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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-12638
F&M BANCORP
(Exact name of registrant as specified in its charter)
MARYLAND 52-1316473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(Address of principal executive offices) (Zip Code)
(301) 694-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($5 PAR VALUE)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 1, 2000, the aggregate market value of 10,617,454 shares of Common
Stock outstanding and held by non-affiliates of Registrant was $202,368,673.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement dated March
17, 2000 relating to the 2000 Annual Meeting of Stockholders of the Registrant
are incorporated herein by reference into Part III.
TABLE OF CONTENTS
PART 1 PAGE
Item 1 Business 3
The Companies 3
Farmers & Mechanics National Bank 3
Home Federal Savings Bank 3
Bank Deposits and Lending Activities 3
Financial Information About Industry Segments 4
Banking Products and Services 4
Environmental Liabilities 4
Seasonal Aspects 4
Employees 4
Competition 4
Supervision and Regulation 4
Bank Holding Company Regulation 4
Bank Regulation 5
Savings Bank Regulation 5
Regulatory Restrictions 5
Capital Requirements 5
Interstate Banking 6
Monetary Policy 6
Legislation 6
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
PART III
Item 10 Directors and Executive Officers of the Registrant 49
Item 11 Executive Compensation 49
Item 12 Security Ownership of Certain Beneficial Owners and Management 49
Item 13 Certain Relationships and Related Transactions 49
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50
Signatures 52
2
ITEM 1. BUSINESS
THE COMPANIES
GENERAL. F&M Bancorp ("Bancorp") is a bank holding company headquartered in
Frederick, Maryland that is organized under the laws of the State of Maryland
and registered under the Bank Holding Company Act of 1956. Bancorp derives
substantially all of its income from operation of its wholly owned subsidiaries.
Bancorp's principal subsidiaries are Farmers & Mechanics National Bank and Home
Federal Savings Bank.
On December 31, 1999, Bancorp had consolidated assets of $1.719 billion,
total loans of $1.115 billion, total deposits of $1.314 billion, and total
shareholders' equity of $144 million. The principal executive offices of Bancorp
are located at 110 Thomas Johnson Drive, Frederick, Maryland 21702 and its
telephone number is (301) 694-4000.
On December 30, 1999, Bancorp completed the acquisition of Patapsco Valley
Bancshares, Inc. ("PVB") and its commercial banking subsidiary, Commercial &
Farmers Bank ("C&F"), Ellicott City, MD, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Under the terms of the merger
agreement, C&F was merged with and into the Bank at closing, increasing the
Bank's assets by approximately $173 million, loans by approximately $118
million, and deposits by approximately $150 million.
On July 15, 1999, Bancorp consummated a merger with Potomac Basin Group
Associates, Inc. ("PB"), in a tax-free exchange of shares accounted for as a
pooling-of-interests. PB is a Beltsville, MD-based, full-line independent
insurance agency specializing in corporate employee benefit plans.
On June 18, 1999, Bancorp, through Farmers & Mechanics National Bank,
purchased assets and liabilities associated with the Fairfield, Pennsylvania
office of Farmers Bank, a subsidiary of Allfirst. Under the terms of the
agreement, Farmers & Mechanics National Bank assumed responsibility for services
related to checking, savings, and certificates of deposit products totaling
$10.8 million and purchased the branch office and real estate of Farmers Bank
located at 20 East Main Street, Fairfield, PA.
On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. ("MNOC") and its commercial banking subsidiary, Taneytown Bank
& Trust Company ("TBT"), Taneytown, MD, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Under the terms of the merger
agreement, TBT was merged with and into Farmers & Mechanics National Bank at
closing, increasing the Bank's assets by approximately $304 million, loans by
approximately $167 million, and deposits by approximately $244 million.
On May 29, 1998, Bancorp acquired Keller Stonebraker Insurance, Inc. ("KS"),
Hagerstown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. KS operates as an independent, wholly owned subsidiary of
the Bank and provides a full line of consumer and commercial business insurance
products through offices in Hagerstown and Cumberland, MD and Keyser, WV.
Consumer insurance products include annuities, homeowners, automobile, life and
personal umbrellas. Commercial business products include property and casualty
packages, workers' compensation, bonds, professional liability, umbrella, and
401(k) and other benefit plans.
On November 15, 1996, Bancorp completed its acquisition of Home Federal
Corporation, a Maryland corporation and unitary thrift holding company, which at
closing had approximately $228 million in assets and $161 million in deposits.
FARMERS & MECHANICS NATIONAL BANK. Farmers & Mechanics National Bank ("the
Bank") was incorporated in 1865 as a national banking association under the laws
of the United States, and is the successor to Maryland State chartered banking
institutions dating from 1817. In 1915, the Bank acquired trust powers. The
Bank, the deposits of which are insured by the Federal Deposit Insurance
Corporation, conducts general banking and trust company business through 43
full-service offices and 52 automated teller machines located in Frederick,
Carroll, Montgomery, Baltimore and Howard Counties, MD, and in Adams County,
Pennsylvania. The Bank also operates the East Coast's first full-service mobile
unit, Express Bank, and delivers electronic services throughout its market with
personal and business PC banking access and with its 24-hour telephone banking
service, ExpressLine.
HOME FEDERAL SAVINGS BANK. Home Federal Savings Bank ("the Savings Bank") is
federally chartered and provides consumer, commercial banking, mortgage and
brokerage services, and offers full-service banking through 9 community offices,
19 automated teller machines, and other electronic banking systems in Washington
and Allegany Counties, MD.
BANK DEPOSITS AND LENDING ACTIVITIES. As of December 31, 1999, the Bank had
deposits of $1.143 billion and the Savings Bank had deposits of $171 million. No
material portion of either bank's deposits has been obtained from any single
depositor or group of related depositors, including federal, state and local
governments and agencies. As of December 31, 1999, the Bank had $943 million in
loans representing approximately 64% of its total assets of $1.481 billion and
the Savings Bank had approximately $172 million in loans representing
approximately 73% of its total assets of $237 million. No material portion of
either bank's loans is concentrated within a single industry or group of related
industries. Neither the Bank nor the Savings Bank is dependent upon any single
borrower or a few principal borrowers. The loss of any individual or of a few
principal borrowers would not have a material adverse effect on the operations
or earnings of the Bank or the Savings Bank.
3
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
related Information ("SFAS No. 131"), became applicable to Bancorp beginning
January 1, 1998 and establishes standards for reporting financial information
about "operating segments" of an enterprise. Among other provisions, the
standard sets forth the conditions under which two or more segments may be
combined into a single operating segment such that disclosure of financial
information pertaining to individual segments so combined may not be required.
As disclosed above, the principal business of the Bank and the Savings Bank
are similar inasmuch as both affiliates are engaged in community banking
services to consumers and commercial business establishments, offer similar
branch office and electronic delivery channels, and are subject to similar
regulation. In the aggregate, Bancorp derives more than 90% of its consolidated
revenue and net income and more than 90% of its consolidated assets from the
Bank and the Savings Bank. Accordingly, the financial information required in
this section under the provisions of SFAS No. 131 is contained in the
consolidated financial statements beginning on page 44 which are hereby
incorporated by reference.
BANKING PRODUCTS AND SERVICES. Bancorp, through its wholly owned
subsidiaries, provides banking and bank-related financial services to middle
market and small business organizations, local governmental units, and retail
customers in central Maryland and surrounding areas. Bancorp, through its
subsidiaries, also provides broad-based commercial and retail banking services;
brokerage; personal trust, investment management, and financial planning
services; and a wide variety of related financial products and services to
individuals, businesses and governmental units. In addition, Bancorp provides a
full line of consumer and commercial business insurance products through offices
in Beltsville, Ellicott City, Hagerstown, and Cumberland, Maryland and Keyser,
West Virginia.
