier surrender his or her First Frederick certificates for redemption.
If any holder of First Frederick common stock, options or warrants
shall not have surrendered his or her certificates for exchange within two years
of the effectiveness of the merger, the shares to which such securityholder
would be entitled may, at the option of FCNB, be sold and the proceeds of such
sale, together with any cash in lieu of fractional shares and previously accrued
dividends, held in a non-interest bearing account for such holder's benefit. In
such event, such holder's only right shall be to collect, without interest, and
subject to applicable laws of escheat, such net proceeds, cash and accumulated
dividends, upon surrender of his or her First Frederick certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
FCNB and First Frederick have received an opinion from Kevin P.
Kennedy, Esquire, special tax counsel to FCNB in respect of the merger, as to
certain federal income tax consequences of the merger. The opinion provides that
the merger of First Frederick into FCNB pursuant to the merger agreement will
qualify as a reorganization under Section 368(a)(1)(A) of the Code. The
following is a description of the expected federal income tax consequences of
the merger to FCNB, First Frederick and the shareholders of First Frederick.
No gain or loss will be recognized by First Frederick upon consummation
of the merger.
No gain or loss will be recognized by FCNB upon the receipt of First
Frederick's assets in exchange for FCNB common stock, cash and the assumption of
First Frederick's liabilities. The federal income tax basis of the assets of
First Frederick in the hands of FCNB will be the same as the tax basis of such
assets in the hands of First
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<PAGE>
Frederick immediately prior to the effective time of the merger. The holding
period of the assets of First Frederick transferred to FCNB will include the
period during which such assets were held by First Frederick prior to the
effective time of the merger.
No gain or loss will be recognized by the shareholders of First
Frederick on the receipt of shares of FCNB common stock pursuant to the merger.
The federal income tax basis of the shares of FCNB common stock received by a
shareholder of First Frederick will be the same as the basis of the First
Frederick shares surrendered in exchange therefor. The holding period of the
FCNB common stock received by a shareholder of First Frederick will be the same
as the holding period of the First Frederick shares surrendered in exchange
therefor provided the stock was held by the shareholder as a capital asset.
Cash received by shareholders of First Frederick in lieu of fractional
shares of FCNB common stock will be treated as received by such shareholders as
distributions in redemption of such shares, subject to the conditions and
limitations of Section 302 of the Code
Shareholders of First Frederick who receive solely cash for their
shares will be treated as having received such cash in redemption of such shares
subject to the limitations and conditions of Section 302 of the Code.
The opinion of Mr. Kennedy is not binding on the IRS and the IRS could
disagree with the conclusions reached therein. In the event of such
disagreement, there is no assurance that the IRS would not prevail in a judicial
or administrative proceeding.
As a result of the complexity of the tax laws and the impact of each
shareholder's particular circumstances upon the tax consequences of the merger,
the information set forth above regarding the federal income tax consequences of
the merger is not intended to be individualized tax or legal advice to the
shareholders of First Frederick. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN
TAX OR FINANCIAL COUNSEL AS TO THE SPECIFIC FEDERAL, STATE, AND LOCAL TAX
CONSEQUENCES OF THE MERGER, IF ANY, TO SUCH SHAREHOLDER.
Holders of options and warrants to purchase First Frederick common
stock who will have their options and warrants cancelled in exchange for shares
of FCNB common stock may have special tax consequences. The tax consequences to
the holders of such options and warrants will depend upon a number of factors,
which vary from holder to holder. The tax consequences could include the
recognition of personal service wage income. Personal service wage income is
generally subject to taxation under the Federal Insurance Contributions Act
("FICA"), which includes both social security and medicare taxes, in addition to
federal income taxation. HOLDERS OF OPTIONS AND WARRANTS TO PURCHASE FIRST
FREDERICK COMMON STOCK WHO RECEIVE FCNB COMMON STOCK IN CANCELLATION OF THEIR
OPTIONS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE RECEIPT OF FCNB COMMON STOCK.
ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a pooling of
interests under generally accepted accounting principles. The obligation of FCNB
to consummate the merger is conditioned upon the receipt by FCNB of an opinion
of its independent accountants or FCNB otherwise satisfying itself that the
merger can be accounted for as a pooling of interests, under generally accepted
accounting principles, if consummated in accordance with the merger agreement.
Under the pooling of interests method of accounting, the historical basis of the
assets and liabilities of FCNB and First Frederick will be combined at the
closing and carried forward at their previously recorded amounts. Income and
other financial statements of FCNB issued after consummation of the merger will
be restated retroactively to reflect the consolidated operations of FCNB and
First Frederick as if the merger had taken place prior to the periods covered by
such financial statements.
In order for the merger to qualify for pooling of interests accounting
treatment, substantially all of the outstanding common stock of First Frederick
must be exchanged for FCNB common stock. In the event that any of the conditions
to the pooling of interests method of accounting treatment are not satisfied,
the merger would not qualify for the pooling of interests method of accounting,
and a condition to the consummation of the merger would not be fulfilled. See
"The Merger -- Conditions to the Merger."
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Under generally accepted accounting principles, the pooling of
interests method records neither the acquiring of assets nor the obtaining of
capital. Therefore, all costs incurred to effect a combination accounted for as
a pooling of interests are expenses of the combined enterprise rather than
additions to assets or reductions to shareholders' equity. Accordingly, the
costs incurred in connection with the merger will be charged to expense and
deducted in determining the results of operations of the combined entity.
Expenses of a pooling of interests typically include, but are not
limited to, registration fees and expenses, proxy solicitation costs, legal and
accounting fees, salaries and other expenses related to services of employees,
and costs of combining operations of the previously separate companies. In
connection with the merger, additional accounting adjustments and accruals will
be required to recognize certain specific one-time costs associated with the
merger. These adjustments and accruals will cause significant reductions to the
combined entity's results of operations for the initial period following
consummation of the merger.
First Frederick has an employment agreement with its President, and
FCNB has entered into an agreement regarding the termination of that agreement.
See "The Merger -- Certain Related Agreements and Interests of Certain Persons."
This employment agreement provides for a change in control payment upon the
change in control of First Frederick, which will occur upon the effectiveness of
the merger, as well as certain incentive bonus payments. This liability will be
paid at the closing in accordance with the employment termination agreement, and
will be recognized through a charge to "salaries and employee benefits" of
approximately $290,000. The after tax effect of recognizing this liability will
reduce the combined entity's results of operations by approximately $175,000 in
the initial period after closing. FCNB will recognize approximately $2.8 million
of one-time merger related charges in the first period following consummation of
the merger. These charges relate to expenses incurred in connection with the
merger, including accounting and legal expenses, lease termination costs,
charges required to align the accounting policies of FCNB and First Frederick
relating to the reserve for loan losses, and data processing conversion and
termination costs, and will result in a reduction of FCNB's earnings in the
initial period after closing of approximately $1.7 million on an after tax
basis.
CERTAIN RELATED AGREEMENTS AND INTERESTS OF CERTAIN PERSONS
Support Agreement. As a condition to the obligation of FCNB to
consummate the merger each of the directors of First Frederick has entered into
an agreement with respect to the voting of shares of First Frederick common
stock which they own or control in their individual capacities (the "Support
Agreement"). Pursuant to the Support Agreement, the directors and executive
officers of First Frederick have agreed that they will vote an aggregate of
413,270 shares of First Frederick common stock which they possess the power to
vote or direct the voting of, or approximately 27.09% of the total number of
shares of First Frederick common stock outstanding, in favor of the merger, and
against any other merger, consolidation, share exchange, business combination or
other extraordinary transaction involving First Frederick. See "The Merger --
Termination." See "The First Frederick Shareholder Meeting -- Purpose of the
First Frederick Shareholder Meeting and Vote Required."
Management and Operations of FCNB Following the Merger. Following the
effectiveness of the merger, the officers and directors of FCNB and FCNB Bank as
of the effectiveness of the merger will continue to serve as officers and
directors of FCNB and FCNB Bank. It is anticipated that most of the employees of
First Frederick will become employees of FCNB Bank. FCNB has agreed that all
employees of First Frederick who continue as employees of FCNB will be provided
with benefits which, on the whole are substantially similar to those provided by
FCNB to its similarly situated employees.
Employment Termination and Consulting Agreements. FCNB and Jacob H.
Goldstein, President of First Frederick, have entered into an agreement
regarding the termination of Mr. Goldstein's employment contract with First
Frederick and the payment of the amounts to which he would be entitled
thereunder. FCNB and Mr. Goldstein have agreed that FCNB shall pay, or cause
FCNB Bank to pay, Mr. Goldstein in a lump sum at the effective time of the
merger, an aggregate of $290,000 in lieu of bonus and change in control payments
to which he would otherwise have been entitled under his employment contract
with First Frederick. FCNB and Mr. Goldstein have also entered into a consulting
agreement under which Mr. Goldstein would serve as a management consultant to
FCNB and FCNB Bank, assisting it in maintaining the business and employment
relationships previously developed by First Frederick and First Bank, and on
such other matters as they may agree upon. Mr. Goldstein will be entitled to
compensation at a rate of
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$52,000 per year during the term of the consulting agreement. The consulting
agreement has a term of two years from the effective date of the merger.
Non-Competition Agreements. As a condition of the obligation of FCNB to
consummate the merger, each director of First Frederick has entered into an
agreement restricting such director's ability to engage in activities in
competition with FCNB and FCNB Bank from the effective time of the merger until
June 30, 2002 (the "Non-Compete").
The Non-Compete provides that from and after the effective time of the
merger until June 30, 2002 (the "Covenant Period"), subject to limited
exceptions for certain existing and advisory relationships, the director shall
not, directly or indirectly, engage or participate in the ownership, management,
operation, control or financing of, or otherwise be connected with or have any
interest in, whether as organizer, director, advisory director, officer,
employee, consultant, partner, contractor, stockholder (other than as a holder
of less than 2% of the capital stock of a financial institution reporting under
the Securities Exchange Act of 1934), or otherwise, of any financial institution
competitive with FCNB or FCNB Bank which has a branch or loan production office
(or in the case of financial institutions other than banking (including thrift
institutions, an office) in Frederick County, including but not limited to any
entity engaged in, or which controls any entity engaged in, retail banking
services, commercial banking services, deposit production, loan production or
commercial lending services and mortgage banking services. The Non-Compete also
contains provisions regarding the use and disclosure of confidential or other
non-public information of FCNB and First Frederick, the solicitation of
customers of First Frederick and the solicitation and hiring of employees of
First Frederick during the Covenant Period.
Options and Warrants. In connection with the 1988 organization of First
Bank, certain of the current directors of First Frederick received warrants to
purchase shares of First Bank common stock, which were converted into warrants
to purchase First Frederick common stock in connection with the holding company
formation. The warrants, which expire on December 7, 2008, are presently
exercisable at an exercise price of $4.54 per share. Commencing in 1994, certain
directors received options to purchase shares of First Frederick common stock,
at exercise prices ranging from $4.01 to $8.34 per share. Upon consummation of
the merger, and subject to the agreement of each director involved, the
following directors will receive the number of shares of FCNB common stock set
forth opposite his name upon conversion of such director's options and/or
warrants: Mr. Barrick - 11,861 shares; Mr. Goldstein - 41,201 shares; Mr.
Buterbaugh - 9,259 shares; Mr. Dredden - 5,355 shares; Mr. Fitzgerald - 22,085
shares; Mr. Jenkins - 61,100 shares; Mr. Kline - 19,230 shares; Mr. McClellan -
11,206 shares; Mr. Weinberg - 31,636 shares; Mr. Windsor - 11,625 shares; Mr.
Rauh - 1,107 shares; Mr. Vona - 1,930 shares; and Mr. Kallstrom - 524 shares. In
addition, Mr. Joseph Vona, the father of current director Joseph H. Vona, owns
warrants to purchase shares of First Frederick common stock which, subject to
his agreement, will be converted into 19,840 shares of FCNB common stock.
Indemnification of Directors. FCNB has acknowledged and agreed that all
rights of indemnification, and all limitations on liability, which were
applicable to First Frederick's directors, officers and employees under its
Articles of Incorporation, Bylaws or other governing documents, continue in full
force and effect with respect to matters arising prior to the effective time,
and that FCNB will honor such obligations.
RESTRICTIONS ON RESALE OF FCNB COMMON STOCK BY CONTROLLING PERSONS
The FCNB common stock issued in connection with the merger will be
freely transferable under the Securities Act of 1933 as amended (the "Securities
Act"), except for shares issued to any First Frederick shareholders who may be
deemed to be affiliates of First Frederick under Rule 145 promulgated pursuant
to the Securities Act. This proxy statement/prospectus is not to be used by
affiliates of First Frederick or other persons who may be deemed to be
underwriters under Rule 145(c) for resale of shares received in connection with
the merger.
DISSENTERS' RIGHTS
Any shareholder of First Frederick who does not vote in favor of the
merger and the transactions contemplated by the merger agreement and who has
given prior written notice to First Frederick of such shareholder's objection to
the proposed transaction and who otherwise complies with the procedures set
forth in Title 3, Subtitle 2 of the Maryland General Corporation Law (the
"MGCL"), shall be entitled to receive payment in cash of the fair value of
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<PAGE>
such shareholder's shares of First Frederick common stock. A copy of Title 3,
Subtitle 2 of the MGCL is attached hereto as Exhibit B.
Shareholders of FCNB are not entitled to demand the payment in cash of
the fair value of their shares of FCNB common stock.
A First Frederick shareholder wishing to demand payment of the fair
value of any part of all of his or her shares of First Frederick common stock
must submit a written notice to the Secretary of First Frederick at or prior to
the meeting, stating that such shareholder objects to the proposed merger. The
shareholder must then not vote those shares in favor of the merger. Merely
voting against the merger or not voting in favor of the merger will not
constitute notice of objection or dissent and will not entitle a shareholder to
payment in cash of the value of his or her shares. Promptly following the
effectiveness of the merger, FCNB, as the successor to First Frederick, will
notify in writing each shareholder of First Frederick who filed a notice of
objection to the merger, of the date on which the Articles of Merger were
accepted for record. Within twenty (20) days of the date on which the Articles
of Merger were accepted for record, an objecting shareholder must make a written
demand for payment of the fair value of his or her stock, stating the number and
class of shares for which payment is demanded. The notice of objection should be
sent to First Frederick at 22 West Patrick Street, Frederick, Maryland 21701,
Attention: Jacob H. Goldstein. The demand for payment should be sent to FCNB, as
the successor to First Frederick, at 7200 FCNB Court, Frederick, Maryland,
21703, Attention: Mark A. Severson, Senior Vice President and Treasurer.
FCNB's notice of the date on which the Articles of Merger were accepted
may contain an offer of payment and certain financial disclosures. If an
objecting shareholder who has followed all of the procedural steps required to
demand payment of fair value has not received payment for his or her shares, he
or she may, or FCNB may, within fifty (50) days of the acceptance of the
Articles of Merger, petition the court of equity in Frederick County for
appraisal of the fair value of his or her shares of First Frederick common stock
as of the date of the First Frederick shareholder meeting, without including any
appreciation or depreciation resulting directly or indirectly from the merger or
its proposal. Any shareholder who files a notice of objection, but fails to file
a written demand for the payment of fair value in a timely manner will be bound
by the shareholder vote and will not be entitled to receive payment in cash as a
holder of dissenting shares. A shareholder who demands payment for his or her
stock as a dissenting shareholder has no right to receive any dividends or other
distributions on such shares (or the shares of FCNB common stock into which such
dissenting shares would be converted), after close of business on the date of
the First Frederick shareholder meeting at which the merger is approved, and has
no other rights, including voting rights, with respect to such shares, except
the payment of fair value. The rights of a shareholder who demands payment will
be restored if the demand for payment is withdrawn, a petition of appraisal is
not filed within the time required, a court determines that the shareholder is
not entitled to relief, or the merger is abandoned or rescinded.
If the court finds that the objecting shareholder is entitled to an
appraisal of his or her stock, the court shall appoint three disinterested
appraisers to determine the fair value of the stock. Within sixty (60) days
after appointment (or such longer period as the court may direct), the
appraisers shall file with the court and mail to each dissenting shareholder
their report stating their conclusion as to the fair value of the stock. Within
fifteen (15) days after the filing of the report, any party may object to the
report and request a rehearing. The court, upon motion of any party, will enter
an order either confirming, modifying or rejecting the report and, if confirmed
or modified, enter judgment directing the time within which payment must be
made. If the report is rejected, the court may determine the fair value or remit
the proceeding to the same or other appraisers. Any judgment entered pursuant to
a court proceeding will include interest from the date of the shareholders' vote
at the meeting, unless the court finds that the shareholder's refusal to accept
a written offer to purchase the shares was arbitrary and vexatious or not in
good faith.
The expenses of the appraisal proceedings, not including fees and
expenses of counsel, and not including fees or expenses of experts if FCNB made
an offer of payment for the dissenting shareholder's stock or if the value of
the stock as determined in the appraisal proceeding materially exceeds the
amount offered by FCNB, will be the responsibility of FCNB, except that all or
any part of such expenses may be assessed against any or all of the dissenting
shareholders to whom an offer to pay for such shareholder's shares has been
made, if the court finds the failure to accept such offer was arbitrary,
vexatious or not in good faith.
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<PAGE>
FCNB CORP
Financial and other information relating to FCNB is set forth in FCNB's
Annual Report to Shareholders for the year ended December 31, 1998 and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, incorporated
by reference herein. Additional financial and other information relating to
FCNB, including information relating to FCNB's directors and executive officers,
is included in FCNB's Annual Report on Form 10-K, and FCNB's proxy statement
relating to its Annual Meeting of Shareholders held on April 20, 1999, copies of
which may be obtained without cost from FCNB. See "Additional Information About
FCNB Corp."
HISTORY AND BUSINESS
FCNB was organized in 1986 to serve as the holding company for FCNB
Bank, its principal operating subsidiary. FCNB Bank, which was originally
chartered in 1818, was converted from a national bank to a Maryland commercial
bank in 1993, and is engaged in a general commercial and consumer banking
business, serving individuals and businesses in Frederick, Anne Arundel,
Baltimore, Carroll, Howard, Montgomery and Prince George's counties in Maryland,
the District of Columbia and Fairfax County, VA. FCNB Bank is the fifth largest
commercial banking institution headquartered in Maryland. At March 31, 1999,
FCNB had assets of approximately $1.29 billion, total deposits of approximately
$837.58 million, and total shareholders' equity of approximately $89.72 million.
The principal executive office of FCNB is located at 7200 FCNB Court, Frederick,
Maryland 21703, and its telephone number is (301) 662-2191.
Over the past five years, FCNB has achieved significant growth in
assets. From 1994 to 1998, FCNB's assets grew at a 14.3 % compound annual growth
rate. FCNB has achieved its growth both internally and through acquisition. FCNB
has completed four whole bank acquisitions since 1995, consummating the
acquisition of Elkridge Bank (March 1995), Laurel Federal Savings Bank (January
1996), Odenton Federal Savings and Loan Association (April 1996) and Capital
Bank (November 1998), as well as a number of branch transactions. In December
1998, FCNB also completed the acquisition of Frederick Underwriters, Inc. and
its affiliated companies, a general lines insurance agency.
FCNB has also had a history of earnings growth. Net income (before
extraordinary charges and merger related expenses) grew at a compound annual
growth rate of 7.6% from 1994 to 1998. For the five year period from January 1,
1994 to December 31, 1998, FCNB's average annual return on average equity
(before merger-related expenses) was 12.56%.
FCNB routinely explores opportunities for additional growth and
expansion of its core banking business and related activities, including the
acquisition of companies engaged in banking or other related activities, and
internally generated growth. There can be no assurance, however, that FCNB will
be able to grow, or if it does, that any such growth or expansion will result in
an increase in FCNB's earnings, dividends, book value or market value of its
securities.
DESCRIPTION OF FCNB CAPITAL STOCK
FCNB is authorized to issue an aggregate of twenty-one million
(21,000,000) shares of capital stock, of which twenty million (20,000,000) is
common stock, par value $1.00 per share, and one million (1,000,000) is
undesignated preferred stock. As of the record date for the FCNB meeting there
were 10,074,273 shares of FCNB common stock outstanding, held of record by
approximately 2,973 shareholders, and options to purchase 294,139 shares of FCNB
common stock were issued and outstanding. No shares of preferred stock were
outstanding as of that date. The FCNB Board of Directors has proposed for
approval at the FCNB meeting an amendment to FCNB's Articles of Incorporation
which would increase the number of authorized shares of FCNB common stock to
fifty million (50,000,000).
FCNB Common Stock. Each share of FCNB common stock is entitled to one
vote on all matters to be submitted to a vote of shareholders, and are not
permitted to cumulate votes in the election of directors. The holders of FCNB
common stock are not entitled to any preemptive or preferential right to acquire
any shares of any class of capital stock or other securities of FCNB, except as
the FCNB Board may expressly provide in connection with any offering of capital
stock or other securities. Holders of FCNB common stock are entitled to receive
dividends as and when declared by the FCNB Board.
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FCNB maintains a Dividend Reinvestment and Stock Purchase Plan (the
"DRI Plan") providing for the purchase of additional shares of FCNB common stock
by reinvestment of cash dividends paid on outstanding shares of FCNB common
stock and/or by optional direct cash payments by shareholders. Shares purchased
under the DRI Plan with reinvested cash dividends and optional cash payments can
be acquired at 97% of current market prices. No commissions or other fees are
charged. Optional cash payments pursuant to the DRI Plan are limited to $2,500
for any shareholder in each calendar quarter. The DRI Plan allows FCNB, at its
election, to use shares purchased in the open market, or authorized but unissued
shares, to satisfy demand under the plan.
Upon liquidation, dissolution or winding up of FCNB, the holders of
FCNB common stock would be entitled to ratably receive all of the assets of FCNB
available for distribution after payment of all debts and liabilities of FCNB,
subject to the rights, if any, of the holders of any class of preferred stock
which may be issued with a priority in liquidation or dissolution over the
holders of FCNB common stock.
Preferred Stock. The FCNB Board may, from time to time, by action of a
majority of the Board of Directors, issue shares of the authorized, undesignated
preferred stock, in one or more classes or series. In connection with any such
issuance, the Board may by resolution determine the designation, voting rights,
preferences as to dividends, in liquidation or otherwise, participation,
redemption, sinking fund, conversion, dividend or other special rights or
powers, and the limitations, qualifications and restrictions of such shares of
preferred stock. As of the date hereof, no shares of preferred stock are
outstanding.
MARKET FOR FCNB COMMON STOCK AND DIVIDENDS
Market for Common Stock. FCNB common stock is listed for quotation on
The Nasdaq National Market under the symbol "FCNB." Eight brokerage firms,
Ferris, Baker, Watts & Co., Legg Mason Wood Walker, Inc., Ryan, Beck & Co.,
Wheat First Securities, Inc. Sandler O'Neill & Partners, L.P., Janney Montgomery
Scott, Inc., F.J. Morrisey & Co., Inc., and Friedman, Billings, Ramsey &
Company, Inc., currently offer to make a market in FCNB common stock on a
regular basis.
Dividends. Holders of FCNB common stock are entitled to receive
dividends as and when declared by the FCNB Board of Directors. Historically,
FCNB has paid quarterly cash dividends on or about January 31, April 30, July
31, and October 31 of each year. Funds for the payment of dividends will, for
the foreseeable future, be obtained primarily from dividends paid to FCNB by
FCNB Bank, which dividends are subject to statutory limitations.
In addition, FCNB and its banking subsidiary are subject to capital
ratio requirements imposed by the Federal Reserve. The effect of the payment of
dividends on FCNB's or its subsidiary's capital ratios may be a factor in the
determination of the FCNB Board, or the ability of FCNB, to pay dividends. To
the extent that such ratios are inadequate for regulatory purposes or would be
if dividends were paid by its banking subsidiary to FCNB, or by FCNB to its
shareholders, FCNB's banking subsidiary or FCNB, as applicable, would be
precluded from paying dividends. Although the management of FCNB believes that
sufficient funds for the payment of dividends will be available, there can be no
assurance that funds for the payment of dividends will continue to be available
in sufficient amounts to pay dividends in accordance with FCNB's past practice,
or even if available, that the FCNB Board of Directors will elect to expend
resources in the payment of dividends, as opposed to retaining earnings to fund
growth or expansion, or for other corporate purposes.
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Set forth below are the high and low closing prices for FCNB common
stock for each quarter since January 1, 1997, as reported by The Nasdaq National
Market, as well as the amount of cash dividends declared in each quarter.
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends Declared
------------- ---- --- ------------------
<S> <C> <C> <C>
March 31, 1999 $22.50 $18.88 $0.155
June 30, 1999(1) $20.50 $18.50 $0.160
March 31, 1998 $24.38 $20.81 $0.101
June 30, 1998 $24.94 $24.44 $0.106
September 30, 1998 $26.81 $23.88 $0.112
December 31, 1998 $24.50 $23.00 $0.117
March 31, 1997 $15.34 $13.64 $0.081
June 30, 1997 $15.00 $13.64 $0.081
September 30, 1997 $23.87 $13.98 $0.086
December 31, 1997 $23.69 $20.80 $0.092
</TABLE>
(1) Through June 15, 1999.
COMPARISON OF SHAREHOLDER RIGHTS AND CERTAIN PROVISIONS OF
THE ARTICLES OF INCORPORATION OF FCNB AND FIRST FREDERICK
Following effectiveness of the merger of First Frederick into FCNB, the
former holders of First Frederick common stock will become holders of FCNB
common stock, and the rights of such holders will be determined by reference to
the Maryland General Corporation Law (the "MGCL") as it applies to large, public
companies, and the Restated Articles of Incorporation ("Articles") and Bylaws of
FCNB, rather than the Articles of Incorporation ("Articles") and Bylaws of First
Frederick.
Authorized Shares. The Articles of FCNB authorize the FCNB Board of
Directors to issue, without further authorization by shareholders, up to twenty
million (20,000,000) shares of FCNB common stock, and one million (1,000,000)
shares of preferred stock having such rights as the Board in its discretion may
determine. At the FCNB meeting, the FCNB shareholders will consider and vote on
an amendment to FCNB's Articles which will increase the number of authorized
shares of common stock to fifty million (50,000,000). See "Description of FCNB
Capital Stock" and "Amendment to the Articles of Incorporation of FCNB." The
existence of a class of authorized, undesignated preferred stock could have the
effect of discouraging or rendering more difficult an attempted takeover of
FCNB, or, alternatively, of facilitating a negotiated acquisition. The
availability of additional shares of capital stock for issuance could have the
effect of diluting the ownership interest of holders of FCNB common stock. The
Articles of First Frederick authorize the issuance of five million (5,000,000)
shares of capital stock, two million (2,000,000) of which are designated as
common stock and three million (3,000,000) of which are undesignated and may be
designated with such rights as the First Frederick Board of Directors may
determine.
Voting Rights. The holders of FCNB common stock are entitled to one
vote per share on all matters submitted for a vote of shareholders, and are not
permitted to cumulate votes in the election of directors. The undesignated
preferred shares authorized by FCNB's Articles could be issued with such voting
rights as the FCNB Board of Directors determines at the time of issuance. The
holders of First Frederick common stock are entitled to one vote per share on
all matters submitted for the vote of shareholders, and are not permitted to
cumulate votes in the election of directors.
Directors. The Articles and the Bylaws of FCNB call for a Board of
Directors of between three and fifteen directors, with the exact number to be
determined by the resolution of the Board of Directors. Currently there are
fourteen directors, divided into one class of four directors and two classes of
five directors. At each annual meeting, one class is elected for a three year
term and until their successors shall have been duly elected and qualified. In
determining the rights of any class or series of preferred stock which may in
the future be issued, the Board of Directors
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<PAGE>
of FCNB may provide that any such class or series is entitled to elect one or
more directors separately from the holders of other classes of capital stock.
The Bylaws of First Frederick call for the size of the Board of Directors to be
determined by resolution of the Board of Directors. Currently, there are
fourteen directors, divided into three classes. At each annual meeting, one
class is elected for a three year term, and until their successors are elected
and qualified.
The Articles of FCNB provide that directors may be removed at any time,
but only for cause and upon the vote of the holders of eighty percent (80%) or
more of the total number of votes entitled to be cast generally in the election
of directors. The provision regarding the removal of directors may be amended
only upon the vote of holders of eighty percent (80%) of all votes entitled to
be cast in the election of directors. The Articles of First Frederick provide
that directors may be removed only for cause and upon the vote of the holders of
eighty percent (80%) of the votes entitled to be cast in the election of
directors.
Special Meetings. Special meetings of the shareholders of FCNB may be
called by the Chairman of the Board, President or a majority of the Board of
Directors, or by the request of the holders of at least twenty five percent
(25%) of the votes entitled to be cast at the meeting. FCNB's Bylaws provide
that if any matter to be acted upon at the meeting is substantially the same as
a matter voted upon at any special meeting of shareholders held during the
preceding twelve months, the holders of at least fifty percent (50%) of the
votes entitled to be cast at the meeting must request the meeting with respect
to such matter. Additionally, shareholders of FCNB requesting a special meeting
must pay the reasonably estimated costs of preparing and mailing a notice of
such meeting prior to issuance of a notice for the meeting. Special meetings of
the shareholders of First Frederick may be called for any legitimate purpose by
the Board of Directors or the President, or upon the request of shareholders
owning in the aggregate at least twenty five percent (25%) of the votes entitled
to be cast at the meeting. First Frederick's Bylaws provide that if any matter
to be acted upon at the meeting is substantially the same as a matter voted upon
at any special meeting of shareholders held during the preceding twelve months,
the holders of at least fifty percent (50%) of the votes entitled to be cast at
the meeting must request the meeting with respect to such matter. The conduct of
business at special meetings of both FCNB and First Frederick is limited to the
matters set forth in the notice.
Amendment of Articles/Bylaws. Except where applicable law or the
Articles of FCNB provide otherwise, the Articles of FCNB may be amended by the
affirmative vote of two-thirds of the votes entitled to be cast thereon. The
provision of the FCNB Articles relating to removal of directors may be amended
only upon the vote of the holders of eighty percent (80%) of the votes entitled
to be cast in the election of directors, voting as a single class.
Except to the extent a greater vote is required by law or the Articles
of FCNB, the Bylaws of FCNB may generally be amended by the majority vote of the
shareholders or the Board of directors. Except to the extent that a greater vote
is required by law or the Articles of First Frederick, First Frederick's Bylaws
generally provide that the Bylaws may be amended by the vote of a majority of
the Board of Directors or by the vote of a majority of the votes entitled to be
cast on the amendment. Any amendment to the First Frederick Bylaw provisions
relating to (i) the election of the Board of Directors (including the
classification of the Board of directors); (ii) the number and term of
directors; (iii) Board action by unanimous written consent or (iv) requirements
relating to the amendment of the Bylaws, may be adopted only by the
authorization of not less than seventy-five percent (75%) of the aggregate
number of the votes entitled to be cast by shareholders (voting as a single
class), or by the Board of Directors, as applicable.
Consideration of Business Combinations. The Articles of FCNB provide
that where the Board of Directors evaluates any actual or proposed transaction
which would or may involve a change in control of FCNB, the Board of Directors
shall, in connection with the exercise of its business judgement in determining
what is in the best interests of FCNB and its shareholders and in making any
recommendation to its shareholders, give due consideration to all relevant
factors, including, but not limited to the economic effect, both immediate and
long term, upon FCNB's shareholders, if any, not to participate in the
transaction; the social and economic effect on the employees, depositors and
customers of, and others dealing with, FCNB and its subsidiaries and on the
communities in which FCNB and its subsidiaries operate or are located; whether
the proposal is acceptable based on the historical and current operating results
or financial condition of FCNB; whether a more favorable price could be obtained
for the FCNB common stock or other securities in the future; the reputation and
business practices of the offeror and its management and affiliates as they
would affect the employees of FCNB and its subsidiaries; the future value of the
stock or other securities of FCNB; and any antitrust or other legal and
regulatory issues that are raised by the proposal. If the Board of Directors
determines that any such transaction should be rejected, it may take any lawful
action to defeat such transaction. The Articles of First Frederick contains a
comparable provision.
29
<PAGE>
Advance Written Notice of Shareholder Proposals and Nominations. The
Articles of FCNB provide that any shareholder entitled to vote at a meeting of
shareholders who desires to nominate any person for election as director of FCNB
or who desires to bring up any new business at the meeting, but who does not
seek to have such nomination or proposal included in the proxy materials
prepared by FCNB, give at least 30 days, but not more than 60 days, written
notice to FCNB of such nomination or business. Where less than 31 days notice of
the meeting was given to shareholders by FCNB, notice must be given by the
shareholder within 10 days of the date on which the meeting was announced to
shareholders. If notice by the shareholder is not given in proper form and in a
timely manner, the matter will be laid over until the next meeting of
shareholders held more than 30 days following the meeting at which the
nomination or proposal, was made. The Bylaws of First Frederick require at least
60 days but not more than 90 days notice of any shareholder nomination for
election as a director, provided that if less than 70 days notice or prior
public disclosure of the meeting at which the election of directors will be held
is given, notice must be given by the shareholder within ten days of the date on
which the meeting was announced to the shareholders or such public disclosure
was made. The Bylaws of First Frederick contain comparable provisions regarding
nominations to be brought up at a meeting of shareholders.
Restrictions on Business Combinations with Interested Shareholders.
Section 3-602 of the MGCL imposes conditions and restrictions on certain
"business combinations" (including, among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance of equity securities) between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's stock (an "interested
shareholder"). Unless approved in advance by the board of directors, or
otherwise exempted by the statute, such a business combination is prohibited for
a period of five years after the most recent date on which the interested
shareholder became an interested shareholder. After such five-year period, a
business combination with an interested shareholder must be: (a) recommended by
the corporation's board of directors, and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the interested shareholder with whom the business combination is to be effected,
unless, among other things, the corporation's common shareholders receive a
"fair price" (as defined by the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the interested
shareholder for his or her shares. Section 3-602 is not applicable to the merger
with FCNB. The Articles and Bylaws of First Frederick do not include any
provisions imposing any special approval requirements for a transaction with a
major shareholder.
Control Share Acquisition Statute. Under the MGCL's control share
acquisition law, voting rights of shares of stock of a Maryland corporation
acquired by an acquiring person at ownership levels of 20%, 33-1/3% and 50% of
the outstanding shares are denied unless conferred by a special shareholder vote
of two-thirds of the outstanding shares held by persons other than the acquiring
person and officers and directors of the corporation or, among other exceptions,
such acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's charter or bylaws permit the acquisition of
such shares prior to the acquiring person's acquisition thereof. Unless a
corporation's charter or bylaws provide otherwise, the statute permits such
corporation to redeem the acquired shares at "fair value" if the voting rights
are not approved or if the acquiring person does not deliver a "control share
acquisition statement" to the corporation on or before the tenth day after the
control share acquisition. The acquiring person may call a shareholder's meeting
to consider authorizing voting rights for control shares subject to certain
disclosure obligations and payment of certain costs. If voting rights are
approved for more than fifty percent of the outstanding stock, objecting
shareholders may have their shares appraised and repurchased by the corporation
for cash. As FCNB's acquisition of First Frederick is pursuant to the merger
agreement between FCNB and First Frederick, the control share acquisition law is
not applicable to the merger. The Articles and Bylaws of First Frederick do not
include any provisions restricting the voting ability of major shareholders.
30
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
BUSINESS OF FIRST FREDERICK
First Frederick is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended that provides banking and non-banking
financial services through its wholly owned subsidiary, First Bank. First Bank
is a state-chartered bank that provides a full range of traditional retail and
commercial banking services primarily to individual consumers and small
businesses in the Frederick and Carroll County, Maryland, through six branch
offices. First Bank was founded in 1989 in Frederick City, and incorporated in
the State of Maryland, as a full-service community bank organization. In 1996,
First Frederick was formed to serve as a holding company for First Bank, at
which time First Bank became a subsidiary of First Frederick.
First Bank offers a full service commercial and consumer banking
business. These services include accepting demand, savings and time accounts;
issuing certificates of deposit; and granting and collecting installment loans,
time and demand loans, commercial loans, real estate loans and lines of credit.
First Bank offers safe deposit boxes, drive-up teller facilities and automatic
teller machines. Additionally, First Bank maintains correspondent banking
relationships and transacts overnight investment activities, on an unsecured
basis, with regional correspondent banks and the Federal Home Loan Bank. In
December 1998, First Bank established 26 Automatic Teller Machines in Maryland
and Virginia under an agreement with a national retailer. This arrangement
provided access to the many consumer customers living and working outside the
primary market area of Frederick County.
The banking business in the area served by First Bank is highly
competitive with respect to both loans and deposits. First Bank competes for
deposits principally with other commercial banks, savings and loan associations
and credit unions. In Frederick County, there are approximately 73 commercial
banking offices, including First Frederick's offices and 12 FCNB branches,
offering services ranging from deposits and real estate loans to full service
banking. As of June 30, 1998, First Bank's share of total deposits in the
Frederick County, Maryland market was approximately 5.15%, and its share of the
Frederick City market was approximately 7.53%.
First Bank operates First Bank Mortgage Corporation ("First Bank
Mortgage"), a wholly-owned mortgage subsidiary formed in February 1998. First
Bank Mortgage provides residential mortgage loans to individuals in Frederick,
Washington, Carroll, and Montgomery Counties, Maryland. First Bank also operates
a commercial leasing division, which began in December 1998 to provide an
alternative to traditional commercial equipment financing for small business
customers. The executive offices of First Frederick, First Bank and First
Mortgage are located at 22 West Patrick Street, Frederick, Maryland, 21701 and
its telephone number is (301) 694-5500.
MARKET FOR FIRST FREDERICK COMMON STOCK AND DIVIDENDS
There is no established public trading market for, and there is only
limited and sporadic trading of, First Frederick common stock. First Frederick
stock is not listed for trading on any registered exchange or quoted on Nasdaq,
although bids for First Frederick common stock are reported in the "pink
sheets." Accordingly, First Frederick cannot accurately determine the sales
price of the shares of its stock.
The following table sets forth the high/ask and low/bid prices for
First Frederick common stock during 1997, 1998 and 1999 through June 15, 1999,
based on inquiries made by First Frederick of market makers in its shares and
other available sources. However, the information contained in the table does
not necessarily represent the actual sales prices or the fair market or
intrinsic value of a share of First Frederick common stock. There is no
assurance that any sales were made at the prices specified, or if so, it is not
known how many shares were sold at such prices.
31
<PAGE>
The prices set forth in the following table have been adjusted to
reflect a three-for-two stock split in the form of a 50% stock dividend paid in
September 1997 and a two-for-one stock split in the form of a 100% stock
dividend paid in October 1998.
<TABLE>
<CAPTION>
Cash dividends paid
Quarter Ended High/Ask Low/Bid per share
- --------------------------- ----------- ---------- ---------------------
<S> <C> <C> <C>
March 31, 1999 $19.75 $14.50 $0.10
June 30, 1999(1) $19.75 $17.75 $0.10
March 31, 1998 $11.81 $10.87 $0.17
June 30, 1998 $12.12 $11.87 $0.17
September 30, 1998 $13.12 $12.50 $0.17
December 31, 1998 $14.00 $13.25 $0.10
March 31, 1997 $7.67 $7.17 $0.10
June 30, 1997 $8.33 $7.50 $0.10
September 30, 1997 $8.45 $6.00 $0.167
December 31, 1997 $10.50 $10.25 $0.17
</TABLE>
(1) Through June 15, 1999.
As of the record date, there were approximately 393 holders of record
of the 1,525,215 outstanding shares of First Frederick Common Stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FIRST
FREDERICK
The following table sets forth certain information as of June 15, 1999
concerning the number and percentage of shares of First Frederick common stock
beneficially owned by its directors, executive officers and by its directors and
all executive officers as a group, as well as information regarding each other
person known to First Frederick to own in excess of 5% of the outstanding First
Frederick common stock. Except as otherwise indicated, all shares are owned
directly, and the named person possesses sole voting and sole investment power
with respect to all such shares. Except as set forth below, First Frederick
knows of no other person or persons, who beneficially own in excess of 5% of the
First Frederick common stock.
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership
Outstanding Percent of including Options Percent of
Name Shares Class(1) and Warrants Class(2)
- ---------------------------------------- ------------------ ---------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Samuel Barrick 35,486(3) 2.33% 50,007 3.25%
Jacob H. Goldstein 6,380(4) 0.42% 61,955 3.92%
Noel L. Buterbaugh 16,206(5) 1.06% 27,562 1.79%
George E. Dredden, Jr. 7,268(6) 0.48% 13,849 0.90%
James E. Fitzgerald 53,660(7) 3.52% 80,701 5.20%
James O. Jenkins 92,769(8) 6.08% 167,519 10.47%
Robert E. Kallstrom 8,104(9) 0.53% 8,837 0.58%
Richard R. Kline 1,416(10) 0.09% 24,962 1.61%
James E. McClellan 22,040(11) 1.45% 35,801 2.33%
William M. O'Neill 8,270(12) 0.54% 20,247 1.32%
Philip Rauh, Sr. 17,039(13) 1.12% 18,464 1.21%
Joseph H. Vona 10,526(14) 0.69% 12,937 0.85%
David S. Weinberg 111,856(15) 7.33% 150,548 9.63%
Robert S. Windsor, Jr. 22,184(16) 1.45% 36,419 2.37%
All directors and executive officers as a
group (16 persons) 414,442(17) 27.17% 726,046 39.53%
</TABLE>
(footnotes appear on the following page)
32
<PAGE>
(footnotes from prior page)
(1) Represents percentage of 1,525,215 shares of First Frederick common stock
outstanding as of June 15, 1999.
(2) Represents percentage of 1,525,215 shares of First Frederick common stock
issued and outstanding as of June 15, 1999, except with respect to
individuals holding options or warrants to purchase First Frederick common
stock, in which case represents the percentage of the sum of (a) the number
of shares issued and outstanding plus (b) the number of shares with respect
to which such person holds options or warrants. With respect to all
directors and executive officers as a group, represents the percentage of
the sum of (a) the number of shares issued and outstanding plus (b) the
number of shares with respect to which all such persons hold options or
warrants.
(3) This figure includes: 17,728 shares owned of record by the Samuel W.
Barrick Trust; and 17,728 shares owned of record by the Joan J. Barrick
Trust. Does not include options and/or warrants to acquire 14,521 shares of
First Frederick common stock.
(4) This figure includes a total of 1,172 shares of First Frederick common
stock owned by Mr. Goldstein's three minor children, over which Mr.
Goldstein does not exercise voting power. Does not include options and/or
warrants to acquire 55,575 shares of First Frederick common stock or 868
shares owned by an investment partnership, of which Mr. Goldstein is a
partner owning a 33 1/3% interest and over which he does not exercise
voting power.
(5) This figure does not include options and/or warrants to acquire 11,356
shares of First Frederick common stock.
(6) This figure includes 6,786 shares of First Frederick common stock owned
jointly by Mr. Dredden and his wife. Does not include options and/or
warrants to acquire 6,581 shares of First Frederick common stock.
(7) This figure includes a total of 10,336 shares of First Frederick common
stock owned jointly by Mr. Fitzgerald and his wife, 1,500 shares owned by
JEF Exempt Trust, of which Mr. Fitzgerald is the trustee, and 41,720 owned
by Fitzgerald Realty Group, Inc. Profit Sharing Plan, of which Mr.
Fitzgerald is the trustee. Does not include options and/or warrants to
acquire 27,041 shares of First Frederick common stock.
(8) This figure includes 11,025 shares of First Frederick common stock owned
jointly by Mr. Jenkins and his wife. Does not include options and/or
warrants to acquire 74,750 shares of First Frederick common stock.
(9) This figure includes 5,930 shares of First Frederick common stock owned
jointly by Mr. Kallstrom and his wife. Does not include options and/or
warrants to acquire 733 shares of First Frederick common stock.
(10) This figure includes 1,344 shares of First Frederick common stock owned
jointly by Mr. Kline and his wife. Does not include options and/or warrants
to acquire 23,546 shares of First Frederick common stock.
(11) This figure includes 21,878 shares of First Frederick common stock owned
jointly by Dr. McClellan and his wife. Does not include options and/or
warrants to acquire 13,761 shares of First Frederick common stock.
(12) This figure does not include options and/or warrants to acquire 11,977
shares of First Frederick common stock.
(13) This figure does not include 13,450 shares of First Frederick common stock
owned by a family partnership of which Mr. Rauh is a partner. Does not
include options to acquire 1,425 shares of First Frederick common stock.
(14) This figure does not include options and/or warrants to acquire 2,411
shares of First Frederick common stock.
(15) This figure includes 111,806 owned of record by the David S. Weinberg
Irrevocable Trust. Does not include options and/or warrants to acquire
38,692 shares of First Frederick common stock.
(16) This figure does not include options and/or warrants to acquire 14,235
shares of First Frederick common stock.
(17) This figure does not include options and/or warrants to acquire 311,604
shares of First Frederick common stock owned by First Frederick directors
and executive officers, including those specified above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion focuses on information about the consolidated
financial condition and results of operations of First Frederick for the years
ended December 31, 1998 and 1997, and for the three month periods ended March
31, 1999 and 1998, which may not be readily apparent from a review of the
financial statements. The discussion should be read in conjunction with the
financial statements and the selected financial data presented elsewhere in this
proxy statement/prospectus. Results of operations for the period ended March 31,
1999 is not necessarily indicative of the results of operations for any other
interim period or for the full year ended December 31, 1999.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
Table 1, "Comparative Statement Analysis," shows average balances of
asset and liability categories, interest income and interest paid, and average
yields and rates for the periods indicated.
RESULTS OF OPERATIONS
For the first three months of 1999, First Frederick reported pre-tax
earnings of $581,000 and net earnings of $369,000, as compared to pre-tax
earnings of $472,000 and net earnings of $300,000 in the first three months of
1998. Return on average assets and return on average equity are key measures of
earnings performance. The return on average assets measures the ability to
utilize assets in generating income. Basic earnings per share were $0.24 for the
three months ended March 31, 1999 and $0.20 per share for the same period in
1998, while diluted earnings per share were $0.21 in the first three months of
1999 and $0.18 in the first three months of 1998. For the first three months of
1999, return on average assets ended at 1.23% as compared to 1.20% for the same
period in 1998. The
33
<PAGE>
return on average shareholders' equity for the three months ended March 31,
1999, was 17.86%, compared to 15.00% for the three months ended March 31, 1998.
Earnings increased in 1998 over 1997, resulting in pre-tax income of
$1.9 million compared to $1.7 million for the prior year and net income of $1.36
million compared to $1.07 million the previous year. First Frederick's return on
average assets was 1.27% in 1998, compared to 1.14% in 1997. Return on average
equity was 16.87% in 1998 and 14.01% in 1997. Basic earnings per share were
$0.90 in 1998, compared to $0.71 in 1997, and diluted earnings per share were
$0.79 and $0.64 in 1998 and 1997, respectively. The improvement in earnings is
primarily attributable to the growth of earning assets combined with control of
operating expenses. Key investments made in human resources and improved
technology for efficiency contributed to a second consecutive year of improved
earnings growth. First Frederick positioned itself to continue the positive
trends in profitable growth during the coming year.
Net income was $1.07 million in 1997, compared to $857,000 in 1996.
Basic earnings per share were $0.71 in 1997 compared to $0.57 for 1996, and
diluted earnings per share were $0.64 and $0.52 for 1997 and 1996, respectively.
Return on average assets was 1.14% in 1997 compared to 1.01% for 1996. Return on
average shareholders' equity was 14.01% at December 31, 1997, as compared to
12.43% at December 31, 1996.
Net Interest Income
- -------------------
Net interest income is generated from lending and investment
activities, and is the most significant component of First Frederick's earnings.
Net interest income is the difference between interest and fees earned on loans
and investments and interest paid on deposits and other sources of funding.
Changes in net interest income between periods is affected primarily by the
volume of interest earning assets and the yield on those assets, and by the
volume of interest bearing deposits and other liabilities and the rates paid on
those deposits and liabilities.
First Frederick's tax-equivalent net interest income, before provision
for credit losses, for the first three months of 1999 totaled $1.46 million,
increasing 25% from the $1.16 million recorded for the same period in 1998.
First Frederick's net interest margin was 5.27% for the first three months of
1999, as compared to 4.96% for the same period in 1998, representing a 6%
increase. The increase in net interest income, at March 31, 1999, as compared to
March 31, 1998, was the result of an increase in the level of earning assets as
well as an improvement in the yields earned on those earning assets.
The rate of interest earned on interest earning assets and the rate
paid on interest earning liabilities, while significantly affected by actions
taken by the Federal Reserve to control economic growth, are influenced by
competitive factors within First Frederick's geographic market. Competitive
pressures, for both loans and the funding sources needed to satisfy loan demand
within First Frederick's market area, caused the net interest margin to narrow
during the first three months of 1998. First Frederick improved its net interest
margin in the first three months of 1999 by concentrating efforts on a new
leasing division, established in late 1998, to help support an increase in
yields on small commercial loans and higher volumes of construction lending
which, typically, are associated with higher mortgage loan yields. First
Frederick continued to pursue operating efficiencies through improved technology
in order to enhance non-interest income for First Frederick and First Bank.
Tax-equivalent net interest income before the provision for credit
losses totaled $5.3 million in 1998, increasing 10.4% from $4.8 million in 1997.
The improved net interest income is primarily the result of an approximate 15%
growth in loans. The net interest margin (taxable-equivalent net interest income
as a percent of average interest earning assets) was 5.25% in 1998, as compared
to 5.35% in 1997. This decrease in net interest margin primarily reflects the
impact of the change in the spread between yields on average interest earning
assets and rates paid on average interest-bearing liabilities realized during
1998. This spread decreased by 1 basis point in 1998. During the year, the rate
paid on average interest bearing liabilities increased 3 basis points while the
yield on average earning assets increased 2 basis points.
The yield on the average investment portfolio fell 9 basis points
during 1998 compared to 1997, as higher yielding investments matured in 1998,
and proceeds were reinvested in lower yielding investments. The yield on the
average loan portfolio remained relatively constant despite heavy competitive
34
<PAGE>
pressures. In addition, First Frederick maintained spreads on average earning
assets at a constant level, in the aggregate despite continuing heavy
competitive pressures. Funding sources needed to meet current loan demand in
1998 resulted in higher rates being paid for average interest-bearing
liabilities, causing the net interest spread to narrow. Management believes that
competitive pressures will continue, and declining spreads will continue.
Therefore, First Frederick has invested in technology to assist in improving
operating efficiencies. In addition, new products and services were introduced
during 1998 with the objective of improving the level of non-interest income.
There can be no assurances, however, that these benefits will be realized.
Net interest income increased $643,000, or 15.75%, in 1997, as compared
to 1996. In 1997, the net interest margin on average total interest earning
assets increased to 5.35% from 5.09% in 1996. Changes in the net interest income
between periods were affected principally by the volume of interest bearing
deposits and other liabilities and the rates paid on these deposits and
liabilities.
Table 1: Comparative Statement Analysis
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Average Interest Average Average Interest Average
Balance Income/Paid(2) Yield/Rate Balance Income/Paid(2) Yield/Rate
------- -------------- ---------- ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing deposits in other
banks $ 2,497 $ 136 5.45 % $ 595 $ 36 6.05 %
Loans held for sale 192 15 7.81 560 46 8.21
Investment securities:
Taxable 14,390 886 6.16 16,695 1,063 6.37
Nontaxable 2,228 169 7.59 1,174 87 7.41
-------- ------------ ------- ------------
Total investment securities 16,618 1,055 6.35 17,869 1,150 6.44
-------- ------------ ------- ------------
Loans(1), net of unearned income 80,885 8,072 9.98 69,906 6,983 9.99
-------- ------------ ------- ------------
Total interest-earning assets 100,192 9,278 9.26 88,930 8,215 9.24
-------- ------------ ------- ------------
Noninterest-earning assets 6,664 4,891
Net effect of unrealized gain
(loss) on
Securities available for sale 10 (64)
------- -------
Total assets $ 106,866 $ 93,757
======== =======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
NOW/SuperNOW accounts $ 13,032 $ 432 3.31 % $ 6,846 $ 156 2.28 %
Savings accounts 12,197 329 2.70 11,404 310 2.72
Money market accounts 11,426 440 3.85 9,662 353 3.65
Certificates of deposit and
other time
Deposits less than $100,000 26,862 1,576 5.87 25,162 1,467 5.83
Certificates of deposit and
other time
Deposits of $100,000 or more 18,083 1,121 6.20 15,072 928 6.16
Securities sold under agreements
to
Repurchase 1,638 64 3.91 1,036 38 3.67
Other short-term borrowings 1,049 56 5.34 3,786 208 5.49
-------- -------
------------ ------------
Total interest-bearing liabilities 84,287 4,018 4.77 72,968 3,460 4.74
------------ ------------
Noninterest-bearing deposits 13,441 12,538
Noninterest-bearing liabilities 1,048 601
--------
-------
Total liabilities 98,776 86,107
-------- -------
Shareholders' equity 8,080 7,714
Accumulated other comprehensive
Income 10 (64)
--------
-------
Total shareholders' equity 8,090 7,650
--------
=======
Total liabilities and
shareholders' equity $ 106,866 $ 93,757
======== =======
Net interest income $ 5,260 $ 4,755
============ ============
Net interest spread 4.49 % 4.50 %
Net interest margin 5.25 % 5.35 %
</TABLE>
- ------------------------------------
(1) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled
$232,000 for 1998 and $114,000 for 1997.
(2) Presented on a taxable-equivalent basis using the statutory federal income
tax rate of 35%.
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
Average Interest Average Average Interest Average
Balance Income/Paid(2) Yield/Rate Balance Income/Paid(2) Yield/Rate
------- -------------- ---------- ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing deposits in
other banks $ 1,713 $ 25 5.92 % $ 1,686 $ 23 5.53 %
Loans held for sale 175 4 9.27 378 9 9.66
Investment securities:
Taxable 12,937 192 6.02 16,086 259 6.53
Nontaxable 3,950 76 7.80 1,192 23 6.62
-------- ------------ ------- ------------
Total investment securities 16,887 268 6.44 17,278 282 6.62
-------- ------------ ------- ------------
Loans(1), net of unearned income 93,776 2,256 9.76 75,395 1,791 9.63
-------- ------------ ------- ------------
Total interest-earning assets 112,551 2,553 9.20 94,737 2,105 9.01
-------- ------------ ------- ------------
Noninterest-earning assets 7,055 4,875
Net effect of unrealized gain
(loss) on
Securities available for sale 26 28
-------- -------
Total assets $ 119,632 $ 99,640
======== =======
Liabilities and Shareholders'
Equity Interest-bearing liabilities:
NOW/SuperNOW accounts $ 16,296 $ 133 3.31 % $ 10,418 $ 87 3.39 %
Savings accounts 13,520 83 2.49 11,987 77 2.61
Money market accounts 12,968 120 3.75 9,718 91 3.80
Certificates of deposit and
other time deposits less
than $100,000 28,899 406 5.70 26,659 383 5.83
Certificates of deposit and
other time deposits of $100,000
or more 19,321 294 6.17 17,667 279 6.40
Securities sold under
agreements to Repurchase 1,637 16 3.96 1,269 11 3.52
Other short-term borrowings 2,730 38 5.65 $ 1,410 $ 18 $ 5.18
-------- ------------ ------- ------------
Total interest-bearing liabilities 95,371 1,090 4.64 $ 79,128 946 4.85
------------ ------------
Noninterest-bearing deposits 14,124 11,794
Noninterest-bearing liabilities 1,875 720
-------- -------
Total liabilities 111,370 91,642
-------- -------
Shareholders' equity 8,236 7,970
Accumulated other comprehensive
Income 26 28
-------- -------
Total shareholders' equity 8,262 7,998
-------- -------
Total liabilities and
shareholders' Equity $ 119,632 $ 99,640
======== =======
Net interest income $ 1,463 $ 1,159
============ ============
Net interest spread 4.56 % 4.16 %
Net interest margin 5.27 % 4.96 %
</TABLE>
- -----------------------------------
(1) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled $65,000
and $27,000 for 1999 and 1998, respectively.
(2) Presented on a taxable-equivalent basis using the statutory federal income
tax rate of 35%.
36
<PAGE>
<TABLE>
<CAPTION>
Rate/Volume Analysis
1998 compared to 1997 1997 compared to 1996
---------------------------------- -----------------------------------
Increase (decrease) due to Increase (decrease) due to
Net Net
Increase Increase
Volume Rate(1) (decrease) Volume Rate(1) (decrease)
--------- --------- ----------- ---------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-earning assets:
Interest-bearing deposits in other
banks $ 115 $ (15) $ 100 $ (83) $ 2 $ (81)
Loans held for sale (30) (1) (31) (37) (1) (38)
Investment securities:
Taxable (147) (30) (177) (9) 137 128
Nontaxable 78 4 82 -- -- --
Loans 1,097 (8) 1,089 1,058 112 1,170
--------- --------- ----------- ---------- --------- -----------
Total interest income 1,113 (50) 1,063 929 250 1,179
--------- --------- ----------- ---------- --------- -----------
Interest Paid Interest-bearing
liabilities:
Savings deposits(2) 227 155 382 23 28 51
Time deposits 284 18 302 413 (13) 400
Securities sold under agreements to
repurchase 22 4 26 18 11 29
Other short-term borrowings (150) (2) (152) 57 (1) 56
--------- --------- ----------- ---------- --------- -----------
Total interest paid 383 175 558 511 25 536
--------- --------- ----------- ---------- --------- -----------
Net interest income $ 730 $ (225) $ 505 $ 418 $ 225 $ 643
- ------------------------------------------ ========= ========= =========== ========== ========= ===========
</TABLE>
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Savings deposits include NOW, savings and money market accounts.