ENVIRONMENTAL LIABILITIES. Management of Bancorp is not aware of any
environmental liabilities that would have a material adverse effect on the
operations or earnings of Bancorp.
SEASONAL ASPECTS. Management does not believe that the deposits or the
business of the Bank, the Savings Bank or their subsidiaries in general are
seasonal in nature. The deposits may, however, vary with local and national
economic conditions but should not have a material effect on planning and
policy making.
EMPLOYEES. As of December 31, 1999, Bancorp had no full-time equivalent
employees. As of that date, the Bank and its subsidiaries had 698 full-time
equivalent employees and the Savings Bank and its subsidiaries had 105 full-time
equivalent employees. A total of 803 full-time equivalent employees work for
Bancorp and its direct and indirect subsidiaries.
COMPETITION. The market for banking and bank-related services is highly
competitive and is growing more competitive every year. Traditional banks are
developing capabilities in nontraditional lines of business such as insurance,
brokerage, mutual funds, investment banking, securities underwriting and asset
management, and commercial enterprises such as insurance companies, investment
banking firms and retailers are gaining regulatory approvals to offer
traditional banking products and services, either alone or through affiliations.
Bancorp operates in a highly competitive marketplace that has intensified in
the past several years largely as a result of interstate banking and the
acquisition of in-state financial institutions by larger, out-of-state banks.
The full range of competition includes other bank holding companies, other
commercial banks, other savings and loan associations, credit unions, money
market funds, brokerage houses, investment managers, mortgage companies,
consumer finance companies, leasing companies, insurance carriers, other
insurance agencies, automobile manufacturers and their financing units, and
commercial loan syndicates.
Bancorp competes successfully in its marketplace by effectively focusing its
business energy and resources on meeting the specific needs of its customers
with a level of sales, service, and support intended to foster long-term
relationships. Additionally, through its acquisitions, Bancorp has been able to
expand its presence throughout the Maryland market to better serve clients who
demand a statewide presence. To further this goal, Bancorp expects to
investigate and hold discussions regarding possible transactions with other
banks.
SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION. Bancorp is registered with the Federal Reserve
Board (the "Board") as a bank holding company and is subject to reporting
requirements, supervision and examination by the Board under the Bank Holding
Company Act of 1956 (the "Act"), as amended. The Act restricts the business
activities and acquisitions that may be engaged in or made by Bancorp. Bancorp
is generally prohibited from acquiring direct or indirect ownership or control
of more than 5% of any class of the voting shares of any company which is not a
bank or bank holding company and from engaging in any business other than that
of banking or of managing or controlling banks, or of furnishing services to, or
performing services for, its affiliated banks. The Act and regulations
thereunder require prior approval of the Board of the acquisition by Bancorp of
more than 5% of any class of the voting shares of any additional bank. After
prior approval or notice, Bancorp may acquire other banks and bank holding
companies and engage directly or indirectly in certain activities closely
related to banking. Bancorp must give prior notice of certain purchases or
redemptions of its outstanding equity securities. Bancorp and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease, sale of property, or furnishing of services.
4
The Board may issue cease and desist orders against bank holding companies
and nonbank subsidiaries to stop actions believed to present a serious threat to
a subsidiary bank. The Board also regulates certain debt obligations of bank
holding companies.
BANK REGULATION. The Bank is subject to supervision and regulation by the
Comptroller of the Currency ("OCC"), the Board, and the Federal Deposit
Insurance Corporation ("FDIC"). The regulator having primary supervisory and
examination authority over the Bank is the OCC. Deposits, reserves, investments,
loans, consumer law compliance, issuance of securities, payment of dividends,
establishment of branches, mergers and consolidations, changes in control,
electronic funds transfers, responsiveness to community needs, management
practices, compensation policies, and other aspects of operations are subject to
regulation by the appropriate Federal supervisory authorities and the applicable
banking laws of the State of Maryland. The Bank may establish branch banking
offices and engage in certain corporate activities without geographic limitation
with the prior approval of the OCC. Mergers of the Bank with any other bank
would require approval of, and involve review by, various governmental agencies.
Some of the aspects of the lending and deposit business of the Bank which are
subject to regulation by the Board or the FDIC include disclosure requirements
in connection with personal or mortgage loans, interest on deposits and reserve
requirements. In addition, the Bank is subject to numerous federal, state and
local laws and regulations which set forth specific restrictions and procedural
requirements with respect to extensions of credit, (including to insiders),
credit practices, disclosure of credit terms and discrimination in credit
transactions.
The Bank is subject to restrictions under federal law which limit the
transfer of funds by the Bank to Bancorp and its nonbanking subsidiaries,
whether in the form of loans, extensions of credit, investments, asset
purchases, or otherwise. Such transfers by the Bank to Bancorp or any of
Bancorp's nonbanking subsidiaries are limited in amount to 10% of the Bank's
capital and surplus and, with respect to Bancorp and all such nonbanking
subsidiaries, to an aggregate of 20% of the Bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to be secured in
specified amounts.
SAVINGS BANK REGULATION. The Savings Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and by the
FDIC. The OTS has extensive authority over the operations of savings
associations. The OTS' enforcement authority over all savings associations
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders, and to initiate injunctive actions.
REGULATORY RESTRICTIONS. See Note 14, Regulatory Restrictions, Notes to
Consolidated Financial Statements, page 65, for additional information regarding
certain regulatory restrictions on inter-company transfers of funds and on the
payment of dividends by the Bank and the Savings Bank to Bancorp.
CAPITAL REQUIREMENTS. Under regulatory capital adequacy guidelines
discussed below, Bancorp, the Bank and the Savings Bank were "well
capitalized" at December 31, 1999 and 1998.
The Board, OCC and OTS maintain capital adequacy guidelines applicable
to Bancorp, the Bank and the Savings Bank, respectively, which set forth
minimum levels of capital relative to assets and risk-adjusted assets. The
guidelines require Bancorp and the Bank to maintain a minimum tangible
(leverage) capital ratio of 3% (1.5% for the Savings Bank) Tier 1 capital
(primarily shareholders' equity) to total regulatory assets, plus, for all
but the most highly rated institutions, an additional cushion of 100 to 200
basis points. Tier 1 capital for bank holding companies includes common
equity, minority interest in equity accounts of consolidated subsidiaries,
and qualifying perpetual preferred stock. Tier 1 capital excludes goodwill
and other disallowed intangibles, certain deferred tax assets and any net
unrealized loss on marketable equity securities. At December 31, 1999,
Bancorp's tangible capital ratio was 8.48%.
Bancorp and the Bank must also meet a minimum core, "Tier 1" capital to
risk-weighted assets ratio of 4% (3% for Savings Bank), and Bancorp, the Bank
and the Savings Bank must meet a minimum core and supplemental, "Total" capital
to risk-weighted assets ratio of 8%, measuring the amount of defined capital as
a percentage of the amount and nature of assets and commitments currently at
risk. The risk-weighted capital rules specify four categories of asset or
commitment risk, with each category being assigned a weight ranging from 0% to
100%, depending upon the defined risk of each category. At least 50% of
Bancorp's Total capital must be made up of Tier 1 capital elements including
common equity, retained earnings, guaranteed preferred beneficial interest in
junior subordinated debentures, and a limited amount of perpetual preferred
stock, after subtracting goodwill and certain other adjustments. The remainder
may consist of perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock, and a limited amount of loan
loss reserves. At December 31, 1999, Bancorp's Tier 1 and Total risk-weighted
capital ratios were 12.27% and 13.37%, respectively.