Non-Interest Income
- -------------------
Non-interest income showed no significant increase for the three months
ended March 31, 1999, when compared to the same period in 1998. Non-interest
income was $196,000 for the first three months of 1999, as compared to $190,000
for the first three months of 1998.
Non-interest income (including securities gains) increased by $1.0
million, or 218%, in 1998 over 1997. Other service charge income, representing
origination income generated by First Bank Mortgage Corporation, contributed
$837,000 or 186% to the significant increase in non-interest income during 1998.
This source of income is, and will continue to be, highly influenced by the
general level of interest rates charged on residential mortgage loans. Service
charges on deposit accounts totaled $463,000 and $360,000, in 1998 and 1997,
respectively. Management continued to concentrate on new product offerings and
services to improve the level of non-interest income and ratio of non-interest
income to total revenue. Most fee-based services are less sensitive to interest
rate fluctuations and mitigate the effect of a narrowing net interest spread.
Non-interest income excluding net realized losses, increased by
$72,000, or 16.3%, in 1997, and by $70,000, or 18.9%, in 1996. The increases
were attributed to an improvement in service fees earned on deposit accounts.
At the end of 1998, First Frederick's management introduced 26
automatic teller machines to dispense cash in selected Maryland and Virginia
stores of a national retailer. This operation enables First Frederick to earn
fee income for the use of the machines by the retailer's customers. First
Frederick also began a leasing division, under First Bank, to assist in creating
a new source of fee income and to diversify yields on smaller commercial loans.
Additionally, revenue from service charges on deposit accounts is expected to
increase as the volume of deposits is expanded.
Non-Interest Expenses
- ---------------------
Non-interest expenses increased by 14%, ending at $962,000 for the
first three months of 1999 when compared to $844,000 for the first three months
of 1998. Total salaries and employee benefits increased $28,000 (7.4% over the
first three months of 1998). The increase in salaries and employee benefits
reflects general merit and cost of living adjustments plus additional staffing
to support the creation of the leasing division and First Bank
37
<PAGE>
Mortgage. Additional increases in health care costs also contributed to the
increase in total salaries and employee benefits for the first three months of
1999.
Non-interest expenses increased by $1.2 million, or 37%, in 1998 over
1997. The increase was primarily attributable to higher salaries and employee
benefits expense of $586,000. The increase in salaries and benefits reflects the
additional staffing associated with the First Bank Mortgage and general merit
and cost-of-living adjustments. The average number of employees increased by 10
to 45 during 1998.
Occupancy expenses increased by $127,000 and is attributable to the
first full year of operation of First Bank Mortgage and the new Mt. Airy office,
which opened in late 1997. Equipment expense increased $71,000, and is primarily
associated with technology upgrades to improve efficiency, and replacement of
aged equipment.
Other operating expenses increased $72,000 (27.5%) during the first
three months of 1999 over the same period in 1998. The increase in other
expenses is primarily associated with additional operating expense incurred as a
result of the installation of twenty-six (26) ATMs in a national retail chain,
the replacement of aging equipment and replacement of equipment to meet Year
2000 needs. In addition, $18,000 was attributed to a non-compete agreement for a
former executive of First Frederick. Other operating expenses increased $376,000
in 1998, or 47.7%, compared to the prior period. The increase in other operating
expense was associated, primarily, with higher costs for outsourcing data
processing services, costs associated with the establishment of the mortgage
operation and the introduction of 26 ATMs in the national retailer's stores.
Non-interest expense increased $274,000 in 1997, and $314,000 in 1996.
Increases in salaries and benefits, additional staff and the opening of the
Rosemont and Mt. Airy branch offices all contributed to the increases in
non-interest expenses during 1997 and 1996.
Income Taxes
- ------------
First Frederick's effective tax rates for the first three months of
1999 and 1998 were 36.5% and 36.4%, respectively. First Frederick's income tax
expenses differs from the amount computed at statutory rates primarily due to
tax exempt earnings from certain loans and investment securities. Income taxes
expense ended at $212,000 at March 31, 1999, as compared to $172,000 for March
31, 1998.
Income tax expense declined to $595,000 in 1998, compared to $637,000
in 1997. First Frederick's effective tax rate was 30.3% in 1998, compared to
37.3% in 1997. First Frederick's effective tax rate differs from the amount
computed at statutory rates primarily due to tax-exempt income from certain
loans and investment securities owned. Note 8 to the consolidated financial
statements for the year ended December 31, 1998 reconciles expected income taxes
at statutory rates with income tax expense included in the consolidated
statements of income.
Income tax expense increased to $637,000 in 1997, compared to $465,000
in 1996. The higher level of income tax reflects the increased levels of pre-tax
income experienced in 1997.
Liquidity and Asset Liability Management
- ----------------------------------------
Liquidity represents the ability to support asset growth, meet customer
borrowing needs, fund deposit withdrawals and maintain reserve requirements. It
also involves providing adequate cash and cash equivalent assets, while
sustaining stable growth in net interest income. A regular review and analysis
by management of deposit and loan trends, cash flows of various categories of
loans and monitoring of interest spread relationships is vital to the process.
The conduct of First Frederick's banking business requires that it
maintain adequate liquidity to meet changes in composition and volume of assets
and liabilities due to seasonal, cyclical or other demands. First Frederick's
management evaluates the liquidity position on a daily basis and strives to
maintain a level of liquidity conducive to efficient operations. Attention is
directed primarily to assets or liabilities that mature or can be repriced
within a period of 30-365 days. First Bank attempts to match a portion of its
assets and liabilities to minimize variability in net interest income. This
practice also serves to minimize both liquidity and interest rate risk. Sources
of liquidity include the investment portfolio, cash flows from loan and
investment prepayments and
38
<PAGE>
maturities, short-term borrowings under existing credit facilities, marketing of
core deposit products and the discount window of the Federal Home Loan Bank.
Interest rate sensitivity is an important factor in the management of
the composition and maturity configurations of First Frederick's earning assets
and funding sources. An Asset/Liability Committee manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with First Frederick's liquidity analysis, growth and capital
adequacy goals. First Frederick believes that by selling certain loans rather
than retaining them in its portfolio, it is better able to match the maturities
or repricing of interest sensitive assets to interest sensitive liabilities. It
is the objective of the Asset/Liability Committee to maximize net interest
margins during periods of both volatile and stable interest rates, to attain
earnings growth, and to maintain sufficient liquidity to satisfy depositors'
requirements and meet credit needs of customers.
The following table, "Interest Rate Sensitivity Analysis", summarizes,
as of December 31, 1998, the anticipated maturities or repricing of First
Frederick's interest rate sensitivity gap (interest earning assets less interest
bearing liabilities), and First Frederick's cumulative interest rate sensitivity
gap ratio (cumulative interest rate sensitivity gap divided by total assets). A
negative gap for any time period means that more interest bearing liabilities
will reprice or mature during that time period than interest earning assets.
During periods of rising interest rates, a negative gap position will generally
decrease earnings, and during period of declining interest rates, a negative gap
position will generally increase earnings. The opposite will be true for a
positive gap position. Therefore, a positive gap for any time period means that
more interest earning assets will reprice or mature during that time period than
interest bearing liabilities. During periods of rising interest rates, a
positive gap position will generally increase earnings, and during periods of
declining interest rates, a positive gap position will generally decrease
earnings.
In addition to the gap method of monitoring interest rate sensitivity,
First Frederick employs computer model simulations to measure interest rate
risk. Interest rate risk measures repricing risk, basic risk, yield curve risk
and option risk. The model incorporates cash flow analysis to: (1) measure the
direction of interest rate exposure and the size under various interest rate
scenarios; (2) capture critical information on volumes, maturity dates,
repricing caps, puts and calls; (3) utilize data to focus attention to critical
variables; and (4) reflect changes in prevailing interest rates and liabilities
in different ways. These simulations are prepared on a quarterly basis using an
interest rate shock technique to determine the effects on First Frederick's net
income and the Market Value of Portfolio Equity (MVPE), assuming an immediate
change (increase or decrease) in interest rates. The MVPE simulation is the
process of generating discounted estimated cash flows anticipated under various
scenarios. The MVPE is the estimated economic value of First Frederick based on
the net difference between the value of interest earning assets and the value of
interest bearing liabilities. The model results as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Change in Interest Rate Assumption
-----------------------------------------------
(dollars in thousands)
+200bp -200bp
--------------------- ----------------------
<S> <C> <C>
Net income - increase (decrease) $262 $(289)
Net income - % change 10.10% (11.20%)
MVPE - increase (decrease) ($455) $28
MVPE - % change (3.83%) 0.24%
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis - December 31, 1998
Interest sensitivity period
-------------------------------------------------------
3 or After 1
less 4 to 12 through 5 After 5
months months years years Total
-------- ----------- --------------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits in other banks $ 8,024 $ -- $ -- $ -- $ 8,024
Loans held for sale
Fixed rate 149 -- -- -- 149
Investment securities:(1)
Fixed rate -- -- 6,880 9,370 16,250
Variable rate -- -- -- -- --
Loans:
Fixed rate 2,502 7,698 25,461 7,588 43,249
Variable rate 47,244 -- -- -- 47,244
------- ----------- --------------- ---------- -----------
Total interest-earning assets $ 57,919 $ 7,698 $ 32,341 $ 16,958 $ 114,916
======== =========== =============== ========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts
and savings $ 431 $ 1,033 $ 6,889 $ 26,091 $ 34,444
Money market accounts 13,060 -- -- -- 13,060
Certificates of deposit and other time
Deposits:
Fixed rate 7,566 22,257 18,200 -- 48,023
Federal funds purchased and securities
sold under agreements to repurchase 1,830 -- -- -- 1,830
Other short-term borrowings:
Fixed rate 564 -- -- -- 564
------- ----------- --------------- ---------- -----------
Total interest-bearing liabilities $ 23,451 $ 23,290 $ 25,089 $ 26,091 $ 97,921
======== =========== =============== ========== ===========
Interest-earning assets less
interest-bearing liabilities ("Gap") $ 34,468 $ (15,592) $ 7,252 $ (9,133) $ 16,995
Cumulative Gap $ 34,468 $ 18,876 $ 26,128 $ 16,995 $ 16,995
Cumulative Gap as a percentage of total
assets 28.01% 15.34% 21.23% 13.81% 13.81%
</TABLE>
- -----------------------------------------
(1) Excludes non-rate sensitive equity securities. Reflects fair value
adjustments for securities available for sale.
Financial Condition
- -------------------
First Frederick's total assets were $123.5 million at March 31, 1999.
Total assets increased to $123.0 million at December 31, 1998, a 29% increase
from the prior year-end. An increase of $15.7 million in net loans and $10.1
million in interest bearing deposits and cash, funded by a $26.2 million
increase in deposits contributed to the overall asset growth in 1998. By
continuing to concentrate on its target market of small business lending and
personal relationships, First Bank increased commercial and consumer loans by
$6.3 million and $5.8 million, respectively in 1998. During 1998, First Bank
entered the residential construction loan market and grew construction loans by
$3.7 million.
During 1997, total assets grew at a rate of 6%, from $90 million at
December 31, 1996 to $95.5 million at December 31, 1997. An increase of $8.8
million in net loans was partially funded by a $4.5 million increase in deposits
and customer repurchase agreements. Loan growth outpaced deposit growth
resulting in reliance on short term borrowings to meet the loan demands of the
target market. First Bank concentrated on lending to small business and
consumers, increasing these loan categories by $15.7 million while other loan
categories remained constant.
LOAN PORTFOLIO
First Frederick makes real estate construction, real estate mortgage,
commercial and consumer loans. The real estate construction loans are generally
secured by the construction project financed and have a term of one (1) year or
less. The real estate mortgage loans are generally secured by the property being
financed and have a maximum loan to value ratio of 80%, with terms of one (1) to
five (5) years. Commercial loans are made on both a
40
<PAGE>
secured and unsecured basis. Unsecured loans are made based upon the financial
strength of the borrower. Most commercial loans require personal guarantees from
the principals of the business. The collateral for secured commercial loans may
be accounts receivable, equipment, marketable securities or deposits in First
Bank. The terms of these loans are normally one (1) to five (5) years. Consumer
loans are made on an unsecured or secured basis based upon the financial
strength of the borrower. The collateral for consumer loans may be marketable
securities, automobiles, recreational vehicles, boats, airplanes or deposits in
First Bank. The usual term of these loans is three (3) to five (5) years.
During 1998, First Bank's lending and consumer banking officers
continued to focus their attention on developing profitable customer
relationships with small and medium sized businesses, professionals, investors
and not-for-profit organizations in Frederick County, western Carroll County and
northern Montgomery County. First Bank entered western Carroll County with the
opening of a branch location in Mt. Airy, Maryland.
<TABLE>
<CAPTION>
Loan Distribution
At December 31,
----------------------------------------
1998 % 1997 %
------- ----- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate-construction: $ 9,124 10 % 5,421 7 %
$
Real estate-mortgage 35,960 40 35,937 48
Commercial and agricultural 29,035 32 22,752 31
Consumer 16,374 18 10,595 14
------- --------
Total loans, net of unearned 90,493 100 % 74,705 100 %
income
Less: Allowance for credit (1,039) (910)
losses
------- --------
Net loans $ 89,454 $ 73,795
--------------------------------- ======= ========
</TABLE>
<TABLE>
Maturity and Interest Rate Sensitivity of Loans-December 31, 1998
Maturing in 1 year or less After 1 through 5 years After 5 years
---------------------- ---------------------- -------------------------------
Fixed Variable Fixed Variable Fixed Variable
interest interest interest interest interest interest
rates rates rates rates rates rates Total
--------- ---------- ---------- --------- -------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 109 $ 7,087 $ 62 $ 636 $ -- $ 1,230 $ 9,124
Real estate-mortgage(1) 4,811 9,439 8,990 5,379 4,124 3,217 35,960
Commercial and agricultural 2,169 14,164 6,084 2,319 700 3,599 29,035
Consumer 251 9 14,477 165 1,472 -- 16,374
--------- ---------- ---------- --------- -------- --------- ----------
Total loans, net of unearned
income $ 7,340 $ 30,699 $ 29,613 $ 8,499 $ 6,296 $ 8,046 $ 90,493
- ---------------------------------- ========= ========== ========== ========= ======== ========= ==========
</TABLE>
(1) First Frederick's customary business practice is to write real estate
mortgage loans, which will be retained in its loan portfolio, with
repayment terms normally not exceeding five years. Most loans mature in
five years with the balance due at maturity. Assuming that credit standards
are met at each maturity, First Frederick customarily extends its loans for
successive five year periods.
ALLOWANCE FOR CREDIT LOSSES
First Frederick follows the guidance of Statement of Financial
Accounting Standards #114 (SFAS #114), "Accounting by Creditors for Impairment
of a Loan" as amended by Statement #118, "Accounting by Creditors for Impairment
of Loan Income Recognition and Disclosures". It requires an impaired loan within
its scope to be measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, except that as a
particular expedient, a creditor may measure impairment based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
SFAS #114 excludes smaller balance and homogenous loans from impairment
reporting. Therefore, First Frederick has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as Doubtful or worse, classified as Non-Accrual, and
troubled debt restructurings are considered to be impaired. Loans are placed on
Non-Accrual when the loan is specifically determined to be impaired or when
principal or interest is delinquent for ninety (90) days or more. Any unpaid
interest, previously accrued, on those loans is reversed from income. Interest
income, generally, is not recognized on specific impaired loans unless the
likelihood of future loss is remote. Interest payments received on such loans
41
<PAGE>
are applied as a reduction of the loan's principal balance. Interest income on
other non-accrual loans is recognized only to the extent of interest payments
received. First Frederick considers a slow payment on a loan, to be a minimal
delay. First Frederick has identified commercial real estate and commercial and
industrial type loans as the major risk classifications to be used in the
application of SFAS #114.
First Frederick maintains an allowance for credit losses at a level
which, in management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans and economic conditions. Allowances for impaired loans
are generally determined based on collateral values or the present value of
estimated cash flows. Uncertainties inherent in the estimation process might
cause management's estimate of credit losses in the loan portfolio and the
related allowance to change in the near term. The allowance is increased by the
provision for credit losses, which is charged to expense and reduced by
charge-offs, net of recoveries.
Loans are considered impaired when, based on current information, it is
probable that First Frederick will not collect all principal and interest
payments according to the loan's contractual terms. Generally, loans are
considered impaired once principal or interest payments become 90 days or more
past due and they are placed on non-accrual. Management also considers the
financial condition of the borrower, loan cash flows and the value of related
collateral when evaluating loan impairment. Impaired loans do not include large
groups of smaller balance homogenous loans such as consumer installment loans
that are evaluated collectively for impairment. Loans specifically reviewed for
impairment are normally not considered impaired if the payment is delinquent 90
days or less, provided eventual collection of all amounts is expected.
Impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral, if repayment is expected to be provided by the collateral.
While First Frederick considered the allowance for loan losses to be
adequate at March 31, 1999 and December 31, 1998, management is unable to
predict the amount, if any, of future provisions to the allowance.
The allowance for credit losses was $1.1 million, or 1.15% of total
loans, net of earned income, at March 31, 1999, compared to $1.0 million, or
1.14% of total loans as of December 31, 1998. The provision for loan losses
during the three months ended March 31, 1999 was $90,000. Total non-performing
assets, as of March 31, 1999, were approximately $1.6 million, an increase from
$16,000 at March 31, 1998. This significant increase was the result of the
deterioration of the credit quality of two (2) loan relationships.
Provisions for loan losses aggregated $327,000 in 1998, as compared to
$285,000 in 1997. The allowance for loan losses totaled $1.04 million and
$910,000 at December 31, 1998 and December 31, 1997, respectively, representing
1.14% and 1.22% of outstanding loans. Non-accrual loans at December 31, 1998 and
1997 totaled $1.4 million and $52,000, respectively. The increase in non-accrual
loans is the result of the deterioration of two commercial lending
relationships. Management believes that these relationships will be resolved in
the second quarter of 1999 without additional loss to First Frederick. There can
be no assurance, however, that these relationships will be resolved without loss
or additional provisions for loan losses. The ratio of net loans charged off to
average loans outstanding was .24% and .27% for years ended December 31, 1998
and December 31, 1997, respectively.
First Frederick has loans totaling $1.4 million that are now current
for which there are concerns as to the ability of the borrowers to comply with
present loan repayment terms. While management does not anticipate any loss not
previously provided for on these loans, changes in the financial condition of
these borrowers may necessitate additional provisions for loan losses or future
modifications in their loan repayment terms.
At December 31, 1998 and March 31, 1999, First Frederick had no
concentrations of loans in any one industry exceeding 10% of its total loan
portfolio. An industry for this purpose is defined as a group of counterparties
that are engaged in similar activities and have similar economic characteristics
that would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
The following three tables set forth certain information regarding
activity in, and the allocation of, the allowance for loan losses and First
Frederick's problem assets, at the dates and for the periods indicated.
42
<PAGE>
<TABLE>
<CAPTION>
Three months Year ended December
ended March 31 31,
--------------- -----------------------
1999 1998 1997
--------------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Average total loans out-standing during year $ $92,926 $ 81,077 $ 72,377
=============== =========== =========
Allowance at beginning of year $ 1,039 $ 910 $ 819
Real estate-construction -- -- --
Real estate-mortgage 1 -- --
Commercial and agricultural -- 161 165
Consumer 13 69 64
---------
--------------- -----------
Total charge-offs 14 230 229
--------------- ----------- ---------
Recoveries:
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Commercial and agricultural -- 17 11
Consumer -- 15 25
Total recoveries -- 32 36
Net charge-offs 14 198 193
Additions to allowance charged to operating
expenses 90 327 284
--------------- ----------- ---------
Allowance at end of year $ 1,115 $ 1,039 $ 910
=============== =========== =========
Ratio of net charge-offs to average total
loans 0.02 % 0.24 % 0.27 %
</TABLE>
<TABLE>
<CAPTION>
Allocation of Allowance for Credit Losses
Three months ended
March 31, At December 31,
----------------- --------------------------------------
1999 %(1) 1998 %(1) 1997 %(1)
-------- ------ -------- ------ ------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 27 11 % $ 23 10 % $ 29 7 %
Real estate-mortgage 361 44 304 40 387 48
Commercial and agricultural 575 37 483 32 450 31
Consumer 70 8 59 18 44 14
Unallocated 82 -- 170 -- -- --
------- ------ -------- ----- ------- ------
Total Allowance $ 1,115 100 % $ 1,039 100 % $ 910 100 %
- ----------------------------- ======== ====== ======== ====== ======= ======
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
<TABLE>
<CAPTION>
Problem Assets
At December 31,
---------------------
1998 1997
--------- --------
(dollars in
thousands)
<S> <C> <C>
Nonperforming loans:
Nonaccrual loans(1) $ 1,409 $ 52
Restructured loans(2) -- --
Past due loans(3) 14 1,277
--------- --------
Total nonperforming loans 1,423 1,329
Foreclosed properties -- --
--------- --------
Total nonperforming assets 1,423 1,329
========= ========
Nonperforming assets to total loans (net
of unearned income) and foreclosed
properties at period-end 1.57 % 1.78 %
Nonperforming assets to total assets at
period-end 1.16 % 1.39 %
Allowance for credit losses to
nonperforming loans at period-end 73.01 % 68.47 %
</TABLE>
- -------------------------------------------
(1) See discussion at "Allowance for Credit Losses" for nonaccrual and impaired
loans.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are
not included in these totals.
(3) Past due loans are loans that were contractually past due 90 days or more
as to principal or interest payments at the dates indicated. Nonaccrual and
restructured loans are not included in these totals.
43
<PAGE>
Investment Portfolio
- --------------------
Investment securities represent the second largest component of earning
assets, at 13.8% of total assets at December 31, 1998, and 16.7% of total assets
at December 31, 1997. The investment portfolio is used as a source of interest
income, liquidity and to diversify credit risk. In addition, the portfolio
assists in the management of rate sensitivity, to provide collateral for public
funds, repurchase agreements and other short term borrowings. At December 31,
1998, the investment portfolio totaled $17 million compared to $15.9 million at
December 31, 1997. All of First Frederick's investment securities are classified
as available for sale. Gross unrealized gains were $70,655 and $49,477 and gross
unrealized losses were $13,962 and $37,049 at December 31, 1998 and December 31,
1997, respectively. The investment portfolio's average life is 4.48 years with
an estimated average tax-equivalent yield of 6.30% at December 31, 1998.
First Frederick had no investments that were obligations of the issuer,
or payable from or secured by a source of revenue or taxing authority of the
issuer, whose aggregate book value exceeded 10% of shareholders' equity at
December 31, 1998.
Investment Portfolio Distribution-Book Value (Amortized cost)
<TABLE>
<CAPTION>
At December 31,
------------------------
1998(1) 1997(1)
-------- -----------
(dollars in thousands)
<S> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 7,473 $ 5,244
State and political subdivisions 4,021 1,197
Mortgage backed securities 4,700 8,783
Other securities 771 751
-------- -----------
Total $ 16,965 $ 15,975
- --------------------------------------- ========= ============
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for premium
amortization and discount accretion, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments.
<TABLE>
<CAPTION>
Maturing in: 1 year or less After 1 Through 5 After 5 Through 10 After 10 years
years years
------------------ -------------------- --------------------- --------------------
Average Average Average Average
Amount(1) Yield Amount(1) Yield Amount(1) Yield Amount(1) Yield
--------- -------- -------------------- ----------- --------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and %
corporations $ -- -- % $ 7,473 6.07 % $ -- -- $ -- --
Mortgage backed securities -- -- -- -- 3,539 6.26 1,161 5.56
Other securities 771 -- -- -- -- -- -- --
State and political subdivisions -- -- 534 6.07 743 6.39 2,744 6.90
--------- -------- ----------- --------- ----------- --------- --------- --------
Total $ 771 --% % $ 8,007 6.07% % $ 4,282 6.28 % $ 3,905 6.50 %
- ---------------------------------- ========= ======== =========== ========= =========== ========= ========= ========
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for premium
amortization and discount accretion, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments
DEPOSITS
At December 31, 1998, demand, savings and time deposits represented
13.8%, 16% and 43.3% of total deposits, respectively. The most significant
change in deposits occurred in interest bearing demand deposit accounts, which
increased by $7.7 million, or 86.5%, over the prior period. This increase can be
attributed to the introduction of the "Success Index" Account which is tied to
the 91-day Treasury Bill. Customer repurchase agreements, a form of secured
deposits classified as short-term borrowings on First Frederick's Statement of
Condition, increased to $1.8 million at December 31, 1998, compared to $1.2
million at December 31, 1997.
44
<PAGE>
Average Deposits and Average Rates
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1998 1997
--------------------- ------------------------
Average Average
daily Average daily Average
balance rate balance rate
------------ ------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 13,441 -- % $ 12,538 -- %
Interest-bearing demand deposits 13,032 3.31 6,846 2.28
Savings deposits 23,623 3.26 21,066 3.15
Certificates of deposit and other
time deposits 44,945 6.00 40,234 5.95
------------- -------- ------------ ---------
Total average deposits $ 95,041 4.10 % $ 80,684 3.98 %
============ ======= ============ ========
</TABLE>
Maturities of Time Deposits - $100,000 or More
<TABLE>
<CAPTION>
At December 31,
--------------------------
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Maturing in:
3 months or less $ 4,528 $ 1,217
Over 3 months through 6 months 7,216 5,481
Over 6 months through 12 months 2,623 2,582
Over 12 months 4,808 7,338
--------- ---------
Total Time Deposits-$100,000 or more $ 19,175 $ 16,618
========= =========
</TABLE>
SHORT TERM BORROWINGS
The following tables set forth certain information regarding First
Frederick's short term borrowings.
Securities Sold Under Agreements to Repurchase(1):
<TABLE>
<CAPTION>
At December 31,
----------------------
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Total outstanding at year-end $ 1,830 $ 1,208
Average amount outstanding during the year $ 1,638 $ 1,036
Maximum amount outstanding at any $ 4,985 $ 1,598
month-end
Weighted-average interest rate at year-end 3.88 % 3.48 %
Weighted-average interest rate during the 3.89 % 3.71 %
year
</TABLE>
- -------------------------------------------
(1) Includes securities sold under agreements to repurchase with various
counterparties. Securities sold under agreements to repurchase generally
mature the day following the date sold.
Other Short-term Borrowings(1):
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Total outstanding at year-end $ 564 $ 974
Average amount outstanding during the year $ 1,049 $ 3,786
Maximum amount outstanding at any $ 4,700 $ 7,333
month-end
Weighted-average interest rate at year-end 4.91 % 5.89 %
Weighted-average interest rate during the 5.65 % 5.48 %
year
</TABLE>
- -------------------------------------------
(1) Primarily reflects borrowings under a secured lending arrangement with the
Federal Home Loan Bank of Atlanta and an unsecured credit arrangement with
Drovers and Mechanics Bank.
45
<PAGE>
Capital Resources
- -----------------
Stockholders' equity increased by $586,000 during 1998 as a result of
net income of $1.36 million less the application of $818,000 to repurchase
35,576 shares of common stock and payment of cash dividends totaling $541,000.
First Frederick and First Bank, are subject to various regulatory
capital requirements administered by the Federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and, possibly,
additional discretionary actions by regulators, that, if undertaken, can have a
direct material effect on First Frederick's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Frederick and First Bank must meet specific capital guidelines that
involve quantitative measures of First Frederick's, and First Bank's, assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. First Frederick, and First Bank's, capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Frederick, and First Bank, to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined); and, of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1998 and December 31, 1997,
First Frederick and First Bank met all necessary capital adequacy requirements.
See Note 15 to the consolidated financial statements for a table depicting
compliance with regulatory capital requirements.
As of December 31, 1998, the most recent notification from the
regulatory agency categorized First Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, First Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in Note 15 to the
consolidated financial statements. There are no conditions or events since that
notification that management believes have changed First Bank's category.
Impact of Inflation and Changing Prices
- ---------------------------------------
The impact of inflation on First Frederick is reflected, primarily, in
the increased cost of operations. These increased costs are generally passed on
to First Frederick's customers in the form of increased service fees. Since the
primary assets and liabilities of First Frederick are monetary in nature, the
impact of inflation on interest rates has had, and is expected to continue to
have, an effect on net income.
In structuring fees, negotiating loan margins and developing customer
relationships, management concentrates its efforts on maximizing earnings
capacity while attempting to contain operating expenses. In addition, management
looks toward the development of fee based services to offset the effects of
inflation and changing prices.
The financial statements of First Frederick and related data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, almost all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or the same magnitude as the price of
goods and services, since such prices are affected by inflation. The discussion
on liquidity and interest sensitivity provides additional comments on First
Frederick's approach to managing risk.
Year 2000
- ---------
First Frederick is utilizing both internal and external resources to
address the Year 2000 issues. These resources are being used to reprogram,
replace, or remediate non-compliant software and hardware. First Frederick
46
<PAGE>
expects all of its information technology and non-information technology systems
to be Year 2000 compliant by June 30, 1999, prior to any anticipated impact on
First Frederick's operating systems.
The estimated cost to address the Year 2000 issues is $291,000 and is
being funded through cash flow. The Year 2000 costs are not expected to have an
adverse effect upon First Frederick's results of operations. To date, First
Frederick has incurred approximately $185,000 of capitalized costs related to
Year 2000 preparations.
AMENDMENT TO THE ARTICLES OF INCORPORATION OF FCNB
In connection with the merger, the Board of Directors of FCNB has
approved and adopted an amendment, pursuant to which Article Sixth of the
Articles of Incorporation of FCNB would be amended to increase the number of
authorized shares of FCNB common stock from twenty million (20,000,000) to fifty
million (50,000,000). See "FCNB Corp -- Description of FCNB Capital Stock." The
amendment would be effected by restating the first paragraph of Article Sixth of
the Articles of Incorporation to read in its entirety as follow:
"SIXTH. The total number of shares of stock of all classes
which the Corporation has authority to issue is fifty one
million shares (51,000,000), consisting of fifty million
(50,000,000) shares of Common Stock, par value $1.00 per
share, and one million (1,000,000) shares of preferred
stock, par value $1.00 per share, amounting in aggregate par
value to fifty one million dollars ($51,000,000)."
The number of authorized shares of preferred stock will not
be affected by the amendment.
The Board of Directors of FCNB believes that approval of the amendment
is desirable in order to enable FCNB to have a sufficient number of shares of
FCNB common stock available for general corporate purposes following the
effectiveness of the merger. Such purposes could include employee benefit plans,
stock dividends or splits, or future acquisition activity. Although the merger
agreement provides that as a result of the merger, and without further action,
the Articles of Incorporation of FCNB may be amended as described for state law
purposes, the amendment is being presented separately for approval by FCNB
shareholders in accordance with the requirements of the Commission.
Approval of the amendment would permit the Board of Directors to issue
additional shares of FCNB common stock, up to the total number of authorized
shares, without further stockholder action. The availability of such shares will
enable FCNB to meet possible contingencies or opportunities in which the
issuance of additional shares of FCNB common stock would be advisable. The
availability of additional shares of FCNB common stock could have the effect of
rendering more difficult or discouraging hostile takeover attempts, or
facilitating a negotiated acquisition of FCNB. The affirmative vote of
two-thirds of the votes entitled to be cast at the FCNB shareholder meeting is
required to approve the amendment. Directors of FCNB owning or having the power
to direct the voting of 1,052,687 shares of FCNB common stock have indicated
their intention to vote in favor of the amendment. THE BOARD OF DIRECTORS OF
FCNB RECOMMENDS THAT HOLDERS OF FCNB COMMON STOCK VOTE "FOR" THE AMENDMENT.
LEGAL MATTERS
The validity of the issuance of the shares of FCNB common stock offered
hereby will be passed upon for FCNB by Kennedy, Baris & Lundy, L.L.P., Bethesda,
Maryland. Certain federal income tax consequences of the transaction have been
passed upon by Kevin P. Kennedy, Esquire.
EXPERTS
The consolidated financial statements of First Frederick included
herein and delivered herewith have been audited by Keller Bruner & Company, LLP,
independent certified public accountants, as indicated in their report dated
January 22, 1999 with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
47
<PAGE>
The consolidated financial statements of FCNB incorporated by reference
herein have been audited by Keller Bruner & Company, LLP, independent certified
public accountants, as indicated in their report dated January 28, 1999 with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing.
48
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF FIRST FREDERICK FINANCIAL CORPORATION
<TABLE>
<CAPTION>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
Independent Auditor's Report....................................................................................F-1
Consolidated Balance Sheets.....................................................................................F-2
Consolidated Statements of Income...............................................................................F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income........................................F-5
Consolidated Statements of Cash Flows...........................................................................F-6
Notes to the Consolidated Financial Statements..................................................................F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999
Unaudited Consolidated Balance Sheets..........................................................................F-26
Unaudited Consolidated Statements of Income....................................................................F-27
Unaudited Consolidated Statements of Cash Flows................................................................F-28
Notes to the Unaudited Consolidated Financial Statements.......................................................F-30
</TABLE>
49
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
First Frederick Financial Corporation
Frederick, Maryland
We have audited the accompanying consolidated balance sheets of First Frederick
Financial Corporation and its subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Frederick
Financial Corporation and its subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Keller Bruner & Company, LLP
Frederick, Maryland
January 22, 1999
F-1
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
7
<TABLE>
<CAPTION>
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,018,424 $ 2,887,007
--------------------------------------------
Interest-bearing deposits in other banks 8,023,985 92,611
--------------------------------------------
Loans held for sale 149,119 233,734
--------------------------------------------
Investment securities available for sale - at fair value 17,021,277 15,987,017
--------------------------------------------
Loans 90,492,900 74,704,739
Less allowance for credit losses (1,038,654) (910,153)
--------------------------------------------
89,454,246 73,794,586
--------------------------------------------
Bank premises and equipment, net of accumulated
depreciation and amortization 1,622,437 1,284,684
Interest receivable 655,457 606,161
Intangible, net of accumulated amortization 100,944 182,416
Other assets 1,010,767 469,140
--------------------------------------------
3,389,605 2,542,401
--------------------------------------------
$ 123,056,656 $ 95,537,356
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deposits
Noninterest-bearing $ 15,453,516 $ 11,784,415
Interest-bearing:
NOW accounts 16,585,564 8,869,413
Savings accounts 17,857,967 12,256,375
Money market accounts 13,059,597 9,780,366
Certificates of deposit under $100,000 37,910,068 32,698,589
Certificates of deposit $100,000 and over 10,112,503 9,450,501
--------------------------------------------
110,979,215 84,839,659
Short-term borrowings
Securities sold under agreements
to repurchase 1,830,385 1,207,932
Other short-term borrowings 564,215 973,885
Accrued interest and other liabilities 876,527 295,405
--------------------------------------------
114,250,342 87,316,881
--------------------------------------------
Commitments and Contingencies (Note 11)
Shareholders' Equity
Common stock, par value $1 per share; 2,000,000
shares authorized; 1,525,215 shares in 1998 and
758,863 shares in 1997 issued and outstanding 1,525,215 758,863
Capital surplus 6,150,989 6,116,082
Retained earnings 1,095,312 1,337,901
Accumulated other comprehensive income 34,798 7,629
--------------------------------------------
8,806,314 8,220,475
--------------------------------------------
$ 123,056,656 $ 95,537,356
============================================
</TABLE>
F-3
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED 7
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Interest and fees on loans $ 8,087,476 $ 7,028,925
Interest on interest-bearing deposits in other banks 135,772 35,882
Interest on securities-taxable 886,029 1,062,826
Interest on securities-tax exempt 109,661 57,239
--------------------------------------------
9,218,938 8,184,872
--------------------------------------------
Interest expense
Interest on deposits
NOW accounts 432,272 156,073
Savings accounts 329,027 310,171
Money market accounts 440,265 352,750
Certificates of deposit under $100,000 1,575,896 1,466,558
Certificates of deposit $100,000 and over 1,120,524 927,853
Interest on securities sold under agreements to repurchase 63,683 38,405
Interest on other short-term borrowings 55,855 208,541
--------------------------------------------
4,017,522 3,460,351
--------------------------------------------
NET INTEREST INCOME 5,201,416 4,724,521
Provision for credit losses 327,000 284,587
--------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 4,874,416 4,439,934
--------------------------------------------
Noninterest income
Net realized gains (losses) on sales of securities 39,310 (63,792)
Service charges on deposit accounts 463,051 360,302
Other service charge income 880,612 43,636
Other operating income 43,870 108,491
--------------------------------------------
1,426,843 448,637
--------------------------------------------
Noninterest expenses
Salaries and employee benefits 2,088,730 1,502,750
Occupancy expenses 627,932 500,039
Equipment expenses 460,751 389,009
Other operating expenses 1,164,418 788,070
--------------------------------------------
4,341,831 3,179,868
--------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,959,428 1,708,703
Provision for income taxes 594,552 637,058
--------------------------------------------
NET INCOME $ 1,364,876 $ 1,071,645
============================================
Basic earnings per share $ .90 $ .71
============================================
Diluted earnings per share $ .79 $ .64
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED 7
<TABLE>
<CAPTION>
1998 1997
-------- -----------
<S> <C> <C>
Net income $ 1,364,876 $ 1,071,645
------------ ------------
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period,
net of tax expense of $32,277 and $63,182 for years
ended December 31,1998 and 1997, respectively. 51,297 100,418
Reclassification adjustment for (gains) losses
included in net income, net of tax expense (benefit)
of $15,182 and ($24,636) for years ended December 31,
1998 and 1997, respectively. (24,128) 39,156
--------------------------------------------
27,169 139,574
--------------------------------------------
COMPREHENSIVE INCOME $ 1,392,045 $ 1,211,219
============================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Other
Common Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 496,048 $ 5,991,521 $ 924,216 $ (131,945) $ 7,279,840
Net income - - 1,071,645 - 1,071,645
Cash dividends declared - - (350,007) - (350,007)
Stock options exercised (3,601 shares) 3,601 57,642 - - 61,243
Stock warrants exercised (16,944 shares) 16,944 136,919 - -
153,863
Repurchase of stock (5,000 shares) (5,000) (70,000) (60,000) - (135,000)
Three-for-two stock split, effected
in the form of a 50% stock dividend 247,270 - (247,953) - (683)
Change in fair value of securities
available for sale, net of applicable
deferred income tax effects - - - 139,574 139,574
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 758,863 6,116,082 1,337,901 7,629 8,220,475
Net income - - 1,364,876 - 1,364,876
Cash dividends declared - - (541,376) - (541,376)
Stock options exercised (37,001 shares) 37,001 488,907 - - 525,908
Stock warrants exercised (3,032 shares) 3,032 24,478 - - 27,510
Repurchase of stock (35,576 shares) (35,576) (478,478) (304,194) - (818,248)
Two-for-one stock split, effected in
the form of a 100% stock dividend 761,895 - (761,895) - -
Change in fair value of securities
available for sale, net of applicable
deferred income tax effects - - - 27,169 27,169
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 1,525,215 $ 6,150,989 $ 1,095,312 $ 34,798 $ 8,806,314
=========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Interest and fees received on loans $ 8,123,109 $ 6,971,521
Interest received on interest-bearing deposits in other banks 135,772 35,882
Interest received on securities 1,068,615 1,186,343
Other income 1,315,275 455,561
Proceeds from loan sales 865,818 597,672
Originations of loans held for sale (708,945) (395,964)
Interest paid on securities sold under agreements to repurchase (63,683) (38,405)
Interest paid on other short-term borrowings (55,855) (208,541)
Interest paid to depositors (3,841,716) (3,165,139)
Cash paid to suppliers and employees (4,056,420) (2,907,757)
Income taxes paid (532,000) (857,467)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,249,970 1,673,706
---------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (14,633,300) (9,117,380)
Proceeds from sales of securities available for sale 11,824,151 10,549,471
Proceeds from maturities of and principal payments on securities 1,773,309 1,151,027
Decrease (increase) in interest-bearing deposits in other banks (7,931,374) 273,038
Net increase in loans (16,047,414) (8,598,790)
Purchases of bank premises and equipment (650,058) (626,047)
---------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (25,664,686) (6,368,681)
---------------------------------------------
Cash Flows from Financing Activities
Net increase in noninterest-bearing deposits, NOW accounts,
money market accounts and savings accounts 20,266,075 1,737,096
Net increase in certificates of deposit 5,873,481 6,901,781
Net increase in securities sold under agreements to repurchase 622,453 964,527
Net decrease in other short-term borrowings (409,670) (4,849,399)
Cash dividends paid (541,376) (350,007)
Stock distribution - cash in lieu of fractional shares - (683)
Repurchase of common stock (818,248) (135,000)
Proceeds from issuance of common stock 553,418 215,106
---------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,546,133 4,483,421
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,131,417 (211,554)
Cash and Cash Equivalents
Beginning of year 2,887,007 3,098,561
---------------------------------------------
End of year $ 5,018,424 $ 2,887,007
=============================================
</TABLE>
(Continued)
F-7
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 1,364,876 $ 1,071,645
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for depreciation and amortization 429,128 294,307
Loss (gain) on disposition of property and equipment 6,464 (11,371)
Provision for credit losses 327,000 284,587
Deferred income tax benefits (57,411) (9,358)
Net realized (gains) losses on sales of securities (39,310) 63,792
Net premium amortization on securities 85,154 13,904
Net amortization of net loan origination costs 60,754 6,214
Changes in assets and liabilities
Decrease (increase) in:
Loans held for sale 84,615 158,072
Interest receivable (49,296) (13,004)
Other assets (501,311) 25,931
Increase (decrease) in:
Accrued interest and other liabilities relating
to operating activities 539,307 (211,013)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,249,970 $ 1,673,706
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
First Frederick Financial Corporation (the "Parent Company") is a bank holding
company that provides its customers with banking and non-bank financial services
through its wholly-owned subsidiary, First Bank of Frederick (the "Bank"). The
Bank offers various loan, deposit and other financial service products to its
customers within Frederick County, Maryland and the surrounding region.
Additionally, the Bank maintains correspondent banking relationships and
transacts overnight investment activities, on an unsecured basis, with regional
correspondent banks and the Federal Home Loan Bank.
The accounting and reporting policies and practices of First Frederick Financial
Corporation and its subsidiary (collectively, the "Company") conform with
generally accepted accounting principles. The following is a summary of the most
significant policies and practices.
Basis of presentation: The consolidated financial statements include the
accounts of the Parent Company and the Bank, presented on the accrual basis of
accounting, after elimination of all intercompany accounts and transactions.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks (including cash items
in the process of clearing), and federal funds sold. 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.
Investment securities available for sale: Securities available for sale are
equity securities with readily determinable fair values and those debt
securities the Company intends to hold for an indefinite period of time but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movement in
interest rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. These securities are carried at fair value with any unrealized
holding gains or losses reported in shareholders' equity, net of the related
deferred tax effect.
Interest income from securities, adjusted for amortization of premium and
accretion of discount, is included in interest income in the consolidated
statements of income. Realized gains and losses, determined using the amortized
cost basis of the specific securities sold, are included in noninterest income
in the consolidated statements of income.
F-9
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Loans and interest on loans: Loans are carried at the amount of unpaid
principal. Interest on loans is accrued based on the principal amounts
outstanding. It is the Company's policy to discontinue the accrual of interest
when a loan is delinquent for 90 days or more. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income. Generally, nonaccrual loans include
those specifically classified as impaired, due to concerns about the debtor's
ability to repay the loan according to contractual terms. Interest income is
generally not recognized on specific impaired loans unless the likelihood of
further loss is remote. Cash collections on such loans generally are applied as
a reduction of the loan principal balance and no interest income is recognized
on those loans until the principal balance has been collected. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
Allowance for credit losses: The allowance for credit losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. Uncertainties inherent in the estimation
process, might cause management's estimate of credit losses in the loan
portfolio and the related allowance to change in the near term. The allowance is
increased by the provision for credit losses, which is charged to expense and
reduced by charge-offs, net of recoveries.
Impaired loans: Loans are considered impaired when, based on current
information, it is probable that the Company will not collect all principal and
interest payments according to the loans' contractual terms. Generally, loans
are considered impaired once principal or interest payments become 90 days or
more past due and they are placed on nonaccrual. Management also considers the
financial condition of the borrower, loan cash flows and the value of the
related collateral when evaluating loan impairment. Impaired loans do not
include large groups of smaller balance homogeneous loans such as residential
real estate and consumer installment loans that are evaluated collectively for
impairment. Loans specifically reviewed for impairment are not considered
impaired during periods of "minimum delay" in payment (90 days or less) provided
eventual collection of all amounts due is expected. Impairment of a loan is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral, if
repayment is expected to be provided by the collateral. The majority of the
Company's impaired loans are measured by reference to the fair value of the
collateral. Interest income on impaired loans is recognized on the cash basis
when the likelihood of further loss is remote.
F-10
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation and amortization. The provision for depreciation is
computed using the straight-line method based on estimated useful lives ranging
from ten to twenty-five years for bank premises and ranging from three to twenty
years for equipment. Leasehold improvements are amortized over the shorter of
the terms of the leases or the asset's estimated useful life. Gains and losses
realized on dispositions of property and equipment are reflected in the
consolidated statement of income in the year of disposition. Expenditures for
maintenance and repairs are charged to operating expenses as incurred.
Intangible assets: The intangible assets, resulting primarily from the premiums
paid with the acquisition of certain depository accounts, are stated at cost
less accumulated amortization. Provisions for amortization are computed using
the straight-line method over a seven-year life.
Income taxes: Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax 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: The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 128, Earnings per Share as of December 31, 1997. Statement No. 128
establishes standards for computing and presenting earnings per share (EPS).
Basic EPS is generally computed by dividing net income by the weighted average
number of common shares outstanding for the period, whereas diluted EPS
essentially reflects the potential dilution in basic EPS that could occur if
other contracts to issue common stock were exercised. Per share amounts are
based on the weighted-average number of shares outstanding during each year as
follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS weighted-average shares outstanding 1,523,210 1,500,804
Effect of dilutive securities - stock options and warrants 205,219 175,588
--------------------------------
Diluted EPS weighted-average shares outstanding 1,728,429 1,676,392
================================
</TABLE>
Comprehensive income: On January 1, 1998, the Bank adopted FASB Statement No.
130, Reporting Comprehensive Income. Comprehensive income, as defined by
Statement 130, is the change in equity of a business enterprise during a
reporting period from transactions and other events and circumstances from
non-owner sources. In addition to the Company's net income, the change in equity
components under comprehensive income reporting include the net change in
unrealized gains and losses on available-for-sale securities. As required by
Statement No. 130, prior year information has been modified to conform with the
new presentation.
F-11
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Fair value of financial instruments: All fair value estimates are made at a
specific point in time and are based on existing on- and off-balance-sheet
financial instruments without consideration of the value of anticipated future
business or the value of assets and liabilities that are not considered
financial instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Due to the absence of a genuine
market for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding risk characteristics, current
economic conditions, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions or estimation
methodologies could significantly affect the estimates.
NOTE 2. COMPENSATING BALANCES
Compensating balance arrangements exist with various correspondent banks. These
noninterest-bearing deposits are maintained to reduce charges for standard bank
services. The required balances totaled $128,400 and $119,760 at December 31,
1998 and 1997, respectively. While these balances generally exceed federally
insured limits, the Company has not experienced any losses in such accounts and
does not believe it is exposed to any significant credit risk.
NOTE 3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale at
December 31, 1998 and 1997, summarized by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations:
Due after one year through
five years $ 7,472,567 $ 19,290 $ 3,285 $ 7,488,572
State and political subdivisions:
Due after one year through
five years 533,797 1,894 - 535,691
Due after five years through ten years 3,486,900 36,581 4,937 3,518,544
Mortgage-backed securities 4,700,715 12,890 5,740 4,707,865
Equity securities 770,605 - - 770,605
-------------------------------------------------------------------------
$ 16,964,584 $ 70,655 $ 13,962 $ 17,021,277
=========================================================================
</TABLE>
F-12
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations:
Due after one year through
five years $ 2,993,539 $ 16,781 $ - $ 3,010,320
Due after five years through ten years 2,250,000 2,580 - 2,252,580
State and political subdivisions:
Due after one year through
five years 165,484 2,765 - 168,249
Due after five years through ten years 661,793 3,287 5,610 659,470
Due after ten years 370,365 2,194 1,993 370,566
Mortgage-backed securities 8,782,803 21,870 29,446 8,775,227
Equity securities 750,605 - - 750,605
--------------------------------------------------------------------------
$ 15,974,589 $ 49,477 $ 37,049 $ 15,987,017
==========================================================================
</TABLE>
The fair value of securities issued by Federal Home Loan Bank totaled $8,990,447
and $5,262,900 at December 31, 1998 and 1997, respectively.
Actual maturities may differ from contractual maturities summarized in the
preceding tables because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Gross gains (losses) of $39,310 and ($63,792) were realized on sales of
securities available for sale for the years ended December 31, 1998 and 1997,
respectively.
Securities with a book value of $8,861,526 and $8,357,565 at December 31, 1998
and 1997, respectively, were pledged to secure securities sold under agreements
to repurchase, other short-term borrowings, and for other purposes as required
and permitted by law.
F-13
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans consist of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
Construction $ 9,124,414 $ 5,421,327
Secured by farmland 691,980 691,980
Secured by 1 to 4 family residential properties 13,908,651 13,757,292
Secured by commercial property 21,359,020 21,487,330
--------------------------------------------
Total loans secured by real estate 45,084,065 41,357,929
Commercial and industrial loans 29,034,623 22,751,544
Loans to individuals for household, family and
other personal expenditures 16,374,212 10,595,266
--------------------------------------------
$ 90,492,900 $ 74,704,739
============================================
</TABLE>
Transactions in the allowance for credit losses for the years ended December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 910,153 $ 819,300
Provision charged to operating expenses 327,000 284,587
Recoveries of loans previously charged-off 31,981 36,205
Loans charged-off (230,480) (229,939)
--------------------------------------------
Balance at end of year $ 1,038,654 $ 910,153
============================================
</TABLE>
Selected information concerning the Company's recorded investment in impaired
loans and related interest income for the years ended December 31, 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with specific allocation of
allowance for credit losses $ - $ 77,159
Specific allocation of allowance for credit losses - 70,000
Other impaired loans 1,409,244 14,061
Average recorded investment in impaired loans 750,232 231,483
Interest income recognized on impaired loans 23,251 1,611
</TABLE>
Nonaccrual loans at December 31, 1998 and 1997, which are included in the above
impaired loan information, totaled $1,409,244 and $51,726, respectively.
Interest income that would have been recorded had these nonaccrual loans been
current in accordance with their original terms, was $158,019 in 1998 and $5,960
in 1997. Interest income recognized on these loans was $23,251 in 1998 and
$1,302 in 1997.
F-14
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 630,372 $ 629,641
Furniture and equipment 2,064,111 1,665,277
--------------------------------------------
2,694,483 2,294,918
Less accumulated depreciation and amortization (1,072,046) (1,010,234)
--------------------------------------------
$ 1,622,437 $ 1,284,684
============================================
</TABLE>
Depreciation and amortization charged to operations for the years ended December
31, 1998 and 1997 is included in the statements of income as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Occupancy expenses $ 42,751 $ 24,154
Equipment expenses 251,719 188,681
--------------------------------------------
$ 294,470 $ 212,835
============================================
</TABLE>
NOTE 6. DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of deposit,
including those with an initial term of 12 months or less, are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 29,822,830
2000 12,165,272
2001 2,318,921
2002 2,127,004
2003 1,535,442
Thereafter 53,102
------------------
$ 48,022,571
==================
</TABLE>
F-15
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase:
Securities pledged as collateral for securities sold under agreements to
repurchase include U.S. Treasury and other U.S. government agencies and
corporations, and interest-bearing deposits in other banks which have an
aggregate book value of $2,160,944 and $2,257,728 at December 31, 1998 and 1997,
respectively. Securities sold under agreements to repurchase generally mature
the day following the date sold.
Selected information on repurchase agreements for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average amount outstanding during the year $ 1,637,883 $ 1,036,326
===========================================
Maximum amount outstanding at any month-end $ 4,984,576 $ 1,598,376
===========================================
Weighted average interest rate at year-end 3.88% 3.48%
===========================================
Weighted average interest rate for the year 3.89% 3.71%
===========================================
</TABLE>
Other short-term borrowings:
Other short-term borrowings reflect the Company's borrowings from the Federal
Home Loan Bank of Atlanta (FHLB) and Drovers & Mechanics Bank (Drovers). The
Company has an open line of credit arrangement with the FHLB of $15,000,000 at
December 31, 1998. The outstanding balance at December 31, 1998 and 1997 was
$144,215 and $973,885, respectively. The Company secures any borrowings against
this arrangement with a blanket lien on certain loans and securities. In
addition, during 1998 the Company entered into an unsecured line of credit
arrangement in the amount of $3,000,000 with Drovers. The outstanding balance on
this line of credit was $420,000 at December 31, 1998.
Selected information on other short-term borrowings for the years ended December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average amount outstanding during the year $ 1,049,311 $ 3,785,958
===========================================
Maximum amount outstanding at any month-end $ 4,700,409 7,332,930
===========================================
Weighted average interest rate at year-end 4.91% 5.89%
===========================================
Weighted average interest rate for the year 5.65% 5.48%
===========================================
</TABLE>
F-16
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $ 317,242 $ 288,302
Amortization of deposit intangibles 62,481 50,766
Deferred gain sale/leaseback transaction 31,839 36,231
Other 30,548 22,167
-------------------------------------------
442,110 397,466
Less: Valuation allowance - 10,868
-------------------------------------------
442,110 386,598
-------------------------------------------
Deferred tax liabilities:
Depreciation expense 88,096 90,009
Net unrealized gains on securities available for sale 21,894 4,799
Other 132 117
-------------------------------------------
110,122 94,925
-------------------------------------------
$ 331,988 $ 291,673
===========================================
</TABLE>
A reconciliation of the maximum statutory income tax rate to the provision for
income taxes for the years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes $ 1,959,428 $ 1,708,703
Tax rate 35% 35%
--------------------------------------------
Income tax at maximum statutory rate 685,800 598,046
Increase (decrease) in tax resulting from:
State income taxes, net of federal income tax benefit 86,128 76,085
Tax exempt interest income (35,198) (17,000)
Other (142,178) (20,073)
-------------------------------------------
$ 594,552 $ 637,058
===========================================
</TABLE>
F-17
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes consist of the
following for the years ended December 31, 1998 and 1997:
<TABLE>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Taxes currently payable:
Federal $ 449,513 $ 548,870
State 87,629 97,546
-------------------------------------------
Total taxes currently payable 537,142 646,416
Deferred tax (benefits) 57,410 (9,358)
--------------------------------------------
Provision for income taxes $ 594,552 $ 637,058
============================================
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
In the normal course of business, transactions occur between the Company and its
employees, officers, directors and companies in which the Company's directors
are principal owners. These transactions were made in the ordinary course of
business with substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
other persons. The loans made to these related parties do not involve more than
normal risk of collectibility or present other unfavorable features. A summary
of these related party transactions at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans $ 2,840,040 $ 2,929,627
============================================
Deposits $ 4,063,376 $ 3,436,991
============================================
</TABLE>
NOTE 10. PROFIT SHARING PLAN
Retirement benefits are provided by the Company through a Section 401(k) profit
sharing plan to employees meeting certain age and eligibility requirements.
The terms of the plan enable the Company to make discretionary contributions to
the plan based on the Company's earnings and additional matching amounts based
on employee contributions. The Company's contributions to the plan were $18,056
and $9,651 for the years ended December 31, 1998 and 1997, respectively.
F-18
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES
Credit extension commitments:
The Company is 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. The
Company's exposure to loss, in the event of nonperformance by the other party,
is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
A summary of the contractual amount of the Company's exposure under these
financial instruments at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 2,455,613 $ 1,020,701
Commitments to extend credit 23,094,269 15,686,900
--------------------------------------------
$ 25,549,882 $ 16,707,601
============================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments may expire without being drawn upon. Accordingly, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral or other security obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include deposits held in financial institutions,
marketable securities, personal residences, income-producing commercial
properties, and land under development. Personal guarantees are also obtained to
provide added security for certain commitments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the installation of real property infrastructure and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Standby letters of credit at December 31, 1998 and 1997 are all secured by
deposit accounts. Accordingly, the Bank does not anticipate any material losses
as a result of these transactions.
F-19
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES(CONTINUED)
Leasing arrangements:
The Company leases its operations center and certain office facilities under
several non-cancelable operating lease arrangements with expiration dates
ranging from January 2006 to June 2026, including renewal options. Rents in the
renewal period will be based on prevailing market rates. In addition to minimum
rentals, all of the leases have escalation clauses based upon price indexes and
include provisions for additional payments to cover taxes, insurance, and
repairs and maintenance.