The FDIC requires "prompt corrective action" when an insured institution's
capital falls to certain levels. This rule restricts or prohibits certain
activities and requires an insured institution to submit a capital restoration
plan when it becomes undercapitalized. The restrictions and prohibitions become
more severe as an institution's capital level declines.
Capital adequacy guidelines also provide for consideration of interest rate
risk in the overall determination of a bank's minimum capital requirement. The
guidelines explicitly provide that a bank's exposure to declines in the economic
value of its capital due to changes in interest rates is a factor to be
considered in evaluating capital adequacy.
5
For additional information pertaining to capital adequacy and interest rate
risk management, see Management's Discussion and Analysis of Financial Condition
and Results of Operations, pages 41 and 42.
INTERSTATE BANKING. In September 1994, the Riegle-Neal Interstate Banking and
Branching Act of 1994 (the "Banking and Branching Act") became law. The Banking
and Branching Act provides that, as of September 29, 1995, adequately
capitalized and managed bank holding companies may acquire banks in any state.
State laws prohibiting interstate banking or discriminating against out-of-state
banks are preempted, although states are permitted to require that target banks
located within the state be in existence for a period of up to five years before
they become subject to the Banking and Branching Act. Additionally, the Banking
and Branching Act establishes deposit caps that prohibit acquisitions if the
acquirer would thereafter control 30% or more of the deposits of insured banks
and thrifts held in the state in which the acquisition or merger is occurring or
in any state in which the target maintains a branch or 10% or more of the
deposits nationwide. State-level deposit caps are not preempted as long as they
do not discriminate against out-of-state acquirers, and the federal deposit caps
apply only to initial entry acquisitions.
In addition, the Banking and Branching Act provides that, as of June 1, 1997,
adequately capitalized and managed banks may engage in interstate branching by
merging banks in different states and by opening and maintaining de novo, or
new, branches in states other than the states in which the banks maintain their
principal place of business. With respect to interstate merger, each state had
the opportunity to "opt out" of the interstate merger provisions and, thus,
prohibit such activity. With respect to de novo branching, the Banking and
Branching Act permits such activity only if a state has "opted in" and
specifically allowed such activity. The State of Maryland permits interstate
branching, both by mergers and by establishing new branches.
Under regulatory guidelines, Bancorp is "well-capitalized" and, therefore,
meets the "adequately-capitalized" standard required to participate in
interstate affiliations with out-of-state banks and bank holding companies.
MONETARY POLICY. The earnings and growth of Bancorp, the Bank, and the
Savings Bank are affected by general economic conditions as well as by monetary
policies of regulatory authorities, including the Board, which regulates the
national money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques available to the Board are engaging in open
market transactions in U.S. Government securities, changing the discount rate on
bank borrowings, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth and
distribution of bank loans, investments and deposits. Their use may also affect
interest rates charged on loans or paid on deposits. The effect of governmental
monetary policies on the earnings of Bancorp cannot be predicted.
LEGISLATION. The enactment of the Gramm-Leach-Bliley Act in 1999
significantly changed the business of banking. Known also as the "Financial
Services Modernization Act" the Act becomes effective March 12, 2000. The act,
among other things, repealed the sections of the Glass-Steagall Act which have
prohibited the affiliation of banks with securities firms, allowing a bank
holding company to affiliate with any financial company, for example insurance
or securities, and to cross sell an affiliate's products thus allowing any
financial company to offer to its customers any financial product or service.
The act further expands the number of permissible bank holding company
activities to include a long laundry list of financial activities, any activity
which in the future is deemed by the Federal Reserve Board (the "Board") and the
Treasury Department to consider "financial in nature or incidental to financial
activities" and any activity that the Board determines is complimentary to a
financial activity which does not pose a substantial safety and soundness risk.
The new standard is much broader than the current permissible activities
standard. The broader standard should allow bank holding companies to expand
their product mix and to adapt to changing market conditions.
State laws prohibiting such affiliations are expressly pre-empted.
Significantly, the act removes the ability of commercial businesses to acquire
or establish a thrift holding company or receive a thrift charter and requires
existing unitary thrift holding companies to be sold only to financial companies
in the future.
The act also confirms state regulation of insurance, subject, however, to a
standard that no state may discriminate against affiliates of a bank, thus
attempting to provide for equal treatment of both bank affiliated insurance
agencies and non-bank affiliated insurance agencies. The Act also allows
national banks to engage in new and existing financial activities through
subsidiaries without regard to geographic limitation, and streamlines bank
holding company supervision and clarifies the roles of various regulators.
Regulations are currently being promulgated to implement the provisions of the
Act. The effect of the act and the implementing regulations on Bancorp will not
be known for some time.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the states' legislatures, and before
the various bank regulatory agencies. Some of these proposals could have
significant effects on the way in which Bancorp and its subsidiaries, and
financial institutions in general, conduct their business, and could have
significant effects on Bancorp's operating results. Bancorp cannot however,
accurately predict what those effects would be.
6
ITEM 2. PROPERTIES
The following describes the location and general character of the principa
offices and other materially important physical properties of Bancorp and its
subsidiaries.
The Bank owns a fee simple interest in its principal executive offices and
main banking facility, totaling approximately 115,000 square feet, located at
110 Thomas Johnson Drive,Frederick, MD. The Savings Bank owns a fee simple
interest in its principal executive office and main banking facility, with
approximately 39,000 square feet, located at 122-128 West Washington Street,
Hagerstown, MD. Keller Stonebraker leases approximately 8,000 square feet for
its headquarters office located at 1120 Professional Court, Hagerstown, MD, from
a partnership in which Keller Stonebraker's executive officers hold a 30%
limited partnership interest. Bancorp acquired, in its merger with Monocacy
Bancshares, Inc., a fee simple interest in the 43,500 square foot headquarters
building of Taneytown Bank & Trust Company located at 222 East Baltimore Street,
Taneytown, MD. Through its merger with Patapsco Valley Bancshares, Inc., Bancorp
acquired a fee simple interest in the 15,500 square foot headquarters building
of Commercial & Farmers Bank located at 8593 Baltimore National Pike, Ellicott
City, MD.
Out of a total of 52 full-service branch offices of the Bank and the Savings
Bank at December 31, 1999, 29 were owned and 23 were leased. Information
concerning Bancorp's lease commitments is included in Note 12, Commitments and
Contingencies, Notes to Consolidated Financial Statements, page 63.
ITEM 3. LEGAL PROCEEDINGS
Bancorp and its subsidiaries become involved, from time to time, in various
legal proceedings incidental to their respective businesses. As disclosed in
Note 12, Commitments and Contingencies, Notes to Consolidated Financial
Statements, page 63, in the opinion of the management, there were no legal
matters pending as of December 31, 1999 which would have a material effect on
the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders since the 1999
Annual Shareholder meeting.
7
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED StockHOLDER MATTERS
The principal market on which F&M Bancorp Common Stock is traded is The NASDAQ
Stock Market. The following table sets forth share prices and dividend payments
for the periods indicated:
STOCK PRICE AND DIVIDENDS (1)
1999 1998
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HIGH LOW CLOSE DIVIDEND HIGH LOW CLOSE DIVIDEND
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1st Q $31.55 $29.05 $29.53 $0.23 $37.42 $31.30 $37.42 $0.17
2nd Q 34.77 29.28 31.97 0.26 41.95 34.69 40.42 0.34
3rd Q 32.37 26.25 26.75 0.25 40.95 30.95 32.27 0.18
4th Q 27.88 20.00 20.25 0.23 32.97 29.05 31.19 0.23
(1) DATA HAS BEEN RESTATED FOR 5% STOCK DIVIDEND PAID IN JULY 1999, FOR THE PB
ACQUISITION IN JULY 1999, AND FOR THE PVB ACQUISITION IN DECEMBER 1999.