The total future minimum rental commitment, including renewal periods, under
these leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 473,515
2000 447,513
2001 458,674
2002 468,113
2003 477,814
Later years 5,740,182
------------------
$ 8,065,811
==================
</TABLE>
Rent expense included in occupancy expense in the statements of income totaled
$369,349 and $291,848 for the years ended December 31, 1998 and 1997,
respectively.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as of December
31, 1998 and 1997 were as follows:
<TABLE>
1998 1997
----------------------------------- -----------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 5,018,424 $ 5,018,424 $ 2,887,007 $ 2,887,007
Interest-bearing deposits in
other banks 8,023,985 8,023,985 92,611 92,611
Loans held for sale 149,119 149,119 233,734 233,734
Investment securities 17,021,277 17,021,277 15,987,017 15,987,017
Net loans 89,454,246 89,315,675 73,794,586 73,575,568
----------------------------------------------------------------------------
$ 119,667,051 $ 119,528,480 $ 92,994,955 $ 92,775,937
============================================================================
Financial Liabilities
Deposits $ 110,979,215 $ 111,653,741 $ 84,839,659 $ 85,198,236
Short-term borrowings 2,394,600 2,394,600 2,181,817 2,181,817
----------------------------------------------------------------------------
$ 113,373,815 $ 114,048,341 $ 87,021,476 $ 87,380,053
============================================================================
</TABLE>
F-20
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash and due from banks, Interest-bearing deposits in other banks and Loans held
for sale: The fair value of these financial instruments is estimated to
approximate the carrying amounts due to their short-term nature.
Investment securities: Fair values are based on quoted market prices.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Each portfolio is further segmented into fixed and adjustable
rate interest terms by performing and nonperforming categories.
The fair value of performing loans with original maturities greater than one
year is calculated by discounting estimated cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. The estimated cash flows do not anticipate
prepayments. The fair value of performing loans with original maturities of one
year or less is considered equal to the carrying amount.
Fair value of nonperforming loans is based on recent external appraisals. If
appraisals are not available, fair value is based on estimated cash flows which
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the fair value
presented for loans would be indicative of the value negotiated in an actual
sale.
Deposits: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts and money market
accounts is equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amount approximates fair value for
variable-rate certificates of deposits due to the frequent repricing of these
instruments at market rates. Fair value of fixed-rate certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits with similar remaining
maturities.
Short-term borrowings: Due to the short maturities of these borrowings the
carrying amounts approximate fair value.
F-21
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. COMMON STOCK WARRANTS
Pursuant to an agreement approved by the Board of Directors, warrants to
purchase additional shares of common stock have been issued to the founding
directors. Each warrant will entitle the holder to purchase one additional share
of common stock. The exercise price is $4.54 per share. The maximum number of
shares that directors may purchase with these warrants totaled 254,933 and
260,997 shares as of December 31, 1998 and 1997, respectively. The exercise
period for the warrants will expire on December 7, 2008. The exercise price and
the maximum number of shares that may be purchased are subject to certain
anti-dilution provisions and, therefore, have been adjusted for the effects of
stock distributions.
NOTE 14. COMMON STOCK OPTIONS
The Company has a stock option plan ("Plan") for key employees, which is
accounted for in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Plan permits the granting of both incentive stock options and non-qualified
stock options to purchase common stock of the Company. The exercise price per
share for incentive stock options and non-qualified stock options shall not be
less than 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. Each incentive and non-qualified stock option granted under this plan
shall expire not more than ten years from the date the option is granted.
The following is a summary of transactions during the two years ended December
31, 1998:
<TABLE>
<CAPTION>
Options issued Weighted-average
and outstanding exercise price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 128,290 $ 4.73
Exercised 10,804 4.45
Granted 37,500 8.07
Terminated - -
---------------------------------------
Balance, December 31, 1997 154,986 5.56
Exercised 71,152 4.53
Granted - -
Terminated 9,928 4.54
---------------------------------------
Balance, December 31, 1998 73,906 $ 6.69
=======================================
</TABLE>
F-22
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. COMMON STOCK OPTIONS (CONTINUED)
At December 31, 1998, the 73,906 options issued and outstanding had exercise
prices ranging from $4.54 to $8.34 and had an approximate weighted-average
remaining contractual life of 67 months. Of those options issued and
outstanding, there were 37,291 and 84,412 options exercisable with
weighted-average exercise prices of $5.96 and $4.64 at December 31, 1998 and
1997, respectively. The total number of shares reserved for the Company's stock
option plan was 165,376 at December 31, 1998. The exercise price and number of
shares granted and reserved for stock options have been retroactively adjusted
for the effects of stock distributions.
In addition to the preceding Plan for key employees, Company directors were
granted options to purchase 22,870 shares at $4.01 per share in 1994, 5,500
shares at $7.34 per share in 1995, and 3,900 shares at $7.25 per share in 1996.
During the year ended December 31, 1998, 1,425 of these options had been
exercised at a weighted-average exercise price of $5.35 and 1,741 of these
options had terminated at a weighted-average exercise price of $4.82. The
exercise price and number of shares granted have been retroactively adjusted for
the effects of stock distributions.
The Company's net income and basic and diluted earnings per share would not be
materially different had compensation expense been determined based on the fair
value of the options granted under both plans on the date of grant using an
option-pricing model prescribed in Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation."
NOTE 15. SHAREHOLDERS' EQUITY
Retained earnings: Banking regulations limit the amount of cash dividends that
may be paid without prior regulatory agency approval. Maryland law limits the
amount of the Bank's earnings available for the payment of cash dividends until
surplus equals 100% of the aggregate of the par value of its common stock.
Additionally, since the Bank's deposits are insured by the FDIC, no cash
dividends may be paid if the Bank is in default on any assessment due the FDIC.
At December 31, 1998, $1,308,458 is available for the payment of cash dividends.
On January 14, 1999, the Board of Directors declared a $.10 per share cash
dividend payable to shareholder's of record on February 15, 1999.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-23
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes the Company and the
Bank meet all capital adequacy requirements to which they are subject as of
December 31, 1998.
As of December 31, 1998, the most recent notification from the regulatory agency
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------------- -------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk-Weighted Assets)
Company $ 9,845,314 10.67% $7,378,482 8.00 % N/A
Bank 8,723,000 9.52 % 7,327,600 8.00 % $9,159,500 10.00
Tier I Capital (to Risk-Weighted Assets)
Company 8,806,314 9.55 % 3,689,241 4.00 % N/A
Bank 7,684,000 8.39 % 3,663,800 4.00 % 5,495,700 6.00
Tier I Capital (to Average Assets)
Company 8,806,314 7.50 % 4,695,601 4.00 % N/A
Bank 7,684,000 6.58 % 4,670,160 4.00 % 5,837,700 5.00
As of December 31, 1997
Total Capital (to Risk-Weighted Assets)
Company $ 8,930,583 11.66 % $6,128,185 8.00 % N/A
Bank 8,711,377 11.38 % 6,121,330 8.00 % $ 7,651,663 10.00
Tier I Capital (to Risk-Weighted Assets)
Company 8,030,430 10.48 % 3,064,092 4.00 % N/A
Bank 7,811,224 10.21 % 3,060,665 4.00 % 4,590,998 6.00
Tier I Capital (to Average Assets)
Company 8,030,430 8.56 % 3,753,717 4.00 % N/A
Bank 7,811,224 8.33 % 3,750,290 4.00 % 4,687,863 5.00
</TABLE>
F-24
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
Undesignated shares: The Board of Directors has the authority to issue an
additional 3,000,000 shares of any type or class of stock, with such
designations, voting powers, preferences, participation, redemption, sinking
fund, conversion, dividend and other optional or special rights, and such
restrictions, limitations and qualifications as the Board of Directors may
determine.
Restrictions on lending from subsidiary to parent: Federal law imposes certain
restrictions limiting the ability of the Bank to transfer funds to the Parent
Company in the form of loans or advances. Section 23A of the Federal Reserve Act
prohibits the Bank from making loans or advances to the Parent Company in excess
of 10 percent of its capital stock and surplus, as defined therein. There were
no material loans or advances outstanding at December 31, 1998.
Repurchase plan: On September 10, 1998, the Board of Directors authorized a
stock repurchase program. Pursuant to the terms of this program, the Company may
repurchase up to nine percent of its outstanding common stock. No shares were
purchased as of December 31, 1998.
F-25
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1999
<S> <C>
ASSETS
Cash and due from banks $ 7,071
Interest bearing deposits in other banks 1,280
Loans held for sale 175
Investment securities available for sale at fair value 17,438
- -----------------------------------------------------------------------------------------
Loans 95,439
Less: Allowance for credit losses (1,115)
Unearned Income (179)
- -----------------------------------------------------------------------------------------
Net Loans 94,145
- -----------------------------------------------------------------------------------------
Bank premises and equipment 1,526
Other assets 1,910
=========================================================================================
Total Assets $ 123,545
=========================================================================================
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Deposits
Non interest bearing $ 16,257
Interest bearing 88,264
- -----------------------------------------------------------------------------------------
Total Deposits 104,521
- -----------------------------------------------------------------------------------------
Short term borrowings:
Securities sold under agreements to repurchase 1,964
Other short term borrowings 7,544
Accrued interest and other liabilities 546
- -----------------------------------------------------------------------------------------
Total Liabilities 114,575
- -----------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, per share par value $1.00 per share; 2,000,000 shares
authorized; 1,525,215 shares issued and outstanding 1,525
Capital surplus 6,151
Retained earnings 1,313
Accumulated other comprehensive income (loss) (19)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 8,970
========================================================================================
Total liabilities and shareholders' equity 123,545
========================================================================================
</TABLE>
F-26
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the three months ended
- ------------------------------------------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 2,260 $ 1,800
Interest and dividends on investment securities:
Taxable 179 246
Tax exempt 50 15
Dividends 13 13
Other interest income 25 23
- ------------------------------------------------------------------------------------------------------------------------
Total interest Income 2,527 2,097
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 1,036 917
Interest on securities sold under agreements to repurchase 16 11
Interest on other short-term borrowings 38 18
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,090 946
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 1,437 1,151
Provision for credit losses 90 25
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,347 1,126
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service fees 136 141
Net securities gains - 1
Gain on sale of loans 27 28
Other operating income 33 20
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 196 190
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 407 379
Occupancy expenses 134 132
Equipment expenses 87 71
Other operating expenses 334 262
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 962 844
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 581 472
Income tax expense 212 172
- ------------------------------------------------------------------------------------------------------------------------
Net income 369 300
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during period (87) 6
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (87) 6
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income 282 306
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 369 $ 300
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.24 $ 0.20
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.21 $ 0.18
- ------------------------------------------------------------------------------------------------------------------------
Basic weighted-average number of shares outstanding 1,525,215 1,520,758
- ------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average number of shares outstanding 1,732,434 1,704,556
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Interest and fees received on loans $ 2,221 $ 1,762
Interest received on interest-bearing deposits in other banks 25 23
Interest received on securities 231 199
Other income 166 161
Proceeds from loan sales 337 342
Originations of loans held for sale (333) (458)
Interest paid on securities sold under agreements to repurchase (16) (11)
Interest paid on other short-term borrowings (38) (18)
Interest paid to depositors (1,018) (895)
Cash paid to suppliers and employees (1,411) (1,297)
Income taxes paid (9) (1)
---------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 155 (193)
---------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (778) (1,605)
Proceeds from sales of securities available for sale - 100
Proceeds from maturities of and principal payments on securities 253 425
Decrease (increase) in interest-bearing deposits in other banks 6,744 (4,412)
Net increase in loans (4,813) (1,275)
Purchases of bank premises and equipment (11) (142)
---------------------------------------------
Net cash provided by (used in) investing activities 1,395 (6,909)
---------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in noninterest-bearing deposits, NOW accounts,
money market accounts and savings accounts (4,891) 4,909
Net increase (decrease) in certificates of deposit (1,568) 4,000
Net increase in securities sold under agreements to repurchase 134 84
Net increase (decrease) in other short-term borrowings 6,980 (826)
Cash dividends paid (152) (129)
Repurchase of common stock - (818)
Proceeds from issuance of common stock - 541
---------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 503 7,761
---------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,053 659
Cash and Cash Equivalents
Beginning of year 5,018 2,887
---------------------------------------------
End of year $ 7,071 $ 3,546
=============================================
</TABLE>
(Continued)
F-28
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by (Used in) Operating Activities
Net income $ 369 $ 300
Adjustments to reconcile net income to net cash
provided (used in) by operating activities
Provision for depreciation and amortization 145 126
Provision for credit losses 90 25
Net realized (gains) on sales of securities - (1)
Net premium amortization on securities 40 1
Net amortization of net loan origination costs 32 5
Changes in assets and liabilities
Decrease (increase) in:
Loans held for sale (26) (144)
Interest receivable (110) (117)
Other assets (34) (429)
Increase (decrease) in:
Accrued interest and other liabilities relating
to operating activities (351) 41
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 155 $ (193)
===================================================================================================================
</TABLE>
F-29
<PAGE>
FIRST FREDERICK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
Note 1. - The accompanying unaudited consolidated financial statements for First
Frederick Financial Corporation ("First Frederick') have been prepared in
accordance with the instructions for Form 10-QSB and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim financial statements
have been prepared utilizing the interim basis of reporting and, as such,
reflect all adjustments which are normal and recurring in nature and are, in the
opinion of management, necessary for a fair presentation of the results for the
periods presented.
Note 2. - Per share amounts: On December 31, 1997 First Frederick adopted FASB
Statement No. 128. "Earnings per Share." Statement 123 establishes standards for
computing and presenting earnings per share ("EPS") that simplify the standards
previously followed in Accounting Principals Board Opinion No. 15. It replaces
the former presentation of primary EPS with a presentation of basic EPS and,
where applicable, requires the dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS is generally computed by dividing net
income by the weighted-average number of common shares outstanding for the
period, whereas diluted EPS essentially reflects the potential dilution in basic
EPS that could occur if other contracts to issue common stock were exercised.
Per share amounts are based on the weighted-average number of shares outstanding
during each year as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1999 1998
<S> <C> <C>
Basic EPS weighted-average shares outstanding 1,525,215 1,520,758
Effect of dilutive securities - stock options 207,219 183,798
- -------------------------------------------------------------------------------------------------------
Diluted EPS weighted-average shares outstanding 1,732,434 1,704,556
- -------------------------------------------------------------------------------------------------------
</TABLE>
Note 3. - Comprehensive Income: On January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Comprehensive income, as defined by Statement 130, is the change in
equity of a business enterprise during a reporting period from transactions and
other events and circumstances from non-owner sources. In addition to an
enterprise's net income, change in equity components under comprehensive income
reporting would also include such items as the net change in unrealized gain or
loss on available-for-sale securities and foreign currency translation
adjustments. Statement 130 requires disclosure of comprehensive income and its
components with the same prominence as the Company's other financial statements.
F-30
<PAGE>
EXHIBIT A
Agreement and Plan of Merger
<PAGE>
This Agreement and Plan of Merger (the "Agreement"), made as of this
12th day March, 1999, by and between FCNB Corp ("FCNB"), a corporation organized
and existing under the laws of the State of Maryland and having its principal
office at 7200 FCNB Court, Frederick, Maryland 21703, and First Frederick
Financial Corporation ("First"), a corporation organized and existing under the
laws of the State of Maryland and having its principal office at 22 West Patrick
Street, Frederick, Maryland 21701.
WHEREAS, the respective Boards of Directors of FCNB and First each deem
it advisable and in the best interest of their respective shareholders that
First be acquired by FCNB through the merger of First with and into FCNB
substantially on the terms, and subject to the conditions, set forth in this
Agreement; and
WHEREAS, the respective Boards of Directors of FCNB and First have each
approved the merger of First with and into FCNB, substantially on the terms, and
subject to the conditions, hereinafter set forth (the "Merger");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereafter set forth, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Merger. Subject to the terms and conditions hereafter set forth,
First shall be merged with and into FCNB, in accordance with the applicable
provisions of the Maryland General Corporation Law, as amended (the "MGCL").
1.2 Name. The name of the surviving corporation (the "Surviving
Corporation" when reference is made to it after the Effective Time (hereinafter
defined)) shall be "FCNB Corp".
1.3 Certificate of Incorporation; Bylaws. As a result of, and upon the
effectiveness of the Merger, Article Sixth of the Articles of Incorporation of
FCNB shall, without further action, be amended to increase the total number of
shares of capital stock of all classes which FCNB is authorized to issue to
fifty-one million (51,000,000), fifty million (50,000,000) of which shall be
common stock, par value $1.00 per share, and one million of which shall be
preferred stock, par value $1.00 per share. The Articles of Incorporation of
FCNB in effect at the Effective Time and as so amended, and the Bylaws of FCNB
in effect at the Effective Time, shall be the Articles of Incorporation and
Bylaws of the Surviving Corporation.
1.4 Board of Directors; Officers. (a) The Board of Directors of FCNB at
the Effective Time shall serve as the Board of Directors of the Surviving
Corporation until their successors are duly elected and qualified.
(b) The Officers of FCNB at the Effective Time shall serve as the officers of
the Surviving Corporation until their successors are duly appointed by the Board
of Directors.
1.5 Effect of the Merger. At the Effective Time, the separate corporate
existence of First shall cease and FCNB as the Surviving Corporation shall
succeed to and possess all of the properties, rights, powers, privileges,
franchises, patents, trademarks, licenses, registrations, and other assets of
every kind and description of First, and shall be subject to, and be responsible
for, all debts, liabilities, and obligations of First, all without further act
or deed, and in accordance with the applicable provisions of the MGCL.
1.6 Closing; Effective Time. (a) The closing of the Merger (the
"Closing") shall occur at the principal offices of FCNB, at a time and on a date
specified in writing by the parties, which date shall be as soon as practicable,
but not more than thirty (30) days, after the latest of the receipt of all
requisite approvals and authorizations of regulatory and governmental
authorities, the expiration of all applicable waiting periods and the
satisfaction or waiver of all conditions hereto. The date at which the Closing
occurs is occasionally referred to herein as the "Closing Date."
(b) The Merger shall become effective upon the later of (i) the filing of the
articles of merger in substantially the form attached hereto as Exhibit A (the
"Articles of Merger") with the Maryland State Department of Taxation and
Assessments (the "Department") or (ii) the time set forth in the Articles of
Merger filed with the Department (the
A-1
<PAGE>
"Effective Time"). Except as otherwise agreed in writing, the Effective Time
shall be within one business day of the Closing.
ARTICLE II
2.1 Conversion of Shares, Options and Warrants. (a) At the Effective
Time, each of the outstanding shares of common stock, par value $1.00 per share,
of First ("First Common Stock") (excluding shares of First Common Stock held in
treasury or by any First Subsidiary (other than in a fiduciary capacity), by
FCNB or any FCNB Subsidiary (other than in a fiduciary capacity), or as to which
the holders have perfected dissenters' right in accordance with the MGCL
("dissenting shares")), shall automatically, and without further action, be
converted into one and four hundred thirty four ten-thousandths (1.0434) shares
of the common stock, par value $1.00 per share, of FCNB ("FCNB Common Stock")
(the "Conversion Ratio"). The Conversion Ratio reflects the closing price
($20.125) of the FCNB Common Stock on March 8, 1999. The Conversion Ratio shall
be proportionately adjusted for dividends on FCNB Common Stock payable in shares
of FCNB Common Stock or any combination or subdivision of the FCNB Common Stock
the record date for which is after the date hereof but prior to the Effective
Time. Following the Effective Time, certificates which formerly represented
shares of First Common Stock (except for certificates representing shares held
in treasury or by any First Subsidiary or dissenting shares) shall be deemed for
all purposes to represent shares of FCNB Common Stock, except that until
exchanged in accordance with the provisions of Section 2.2 hereof, the holders
of such shares shall not be entitled to receive dividends or other distributions
or payments in respect of FCNB Common Stock.
(b) (i) At the Effective Time, and subject to the agreement of each holder, each
incentive and nonincentive stock option issued and outstanding under the First
Employee Option Plan (each a "First Employee Option") outstanding as of the
Effective Time, shall automatically, and without further action, be converted
into the number of shares of FCNB Common Stock determined by (i) dividing the
exercise price per share of such First Employee Option by 20.125, and (ii)
subtracting such quotient (rounded to four decimal places) from the Conversion
Ratio.
(ii) At the Effective Time, subject to the receipt of the agreement of each
holder, each stock option issued to First's Directors Option Plan (each a "First
Director Option," and together with the First Employee Options, the "First
Options") and each organizers warrant ("Warrants"), outstanding as of the
Effective Time, shall automatically, and without further action, be converted
into the number of shares of FCNB Common Stock determined by (i) dividing the
exercise price per share of such First Employee Option by 20.125, and (ii)
subtracting such quotient (rounded to four decimal places) from the Conversion
Ratio.
(c) No certificate for fractional shares of FCNB Common Stock will be issued in
connection with the exchange contemplated by the Merger, and holders of First
Common Stock entitled to fractional shares shall be paid cash in lieu of such
fractional shares, without interest, on the basis of the value of a share of
FCNB Common Stock. For purposes of this Agreement, the value of a share of FCNB
Common Stock shall be equal to the average of the per share closing price for
FCNB Common Stock for the twenty (20) trading days immediately preceding the
date which is two business days before the Closing Date (the "Value
Determination Period"), as reported on the Nasdaq National Market ("Nasdaq"). In
the event that there shall be no trade on any trading day within the foregoing
period, or if Nasdaq shall fail to report a closing price on any such day, the
closing price for such day shall be the average of the closing bid price and the
closing asked price as reported by Nasdaq. In the event of the payment of a
dividend payable in shares of FCNB Common Stock, or the combination or
subdivision of the FCNB Common Stock, the calculation for determining the value
per share of FCNB Common Stock shall be proportionally adjusted to reflect such
event.
(d) Each share of FCNB Common Stock outstanding immediately prior to the
Effective Time shall be unchanged, and shall continue to be issued and
outstanding shares of FCNB Common Stock.
(e) All shares of First Common Stock held by First as treasury shares or by any
First Subsidiary (other than in a fiduciary capacity), by FCNB or any FCNB
Subsidiary (other than in a fiduciary capacity) shall be cancelled and shall not
be converted as provided in Section 2.1(a).
2.2 Exchange of Share Certificates. Certificates formerly representing
shares of First Common Stock shall be exchanged for FCNB Common Stock
certificates in accordance with the following procedures:
A-2
<PAGE>
(a) Exchange Agent. At FCNB's election, FCNB or the transfer agent for FCNB
shall act as exchange agent ("Exchange Agent") to receive First Common Stock
certificates from the holders thereof and to exchange such stock certificates
for FCNB Common Stock certificates, and if appropriate, to pay cash for
fractional shares of FCNB Common Stock pursuant to Section 2.1 hereof. The
Exchange Agent shall, promptly after the Effective Time, mail to each former
shareholder of First a notice specifying the procedures to be followed in
surrendering such shareholder's First Common Stock certificates.
(b) Surrender of Certificates. As promptly as possible after receipt of the
Exchange Agent notice, each former shareholder of First shall surrender his or
her certificates to the Exchange Agent; provided, that if any former shareholder
of First shall be unable to surrender his First Common Stock certificates due to
loss or mutilation thereof, he or she may make a constructive surrender by
following the procedures customarily followed by FCNB in the replacement of lost
or mutilated certificates, including, if necessary, the posting of appropriate
bond. Upon actual or constructive surrender of First Common Stock certificates
from a former First shareholder, the Exchange Agent shall issue such
shareholder, in exchange therefore, one or more certificates representing the
number of whole shares of FCNB Common Stock into which such shareholder's shares
of First Common Stock have been converted, together with a check in the amount
of any cash in lieu of fractional shares of FCNB Common Stock.
(c) Dividend Withholding. Dividends or other distributions, if any, payable by
FCNB after the Effective Time to any former shareholder of First who has not
prior to the payment date surrendered his or her First Common Stock shall be
withheld. Any dividends or other distributions so withheld shall be paid,
without interest, to such former shareholder upon proper surrender of his First
Common Stock certificates.
(d) Failure to Surrender Certificates. All First Common Stock certificates must
be surrendered to the Exchange Agent within two (2) years of the Effective Time.
In the event that any former shareholder of First shall not have properly
surrendered his or her certificates within such period, the shares of FCNB
Common Stock that would otherwise have been issued to such shareholder may, at
the option of FCNB, be sold and the net proceeds of such sale, together with any
cash in respect of fractional shares and any previously accrued dividends, shall
be held in a non-interest bearing account for such shareholder's benefit. From
and after such sale, the sole right of such shareholder shall be the right to
collect such net proceeds, cash and accumulated dividends. Subject to all
applicable laws of escheat, such amount shall be paid to such former shareholder
of First, without interest, upon proper surrender of his or her First Common
Stock certificates.
2.3 Merger of Subsidiaries. FCNB and First acknowledge and agree that
it is FCNB's expectation that First Bank of Frederick, the wholly-owned
subsidiary of First ("First Bank"), will be merged with and into FCNB Bank,
FCNB's wholly owned subsidiary ("FCNB Bank"). First agrees that it shall, or
shall cause First Bank to, at the request of FCNB, provide such assistance,
cooperation and information, execute, deliver, verify, file or acknowledge such
other agreements, instruments, applications or other documents, and take all
such other actions and do all such other things as may be reasonably necessary
in order to effect such other transactions and to effect the intents and
purposes of this Section 2.3.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FCNB
3.1 Organization and Authority. FCNB is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland,
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), and has the corporate power and authority to own its
properties and assets and to carry on its business, and the business of its
subsidiaries, as now being conducted and to enter into and carry out its
obligations under this Agreement. FCNB is qualified to do business as a foreign
corporation in each jurisdiction where such qualification is necessary, except
where the failure to obtain such qualification would not have a material adverse
effect on the business, operations, assets, financial condition, prospects or
results of operations, of FCNB and its subsidiaries, taken as a whole. FCNB has
all necessary governmental authorizations to own or lease its properties and
assets, and carry on its business as now being conducted, with the exception of
those authorizations which the failure to obtain would not have a material
adverse effect on the business, operations, financial condition, or result of
operations of FCNB and its subsidiaries, taken as a whole.
A-3
<PAGE>
3.2 Capital Structure of FCNB. As of February 28, 1999, the authorized
capital stock of FCNB consisted of 20,000,000 shares of common stock, par value
$1.00 per share, of which at such date, 10,064,892 shares were issued and
outstanding and 1,000,000 shares of undesignated preferred stock, par value
$1.00 per share, of which no shares were issued or outstanding at such date.
Additionally, 819,077 shares of Common Stock have been reserved for issuance
pursuant to FCNB's 1992 Stock Option Plan, the FCNB 1997 Director Stock Option
Plan and the FCNB Option Plan for former employees of Capital Bank, National
Association (the "FCNB Option Plans"), under which options to purchase an
aggregate of 282,846 shares of FCNB Common Stock are issued and outstanding as
of the date hereof. Additionally, 214,736 shares of FCNB Common Stock are
reserved for issuance in connection with the FCNB Dividend Reinvestment Plan
("DRI Plan"). Other than as set forth in this Section 3.2, there are no other
shares of capital stock or other equity securities of FCNB outstanding and no
other outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of FCNB, or
contracts, commitments, understandings, or arrangements by which FCNB was or may
become bound to issue additional shares of its capital stock or options,
warrants or rights to purchase or acquire any additional shares of its capital
stock
All of the outstanding shares of FCNB Common Stock, and, when issued in
accordance with the provisions of this Agreement, all of the shares of FCNB
Common Stock to be issued in exchange for shares of First Common Stock, are, or
will be, duly authorized and validly issued shares of FCNB Common Stock, which
shares are fully paid and nonassessable under the MGCL. No shares of FCNB Common
Stock have been, and none of the shares of FCNB Common Stock to be issued in
exchange for shares of First Common Stock will be, issued in violation of the
preemptive rights of any shareholder of FCNB. FCNB has reserved a sufficient
number of shares of FCNB Common Stock for the purpose of issuing shares of FCNB
Common Stock in accordance with the provisions of Article II hereof.
3.3 FCNB Subsidiaries. FCNB directly owns all the shares of the
outstanding capital stock of FCNB Bank. Except as set forth in the separate
disclosure letter of FCNB dated as of the date hereof, and delivered not later
than the date hereof (the "FCNB Disclosure Letter"), neither FCNB nor FCNB Bank
has any other subsidiaries. No equity securities of FCNB Bank are or may become
required to be issued by reason of any options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever, relative to, or
concerning securities or rights convertible into, or exchangeable for, shares of
any class of capital stock of FCNB Bank, and there are no other contracts,
commitments, understandings or arrangements by which FCNB Bank is bound to issue
additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock. All of the
shares of capital stock of FCNB Bank so owned by FCNB are fully paid and
non-assessable and are owned by it free and clear of any claim, lien,
encumbrance or agreement with respect thereto. FCNB Bank is a commercial bank
duly organized, validly existing and in good standing under the laws of the
State of Maryland and has the corporate power and authority and all necessary
federal, state, local and foreign authorizations to own or lease its properties
and assets and to carry on its business as it is now being conducted. The
deposits of FCNB Bank are insured to the applicable legal limits by the Federal
Deposit Insurance Corporation (the "FDIC").