DIVIDEND PER SHARE INFORMATION IS CALCULATED BASED ON THE RESTATED WEIGHTED
AVERAGE SHARES OF STOCK AND INCLUDES DIVIDEND PAYMENTS MADE BY PB AND PVB TO
THEIR SHAREHOLDERS PRIOR TO BANCORP'S ACQUISITION OF THESE COMPANIES.
DIVIDEND PER SHARE AMOUNTS DECLARED BY BANCORP WERE $0.27 PER SHARE DURING
EACH QUARTER IN 1999 AND $0.25 PER SHARE DURING EACH QUARTER IN 1998.
Information concerning restrictions on the ability of affiliates to transfer
funds in the form of dividends to Bancorp is included in Note 14, Regulatory
Restrictions, Notes to Consolidated Financial Statements, page 65.
8
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
F&M Bancorp and Subsidiaries
YEARS ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
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OPERATING INCOME
Interest income $ 113,798 $ 111,020 $ 107,011 $ 100,237 $ 96,486
Interest expense 52,041 50,627 47,599 45,523 43,026
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Net interest income 61,757 60,393 59,412 54,714 53,460
Provision for credit losses 1,295 3,056 2,910 1,822 4,246
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Net interest income after provision for credit losses 60,462 57,337 56,502 52,892 49,214
Net gains (losses) on sales of securities 10 1,104 76 (550) 20
Other noninterest income 24,978 25,185 22,278 18,777 19,319
Noninterest expense 67,208 63,393 56,852 55,196 50,936
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Income before provision for income taxes 18,242 20,233 22,004 15,923 17,617
Provision for income taxes 5,179 5,600 6,119 4,057 3,566
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 13,063 $ 14,633 $ 15,885 $ 11,866 $ 14,051
Net income, excluding special items(1) 16,902 16,494 15,635 14,169 12,015
PER SHARE DATA
Net income--basic $ 1.19 $ 1.34 $ 1.47 $ 1.10 $ 1.30
Net income--basic, excluding special items(1) 1.54 1.51 1.44 1.31 1.11
Net income--diluted 1.18 1.33 1.46 1.09 1.29
Net income--diluted, excluding special items(1) 1.53 1.50 1.43 1.30 1.11
Cash dividends paid 0.97 0.92 0.61 0.45 0.43
Book value 13.07 13.58 13.05 12.00 11.38
KEY RATIOS
Return on average assets 0.80% 0.96% 1.11% 0.87% 1.11%
Return on average assets, excluding special items(1) 1.03 1.08 1.09 1.04 0.95
Return on average shareholders' equity 8.80 10.02 11.77 9.45 12.12
Return on average shareholders' equity,
excluding special items(1) 11.38 11.30 11.59 11.28 10.37
Average shareholders' equity to total average assets 9.06 9.60 9.42 9.22 9.17
Dividend payout ratio(2) 81.51 68.66 41.50 40.91 33.08
Dividend payout ratio,(2) excluding special items(1) 62.99 60.93 42.36 34.35 38.74
SELECTED AVERAGE BALANCES
Total average assets $1,639,789 $1,521,435 $1,431,523 $1,361,478 $1,263,418
Total average shareholders' equity 148,508 146,021 134,911 125,594 115,914
AT PERIOD END
Loans, net of unearned income $1,114,734 $ 991,756 $ 981,023 $ 914,660 $ 843,759
Total assets 1,719,334 1,620,490 1,479,690 1,407,703 1,346,342
Total deposits 1,314,073 1,285,261 1,173,057 1,137,442 1,116,025
Total shareholders' equity 143,820 148,187 141,755 129,760 122,855
ASSET QUALITY
Nonperforming assets $ 7,366 $ 7,249 $ 13,746 $ 16,564 $ 19,622
Nonperforming assets / total assets 0.43% 0.45% 0.93% 1.18% 1.46%
Net charge-offs to average loans outstanding 0.22 0.25 0.26 0.12 0.68
(1) SPECIAL ITEMS ARE TRANSACTIONS OF AN UNUSUAL OR NONRECURRING NATURE AND
INCLUDE ITEMS SUCH AS MERGER-RELATED EXPENSES AND CERTAIN GAINS ON SALE OF
SECURITIES AND REAL ESTATE.
(2) REFLECTS THE PERCENTAGE RELATIONSHIP OF CASH DIVIDENDS PAID TO BASIC
EARNINGS PER SHARE.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides an overview of the financial condition and
results of operations of F&M Bancorp and Subsidiaries ("Bancorp") for the three
years in the period ended December 31, 1999, and is intended to assist readers
in their analysis and understanding of the accompanying consolidated financial
statements and notes thereto.
Bancorp's acquisition of Potomac Basin Group Associates, Inc. ("PB"),
completed in July 1999, and Patapsco Valley Bancshares, Inc. ("PVB") and its
wholly owned subsidiary, Commercial & Farmers Bank ("C&F"), completed in
December 1999, are accounted for as poolings-of-interests transactions.
Accordingly, the consolidated financial statements, notes, and historical
financial data contained herein were restated for all prior periods presented to
include the financial condition and results of operations for PB and PVB. Refer
to Note 2, Notes to Consolidated Financial Statements, for further information
regarding acquisition activity within the periods reported.
All per share amounts in this report have been restated to give effect to
subsequent stock dividends and shares issued in pooling-of-interest
transactions.
FORWARD-LOOKING STATEMENTS
Certain information included in the following section of this report, other than
historical information, may contain certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "likely", "unlikely", "continue",
or similar terms. Although Bancorp believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from those projected in the forward-looking statements.
1999 COMPARED TO 1998
OVERVIEW
Net income for 1999 decreased 8% to $13.1 million, or $1.18 per diluted share,
from $14.6 million, or $1.33 per diluted share, for 1998, largely reflecting the
influence of special items of an unusual or nonrecurring nature recognized in
the periods compared and as set forth in Table 1. Excluding special items in
both years, net income increased slightly to $16.9 million, or $1.53 per share,
from $16.5 million, or $1.50 per share, for 1998. Per share amounts are stated
throughout this section on a diluted basis unless specifically noted otherwise.
SPECIAL ITEMS--1999
Special items for 1999, as shown in Table 1 on an after-tax basis, included
$3.839 million of merger-related expense, or $0.35 per share. This amount
included $117 thousand ($0.01 per share) related to the November 1998
acquisition of TBT, $115 thousand ($0.01 per share) related to the July 1999
acquisition of PB, and $3.608 million ($0.33 per share) related to the
acquisition of PVB (which includes C&F). The integration of C&F's core
processing systems and administrative functions will be completed in March,
2000.
SPECIAL ITEMS--1998
Special items for 1998, as shown in Table 1 on an after-tax basis, included
$2.332 million of merger-related expense, or $0.21 per share. This amount
included $192 thousand ($0.01 per share) of merger-related expenses pertaining
to the 1998 integration of core processing systems and administrative functions
at the Savings Bank, acquired in November 1996, $190 thousand ($0.01 per share)
related to the May 1998 acquisition of KS, and $1.922 million ($0.19 per share)
related to the acquisition and integration of TBT. A special provision for
possible loan losses related to the acquisition of TBT amounted to $460 thousand
after tax, or $0.04 per share. The integration of TBT's core processing systems
and administrative functions was completed in February 1999. Net securities
gains realized by TBT during 1998 amounted to $661 thousand ($0.06 per share),
and Bancorp realized a net gain of $270 thousand ($0.02 per share) on the sale
of bank-owned real estate.
10
TABLE 1. NET INCOME EXCLUDING SPECIAL ITEMS
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 EPS(1) 1998 EPS(1) 1997 EPS(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income as reported $13,063 $1.18 $14,633 $1.33 $15,885 $1.46
Adjustments (net of income taxes):
Merger-related expense 3,839 .35 2,332 .21 294 .02
Special provision for credit losses -- -- 460 .04 -- --
Gain on sale of property -- -- (270) (.02) -- --
Gain on sale of merchant services -- -- -- -- (552) (.05)
Gain on sale of loans -- -- -- -- (110) (.01)
Litigation expense -- -- -- -- 177 .02
SAIF assessment -- -- -- -- -- --
Securities losses (gains) -- -- (661) (.06) (59) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income excluding special items $16,902 $1.53 $16,494 $1.50 $15,635 $1.43
(1) DILUTED EARNINGS PER SHARE
RESULTS OF OPERATIONS
NET INTEREST INCOME
Approximately 71% of Bancorp's gross revenue was derived from net interest
income in 1999, up from 70% in 1998. Net interest income is principally the sum
of interest and fees on loans plus interest and discount on investment
securities, less interest paid on deposits and borrowings. Although
interest-bearing deposits continued to represent Bancorp's principal funding
source, factors largely related to intense competition for bank deposits
throughout the financial services industry have forced banks to seek dependable,
relatively low-cost alternative sources of funds. Bancorp frequently supplements
its funding with Federal Home Loan Bank ("FHLB") borrowings, which have proven
to be reliable and cost-effective across all maturities selected. Other, more
traditional, funding sources include repurchase agreements and federal funds
purchased.
Net interest income is influenced by a number of external economic and
competitive factors such as the Federal Reserve Board monetary policy and its
influence on market interest rates; loan demand and competition from nonbank
lenders; and competition with investment managers, brokerage firms and
investment bankers for consumer and commercial business assets that might
otherwise be deposited in banks. Internal factors impacting levels and changes
in net interest income are attributed to Bancorp's interest rate risk management
policies, which address a variety of issues including loan and deposit pricing
practices, funding alternatives and maturity schedules. Historically, Bancorp
has not made use of derivatives, interest rate hedges or similar instruments or
transactions to manage interest rate risk, but is prepared to employ such
instruments as circumstances dictate.
11
TABLE 2. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
(DOLLARS IN THOUSANDS) BALANCES RATE BALANCES RATE BALANCES RATE
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning Assets
Short-term funds $ 41,503 $ 2,051 4.94% $ 41,045 $ 2,481 6.04% $ 24,842 $ 1,319 5.31%
--------- ------- --------- ------- --------- -------
Investment securities:(1)
Taxable 321,016 19,424 6.05 269,091 16,480 6.12 239,357 15,272 6.38
Tax-exempt(2) 131,016 9,066 6.92 101,158 7,093 7.01 99,608 7,259 7.29
--------- ------- --------- ------- --------- -------
Total investment securities(2) 452,032 28,490 6.30 370,249 23,573 6.37 338,965 22,531 6.65
--------- ------- -------- ------- --------- -------
Loans, net, including loans held for
sale(2) 1,032,955 86,601 8.38 996,094 87,621 8.80 956,893 85,773 8.96
--------- ------- -------- ------- --------- -------
Total interest-earning assets and average
yield(2) 1,526,490 117,142 7.67 1,407,388 113,675 8.08 1,320,700 109,623 8.30
------- ------- -------
Total noninterest-earning assets 113,299 114,047 110,823
--------- --------- ---------
Total assets $1,639,789 $1,521,435 $1,431,523
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest bearing deposits:
Checking $ 180,281 $ 3,163 1.75% $ 157,204 $ 3,024 1.92% $ 145,806 $2,966 2.03%
Savings 179,124 4,175 2.33 179,407 4,628 2.58 187,459 5,012 2.67
Money market accounts 198,170 6,732 3.40 164,537 5,293 3.22 145,048 4,355 3.00
Certificates of deposit 556,161 28,779 5.17 537,196 29,322 5.46 507,939 27,761 5.47
--------- ------- --------- ------- --------- -------
Total interest bearing deposits 1,113,736 42,849 3.85 1,038,344 42,267 4.07 986,252 40,094 4.07
--------- ------- --------- ------- --------- -------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 73,151 3,304 4.52 55,084 2,680 4.87 47,350 2,407 5.08
Other short-term borrowings 16,274 938 5.76 26,703 1,476 5.53 62,001 3,664 5.91
--------- ------- --------- ------- --------- -------
Total short-term borrowings 89,425 4,242 4.74 81,787 4,156 5.08 109,351 6,071 5.55
Long-term borrowings 92,368 4,950 5.36 73,964 4,204 5.68 24,350 1,434 5.89
--------- ------- --------- ------- --------- -------
Total borrowed funds 181,793 9,192 5.06 155,751 8,360 5.37 133,701 7,505 5.61
--------- ------- --------- ------- -------- -------
Total interest-bearing liabilities
and average rate incurred 1,295,529 52,041 4.02 1,194,095 50,627 4.24 1,119,953 47,599 4.25
--------- ------- --------- ------- --------- -------
NONINTEREST-BEARING LIABILITIES
Demand deposits 176,946 166,541 160,916
Other liabilities 18,806 14,778 15,743
--------- --------- ---------
Total noninterest-bearing liabilities 195,752 181,319 176,659
--------- --------- ---------
Total liabilities 1,491,281 1,375,414 1,296,612
--------- --------- ---------
Shareholders' equity 148,508 146,021 134,911
--------- --------- ---------
Total liabilities and shareholders' $1,639,789 $1,521,435 $1,431,523
equity ========= ========= =========
Net interest income $ 65,101 $63,048 $62,024
======== ======= =======
Net interest spread(3) 3.65% 3.84% 4.05%
===== ===== =====
Net interest margin(4) 4.26% 4.48% 4.70%
===== ===== =====
(1) AVERAGE BALANCES AND THE RELATED AVERAGE RATE ARE BASED ON AMORTIZED COST.
(2) INTEREST AND YIELDS ON OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS AND
TAX-EXEMPT LOANS ARE COMPUTED ON A TAXABLE EQUIVALENT BASIS USING THE U.S.
STATUTORY TAX RATE OF 35 PERCENT. IN ADDITION, LOAN FEE INCOME IS INCLUDED
IN THE INTEREST INCOME CALCULATIONS, AND NONACCRUAL LOANS ARE INCLUDED IN
THE AVERAGE LOAN BASE UPON WHICH THE INTEREST RATE EARNED ON LOANS IS
CALCULATED.
(3) NET INTEREST SPREAD IS THE DIFFERENCE BETWEEN THE RATIOS (EXPRESSED AS
PERCENTAGES) OF TAXABLE-EQUIVALENT INTEREST INCOME TO EARNING ASSETS AND
OF INTEREST EXPENSE TO INTEREST-BEARING LIABILITIES.
(4) NET INTEREST MARGIN IS THE DIFFERENCE BETWEEN THE RATIOS (EXPRESSED AS
PERCENTAGES) OF TAXABLE-EQUIVALENT INTEREST INCOME TO EARNING ASSETS AND OF
INTEREST EXPENSE TO EARNING ASSETS.
Table 2 displays average balances, interest and interest rates for each major
category of interest-earning assets and interest-bearing liabilities over a
three-year period. Total interest income, expressed on a taxable-equivalent
basis as if every dollar of interest income was fully taxable at the same
federal and state tax rate, increased 3% to $117 million for 1999 from $114
million for 1998. The increase was attributed largely to a 22% increase in
average investment securities supplementing a modest 4% growth in average loans.