3.4 Authorization. The execution, delivery and performance of this
Agreement by FCNB and the consummation of the transactions contemplated hereby
have been duly authorized by the Board of Directors of FCNB and, except for
approval by the shareholders of FCNB, no other corporate proceedings on the part
of FCNB are necessary to authorize this Agreement and the transactions
contemplated hereby. Subject to shareholder approval and the approvals of
government agencies having regulatory authority over FCNB and FCNB Bank as may
be required by statute or regulation, this Agreement is the valid and binding
obligation of FCNB, enforceable in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization or moratorium or
other similar laws affecting creditors' rights generally and the rights of
creditors of insured depository institutions, and subject to general equitable
principles which may limit the enforcement of certain remedies.
Neither the execution, delivery and performance of this Agreement by
FCNB, nor the consummation of the transactions contemplated hereby, nor
compliance by FCNB with any of the provisions of this Agreement, will (i)
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice of lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration, or the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of FCNB under any of the terms,
conditions or provisions of, (x) the Articles of Incorporation or Bylaws of
FCNB, or (y) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which FCNB is a
party or by which FCNB may be bound, or to
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which FCNB or any of its properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to FCNB or any of its properties or assets.
Other than in connection or in compliance with the applicable
provisions of the MGCL, the Maryland Financial Institutions Code (the "MFIC"),
the Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder (the "Exchange Act"), the securities or blue
sky laws of the various states and consents, authorizations, approvals or
exemptions required under the BHCA or the Federal Deposit Insurance Act (the
"FDIA") or any applicable federal or state banking statute, no notice to, filing
with, authorization of, exemption by, or consent or approval of, any public body
or authority is necessary for the consummation by FCNB of the transactions
contemplated by this Agreement. FCNB has no reason to believe that any required
regulatory consent or approval will not be received or will be received with
conditions or restrictions which it would deem unduly burdensome, or which would
have an adverse impact on its capacity to consummate the transactions
contemplated hereby.
3.5 Financial Statements. FCNB has furnished to First the following
financial statements: the audited Consolidated Balance Sheets for the years
ended December 31, 1998 and 1997, and Consolidated Statements of Income and
Comprehensive Income, Consolidated Statements of Stockholders' Equity and
Consolidated Statements of Cash Flows of FCNB and its subsidiaries as of and for
the years ended December 31, 1998, 1997 and 1996. Each of the aforementioned
financial statements, and like financial information provided to First
subsequent to the date hereof, have been and will be prepared in accordance with
generally accepted accounting principles applied on a consistent basis, and
present fairly and will present fairly the consolidated financial position,
results of operations, stockholders' equity and changes in financial position of
FCNB as of the dates and for the periods therein set forth. In the case of the
interim fiscal periods, all adjustments, consisting only of normal recurring
items, have been and will be made, subject to year end audit adjustments.
Without limitation of the foregoing, the reserves for possible credit losses
which it has established and which are included in the above-referenced FCNB
Financial Statements, were as of such dates, in the judgement of FCNB, adequate
to absorb all reasonably anticipated losses in the loan and lease portfolios of
FCNB, in view of the size and character of such portfolios, current economic
conditions, and other pertinent factors; and, further, no facts have
subsequently come to the attention of management of FCNB which would cause it to
restate in any material way the levels of such reserves for possible credit
losses as of such dates. Such financial statements do not, as of the date
thereof, include any material asset, or omit any material liability, absolute or
contingent, or other fact, the inclusion or omission of which renders such
financial statements, in light of the circumstances in which they were made,
misleading in any material respect.
3.6 SEC Filings. FCNB has filed all reports, forms, statements and
other documents with the SEC that it was required to file since January 1, 1996
(the "SEC filings"), all of which complied in all material respects with the
applicable requirements of the Securities Act and/or Exchange Act. As of their
respective dates, and except as revised, amended or modified by a subsequently
filed document, each such SEC filing did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.7 Absence of Material Adverse Changes. Since December 31, 1998, there
has not been any change in the financial condition, results of operations or
business of FCNB and its subsidiaries that has had, or may be reasonably
expected to have, a material adverse effect on the business, operations, assets,
financial condition, prospects or results of operations of FCNB and its
subsidiaries, taken as a whole, or on the ability of FCNB to consummate the
transactions contemplated hereby.
3.8 Reports. As of February 28, 1999 FCNB and FCNB Bank have filed,
since that date have filed, and subsequent to the date hereof will file, all
reports, registrations and statements, if any, together with any amendments
required to be made with respect thereto, that were and are required to be filed
with (i) the SEC, (ii) the Federal Reserve Board, (iii) the FDIC, (iv) the
Department, and (v) the Department of Financial Regulation (the "DFR") (all such
reports and statements are collectively referred to herein as the "FCNB
Reports"). As of their respective dates, the FCNB Reports complied and will
comply in all material respects with all the statutes, rules and regulations
enforced or promulgated by the regulatory authority with which they were filed
and did not and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
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3.9 Litigation and Other Proceedings. Except as set forth in the FCNB
Disclosure Letter, FCNB is not a party to any pending, or, to the knowledge of
FCNB, threatened claim, action, suit, investigation or proceeding or subject to
any order, judgment or decree, except for matters which, in the aggregate,
cannot reasonably be anticipated to have, a material adverse effect on the
business, operations, assets, financial condition, prospects or results of
operations of FCNB and its subsidiaries, taken as a whole. FCNB does not have
any knowledge of any pending or threatened action, suit or proceeding which
presents a claim to prohibit, restrict or restrain the transactions contemplated
hereby or by the Bank Merger Agreement (as hereinafter defined) or the Option
Agreement (as hereinafter defined).
3.10 Compliance with Laws. FCNB and the FCNB Subsidiaries have all
permits, licenses, certificates of authority, orders and approvals of, and have
made all filings, applications and registrations with, federal, state, local or
foreign governmental or regulatory bodies that are required in order to permit
them to carry on their business as presently conducted and the absence of which
would have a material adverse effect on such business; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect, and, to the knowledge of FCNB, no suspension or cancellation of any of
them is threatened; and all such filings, applications and registrations are
current. The conduct of its business by FCNB does not violate, in any material
respect, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation now in effect. FCNB is not in default
under any order, license or demand of any federal, state, local or other
governmental agency or with respect to any order, writ, injunction or decree of
any court. Except for statutory or regulatory restrictions of general
application, no federal, state, local or other governmental authority has placed
any restrictions on the business of FCNB.
3.11 Proxy Statement, Etc. None of the information supplied or to be
supplied by FCNB for inclusion, or included, in (i) the Proxy Statements to be
mailed to the shareholders of First and FCNB ("Proxy Statement" as described in
Section 5.3 below), in connection with the Shareholder Meetings and (ii) any
other documents to be filed with the SEC or any regulatory agency in connection
with the transactions contemplated hereby will, to the best knowledge of FCNB
and at such respective times as such information is supplied or such documents
are filed or mailed, be false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to make the statements
therein not misleading. All documents which FCNB is responsible for filing with
the SEC and any regulatory agency in connection with the Merger will comply as
to form in all material respects with the provisions of applicable law.
3.12 Year 2000. FCNB is in compliance in all material respects with all
regulatory requirements regarding Year 2000 issues. FCNB has developed, approved
and is implementing in a timely manner, a Year 2000 compliance program which
will ensure that its computer systems and/or those of its data processing
providers are or will be Year 2000 compliant prior to December 1999. No material
costs in excess of those reflected on the financial statements and internal
budget projections will be incurred in connection with such programs.
3.13 Brokers and Finders. Except for a success fee of .03% of the
aggregate value of the consideration issued by FCNB to holders of First Common
Stock to Feldman Financial Advisors, Inc., neither FCNB nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for FCNB
in connection with this Agreement or the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST
First represents and warrants to FCNB that:
4.1 Organization and Authority. First is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland,
is a registered bank holding company BHCA, and has the corporate power and
authority to own its properties and assets and to carry on its business, and the
business of its subsidiaries, as now being conducted and to enter into and carry
out its obligations under this Agreement. First is qualified to do business as a
foreign corporation in each jurisdiction where such qualification is necessary,
except where the failure to obtain such qualification would not have a material
adverse effect on the business, operations, assets, financial condition,
prospects or results of operations, of First and its subsidiaries, taken as a
whole. First has all necessary governmental
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authorizations to own or lease its properties and assets, and carry on its
business as now being conducted, with the exception of those authorizations
which the failure to obtain would not have a material adverse effect on the
business, operations, financial condition, or result of operations of First and
its subsidiaries, taken as a whole.
4.2 First Subsidiaries. First directly owns all the shares of the
outstanding capital stock of First Bank of Frederick, Frederick, Maryland, a
Maryland chartered commercial bank which is not a member of the Federal Reserve
System ("First Bank"). Except as set forth in the separate disclosure letter of
First dated as of the date hereof, and delivered not later than the date hereof
(the "First Disclosure Letter"), updated for comparative purposes as of the date
of Closing, neither First nor First Bank has any other subsidiaries, or owns any
capital stock or other interests in any entity (including, without limitation,
corporations, partnerships, joint ventures, and inactive corporations). First
Bank, together with all other First subsidiaries referred to on occasion as
"First Subsidiaries" and each individually as a "First Subsidiary". No equity
securities of any First Subsidiary are or may become required to be issued by
reason of any options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever, relative to, or concerning securities
or rights convertible into, or exchangeable for, shares of any class of capital
stock of any First Subsidiary, and there are no other contracts, commitments,
understandings or arrangements by which any First Subsidiary is bound to issue
additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock. All of the
shares of capital stock of each of the First Subsidiaries so owned by First or
any First Subsidiary are fully paid and non-assessable and are owned by it free
and clear of any claim, lien, encumbrance or agreement with respect thereto.
First Bank is a commercial bank duly organized, validly existing and in good
standing under the laws of the State of Maryland, and has the corporate power
and authority and all necessary federal, state, local and foreign authorizations
to own or lease its properties and assets and to carry on its business as it is
now being conducted. The deposits of First Bank are insured to the applicable
legal limits by the Bank Insurance Fund of the FDIC. Each other First Subsidiary
is duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization, and has the corporate power and authorization and
all necessary material federal, state, local and foreign authorizations to own
or lease its properties and assets and to carry on its business as it is now
being conducted, except for such authorizations which the failure to possess or
obtain would not have a material adverse effect on the financial condition,
results of operations, properties, assets or business of First and the First
Subsidiaries, taken as a whole.
4.3 Capitalization of First. As of February 28,1999, the authorized
capital stock of First consisted of five million (5,000,000) shares, of which
two million (2,000,000) shares are designated as common stock, par value $1.00
("First Common Stock"), and three million (3,000,000) shares are undesignated.
As of February 28, 1999, 1,525,215 shares of First Common Stock were issued and
outstanding, and no shares of First Common Stock or other class or series of
capital stock have been issued since that date. Except for options to acquire
102,952 shares of First Common Stock upon the exercise of options issued
pursuant to the First Option Plans, and Warrants to acquire 254,925 shares of
First Common Stock, which options and Warrants are described (including, but not
limited to, exercise price, expiration date, identity of holders, and number
held by each holder) in the First Disclosure Letter, there are no other shares
of capital stock or other equity securities of First outstanding and no other
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of capital stock of First, or
contracts, commitments, understandings, or arrangements by which First was or
may become bound to issue additional shares of its capital stock or options,
warrants or rights to purchase or acquire any additional shares of its capital
stock.
All of the outstanding shares of First Common Stock are duly and
validly issued shares of First Common Stock, and are fully paid and
nonassessable. No shares of First Common Stock have been issued in violation of
the preemptive or preferential rights of any holder of First Common Stock.
Except as set forth in the First Disclosure Letter, all of the outstanding
shares of First Common Stock have been issued pursuant to an effective
registration statement under the Securities Act of 1933, and pursuant to
effective registrations or qualifications under applicable state securities or
blue sky laws or pursuant to applicable exemptions from such registration or
qualification. The First Disclosure Letter sets forth any exemptions from such
registration relied upon and the circumstances of any such exempt offering.
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4.4 Authorization. The execution, delivery and performance of this
Agreement by First and the consummation of the transactions contemplated hereby
have been duly authorized by the Board of Directors of First and, except for the
approval by the shareholders of First, no other corporate proceedings on the
part of First are necessary to authorize this Agreement and the transactions
contemplated hereby. Subject to shareholder approval, this Agreement is the
valid and binding obligation of First enforceable against it in accordance with
its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization or moratorium or other similar laws or equitable principles
affecting creditors' rights generally and subject to general equitable
principles which may limit the enforcement of certain remedies.
Except as set forth in the First Disclosure Letter, neither the
execution, delivery and performance of this Agreement by First, nor the
consummation of the transactions contemplated hereby, nor compliance by First
with any of the provisions hereof or thereof, will (i) violate, conflict with,
or result in a breach of any provisions of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration or the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
First or any First Subsidiary under any of the terms, conditions or provisions
of (x) its or any First Subsidiary's Articles or Certificate of Incorporation or
Charter or Bylaws or (y) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which First or
any of the First Subsidiaries may be bound, or to which First or any of the
First Subsidiaries or any of the properties or assets of First or the First
Subsidiaries may be subject; or (ii) subject to compliance with the statutes and
regulations referred to in the next paragraph, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to First
or any of the First Subsidiaries or any of their respective properties or
assets.
Other than in connection or in compliance with the applicable
provisions of the MGCL, the MFIC, the Securities Act, the Exchange Act, the
securities or blue sky laws of the various states and consents, authorizations,
approvals or exemptions required under the BHCA, the FDIA or any applicable
federal or state banking statute, no notice to, filing with, authorization of,
exemption by, or consent or approval of, any public body or authority is
necessary for the consummation by First of the transactions contemplated by this
Agreement. First has no reason to believe that any required regulatory consent
or approval will not be received or will be received with conditions or
restrictions which FCNB would deem unduly burdensome, or which would have an
adverse impact on its capacity to consummate the transactions contemplated
hereby.
4.5 First Financial Statements. The consolidated balance sheets of
First as of December 31, 1998 and 1997, and the related consolidated statements
of financial condition, operations, changes in stockholders' equity,
comprehensive income and cash flows for the two years ended December 31 1998,
certified by Keller Bruner & Company, LLP, copies of which have been furnished
by First to FCNB (the "First Consolidated Financial Statements"), and like
financial information provided to FCNB subsequent to the date hereof, have been
and will be prepared in accordance with generally accepted accounting principles
applied on a consistent basis, and present and will present fairly the financial
position of First at the dates, and the consolidated results of operations,
stockholders' equity, and changes in the financial position of First for the
periods stated therein. In the case of interim fiscal periods, all adjustments,
consisting only of normal recurring items, have been and will be made, subject
to year-end audit adjustments. Without limitation of the foregoing, and except
as agreed upon between the parties hereto, the reserves for possible credit
losses which are included in the above-referenced First Consolidated Financial
Statements, were as of such dates, adequate to absorb all reasonably anticipated
losses in the loan and lease portfolios of First and each of the First
Subsidiaries, in view of the size and character of such portfolios, current
economic conditions, and other pertinent factors; and, further, no facts have
subsequently come to the attention of management of First which would cause it
to restate in any material way the levels of such reserves for possible credit
losses.
4.6 Books of Account; Corporate Records. The books of account of First
and each First Subsidiary are maintained in compliance in all material respects
with all applicable legal and accounting requirements. The minute books of First
and each of the First Subsidiaries accurately disclose all material corporate
actions of their respective shareholders and Board of Directors and of all
committees thereof.
4.7 Reports. As of February 28, 1999, First and the First Subsidiaries
have filed, since that date have filed, and subsequent to the date hereof will
file, all reports, registrations and statements, if any, together with any
amendments required to be made with respect thereto, that were and are required
to be filed with (i) the SEC, (ii) the Federal Reserve Board, (iii) the FDIC,
(iv) the Department and (v) the DFR (all such reports and statements are
collectively referred to
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herein as the "First Reports"). As of their respective dates, the First Reports
complied and will comply in all material respects with all the statutes, rules
and regulations enforced or promulgated by the regulatory authority with which
they were filed and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
4.8 Absence of Certain Changes. Since February 28, 1999 there has not
been any change, in the nature of the business, results of operations, assets,
financial condition, prospects, method of accounting or accounting practice, or
manner of conducting the business of First and the First Subsidiaries, or
otherwise, any of which changes has had, or may reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the business,
operations, assets, financial condition, prospects or results of operations of
First and the First Subsidiaries taken as a whole, or on the ability of First to
consummate the transactions contemplated hereby.
4.9 Insurance. All policies of insurance, including policies of title
insurance, liability insurance and financial institutions bonds maintained by
First or any First Subsidiary, including the identity of the carrier, type of
coverage, policy limits, expiration, and claims made within the past five (5)
years, are set forth in the First Disclosure Letter. All such policies are in
full force and effect and no notices of cancellation have been received in
connection therewith. Such policies are in accordance with customary and
reasonable practice in the banking industry in respect of amounts, types and
risks insured, for the business in which First and the First Subsidiaries are
engaged, and are sufficient for compliance with all legal requirements and all
agreements to which First or any First Subsidiary is a party. Neither First nor
any First Subsidiary is in default with respect to any such policy which
defaults, taken as a whole, are material to First.
4.10 Properties, Leases and Other Agreements. Except as may be
reflected in the First Consolidated Financial Statements and except for any lien
for current taxes not yet delinquent, and except for imperfections of title,
encumbrances and easements, if any, as are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with the
present or proposed use of, such properties or assets, First and the First
Subsidiaries have good title, free and clear of any liens, claims, charges,
options or other encumbrances, to all of the personal and real property
reflected in the consolidated balance sheet of First as of December 31, 1998
referred to above in Section 4.5, and all personal and real property acquired
since such date, except such personal and real property as has been disposed of
for fair value in the ordinary course of business. All leases material to First
and the First Subsidiaries, pursuant to which First or any First Subsidiary, as
lessee, leases real or personal property, are valid and effective in accordance
with their respective terms, and there is not, under any of such leases, any
material existing default by First or any First Subsidiary or any event which
with notice or lapse of time or both would constitute such a material default.
The First Disclosure Letter sets forth a complete list and brief description of
all real estate owned or leased by First or any First Subsidiary (including real
estate acquired by means of foreclosure, transfer in lieu of foreclosure or by
exercise of any creditor's right), and all personal property having a value in
excess of $25,000 owned or leased by First or any First Subsidiary. Each item of
real estate described in the First Disclosure Letter and used in the conduct of
the business of First or any First Subsidiary is in good repair and insurable at
market rates; no notice of violation of zoning laws, building or fire codes or
other statutes, ordinances or regulations relating to the use or operation of
such property has been received by or is known of by First or any First
Subsidiary; and there are no condemnation or similar proceedings pending or
threatened against any such property or any portion thereof.
4.11 Taxes. First and the First Subsidiaries have duly filed, or will
file, all federal, state, local and foreign tax returns ("Returns") required by
applicable law to be filed on or before the Effective Time (all such Returns
being accurate and complete in all material respects), and have paid or have set
up adequate reserves or accruals for the payment of all taxes required to be
paid in respect of the periods covered by such Returns, and will pay, or where
payment is not yet due, will set up adequate reserves or accruals adequate in
all material respects for the payment of all taxes for any subsequent periods
ending on or prior to the Effective Time or any portion of a subsequent period
which includes the Effective Time and ends subsequent thereto. Neither First nor
any of the First Subsidiaries will have any material liability for any such
taxes in excess of the amounts so paid or reserved or accruals so established.
Neither First nor any of the First Subsidiaries is delinquent in the payment of
any material tax, assessment or governmental charge and has not requested any
extension of time within which to file any tax returns in respect of any fiscal
year which have not since been filed. No material deficiencies for any tax,
assessment or governmental charge have been proposed, asserted or assessed
(tentatively or definitively) against First which have not been settled and paid
and, as of the date of this Agreement, no requests for waivers of the time to
assess any tax, or waivers of the statutory period of limitation, are
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pending or have been granted, and First does not have in effect any currently
effective power of attorney or authorization to any person to represent it in
connection with any taxes.
4.12 Fiduciary Activities. Except as set forth in the First Disclosure
Letter, neither First, nor any First Subsidiary, is directly or indirectly
engaged in any fiduciary or custodial activities.
4.13 Intangible Property. First and the First Subsidiaries own or
possess the right, free of the claims of any third party, to use all material
trademarks, service marks, trade names, copyrights, patents, and licenses
currently used by them in the conduct of their respective businesses, each of
which is described in the First Disclosure Letter. No material product or
service offered and no material trademark, service mark or similar right used by
them infringes any rights of any other person, and, as of the date hereof, First
has received no written or oral notice of any claim of such infringement.
4.14 Employee Relations. As of the date hereof, First and each First
Subsidiary is in all material respects in compliance with all federal and state
laws, regulations, and orders respecting employment and employment practices
(including Title 7 of the Civil Rights Act of 1964), terms and conditions of
employment, and wages and hours, and none of them is engaged in any unfair labor
practice, and there are no pending, or to the knowledge of First, threatened
actions, suits or proceedings, administrative, arbitrarial, civil, criminal or
otherwise, seeking to impose on First or any First Subsidiary, any penalty, or
to recover any damages from First, any First Subsidiary or any person to whom
they may be obligated to provide indemnification or defense, as a result of the
violation or alleged violation of any of such employment related laws,
regulations or orders, and there is no basis for any of the foregoing. As of the
date hereof, no dispute exists between First or any of the First Subsidiaries
and any of their respective employee groups regarding employee organization,
wages, hours, or conditions of employment which would materially interfere with
the business or operations of First and the First Subsidiaries taken as a whole.
As of the date hereof, there are no labor or collective bargaining agreements
binding upon First or any First Subsidiary or to which First or any First
Subsidiary is a party, and, except as set forth in the First Disclosure Letter,
no employment or consulting agreements binding upon First or any First
Subsidiary, or to which First or any First Subsidiary is a party. As of the date
hereof, neither First nor any First Subsidiary is aware of any attempts to
organize a collective bargaining unit to represent any of their respective
employee groups. All contributions due on or prior to the date hereof to any
pension, profit-sharing, or similar plan of First or any First Subsidiary have
been paid or provided for in accordance with the Employee Retirement Income
Security Act of 1974, as amended, and all other applicable federal and state
statutes and regulations. The First Disclosure Letter sets forth each employment
contract, deferred compensation, non-competition, bonus, stock option, profit
sharing, pension, retirement, incentive and insurance arrangement or plan, and
any other remunerative or fringe benefit arrangement applicable to First or any
First Subsidiary, including the amounts currently payable pursuant to any
employment agreement or other remunerative arrangement.
4.15 ERISA. The First Disclosure Letter sets forth a complete list of
First Bank's employee pension benefit plans within the meaning of Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
profit sharing plans, stock purchase plans, deferred compensation and
supplemental income plans, group insurance plans and all other employee welfare
benefits plans within the meaning of Section 3(1) of ERISA, maintained for the
benefit of the employees or former employees, including any beneficiaries
thereof, and directors or former directors of First and First Subsidiaries.
First has delivered to FCNB a true and correct copy of each such employee
benefit plan. Other than as set forth in this Section 4.15 and in the First
Disclosure Letter, neither First nor any First Subsidiary maintains any plans of
the type described in this Section.
All "employee benefit plans" (as defined in Section 3(3) of ERISA)
comply in all material respects with all applicable provisions of ERISA, the
Code, and all other federal, state, or local laws. The assets of First are not
subject to any liens under ERISA or the Code with respect to any employee
benefit plan of First or an Affiliate (as defined below), and no event has
occurred, or condition exists, which could subject First or its assets to a
future liability, obligation, or lien arising out of any employee benefit plan
of First or an Affiliate.
All employee benefit plans currently or previously maintained,
sponsored, or contributed to by First or First Bank have been administered,
maintained, and operated in accordance with their terms. All contributions,
payments, fees or expenses relating to each such employee benefit plan that were
deducted by First or First Bank for income tax purposes were properly deductible
in the year claimed. There are no actions, claims (other than routine benefit
claims made in the ordinary course), proceedings or inquiries, pending or
threatened, with respect to any such employee benefit
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plan, and neither First nor First Bank has any knowledge of any fact which could
give rise to any such action, claim, proceeding or inquiry. Neither First, First
Bank, nor any other person or entity who or which is a party in interest (as
defined in Section 3(14) of ERISA) or disqualified person (as defined in Section
4975(e)(2) of the Code) has acted or failed to act with respect to any such
employee benefit plan in any manner which constitutes: (a) a breach of fiduciary
responsibility under ERISA; (2) a prohibited transaction under Section 406 of
ERISA or Section 4975 of the Code; or (3) any other violation of ERISA or the
Code, except as set forth in the First Disclosure Letter. Except as set forth in
the First Disclosure Letter, neither First nor First Bank is obligated to
indemnify, reimburse, or contribute to the liabilities or expenses of any person
or entity who may have committed or been involved in any such fiduciary breach,
prohibited transaction, or ERISA or Code violation. Each such employee benefit
plan which is intended to meet the requirements for tax-favored treatment under
Subtitle A, Chapter 1 of the Code meets such requirements. Each such employee
benefit plan that was intended to constitute a qualified plan under Section
401(a) of the Code has, at all times, been qualified, in form and operation,
under Section 401(a) of the Code, and any related trust is and has, at all
times, been exempt from income tax. Neither First nor any Affiliate (as defined
below) has ever maintained or contributed to a multiemployer plan (as defined in
Section 3(37) of ERISA). Except as set forth in the First Disclosure Letter, all
returns, reports, statements, notices, declarations or documents relating to an
employee benefit plan that are required by law to be filed with or furnished to
any federal, state, or local governmental agency have been timely filed. Any
employee benefit plan (including any employee benefit plan of an Affiliate) that
is a group health plan (as defined in Section 5000(b)(1) of the Code) has
complied in each and every case with the requirements of Sections 601 through
607 of ERISA and Section 4980B of the Code and all other applicable federal,
state, and local laws relating to continuation coverage (collectively "COBRA"),
and no such plan provides benefits to former employees or their beneficiaries
(except to the extent required under COBRA). Each employee benefit plan can be
amended, modified, or terminated without participant consent and without
additional liability accruing to First or any First Subsidiary after the date of
Plan termination. For this purpose, liabilities accrued on or before the date of
Plan termination shall be limited to the following: (1) in the case of an
employee benefit pension plan (within the meaning of Section 3(2) of ERISA), the
participant's "accrued benefit," as defined in Section 3(23) of ERISA; and (2)
in the case of an employee welfare benefit plan (within the meaning of Section
3(1) of ERISA), claims for expenses, costs, or services (including, but not
limited to, medical and other health care services) actually performed or
incurred before the date of the Plan termination. Any prior amendment,
modification, or termination of an employee benefit plan has been made in
accordance with the terms of the Plan and applicable law.
For purposes of this Section 4.15, the term Affiliate means an entity
included in the group of entities consisting of First and all other entities
that are treated as part of the same controlled group under Section 414(b), (c),
(m) or (o) of the Code.
4.16 Contracts. Except as disclosed in the First Disclosure Letter,
neither First nor any First Subsidiary is a party to, and no property or assets
of First or any First Subsidiary is subject to any contract, agreement, lease,
sublease, license, arrangement, understanding or instrument calling for payments
in excess of $25,000 over the term of the contract or in any year ("Material
Contract"). Except as disclosed in the First Disclosure Letter each such
Material Contract is valid and in full force and effect, and all parties thereto
have in all material respects performed all obligations thereunder required to
be performed to date, and are not in material default. Except as disclosed in
the First Disclosure Letter each Material Contract is assumable and assignable
without consent of the other party thereto and does not contain any provision,
increasing or accelerating payments otherwise due, or change or modify the
provisions or terms of such Material Contract as a result of this Agreement or
the transactions contemplated hereby.
4.17 Related Party Transactions. Except as set forth in the First
Disclosure Letter neither First nor any First Subsidiary has any contract,
extension of credit, business arrangement, depository relationship, or other
relationship with (i) any present or former director or officer of First or any
First Subsidiary; (ii) any shareholder of First owning 5% or more of the
outstanding First Common Stock; or (iii) any affiliate or associate of the
foregoing. Each extension of credit disclosed in the First Disclosure Letter has
been made in the ordinary course of business, and on the same terms, including
interest rate and collateral, as those prevailing at the time for comparable
arms'-length transactions, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
4.18 Loans. Except as set forth in the First Disclosure Letter, each of
the loans of First or any First Subsidiary represents the legal, valid and
binding obligation of the borrowers named therein, enforceable in accordance
with its terms (including the validity, perfection and enforceability of any
lien, security interest or other encumbrance relating to such loan), except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization,
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moratorium or similar laws relating to or affecting the enforcement of
creditors' rights generally, and subject to general principles of equity which
may limit the enforcement of certain remedies. Except as set forth in the First
Disclosure Letter no default (including any event or circumstance which with the
passage of time or the giving of notice or both would constitute a default) in
respect of any material provision of any such loan exists, and First has no
knowledge of any borrower's inability to repay any of such loans when due,
whether or not such borrower is currently in default.