12
Total interest expense increased 2.8%, to $52 million for 1999, from $50.6
million for 1998, but trailed the rate of growth of interest-bearing liabilities
as the average cost of funds declined to 4.02% for 1999, from 4.24% for 1998.
Average interest-bearing deposits increased by 7.3% for 1999, and average
borrowings, principally long term, increased by 16.7%. While the 32.8% growth in
average repurchase balances between 1999 and 1998 reflected growth in underlying
commercial account relationships, a 7.9% increase in FHLB borrowings was related
chiefly to funding the vault cash build-up recommended by regulatory guidance to
meet potential customer needs related to the Year 2000.
The net interest margin ("margin"), which is the ratio of taxable-equivalent
net interest income to average earning assets, has been under considerable
pressure throughout the banking industry, especially over the past two years. A
moderate decline in the margin to 4.26% for 1999 compared with 4.48% for 1998
was principally the result of modest growth in total average loans, with
stronger growth in lower-yielding investment securities. Furthermore, Bancorp's
earning assets have a tendency to re-price more quickly than its
interest-bearing liabilities, further exacerbating the margin decline as
interest rates moved lower in the beginning of 1999. The last quarter of the
year reflected a reversal of this trend as interest rates increased slightly.
Table 3, Analysis of Changes in Net Interest Income, quantifies the change in
net interest income for the periods presented and, as discussed above, shows how
much was attributed to volume factors and how much was influenced by interest
rate movements. Bancorp endeavors to maintain a relatively balanced position
between interest-sensitive assets and interest-sensitive liabilities without
forgoing opportunities to benefit from relevant interest rate conditions within
the boundaries of prudent risk management and established corporate policy.
Further information may be found on page 40, Asset and Liability Management
("ALM"), Market Risk on page 41, and in Table 15, Effects of Changes in Interest
Rates on MVE, page 41.
TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 OVER 1998 1998 OVER 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE DUE TO CHANGE IN(1) INCREASE DUE TO CHANGE IN(1)
(DOLLARS IN THOUSANDS) (DECREASE) VOLUME RATES (DECREASE) VOLUME RATES
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans(2)(3) $(1,020) $3,176 $(4,196) $ 1,848 $ 3,468 $(1,620)
Interest and dividends on investment securities:
Taxable 2,944 3,144 (200) 1,208 1,839 (631)
Tax-exempt(4) 1,973 2,067 (94) (166) 112 (278)
Interest on federal funds sold (143) 229 (372) 157 (130) 287
Interest-bearing deposits with banks (287) (153) (134) 1005 961 44
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,467 8,463 (4,996) 4,052 6,250 (2,198)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 582 2,556 (1,974) 2,173 2,222 (49)
Interest on federal funds purchased and securities
sold under agreements to repurchase 624 828 (204) 273 380 (107)
Interest on other short-term borrowings (538) (599) 61 (2,188) (1,966) (222)
Interest on long-term borrowings 746 997 (251) 2,770 2,820 (50)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,414 3,782 (2,368) 3,028 3,456 (428)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,053 $4,681 $(2,628) $ 1,024 $ 2,794 $(1,770)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) THE CHANGE IN INTEREST DUE TO BOTH RATE AND VOLUME HAS BEEN ALLOCATED TO
RATE AND VOLUME CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH.
(2) INCLUDED IN THE CHANGE IN INTEREST INCOME ARE INCREASED FEES ON LOANS OF
$2,376 FOR THE YEAR ENDED DECEMBER 31, 1999 OVER 1998 AND INCREASED FEES ON
LOANS OF $2,998 FOR THE YEAR ENDED DECEMBER 31, 1998 OVER 1997.
(3) TAX EQUIVALENT ADJUSTMENTS OF $262 FOR 1999, $250 FOR 1998 AND $153 FOR
1997 ARE INCLUDED IN THE CALCULATION OF RATE CHANGES FOR INTEREST AND FEES
ON LOANS.
(4) TAX-EQUIVALENT ADJUSTMENTS OF $3,082 FOR 1999, $2,405 FOR 1998 AND $2,459
FOR 1997 ARE INCLUDED IN THE CALCULATION OF RATE CHANGES FOR TAX-EXEMPT
INVESTMENT SECURITIES CHANGES FOR TAX-EXEMPT INVESTMENT SECURITIES.
13
PROVISION FOR CREDIT LOSSES
The provision for credit losses was decreased by 58% for 1999, to $1.3 million,
from $3.1 million for 1998, related to improved credit quality and a declining
level of consumer loan losses. Total net loan losses for 1999 declined by 1%
from 1998, and amounted to 0.22% of average total loans for the year. During
1998, a special provision for possible loan losses related to the acquisition of
TBT amounted to $750 thousand ($460 thousand after tax). Excluding this special
item of $750 thousand from the 1998 provision for comparison purposes, the
provision for credit losses was decreased by 44% for 1999 from 1998. A five-year
history of the allowance for credit losses is displayed in Table 13, page 38.
NONINTEREST INCOME
Noninterest income decreased 5% in 1999, to $25.0 million, from $26.3 million in
1998. Excluding special items of an unusual or nonrecurring nature occurring
during 1998 as described below, noninterest income from continuing operations
increased $166 thousand in 1999.
Included in the results for 1998 were net investment securities gains of $1.0
million realized by TBT in the eleven-month period prior to the merger and a
$467 thousand gain realized by Bancorp on the sale of real estate previously
used as a branch office facility.
Trust income increased 9% in 1999, resulting primarily from an increase in
estate administration fees.
Service charges on deposit accounts increased 4% in 1999, to $7.1 million,
from $6.8 million for 1998 related largely to transaction volume.
Insurance income increased 19% to $6.9 million for 1999 from $5.8 million for
1998 related to increased sales of consumer and commercial business insurance
products.
Gains on sales of loans decreased 44% to $2.2 million for 1999 from $3.9
million for 1998. The origination activity of 1999 could not keep pace with the
1998 volumes. The historically low mortgage rate environment that was sustained
throughout 1998 triggered high refinancing volume that year.
Other operating income increased 7% to $5.9 million for 1999 from $5.5
million for 1998 principally related to an increase in brokerage and alternative
investment income.
NONINTEREST EXPENSE
Total noninterest expense, sometimes referred to as overhead expense, increased
6% to $67.2 million for 1999 from $63.4 million for 1998. Excluding merger
related expense and other special items of an unusual or nonrecurring nature as
disclosed in Table 1 and discussed below, noninterest expense increased 3%.
Salaries increased 1% to $28.4 million for 1999 from $28.1 million for 1998.
Pension and other employee benefits declined 5% to $6.0 million for 1999 from
$6.3 million for 1998 related to favorable experience in medical and health
programs.
Merger-related expense increased to $5.0 million for 1999 from $3.2 million
for 1998 largely associated with legal and accounting fees, severance payments,
contract terminations,and similar expenses incurred in connection with the
acquisition and merger of PVB which closed on December 30, 1999.
Occupancy and equipment expense declined 3% to $9.3 million for 1999 from
$9.6 million for 1998 attributed to cost reductions associated with a systems
conversion at the Savings Bank completed in June 1998.
Other operating expense increased 13% to $18.5 million for 1999 from $16.3
million for 1998 related principally to professional services regarding a number
of bank initiatives, including a program designed to enhance fee income
opportunities, human resource development programs, and outsourcing
opportunities.
INCOME TAXES
Income tax expense decreased by 8% to $5.2 million for 1999, from $5.6 million
for 1998, largely related to a 7% decrease in income before taxes. Tax expense
varies with changes in the level of income before taxes, the amount of
tax-exempt income realized, and the relationship of these changes to each other.
Also, the amount of income tax expense differs from the amount computed at
statutory rates primarily because interest realized on state and municipal
obligations and certain loans is tax-exempt. See Note 8, INCOME TAXES, Notes to
Consolidated Financial Statements.
The effective tax rate, which is the provision for income taxes divided by
income before taxes, increased slightly to 28.4% for 1999 compared with 27.7%
for 1998 largely related to non-tax-deductible expenses associated with the
acquisitions.
14
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Bancorp's financial condition can be evaluated by analyzing its sources and uses
of funds. The comparison of average balances in Table 4 shows an increase in
average earning assets ("Uses") for 1999 of $119 million, or 8.5% above 1998,
and indicates how that increase was funded ("Sources").
INVESTMENT SECURITIES
The investment securities portfolio is structured and managed to meet several
important financial objectives:
- To maintain sufficient balance sheet liquidity to meet any reasonable
decline in deposits and any anticipated increase in loans.
- To insure safety of principal and interest by investing only in securities
permitted by regulation.
- To maximize income consistent with liquidity and safety requirements.
- To maintain a source of assets which can be pledged as collateral for
federal, state and municipal deposits.
The investment securities portfolio is held in two categories for accounting
and reporting purposes: (1) available-for-sale ("AFS") securities are those
which are intended to be held for an indefinite period of time, but not
necessarily to maturity, and (2) held-to-maturity ("HTM") securities are those
for which there is both a positive intent and an ability to hold to maturity.
These determinations are made when the securities are purchased and are integral
to Bancorp's asset/liability ("ALM") policies. The accounting policy for
investment securities is set forth in Note 1, NATURE OF BANKING ACTIVITIES AND
SIGNIFICANT ACCOUNTING POLICIES, Notes to Consolidated Financial Statements.
Short-term uses of funds, shown in Table 4 as federal funds and
interest-bearing deposits with banks, are principally a function of the
management of Bancorp's daily cash and liquidity requirements. An increase in
these accounts, for example, may indicate a temporary excess of investable funds
not otherwise required for increases in loans or investments, or decreases in
deposits. Conversely, a decrease in these categories usually indicates the
opposite.
TABLE 4. SOURCES AND USES OF FUNDS
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCREASE AVERAGE INCREASE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE (DECREASE) % BALANCE (DECREASE) % BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDING USES
Federal funds sold $ 18,261 $ 3,547 24.1% $ 14,714 $ (2,134) (12.7)% $ 16,848
Interest-bearing deposits with banks 23,242 (3,089) (11.7) 26,331 18,337 229.4 7,994
Taxable investment securities 321,016 51,925 19.3 269,091 29,734 12.4 239,357
Tax-exempt investment securities 131,016 29,858 29.5 101,158 1,550 1.6 99,608
Loans, net 1,032,955 36,861 3.7 996,094 39,201 4.1 956,893
- ------------------------------------------------------------------------------------------------------------------------------------
Total uses $1,526,490 $119,102 8.5% $1,407,388 $ 86,688 6.6% $1,320,700
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDING SOURCES
Interest-bearing checking $ 180,281 $ 23,077 14.7% $ 157,204 $ 11,398 7.8% $ 145,806
Savings 179,124 (283) (0.2) 179,407 (8,052) (4.3) 187,459
Money market accounts 198,170 33,633 20.4 164,537 19,489 13.4 145,048
Certificates of deposit 556,161 18,965 3.5 537,196 29,257 5.8 507,939
Short-term borrowings 89,425 7,638 9.3 81,787 (27,564) (25.2) 109,351
Long-term borrowings 92,368 18,404 24.9 73,964 49,614 203.8 24,350
Noninterest-bearing funds (net)(1) 230,961 17,668 8.3 213,293 12,546 6.2 200,747
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources $1,526,490 $119,102 8.5% $1,407,388 $ 86,688 6.6% $1,320,700
- ------------------------------------------------------------------------------------------------------------------------------------
(1) NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY, LESS NONINTEREST-
EARNING ASSETS.
TABLE 5. INVESTMENT PORTFOLIO DISTRIBUTION-AMORTIZED COST(1)
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government corporations
and agencies $137,554 $131,158 $129,488
Obligations of states and political subdivisions 131,711 125,842 103,592
Mortgage-backed securities 146,704 154,848 89,544
Other securities 14,875 23,305 19,176
- ------------------------------------------------------------------------------------------------------------------------------------
Total $430,844 $435,153 $341,800
- ------------------------------------------------------------------------------------------------------------------------------------
(1) REFLECTS THE COST OF SECURITIES PURCHASED, ADJUSTED FOR AMORTIZATION OF
PREMIUMS AND ACCRETION OF DISCOUNTS, WHICH DIFFERS FROM THE AMOUNTS
REFLECTED IN THE CONSOLIDATED BALANCE SHEETS DUE TO FAIR VALUE ADJUSTMENTS
MADE IN ACCORDANCE WITH FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT
NO. 115.
15
TABLE 6. INVESTMENT PORTFOLIO ANALYSIS--DECEMBER 31, 1999
MATURING IN:
- ------------------------------------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH
OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -----------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:(1)
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies $12,529 5.34% $70,939 6.06% $54,086 6.46% $ -- --% $137,554 6.15%
Obligations of states and political
subdivisions(2) 1,040 6.72 4,338 6.73 22,755 6.48 14,360 6.65 42,493 6.56
Mortgage-backed securities(3) 1,476 6.30 72,900 6.57 27,059 6.45 35,071 6.44 136,506 6.52
Equity securities -- -- -- -- -- -- 14,875 5.96 14,875 5.98
- -----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 15,045 5.53 148,177 6.33 103,900 6.46 64,306 6.38 331,428 6.35
- -----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of states and
political subdivisions(2) 7,389 7.35 33,298 7.07 18,514 6.77 30,017 6.76 89,218 6.93
Mortgage-backed securities(3) -- -- 8,139 7.63 2,059 7.27 -- -- 10,198 7.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 7,389 7.35 41,437 7.18 20,573 6.82 30,017 6.76 99,416 6.99
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $22,434 6.13% $189,614 6.52% $124,473 6.52% $94,323 6.50% $430,844 6.50%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) REFLECTS THE COST OF SECURITIES PURCHASED, ADJUSTED FOR AMORTIZATION OF
PREMIUMS AND ACCRETION OF DISCOUNTS, WHICH DIFFERS FROM THE AMOUNTS
REFLECTED IN THE 1999 CONSOLIDATED BALANCE SHEET DUE TO FAIR VALUE
ADJUSTMENTS MADE IN ACCORDANCE WITH FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT NO. 115.
(2) YIELDS ARE PRESENTED ON A FULLY TAXABLE EQUIVALENT BASIS USING THE FEDERAL
STATUTORY RATE OF 35%.
(3) ESTIMATED PREPAYMENT ASSUMPTIONS HAVE BEEN INCORPORATED INTO THE MATURITIES
FOR MORTGAGE-BACKED SECURITIES BASED UPON HISTORICAL TRENDS.
Table 5, Investment Portfolio Distribution, displays the year-end amortized
cost of the investment securities portfolio, which decreased slightly to $431
million at December 31, 1999 from $435 million at December 31, 1998.
As shown in Table 6, Investment Portfolio Analysis, the amortized cost of AFS
securities totaled $331.4 million and represented 77% of the total securities
portfolio and 19% of consolidated total assets at December 31, 1999. AFS
securities provide substantial liquidity, chiefly for unexpected loan growth or
deposit withdrawal requirements. Conversely, HTM securities, which amounted to
$99.4 million, or 23% of the total portfolio at December 31, 1999, are expected
to be held until their scheduled maturities and are composed of longer-term,
tax-exempt state and municipal obligations and mortgage-backed securities.