4.19 Environmental Matters. First has no knowledge or information that
any environmental contaminant, pollutant, toxic or hazardous waste or similar or
like substance has been generated, used, stored, processed, disposed of,
discharged at, or was or is otherwise present at any real estate now or
previously owned or acquired (including without limitation any real estate
acquired by means of foreclosure, transfer in lieu of foreclosure or by exercise
of any other creditor's right) or leased by First or any First Subsidiary, or
any real estate which is pledged or stands as collateral security for any loan
or other extension of credit by First or any First Subsidiary, except as
disclosed in the First Disclosure Letter. Except as disclosed in the First
Disclosure Letter, there is no legal, administrative, arbitrarial or other
proceeding, claim, action, cause of action or governmental proceeding or
investigation of any nature whatsoever, seeking to impose, or that could result
in the imposition, on First or any First Subsidiary of any liability arising
under any local, state, or federal environmental statute, regulation, rule or
ordinance, pending or, to the knowledge of First, threatened against First or
any First Subsidiary; and there is no reasonable basis for any of the foregoing;
and neither First nor any First Subsidiary is subject to any agreement, order,
judgment, decree or memorandum of any court, governmental authority, regulatory
agency or third party imposing any such liability. Notwithstanding anything to
the contrary contained herein, FCNB shall be entitled to conduct investigations
into environmental matters relating to First and the First Subsidiaries for a
period of 45 days from the date hereof. First agrees that it shall permit to be
performed, at FCNB's expense, such environmental testing and investigations as
FCNB shall request.
4.20 Litigation and Other Proceedings. Except as set forth in the First
Disclosure Letter, neither First nor any of the First Subsidiaries is a party to
any pending, or, to the knowledge of First, threatened claim, action, suit,
investigation or proceeding or subject to any order, judgment or decree, except
for matters which, in the aggregate, cannot reasonably be anticipated to have, a
material adverse effect on the financial condition, results of operations,
business, properties or prospects of First and the First Subsidiaries taken as a
whole, and there is no basis for any of the foregoing. The First Disclosure
Letter sets forth a complete and accurate list of all actions, suits,
investigations or proceedings to which First or any First Subsidiary is a party
or which relate to any of their respective assets. First does not have any
knowledge of any pending or threatened action, suit or proceeding which presents
a claim to prohibit, restrict or restrain the transactions contemplated hereby
or by the Bank Merger Agreement or the Option Agreement.
4.21 Compliance with Laws. First and each of the First Subsidiaries
have all permits, licenses, certificates of authority, orders and approvals of,
and have made all filings, applications and registrations with, federal, state,
local or foreign governmental or regulatory bodies that are required in order to
permit them to carry on their business as presently conducted and the absence of
which would have a material adverse effect on such business; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect, and, to the best knowledge of First, no suspension or cancellation of
any of them is threatened; and all such filings, applications and registrations
are current. The conduct of its business by First and each of the First
Subsidiaries does not violate, in any material respect, any applicable domestic
(federal, state or local) or foreign law, statute, ordinance, license or
regulation now in effect. Neither First nor any of the First Subsidiaries is in
default under any order, license, regulation or demand of any federal, state,
local or other governmental agency or with respect to any order, writ,
injunction or decree of any court. Except for statutory or regulatory
restrictions of general application, no federal, state, local or other
governmental authority has placed any restrictions on the business of First or
any of the First Subsidiaries.
4.22 Year 2000. First is in compliance in all material respects with
all regulatory requirements regarding Year 2000 issues. First has developed,
approved and is implementing in a timely manner, a Year 2000 compliance program
which will ensure that its computer systems and/or those of its data processing
providers are or will be Year 2000 compliant prior to December 1999. No material
costs in excess of those reflected on the financial statements and internal
budget projections will be incurred in connection with such programs.
4.23 Proxy Statement, Etc. None of the information supplied or to be
supplied by First for inclusion, or included, in (i) the Proxy Statement or (ii)
any other documents to be filed with the SEC or any regulatory agency in
connection with the transactions contemplated hereby will, to the best knowledge
of First, and at the respective times such information is supplied or such
documents are filed or mailed, be false or misleading with respect to any
material
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fact, or omit to state any material fact necessary in order to make the
statements therein not misleading. All documents which First is responsible for
filing with the SEC and any regulatory agency in connection with the
transactions contemplated hereby, and all information provided by First to FCNB
for inclusion in any such filings by FCNB, will comply as to form in all
material respects with the provisions of applicable law.
4.24 Brokers and Finders. Neither First or any First Subsidiary, nor
any of their officers, directors, or employees, or to their best knowledge any
shareholder of First, has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted, directly or indirectly, for
First, in connection with this Agreement or the transactions contemplated
hereby.
ARTICLE V
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
5.1 Forbearance by First. From the date hereof until the Effective
Time, First covenants and agrees that it will not do, or agree or commit to do,
or permit any First Subsidiary to do or agree or commit to do, without the prior
written consent of FCNB, any of the following:
(a) except as in the ordinary course of business consistent with past practice,
enter into or assume any Material Contract, make any material commitment, incur
any material liabilities or material obligations, whether directly or by way of
guaranty, including any obligation for borrowed money whether or not evidenced
by a note, bond, debenture or similar instrument, acquire or dispose of any
material property or asset, or engage in any transaction not in the ordinary
course of business consistent with past practice or subject any of First's
assets or properties to any lien, claim, charge or encumbrances whatsoever;
(b) grant any general increase in compensation to its employees or officers or
directors, pay any bonus, or effect any increase in retirement benefits to any
class of employees or its officers (unless any such change shall be required by
applicable law);
(c) declare, set aside or pay any dividend or other distribution on First's
Common Stock,;
(d) redeem, purchase or otherwise acquire any shares of its capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
capital stock; merge into any other corporation or bank or permit any other
corporation or bank to merge into it, or consolidate with any other corporation
or bank; liquidate, sell or dispose of any assets or acquire any assets,
otherwise than in the ordinary course of its business consistent with past
practice; or agree to do any of the foregoing;
(e) open, or file an application with any federal or other regulatory agency
with respect to the opening of any additional office, branch or banking
facility, or the acquisition or establishment of any additional banking or
nonbanking facility;
(f) issue any share of its capital stock or permit any share of its capital
stock held in its treasury to become outstanding, except for the issuance of
shares of First Common Stock pursuant to the exercise of options outstanding as
of the date hereof pursuant to the First Option Plans; issue, grant or extend
the term of any option, warrant, or stock appreciation right;
(g) amend the Articles or Certificate of Incorporation or Charter or Bylaws of
First or any First Subsidiary;
(h) effect any capital reclassification, stock dividend, stock split,
consolidation of shares or similar change in capitalization;
(i) take, cause or permit the occurrence of any change or event which would
render any of its representations and warranties contained herein untrue in any
material respect at and as of the Effective Time;
(j) enter into any related party transaction of the type contemplated by Section
4.17 hereof, except for transactions relating to deposit relationships or the
extension of credit in the ordinary course of business, on substantially the
same
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terms, including interest rate and collateral, as those prevailing for
comparable transactions with unaffiliated parties, and which do not present more
than the normal risk of collectibility or other unfavorable features, and in
respect of which disclosure has been made to FCNB prior to disbursement;
(k) solicit, encourage, or authorize any person, including but not limited to
directors, officers, shareholders, or employees, to solicit from, or communicate
with, any third party, inquiries or proposals relating to the disposition of
First's or any First Subsidiary's business or assets, or the acquisition of
First's or any First Subsidiary's voting securities, or the merger of First,
First Bank or any other material First Subsidiary with any person other than
FCNB or any subsidiary of FCNB, or provide any such person with information or
assistance or negotiate or conduct any discussions with any such person in
furtherance of such inquiries or to obtain a proposal, or continue any such
activities in progress on the date hereof, and First shall promptly notify FCNB
of all of the relevant details, including the identity of such third party and
the nature of any such third party proposal, relating to all inquiries and
proposals which it may receive relating to any of such matters; or
(l) knowingly take any action which would (i) adversely affect the ability to
obtain the necessary approvals of governmental authorities required for the
transactions contemplated hereby; (ii) adversely affect the status of the
transactions contemplated hereby as a reorganization for purposes of Section 368
of the Internal Revenue Code of 1986, as amended; (iii) adversely affect the
eligibility of the transactions contemplated hereby for treatment as a pooling
of interests for financial reporting purposes; or (iv) adversely affect the
ability to perform the covenants and agreements under the Agreement.
5.2 Conduct of Business. From the date hereof until the Effective Time,
First covenants and agrees that, except as otherwise consented to by FCNB in
writing it shall, and shall cause each First Subsidiary to:
(a) carry on its business, and maintain its books of account and other corporate
records, in the ordinary course consistent with past practice and legal and
regulatory requirements;
(b) to the extent consistent with prudent business judgment, use all reasonable
efforts to preserve its present business organization, to retain the services of
its officers and employees, and maintain customer and other business
relationships;
(c) maintain all of the structures, equipment, and other real and personal
property of First and the First Subsidiaries in good repair, order and
condition, ordinary wear and tear and unavoidable casualty excepted;
(d) use all reasonable efforts to preserve or collect all material claims or
causes of action of First or the First Subsidiaries;
(e) keep in full force and effect all insurance coverage maintained by First or
the First Subsidiaries;
(f) perform in all material respects all obligations under all material
agreements, contracts, commitments and other instruments which First or any
First Subsidiary is a party or by which they may be bound or which relate to or
affect any of their respective assets or properties;
(g) comply in all material respects with all statutes, laws, regulations, rules,
ordinances, orders, decrees, consent agreements, examination reports and other
federal, state and local governmental or regulatory directives applicable to
First or any First Subsidiary and the conduct of their respective businesses;
and
(h) at all times maintain the allowance for loan losses at a level which is
adequate to absorb reasonably anticipated losses in the loan and lease
portfolio, in accordance with generally accepted accounting principles and
regulatory requirements.
5.3 Approval of First Shareholders. Subject to the effectiveness of the
Registration Statement (defined in Section 6.2 below), First shall cause a
meeting of its shareholders (the "First Shareholder Meeting" together with the
FCNB Shareholder Meeting, the "Shareholder Meetings") to be held as soon as
reasonably possible, but no later than sixty (60) days after the effectiveness
of the Registration Statement, for the purpose of considering the approval of
the Merger and adoption of this Agreement. First shall cause to be distributed
to each shareholder of record of First
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(according to the transfer records of First as of the record date for the First
Shareholder Meeting), such material required by applicable statutes and
regulations including but not limited to a copy of the joint Prospectus/Proxy
Statement (the "Proxy Statement") to be prepared by FCNB in connection with the
Merger and to be included in the Registration Statement. The Proxy Statement
shall be mailed by First on the date (the "Mailing Date") at least twenty (20)
business days prior to the date of the First Shareholder Meeting. The Board of
Directors of First shall recommend to its shareholders that they vote the shares
held by them to approve the Merger and to adopt this Agreement and First shall
use its best efforts in good faith to obtain its shareholders' approval of the
Merger in accordance with Maryland law.
5.4 Conduct of Business by FCNB. FCNB covenants that it shall, from the
date hereof until the Effective Time, use its best efforts to (i) preserve its
business organization intact in all material respects; (ii) maintain good
relationships with its employees; and (iii) preserve for itself the goodwill of
its and its subsidiaries' customer and other business relationships. FCNB
covenants that from the date hereof until the Effective Time, it shall not,
without the prior written consent of First, knowingly take any action which
would (i) adversely affect the ability to obtain the necessary approvals of
governmental authorities required for the transactions contemplated hereby; (ii)
adversely affect the status of the transactions contemplated hereby as a
reorganization for purposes of Section 368 of the Internal Revenue Code of 1986,
as amended; (iii) adversely affect the eligibility of the transactions
contemplated hereby for treatment as a pooling of interests for financial
reporting purposes; or (iv) adversely affect the ability to perform the
covenants and agreements under the Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Access and Information. (a) First shall afford to FCNB, and to
FCNB's accountants, counsel and other representatives, reasonable access during
normal business hours, during the period prior to the Effective Time, to all of
its properties, books, contracts, commitments and records and, during such a
period, shall furnish promptly to FCNB (a) a copy of each report, schedule and
other document filed or received by it during such period with or from (i) the
SEC; (ii the Federal Reserve Board; (iii) the DFR; (iv) the FDIC; and (b) all
other information concerning its business, properties and personnel as FCNB may
reasonably request. FCNB shall cause all information obtained by it or its
representatives pursuant to this Agreement or in connection with the negotiation
thereof to be treated as confidential and shall not use, nor knowingly permit
others to use, any such information for any purpose other than in connection
with the transactions contemplated hereby, unless such information becomes
generally available to the public or is required to be disclosed pursuant to the
order of a court of competent jurisdiction or otherwise in accordance with
applicable law, and in the event of the termination of this Agreement shall
promptly return all documents (including copies thereof) obtained hereunder from
First, and shall destroy all copies of any analyses, compilations, notes,
studies or other documents prepared from any such material by FCNB or for FCNB's
use.
(b) FCNB shall afford to First, and to First's accountants, counsel and other
representatives, reasonable access during normal business hours, during the
period prior to the Effective Time, to all of its properties, books, contracts,
commitments and records and, during such a period, shall furnish promptly to
First (a) a copy of each report, schedule and other document filed or received
by it during such period with or from (i) the SEC; (ii) the Federal Reserve
Board; (iii) the FDIC; (iv) the DFR; and (b) such other information concerning
its business, properties and personnel as First may reasonably request. First
shall cause all information obtained by it or its representatives pursuant to
this Agreement or in connection with the negotiation thereof to be treated as
confidential and shall not use, nor knowingly permit others to use, any such
information for any purpose other than in connection with the transactions
contemplated hereby, unless such information becomes generally available to the
public or is required to be disclosed pursuant to the order of a court of
competent jurisdiction or otherwise in accordance with applicable law, and in
the event of the termination of this Agreement shall promptly return all
documents (including copies thereof) obtained hereunder from FCNB, and shall
destroy all copies of any analyses, compilations, notes, studies or other
documents prepared from any such material by First or for First's use.
6.2 Registration Statement; Other Information; Applications;
Cooperation. (a) As promptly as practicable after the date hereof and the
furnishing by First of all information regarding First required to be reflected
therein, FCNB shall file (i) a registration statement (the "Registration
Statement") with the SEC on Form S-4 under the Securities Act, containing the
Proxy Statement to be used in connection with the Shareholder Meetings regarding
the Merger, (ii) the applications for Federal Reserve and Commissioner approval,
and (iii) any other applications for regulatory or other
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approvals deemed necessary or appropriate by FCNB. FCNB will use reasonable
efforts to cause said Registration Statement to be declared effective as soon as
practicable thereafter. The parties hereto agree, that at the time the
Registration Statement becomes effective and at the Mailing Date of the Proxy
Statement, the Registration Statement will comply as to form in all material
respects with the applicable provisions of the Securities Act, and the
Registration Statement, at the time it becomes effective, and the Proxy
Statement, in either case as amended or supplemented by any amendment or
supplement filed with the SEC, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that information as of a later date included
therein shall be deemed to modify information of an earlier date, and with
respect to either party, the foregoing statement shall not apply to statements
in or omissions from the Registration Statement or Proxy Statement made in
reliance upon and in conformity with information furnished by the other party
for use in the Registration Statement or Proxy Statement. After becoming aware
of any statement or omission which renders the statement set forth in the
preceding sentence not true or correct, FCNB will promptly amend, supplement or
revise such material in order to make the statement in the preceding sentence
true and correct at all times up to and including the Effective Time. First
shall have the right to review the Registration Statement and each of the above
applications, together with any and all amendments thereto, and to comment on
their form and content, prior to their being filed by FCNB. First agrees that it
shall, and shall cause its employees, agents, representatives, and advisors to,
cooperate with FCNB in the preparation and filing of the Registration Statement
and the aforementioned regulatory applications, including, but not in
limitation, by providing on a prompt basis information requested by FCNB for
inclusion in such documents, and by providing comments on drafts of such
documents on a timely basis.
(b) FCNB agrees to use its best efforts to prepare and file all material
applications, notices or other filings with respect to the Merger required to be
made with the Federal Reserve Board or the DFR, not later than sixty (60) days
from the date hereof, subject to the timely furnishing by First of all
information regarding First required to be included therein or necessary for the
preparation of such applications.
6.3 Approval of FCNB Shareholders. Subject to the effectiveness of the
Registration Statement, FCNB shall cause a meeting of its shareholders (the
"FCNB Shareholder Meeting") to be held as soon as reasonably possible, but no
later than sixty (60) days after the effectiveness of the Registration
Statement, for the purpose of considering the approval of the Merger and
adoption of this Agreement. FCNB shall cause to be distributed to each
shareholder of record of FCNB (according to the transfer records of FCNB as of
the record date for the FCNB Shareholder Meeting), such material required by
applicable statutes and regulations including but not limited to a copy of the
Proxy Statement. The Mailing Date for the Proxy Statement shall be at least
twenty (20) business days prior to the date of the FCNB Shareholder Meeting. The
Board of Directors of FCNB shall recommend to its shareholders that they vote
the shares held by them to approve the Merger and to adopt this Agreement and
FCNB shall use its best efforts to obtain its shareholders' approval of the
Merger in accordance with Maryland law.
6.4 Notice of Actual or Threatened Breach. Each party will promptly
give written notice to the other party upon becoming aware of any impending or
threatened occurrence of any event or the failure of any event to occur which
would cause or constitute a breach of any of the representations, warranties or
covenants made by such party in this Agreement, any other changes or
inaccuracies in any data previously given or made available to the other party,
or which would threaten consummation of the transaction contemplated hereby.
6.5 Current Information. During the period from the date of this
Agreement to the Effective Time, First will cause one or more of its
representatives to confer on a regular and frequent basis with representatives
of FCNB and to report the general status of its ongoing operations. First will
promptly notify FCNB of any material change in the normal course of its business
or in the operation of its properties and, to the extent permitted by applicable
law, of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the institution
or the threat of material litigation involving First, and will keep FCNB fully
informed with respect to such events. FCNB shall provide copies of all reports
filed by FCNB pursuant to Section 13 of the Exchange Act to First upon the
filing of such reports.
6.6 Filing with Department. FCNB and First shall execute and deliver
and use their best efforts to file appropriate Articles of Merger with the
Department at the earliest practicable date after satisfaction or waiver of the
conditions set forth in Article VII hereof.
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6.7 Expenses. Each party hereto shall pay its own expenses incident to
preparing for, entering into and carrying out this Agreement and to the
consummation of the Merger and the transactions contemplated hereby. First
agrees that the aggregate expenses of First, including all fees and expenses of
legal counsel, accountants, and financial or other advisors, shall not exceed
reasonable amounts in light of the circumstances and the amount and nature of
work or services to be performed.
6.8 Miscellaneous Agreements and Consents. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, using reasonable
efforts to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby. FCNB and First will, and First will cause each of the First
Subsidiaries, as the case may be, to use its best efforts to obtain consents of
all third parties and governmental bodies necessary or desirable for the
consummation of the transactions contemplated by this Agreement.
6.9 Press Releases. FCNB and First will consult with each other as to
the form, substance and timing of any press release or other public disclosure
of matters related to this Agreement or any of the transactions contemplated
hereby. Notwithstanding the foregoing, FCNB and First agree that FCNB and First
shall, immediately following the execution hereof, issue a joint press release
announcing the execution of the Agreement and the proposed Merger, and further
agree that FCNB and First shall each be entitled to issue separate press
releases announcing the execution of the Agreement and the proposed Merger, a
copy of which release will be provided to the other party prior to issuance.
6.10 Current Public Information. FCNB agrees that it shall, for a
period of two (2) years following the Effective Time, use its best efforts to
meet the current public information requirements as set forth in paragraph (c)
of Rule 144 promulgated under the Securities Act, and will provide those persons
providing affiliate letters pursuant to Section 7.2(n) with such other
information as they may reasonably require and to otherwise cooperate with such
persons to facilitate any sales of FCNB Common Stock issued to such persons
pursuant to this Agreement in compliance with the provisions of Rule 144 and/or
Rule 145 promulgated under the Securities Act.
6.11 No Purchases or Sales of FCNB Common Stock During Value
Determination Period. Except for purchases of shares of FCNB Common Stock by
FCNB in connection with the DRI Plan and FCNB's 401(k) Plan, neither FCNB,
First, any subsidiary of FCNB, any First Subsidiary, nor any executive officer
or director of either FCNB, First, any FCNB subsidiary or any First Subsidiary,
nor any shareholder who shall be deemed an "affiliate" of FCNB or First (as that
term is used for purposes of Rule 144 and Rule 145 promulgated under the
Securities Act) shall purchase or sell on Nasdaq, or submit a bid to purchase or
an offer to sell on Nasdaq, directly or indirectly, any shares of FCNB Common
Stock or any options, warrants, rights or other securities convertible into or
exchangeable for shares of FCNB Common Stock during the Value Determination
Period.
6.12 First Employees. Following the Effective Time, FCNB shall provide
to all officers and employees of First who, at the Effective Time, become
employees of FCNB ("Continuing Employees") employee benefits under terms and
conditions, which when taken as a whole, are substantially similar to those
currently provided by FCNB to its similarly situated officers and employees. For
purposes of participation, vesting and accrual of benefits under FCNB's employee
benefit plans: (i) service under any qualified defined benefit plans of First
shall be treated as service under FCNB's qualified defined benefit plans; (ii)
service under any qualified defined contribution plans of First shall be treated
as service under FCNB's qualified defined contribution plans; and (iii) service
under any other employee benefit plans of First shall be treated as service
under any similar benefit plan maintained by FCNB. FCNB shall cause the FCNB
welfare benefit plans to waive any waiting period and restrictions or
limitations for preexisting conditions and insurability. FCNB shall honor all
employment, severance, consulting and other compensation contracts between First
and any current or former director, officer, employee thereof existing on the
date hereof and disclosed in the First Disclosure Letter.
6.13 Stock Option Agreement. First agrees that, simultaneously with the
execution of this Agreement, it shall grant FCNB an option, substantially in the
form attached hereto and made a part hereof, to acquire such number of shares of
First Common Stock as shall equal 19.9% of the outstanding First Common Stock
following exercise thereof.
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6.14 Insurance. (a) First agrees that it shall use its best efforts to
obtain director's and officer's liability insurance coverage covering the
directors and officers of First who do not serve after the Effective Time as
directors of FCNB or FCNB Bank covering a period of not less than three (3)
years after the Effective Time, from its current insurance carrier or a carrier
reasonably acceptable to FCNB. In the event that First shall be unable to obtain
such insurance coverage FCNB shall be entitled to obtain comparable coverage for
such directors from its insurance carrier.
(b) FCNB acknowledges and agrees that all rights to indemnification and all
limitations on liability existing in favor of the officers, directors and
employees of First and its Subsidiaries (the "Covered Persons") as provided in
their respective Articles or Certificate of Incorporation or charter, Bylaws and
other governing documents, as in effect as of the date hereof with respect to
matters arising prior to the Effective Time, shall continue in full force and
effect, and shall be honored by FCNB to the extent set forth in such governing
documents, as if it were the indemnifying party thereunder, without any
amendment thereof, provided, however, that all rights to indemnification in
respect of any claim asserted or made within such period shall continue until
the final disposition of such claim. Not in limitation of the foregoing, in any
case where approval by FCNB is required to effectuate any indemnification, the
Covered Person seeking indemnification shall be entitled to require, by written
notice delivered to FCNB, such determination regarding approval to be made by
independent counsel mutually agreed upon by FCNB and such Covered Person.
(c) If FCNB or any successor or assign thereof shall merge into or consolidate
with any other person, and shall not be the party surviving such merger or
consolidation, or shall transfer all or substantially all of its assets to any
person, then in each such case FCNB (or such successor or assign) shall make
appropriate provision for the assumption by the acquiring or surviving party of
the obligations set forth in Section 6.14(b). Notwithstanding anything to the
contrary contained herein, nothing in this Section 6.14 shall create any right
of any Covered Person to any indemnification by FCNB at any time during any
period following the Effective Time when the insurance coverage described in
Section 6.14(a) shall be in effect, or at any time following the end of the
three (3) year period following the Effective Time.
6.15 Unsolicited Acquisition Proposals. (a) Notwithstanding anything
contained in Section 5.1(k) to the contrary, in the event that First shall
receive prior to the Effective Time an Unsolicited Acquisition Proposal (as
hereinafter defined) which, in the good faith determination of the Board of
Directors of First, the fiduciary duty of the directors under Maryland law
requires that the Board of Directors consider, negotiate, communicate, or
provide information with respect to (collectively "communications"), which such
determination shall be based on the written advice of, counsel to First, to the
effect that the fiduciary duty of the directors requires such communications
because such Unsolicited Acquisition Proposal is more favorable (in the written
opinion of First's financial advisor) to shareholders of First than the Merger,
then First shall be entitled to engage in such communications.
(b) For purposes of this Section 6.15 an "Unsolicited Acquisition Proposal"
shall mean any proposal, other than the Merger, received by First without
violation of the provisions of Section 5.1(k) hereof regarding (i) any merger,
consolidation, share purchase or exchange, or purchase and assumption or similar
transaction involving First; or (ii) any sale, lease, transfer, pledge,
encumbrance or other disposition, directly or indirectly, of all of the assets
of First. Any proposal relating to any such transaction made by any party at the
direction, suggestion, solicitation, encouragement, or otherwise as a result of
contact between such party and any investment banker or financial advisor
retained by First shall be deemed to be a proposal solicited by First for
purposes of this Section 6.15 and shall not constitute an Unsolicited
Acquisition Proposal. First shall immediately advise FCNB of, and communicate to
FCNB the terms of, any such inquiry or proposal addressed to First or of which
First or its officers, directors, employees, agents, or representatives
(including, without limitation, any investment banker or financial advisor) has
knowledge. First's Board of Directors shall use its best efforts to cause its
officers, directors, employees, agents and representatives to comply with the
requirements of this Section and Section 5.1(k).
6.16 Disclosure Letters. First and FCNB agree that they shall each
update their respective Disclosure Letter at and as of the Closing Date, for
comparative purposes.
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ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approvals. The Merger shall have been approved by the requisite
majorities of the shareholders of each of FCNB and First.
(b) Tax Opinion. There shall have been delivered to FCNB and First, an opinion
of Kevin Kennedy, Esquire, special tax counsel to FCNB, in form and substance
satisfactory to FCNB and First to the effect that:
(i) the transactions contemplated by this Agreement (including the
additional transactions contemplated by Section 2.4 of this Agreement)
will constitute a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended;
(ii) no gain or loss will be recognized by FCNB or First as a result of
the transactions contemplated hereby;
(iii) the tax basis of the assets of First in the hands of FCNB will be
the same as the tax basis of such assets in the hands of First
immediately prior to the Effective Time;
(iv) the holding period of the assets of First transferred to FCNB will
include the period during which such assets were held by First prior to
the Effective Time;
(v) no gain or loss will be recognized by the shareholders of First
upon the receipt of FCNB Common Stock in exchange for their shares of
First Common Stock (except in respect of cash received in lieu of the
issuance of fractional shares of FCNB Common Stock and any shareholder
of First who receives payment of cash as a dissenting shareholder);
(vi) the tax basis of the FCNB Common Stock received by shareholders of
First pursuant to the Agreement will be the same as the tax basis of
the First Common Stock surrendered in exchange therefore; and
(vii) the holding period of the FCNB Common Stock received by the
shareholders of First will include the holding period of the shares of
First Common Stock surrendered in exchange therefore, provided that
such shares of First Common Stock are held as a First asset as of the
Effective Time.
7.2 Conditions to Obligation of FCNB to Effect the Merger. The
obligation of FCNB to effect the Merger shall be subject to the fulfillment or
waiver at or prior to the Effective Time of the following additional conditions:
(a) Representations and Warranties; Corporate Proceedings. The representations
and warranties of First set forth in Article IV hereof shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time, and FCNB shall have received a certificate of the President of
First to that effect. All corporate action required to have been taken by, or on
the part of, First to authorize the execution, delivery and performance of this
Agreement and the Merger, respectively, shall have been duly and validly taken,
and FCNB shall have received certified copies of the resolutions evidencing such
authorizations.
(b) Performance of Obligations. First shall have in all material respects
performed all obligations required to be performed by it under this Agreement
prior to the Effective Time, and FCNB shall have received a certificate of the
President of First to that effect.
(c) Permits, Authorizations, Etc. First and the First Subsidiaries shall have
obtained any and all material permits, authorizations, consents, waivers,
clearances or approvals required for the lawful consummation of the Merger.
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(d) No Material Adverse Change. There shall not have been any material adverse
change in the business, operation, assets, financial condition, prospects or
results of operations of First, First Bank, or any other material First
Subsidiary. For purposes hereof, adverse developments with respect to any matter
disclosed to FCNB prior to the date hereof and included in the First Disclosure
Letter delivered to FCNB on the date hereof shall not constitute a material
adverse change to the extent that the nature and scope of the adverse
development is of the nature and within the scope of the matter disclosed.
(e) Regulatory Approvals. FCNB shall have received unconditional approval of the
Merger contemplated by this Agreement from the Federal Reserve Board, the DFR
and any other federal or state regulatory agencies whose approval is required
for consummation of such transaction (except for such conditions as are
ordinarily imposed in connection with transactions of the type contemplated
hereby and which are not, in the opinion of FCNB, unduly burdensome), and all
notice and waiting periods after the granting of any such approval shall have
expired.
(f) Environmental Matters. FCNB shall have completed, with results satisfactory
to it, the investigations into environmental matters referred to in Section 4.19
above.
(g) No Injunction. No injunction, restraining order, stop order or other order
or action of any federal or state court or agency in the United States which
prevents the consummation of the Merger shall be in effect, and no action shall
have been instituted or threatened, and no statute, rule or regulation shall
have been enacted, by any state or federal government or government agency,
which prohibits, restricts or makes illegal the consummation of the transactions
contemplated hereby or which in the reasonable judgment of FCNB would make it
inadvisable to consummate the transactions contemplated by this Agreement.
(h) Litigation. Except as set forth in the First Disclosure Letter, at the
Effective Time, there shall not be pending or threatened against First or any
First Subsidiary or the officers or directors thereof in their capacity as such,
any suit action or proceeding (including antitrust actions) which, if
successful, would, in the reasonable judgment of FCNB, have a material adverse
effect on the business, operation, assets, financial condition, prospects or
results of operations of First or First Bank.
(i) Dissenters. Holders of not more than 5% of the outstanding Common Stock of
First shall have validly exercised and perfected their rights to dissent from
the Merger and demand fair value of their shares of First Common Stock in
accordance with Maryland law.
(j) Voting Agreement. Each of the directors of First shall have, simultaneously
with the execution of the Merger Agreement entered into a Voting Agreement in
substantially in the form attached hereto.
(k) Brokers and Finders Fees. First shall have paid in full, at or prior to
Closing, all amounts owing in respect of the payments contemplated in Section
4.23 hereof.
(l) Accountants' Letter. FCNB shall have received from Keller Bruner & Company,
L.L.C., independent public accountants to First, a letter dated the Closing
Date, with respect to certain financial information regarding First, which shall
be substantially in the following form:
(i) they are independent public accountants with respect
to First;
(ii) in their opinion the audited financial statements of
First examined by them and included in the Proxy Statement furnished to
shareholders of First, or subsequently provided to FCNB and/or the
shareholders of First, comply as to form in all material respects with
the requirements applicable thereto;
(iii) at the request of First they have carried out procedures
to a specified date not more than five business days prior to the
Effective Time as follows: (1) read the unaudited financial statements
of First for the period from the date of the most recent audited
financial statements of First through the last day of the most recent
calendar month ended prior to such specified date not more than five
days prior to the Effective Time; (2) read the minutes of the meetings
of the shareholders and of the Board of Directors (and all committees
thereof) of First from the date of the most recently audited financial
statements to a date not more than five days prior to the Effective
Time, and (3) consulted with certain officers and employees of First
responsible for
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financial and accounting matters as to whether there has been any
change in First stock or long-term debt, or any decrease in
consolidated net assets or in the total or per-share amounts of net
income of First, and, based on such procedures and except as disclosed
in such letter, nothing has come to their attention which would cause
them to believe that:
(A) the financial statements referred to in (1) above
do not fairly present the financial position of First and the
results of its operations and changes in its financial
position at the dates and for the periods referred to therein
and are not presented in conformity with generally accepted
accounting principles applied on a basis consistent in all
material respects with that of the audited consolidated
statements of First at December 31, 1998, except as expressly
required by this Agreement or noted in such letter;
(B) as of said date not more than five business days
prior to the Effective Time, there was any (x) change in the
First stock or long-term debt of First or (y) decreases in
consolidated net assets of First, in each case as compared
with the amounts shown in the balance sheet of First at the
date of the most recent audited financial statements, or for
the period from the date of the most recent financial
statements to said date not more than five business days prior
to the Effective Time, there were any decreases, as compared
with the corresponding portion of the preceding fiscal year,
in the total or per share amounts of income before
extraordinary items or net income, other than, in each case,
as set forth in such letter;
(C) the consolidated financial statements of First
for the quarter immediately preceding the Effective Time are
not prepared in accordance with generally accepted accounting
principles, and, based on a review of the interim financial
statements of First and upon due inquiry made of the
management of First, that material modifications should be
made to such financial statements for them to be in conformity
with generally accepted accounting principles as of said date
not more than five business days prior to the Effective Time,
except as noted in such letter;
(D) the reserve for possible credit losses
established by First is not adequate to absorb reasonably
anticipated losses in the loan and leasing portfolio of First
in view of the size and character of such portfolios, then
current economic conditions and other pertinent factors; and
(E) there are any contingent liabilities which could
have a materially adverse effect on the assets, business or
prospects of First or any First Subsidiary other than as
disclosed in the most recent audited financial statements for
First or other than, in each case, as disclosed in said
letter.
The parties hereto acknowledge and agree that the foregoing letter is not, and
the contents shall not be governed as a, "comfort letter" as that term is used
for purposes of Statement of Financial Accounting Standards No. 72 , but is an
agreed upon procedures letter,
(m) Opinion of Counsel. First shall have delivered to FCNB an opinion, dated
the Effective Time, of counsel to First, in form and substance reasonably
satisfactory to FCNB and its counsel, to the effect that:
(i) First is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland; is
registered as a bank holding company under the BHCA; and has full
corporate power and authority to own and operate its business and
properties and to carry on its business as currently conducted;
(ii) First Bank is a state charted commercial bank duly
organized, validly existing and in good standing under the laws of the
State of Maryland; and has full corporate power and authority to own
and operate its business and properties and to carry on its business as
currently conducted
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(ii) subject to possible increase to reflect the issuance of
shares of First Common Stock pursuant to the exercise of options
outstanding under the First Option Plans, the authorized capital stock
of First consists solely of 5,000,000 shares of capital stock, par
value $1.00 per share, 2,000,000 of which are First Common Stock, of
which 1,525,125 shares are validly issued and outstanding, fully paid
and nonassessable and have not been issued in violation of the
preemptive rights of any person, and 3,000,000 of which are
undesignated;
(iii) subject to possible decrease to reflect the exercise of
such options, to the knowledge of such counsel, except for the 102,952
options outstanding pursuant to the First Option Plans and 254,925
Warrants, there are no outstanding subscriptions, warrants, or rights
to acquire from First or First Bank, or requiring First or First Bank
to issue, or any outstanding securities or obligations convertible
into, shares of First Common Stock or other class of capital stock or
the capital stock of First Bank;
(iv) to the knowledge of such counsel, there are no
outstanding obligations of First or any First Subsidiary, to purchase,
reacquire or redeem any shares of First Common Stock;
(v) execution, delivery and performance of this Agreement by
First and consummation of the transactions contemplated in this
Agreement do not and will not conflict with, or result in the breach
of, or constitute a default under, any of the provisions of the
Articles or Certificate of Incorporation or Charter or Bylaws of First
or any First Subsidiary or, to the knowledge of such counsel, any
material agreement to which First or any First Subsidiary is a party or
by which their properties or assets may be bound; and
(vi) First has full corporate power and corporate authority to
execute, deliver and perform this Agreement, and this Agreement has
been duly authorized, approved and adopted by all requisite corporate
action of First, and by the shareholders of First, and constitutes the
valid and legally binding obligation of First in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors' rights
generally and subject to general equity principles which may limit the
enforcement of certain remedies;
(vii) except as set forth in the First Disclosure Letter, such
counsel does not know of any claim, litigation, arbitration proceeding,
labor dispute or investigation of any kind pending or threatened
against First, or any First Subsidiary in any court or before any
federal, state or municipal or other governmental agency or
instrumentality relating in any way to the transactions contemplated in
this Agreement, or which is determined adversely to First or such First
Subsidiary, would have a material adverse effect on the financial
condition, results of operations, business, properties, or assets of
First and the First Subsidiaries, taken as a whole; and
(viii) to the knowledge of such counsel, such counsel has no
reason to believe that (except as to financial statements and other
financial or statistical data, or as to materials relating to or
supplied by FCNB or the FCNB subsidiaries for inclusion in the Proxy
Statement, as to which no belief need be expressed) the Proxy
Statement, as it may be amended or supplemented, contained an untrue
statement of a material fact or omitted any material fact required to
be stated therein or necessary in order to make the statements therein,
in light of the circumstances in which they were made, not misleading,
as of the time the Registration Statement became effective, the time of
the Shareholder Meetings or as of the Closing Date.
(n) Affiliate Letters. (i) First shall deliver or cause to be delivered to FCNB
a letter from each officer, director or shareholder of First who may be deemed
to be an "affiliate" (as defined for purposes of Rules 145 and 405 promulgated
under the 1933 Act) of First, in form and substance reasonably satisfactory to
FCNB, under the terms of which each such officer, director, and shareholder
acknowledges and agrees to abide by and comply with: all limitations imposed by
this Agreement with respect to the purchase or sale or other disposition of
shares of FCNB Common Stock after the date hereof and prior to the Effective
Time; the 1933 Act and all rules, regulations and releases promulgated
thereunder with respect to the sale or other disposition of the shares of FCNB
Common Stock received by such person in connection with this Agreement,
including those accounting rules, regulations, releases and guidelines which
govern the eligibility of the transactions governed hereby for treatment as a
pooling of interests, including those which impose limitations or restrictions
on the sale, disposition or other transactions with respect to shares of First
Common Stock and FCNB Common Stock prior to and during the period following the
Effective Time.
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(ii) FCNB shall have received from each of its directors, officers and
shareholders who may be deemed to be an "affiliate" a letter in which such
persons agree to abide by the provisions of this Agreement regarding the
purchase and sale or other disposition of shares of FCNB Common Stock after the
date hereof and prior to the Effective Time and accounting rules, regulations,
releases and guidelines which govern the eligibility of the transactions
governed hereby for treatment as a pooling of interests, including those which
impose limitations or restrictions on the sale, disposition or other
transactions with respect to shares of First Common Stock and FCNB Common Stock
prior to and during the period following the Effective Time.
(o) Accounting Treatment. FCNB shall have received an opinion of Keller Bruner &
Company, L.L.C., or otherwise determined to its satisfaction, that the
transactions contemplated hereby can be accounted for as a pooling of interests
for financial reporting purposes.
(p) Third Party Consents. First shall have obtained all material third party
consents under any agreement, contract, lease, note, license, permit or other
document by which First or any First Subsidiary is bound or to which any of
their respective properties is subject required for the consummation of the
transactions contemplated hereby.
(r) Non-Competition Agreements. Each of the members of the Board of Directors of
First and First Bank shall have entered into an agreement, in form and substance
satisfactory to FCNB, with FCNB and FCNB Bank regarding limitations on the
ability of such persons to compete with FCNB and FCNB Bank, and to solicit
customers of FCNB, for the period commencing at the Effective Time and ending on
June 30, 2002.
(s) Option and Warrant Holder Agreements. FCNB shall have received agreements,
satisfactory in form and substance to FCNB, from each of the holders of First
Options pursuant to the First Option Plans and Warrants consenting to the
treatment of such Options or Warrants, as the case may be as contemplated by
Section 2.1(b) hereof.
(t) Employment Termination Agreement. FCNB shall have received an agreement,
satisfactory in form and substance to FCNB, from Jacob H. Goldstein, and
consented to by First and First Bank, relating to the termination of Goldstein's
existing employment agreement with First and First Bank as of the Effective
Time.
7.3 Conditions to Obligation of First to Effect the Merger. The
obligation of First to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Time of the following additional conditions:
(a) Representations and Warranties; Corporate Proceedings. The representations
and warranties of FCNB set forth in Article III hereof shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time as though made at and as of the Effective Time, and First shall
have received a signed certificate the President of FCNB to that effect. All
corporate action required to have been taken by, or on the part of, FCNB to
authorize the execution, delivery and performance of this Agreement and the
Merger, respectively, shall have been duly and validly taken, and First shall
have received certified copies of the resolutions evidencing such
authorizations.
(b) Performance of Obligations. FCNB shall have in all material respects
performed all obligations required to be performed by it under this Agreement
prior to the Effective Time, and First shall have received a certificate of the
President of FCNB to that effect.
(c) Registration Statement. The Registration Statement of FCNB under the
Securities Act relating to the FCNB Common Stock shall have been declared
effective, and no stop order with respect to the Registration Statement shall
have been issued, or First shall have received an opinion of counsel to FCNB
that such registration is not required. In addition, all state securities and
blue sky permits and approvals required to carry out the transactions
contemplated hereby shall have been obtained.
(d) Opinion of Counsel. FCNB shall have delivered to First an opinion, dated the
Effective Time of Kennedy, Baris & Lundy, L.L.P., in form and substance
reasonably satisfactory to First and its counsel, to the effect that:
(i) FCNB is a corporation duly organized, validly existing and
in good standing under the laws of the State of Maryland; is registered
as a bank holding company under the BHCA; and FCNB has full corporate
power and authority to own and operate its business and properties and
to carry on its business as currently conducted;
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(ii) subject to the possible issuance of additional shares of
FCNB Common Stock pursuant to the exercise of options issued under the
FCNB Option Plan or the DRI Plan the authorized capital stock of FCNB
consists solely of 20,000,000 shares of FCNB Common Stock, of which
10,064,892 shares are validly issued and outstanding immediately prior
to the Effective Time, fully paid and nonassessable and have not been
issued in violation of the preemptive rights of any person, and
1,000,000 shares of undesignated preferred stock, no shares of which
were outstanding immediately prior to the Effective Time;
(iii) except as set forth in such opinion, to the best
knowledge of such counsel, there are no outstanding subscriptions,
warrants, options or rights to acquire from FCNB, or requiring FCNB to
issue, or any outstanding securities or obligations convertible into,
shares of FCNB Common Stock;
(iv) except as set forth in such opinion, to the best
knowledge of such counsel, there are no outstanding commitments or
obligations of FCNB to purchase, reacquire or redeem any shares of FCNB
Common Stock;
(v) the FCNB Common Stock issued pursuant to the Merger, when
issued in exchange for the First Common Stock, will be validly issued
and outstanding, fully paid and nonassessable;
(vi) execution, delivery and performance of the Agreement by
FCNB and consummation of the transactions contemplated in the Agreement
do not and will not conflict with, or result in the breach of, or
constitute a default under, any of the provisions of the Articles of
Incorporation or Bylaws of FCNB, or, to the best knowledge of such
counsel, any material agreement to which FCNB is a party or by which
its properties or assets may be bound;
(vii) FCNB has full corporate power and corporate authority to
make, execute, deliver and perform the Agreement and the Agreement has
been duly authorized and approved by all requisite corporate action of
FCNB and constitutes the valid and legally binding obligations of FCNB
in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or
affecting creditors' rights generally and subject to general equity
principles which may limit the enforcement of certain remedies;
(viii) all material filings and registrations with, and
notifications to, all federal, state and local authorities required on
the part of FCNB for the consummation of the Merger have been made, all
approvals and authorizations of all federal, state and local
authorities required on the part of FCNB for consummation of the Merger
are in full force and effect and all applicable waiting periods have
passed;
(ix) such counsel does not know of any claim, litigation,
arbitration proceeding, labor dispute or investigation of any kind
pending or threatened against FCNB in any court or before any federal,
state or municipal or governmental agency or instrumentality relating
in any way to the transactions contemplated in this Agreement; and
(x) to the best knowledge of such counsel, such counsel has no
reason to believe that (except as to financial statements and other
financial or statistical data, or as to materials relating to or
supplied by First or the First Subsidiaries for inclusion in the Proxy
Statement, as to which no belief need be expressed) the Proxy
Statement, as amended or supplemented, contained an untrue statement of
a material fact or omitted any material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading, as of the
time the Registration Statement became effective, the time of the
Shareholder Meetings or as of the Closing Date.
(e) Fairness Opinion. First shall have received from a investment advisor of its
selection, reasonably acceptable to FCNB, an opinion dated as of a date prior to
effectiveness of the Registration Statement to shareholders of First to the
effect that the Merger is fair to the shareholders of First from a financial
point of view.
(f) Nasdaq Listing. The shares of FCNB Common Stock to be issued to holders of
First Common Stock in connection with the Merger shall have been approved for
quotation, upon notice of issuance, on Nasdaq.
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(g) No Material Adverse Change. There shall not have been any material adverse
change in the business, operation, assets, financial condition, prospects or
results of operations of FCNB. For purposes hereof, adverse developments with
respect to any matter disclosed to First prior to the date hereof and included
in the FCNB Disclosure Letter delivered to First on the date hereof shall not
constitute a material adverse change to the extent that the nature and scope of
the adverse development is of the nature and within the scope of the matter
disclosed.
(h) No Injunction. The shall not be in effect any order, decree or injunction of
a court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated hereby, nor shall there be any
pending proceeding of any agency of competent jurisdiction seeking any of the
foregoing.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by mutual consent of First and FCNB; or
(b) by either FCNB or First at anytime after December 31, 1999, if the Merger
shall not theretofore have been consummated, unless the date reflected in this
Section 8.1(b) shall be extended in writing by the parties hereto provided,
however, in the event that First engages in communications relating to an
Unsolicited Acquisition Proposal pursuant to Section 6.15(a) above, First shall
not be entitled to terminate this Agreement pursuant to provisions of Section
8.1(b);
(c) by either FCNB or First in the event of the material breach by the other
party of any material representation, warranty or agreement contained herein;
(d) by either of First or FCNB if any governmental or regulatory approval
required for consummation of the Merger and the transactions contemplated hereby
shall have been denied by final, non-appealable order, or any such denial shall
not have been appealed within the time available for such appeal, provided,
however, that the denial of any application relating to the merger, purchase and
assumption or other transaction contemplated by Section 2.3 hereof shall not
entitle First to terminate this Agreement pursuant to this Section 8.1(d).
(e) by either FCNB or First in the event that any of the conditions precedent to
the obligation of such party to consummate the Merger cannot be satisfied or
fulfilled by the date specified in 8.1(b) of this Agreement, provided that the
terminating party shall not be in material breach of a material representation,
warranty or covenant of this Agreement at the time of termination pursuant to
this Section 8.1(e);
(h) by First, in the exercise of its sole discretion, in the event that the
Merger and the Agreement are not approved by the requisite majority of the
shareholders of First at the First Shareholder Meeting;
(i) by FCNB, in the exercise of its sole discretion, in the event that the
Merger and the Agreement are not approved by the requisite majority of the
shareholders of FCNB at the FCNB shareholder meeting.
8.2 Effect of Termination. In the event of termination of this
Agreement by either First or FCNB as provided in Section 8.1 above, this
Agreement shall forthwith become void except that (i) the provisions of this
Section 8.2, the provisions regarding the confidentiality and return or
destruction of documents of Section 6.1, and the provisions of Section 6.7 shall
survive any such termination and abandonment, and (ii)and there shall be no
liability on the part of either First or FCNB or their respective officers or
directors, except in the event of willful breach of a material provision of this
Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken by or on behalf of their respective Boards of Directors, at any
time before or after approval of the Merger by the shareholders of both First
and FCNB; provided, however, that after such approvals no such amendment shall
reduce the value of or change the form of the consideration to be delivered to
each of First's shareholders as contemplated by the Agreement, unless such
amendment is subject to the obtaining of the approval of the amendment by the
shareholders of First and such approval
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is obtained. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Waiver. Any term, condition or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof.
ARTICLE IX
GENERAL PROVISIONS
9.1 Non-survival of Representations, Warranties and Agreements. No
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation. All
representations, warranties and agreements in this Agreement of First and FCNB
or in any instrument delivered by First and FCNB pursuant to this Agreement
shall expire at the Effective Time or upon termination of this Agreement in
accordance with its terms except this Section 9.1, and the provisions of
Articles I and II, Section 6.12 and 6.16 (to the extent they relate to, or are
to be performed after, the Effective Time).
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly received (i) on the date given if
delivered personally or by telecopier, cable, telegram or telex or (ii) on the
date received if sent by overnight delivery service or if mailed by registered
or certified mail (return receipt requested), to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to FCNB:
A. Patrick Linton, President
FCNB Corp
7200 FCNB Court
Frederick, Maryland 21703
Copy to:
David H. Baris, Esq.
Kennedy, Baris & Lundy, L.L.P.
Suite 300
4719 Hampden Lane
Bethesda, Maryland 20814
(b) if to First:
Jacob H. Goldstein, President
First Frederick Financial Corporation
22 West Patrick Street
Frederick, Maryland 21701
9.3 Material Adverse Change. Notwithstanding anything to the contrary
contained herein, the term "material adverse change" or "material adverse
effect" or words of similar import, shall not include the impact of: (i)
changes, after the date hereof, in laws of general applicability or
interpretations thereof by courts or governmental authorities; (ii) changes,
after the date hereof, in generally accepted accounting principles or regulatory
principles generally applicable to banks; (iii) actions or omissions by a party
hereto (or any of its subsidiaries), after the date hereof, taken or failed to
be taken with the prior informed written consent of the other party, or at the
express written request of the other party, in contemplation of the transaction
contemplated hereby; or (iv) the Merger and compliance with the provisions of
this Agreement on the operating performance of the parties.
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9.4 Severability. Any invalidity, illegality or unenforceability of any
provision of this Agreement in any jurisdiction shall not invalidate or render
illegal or unenforceable the remaining provisions hereof in such jurisdiction
and shall not invalidate or render illegal or unenforceable such provision in
any other jurisdiction.
9.5 Headings. The headings of the Articles and Sections of this
Agreement are for convenience of reference only and shall not be deemed to be a
part of this Agreement.
9.6 Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to any other remedy.
9.7 Miscellaneous. This Agreement (including exhibits, documents and
instruments referred to herein)
(a) together with all Schedules, exhibits, documents and instruments attached
hereto or required to be delivered herewith, or at or prior to closing,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof;
(b) is not intended to confer upon any person not a party hereto any rights or
remedies hereunder;
(c) shall not be assigned by operation of law or otherwise, except that FCNB may
without prior notice to or approval by First, assign this Agreement to a
wholly-owned subsidiary of FCNB, provided, however, that in the event of any
assignment of this Agreement to a subsidiary of FCNB resulting in the merger of
First into such subsidiary, the consideration received by shareholders of First
shall nevertheless consist of shares of FCNB Common Stock as set forth in
Article II hereof;
(d) shall be governed in all respects by the laws of the State of Maryland; and
(e) may be executed in two or more counterparts which together shall constitute
a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective corporate seals to be affixed hereto, all as of the date first
written above.
ATTEST: [SEAL] FCNB CORP
/s/ Helen G. Hahn By: /s/ A. Patrick Linton
- ----------------------------- -----------------------------
Name: Helen G. Hahn Name: A. Patrick Linton
Title: Secretary Title: President
ATTEST: [SEAL] FIRST FREDERICK FINANCIAL
CORPORATION
/s/ Mary Jo Clark By: /s/ Jacob H. Goldstein
- ----------------------------- -----------------------------
Name: Mary Jo Clark Name: Jacob H. Goldstein
Title: Secretary Title: President
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EXHIBIT B
Title 3, Subtitle 2 of the Maryland General Corporation Law
<PAGE>
ANNOTATED CODE OF MARYLAND
CORPORATIONS AND ASSOCIATIONS.
TITLE 3. CORPORATIONS IN GENERAL -- EXTRAORDINARY ACTIONS.
Subtitle 2. Rights of Objecting Stockholders.
ss.3-201 "Successor" defined.
(a) Corporation amending charter. -- In this subtitle, except as
provided in subsection (b) of this section, "successor" includes a corporation
which amends its charter in a way which alters the contract rights, as expressly
set forth in the charter, of any outstanding stock, unless the right to do so is
reserved by the charter of the corporation.
(b) Corporation whose stock is acquired. -- When used with reference to
a share exchange, "successor" means the corporation the stock of which was
acquired in the share exchange.
ss.3-202 Right to fair value of stock.
(a) General rule. -- Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor
if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring
corporate action underss.3-105 of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, unless the right
to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by ss.3-602 of this title or exempted
by ss.3-603 (b) of this title. (b) Basis of fair value. -- (1) Fair value is
determined as of the close of business:
(i) With respect to a merger under ss.3-106 of this title of a 90 percent
or more owned subsidiary into its parent, on the day notice is given or waived
under ss. 3-106; or
(ii) With respect to any other transaction, on the day the stockholders
voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or indirectly
results from the transaction objected to or from its proposal.
(3) In any transaction governed by ss.3-602 of this title or exempted
by ss.3-603 (b) of this title, fair value shall be value determined in
accordance with the requirements of ss.3-603 (b) of this title.
(c) When right to fair value does not apply. -- Unless the transaction is
governed by ss.3-602 of this title or is exempted by ss.3-603 (b) of this title,
a stockholder may not demand the fair value of his stock and is bound by the
terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under ss.3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the date notice
is given or waived under ss.3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the right to do so;
or
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the successor or cash,
scrip, or other rights or interests arising out of provisions for the treatment
of fractional shares of stock in the successor; or
(3) The stock is that of an open-end investment company registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net asset
value.
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ss.3-203 Procedure by stockholder.
(a) Specific duties. -- A stockholder of a corporation who desires to receive
payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under ss.3-106 of this title of a 90 percent or
more owned subsidiary into its parent, within 30 days after notice is given or
waived under ss.3-106; or
(ii) With respect to any other transaction, at or before the stockholders'
meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his stock, stating
the number and class of shares for which he demands payment.
(b) Failure to comply with section. -- A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share exchange,
transfer of assets, or charter amendment.
ss.3-204 Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to holders
of record of that stock on a record date after the close of business on the day
as at which fair value is to be determined under ss.3-202 of this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that stock,
except the right to receive payment of its fair value.
ss.3-205 Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the successor.
ss.3-206 Restoration of dividend and other rights.
(a) When rights restored. -- The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief; or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. -- The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
ss.3-207 Notice and offer to stockholders.
(a) Duty of successor. -- (1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:
(i) A balance sheet as of a date not more than six months before the date of
the offer; (ii) A profit and loss statement for the 12 months ending on the
date of the balance sheet; and (iii) Any other information the successor
considers pertinent.
(b) Manner of sending notice. -- The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
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ss.3-208 Petition for appraisal; consolidation of proceedings; joinder of
objectors.
(a) Petition for appraisal. -- Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. -- (1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation of
all the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an appraisal
proceeding.
ss.3-209 Notation on stock certificate.
(a) Submission of certificate. -- At any time after a petition for appraisal
is filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. -- If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
ss.3-210 Appraisal of fair value.
(a) Court to appoint appraisers. -- If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers -- Filing. -- Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) Same -- Contents. -- The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same -- Service; objection. -- (1) On the same day that the report is
filed, the appraisers shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it and
request a hearing.
ss.3-211 Action by court on appraisers' report.
(a) Order of court. -- The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order. -- (1) If the appraisers' report is confirmed or
modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or (ii) Remit the proceedings to the same or other appraisers
on terms and
conditions it considers proper.
(c) Judgment includes interest. -- (1) Except as provided in paragraph (2) of
this subsection, a judgment for the stockholder shall award the value of the
stock and interest from the date as at which fair value is to be determined
under ss.3-202 of this subtitle.
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under ss.3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:
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(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and (iii) Any other circumstances it considers relevant.
(d) Costs of proceedings. -- (1) The costs of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the stock
made under ss.3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable fees
and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under ss.3-207 of this
subtitle; or
(ii) The value of the stock determined in the proceeding materially exceeds
the amount offered by the successor.
(e) Effect of judgment. -- The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
ss.3-212 Surrender of stock.
The successor is not required to pay for the stock of an objecting stockholder
or to pay a judgment rendered against it in a proceeding for an appraisal
unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it, indorsed
in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates and
sufficient indemnity bond are furnished.
ss.3-213 Rights of successor with respect to stock.
(a) General rule. -- A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under ss.3-202 of this subtitle.
(b) Successor in transfer of assets. -- After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. -- Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
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