In management's opinion, no securities presented any material risk
characteristics at December 31, 1999. Approximately 99% of all obligations of
states and political subdivisions were rated A or higher by either Moody's
Investors Service or Standard and Poors, and approximately 67% were rated AAA at
December 31, 1999.
LOANS
As presented in Table 4, Sources and Uses of Funds, average loans increased 4%
in 1999, whereas total loans at December 31, 1999 increased 12% to $1.1 billion
from $991.9 million at December 31, 1998 as shown in Table 7, Loan Portfolio
Mix. Growth in total loans was most pronounced in the commercial mortgage and
commercial loan sectors, with the portfolio being well diversified.
Management believes that its underwriting standards are conservative and
consistently applied. Although geographically focused on its growing primary
marketplace, which has proven to be economically vibrant and stable over the
years, Bancorp's credit risk is well diversified as to loan type and average
loan size.
16
TABLE 7. LOAN PORTFOLIO MIX
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land $ 67,452 6.1% $ 73,934 7.4% $ 73,778 7.5% $ 67,659 7.4% $ 55,750 6.6%
development
Secured by farmland 7,884 0.6 8,452 0.9 8,479 0.9 9,006 1.0 8,633 1.0
Residential mortgage 305,834 27.4 275,955 27.8 268,999 27.4 253,506 27.7 245,233 29.1
Other mortgage 276,414 24.8 226,380 22.8 200,119 20.4 186,648 20.4 175,896 20.8
Agricultural 656 0.1 560 0.1 819 0.1 985 0.1 1,690 0.2
Commercial and industrial 170,379 15.3 134,573 13.5 143,615 14.6 123,520 13.5 115,774 13.7
Consumer 283,000 25.4 264,199 26.7 282,027 28.8 265,173 29.0 235,962 28.0
Other loans 3,115 0.3 7,703 0.8 3,187 0.3 8,163 0.9 4,821 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $1,114,734 100.0% $991,756 100.0% $981,023 100.0% $914,660 100.0% $843,759 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans are classified according to security, borrower or purpose.
TABLE 8. LOAN MATURITIES AND INTEREST SENSITIVITY(1) AT DECEMBER 31, 1999
MATURING IN:
- ------------------------------------------------------------------------------------------------------------------------------------
ONE YEAR AFTER ONE AFTER FIVE
(IN THOUSANDS) OR LESS(2) THROUGH FIVE YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $24,456 $ 26,036 $16,960 $ 67,452
Secured by farmland 1,782 6,102 -- 7,884
Agricultural 198 458 -- 656
Commercial and industrial 60,721 79,370 30,288 170,379
Other loans 567 1,257 1,291 3,115
- ------------------------------------------------------------------------------------------------------------------------------------
Total $87,724 $113,223 $48,539 $249,486
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitivity:
Predetermined rate $ 89,201 $37,836
Floating rate 24,022 10,703
- ------------------------------------------------------------------------------------------------------------------------------------
Total $113,223 $48,539
- ------------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDES REAL ESTATE MORTGAGE LOANS AND CONSUMER LOANS.
(2) INCLUDES DEMAND LOANS, LOANS HAVING NO STATED SCHEDULE OF REPAYMENTS AND NO
STATED MATURITY, AND OVERDRAFTS.
DEPOSITS
Representing the principal source of funds for loans and investments, average
total deposits, as shown in Table 9, Average Deposits and Rates Paid, increased
by 7% in 1999 over 1998, with increases in every major deposit type except
Savings. Average rates decreased by 5%.
Table 10, Maturity of Time Deposits $100,000 or More, reflects a growth rate
of 25% for 1999, most notably in the popular six- through twelve-month
maturities. Generally the highest cost source of deposits, they are also a
relatively stable source coming largely from local municipalities. Bancorp does
not expect to see this category exceed recent levels of 5-7% of total deposits.
TABLE 9. AVERAGE DEPOSITS AND RATES PAID
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 176,946 $ 166,541 $ 160,916
Interest-bearing deposits:
Checking 180,281 1.75% 157,204 1.92% 145,806 2.03%
Money market 198,170 3.40 164,537 3.22 145,048 3.00
Savings 179,124 2.33 179,407 2.58 187,459 2.67
Time 556,161 5.17 537,196 5.46 507,939 5.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,113,736 3.85 1,038,344 4.07 986,252 4.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total average deposits $1,290,682 3.32% $1,204,885 3.51% $1,147,168 3.50%
- ------------------------------------------------------------------------------------------------------------------------------------
17
TABLE 10. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Maturing in:
3 months or less $25,630 $26,986 $19,049
Over 3 months through 6 months 19,961 14,654 11,628
Over 6 months through 12 months 34,495 23,140 11,533
Over 12 months 18,909 14,124 13,213
- ------------------------------------------------------------------------------------------------------------------------------------
Total $98,995 $78,904 $55,423
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWINGS
Table 4, Sources and Uses of Funds, reveals a shift from short-term borrowings
to long-term borrowings. Short-term borrowings increased $7.6 million to an
average of $89.4 million for 1999, and long-term borrowings, which are mainly
composed of Federal Home Loan Bank advances maturing beyond one year, increased
$18.4 million to an average of $92.4 million for 1999. As a member of the
Federal Home Loan Bank of Atlanta, Bancorp takes advantage of a wide variety of
attractively priced funding options supported by residential mortgage lending
and community reinvestment activities.
Table 11, Short-Term Borrowings, discloses continued growth, largely in repo
relationships with commercial business customers, to $94.0 million at December
31, 1999. Short-term advances from the Federal Home Loan Bank increased to $45.7
million at December 31, 1999 as Bancorp locked in some attractive longer-term
spreads during the year.
TABLE 11. SHORT-TERM BORROWINGS
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
End of period outstanding $ 94,083 $61,427 $47,912
Highest month-end balance 107,335 67,772 65,320
Average balance 73,151 55,084 47,350
Average rate of interest:
At end of year 4.78% 4.12% 5.30%
During year 4.52 4.87 5.08
SHORT-TERM ADVANCES FROM FEDERAL HOME LOAN BANK
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
End of period outstanding $45,728 $14,228 $54,051
Highest month-end balance 45,728 63,353 68,551
Average balance 14,760 24,299 58,745
Average rate of interest:
At end of year 5.65% 5.62% 5.95%
During year 5.73 5.63 5.91
RISK ELEMENTS
NONPERFORMING ASSETS
Table 12, Nonperforming Assets and Contractually Past-Due Loans, displays a
five-year history of steadily declining nonperforming assets. Totaling just $7.4
million, or 0.43% of total consolidated assets at December 31, 1999, Bancorp
reduced its nonperforming assets at an annual rate of 33% over the period shown,
largely reflecting substantial progress by the Savings Bank in dealing with a
legacy of the late-1980s.
Loans that were past due 90 days or more and not classified as nonperforming
totaled $1.5 million at December 31, 1999, or 0.14% of year-end total loans,
compared with $2.4 million one year earlier, or 0.24% of total loans at December
31, 1998. Historically, there has been no direct correlation between loans past
due 90 days or more and nonperforming loans or loan losses.
18
TABLE 12. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans(1) $6,181 $5,544 $ 8,554 $ 8,451 $ 8,885
Other real estate owned net of valuation allowance(2) 1,185 1,705 5,192 8,113 10,737
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $7,366 $7,249 $13,746 $16,564 $19,622
Loans past due 90 or more days as to interest or
principal(3) $1,514 $2,371 $ 1,376 $ 3,025 $ 1,606
Nonperforming loans to total loans 0.55% 0.56% 0.87% 0.92% 1.05%
Nonperforming assets to total loans plus other
real estate owned 0.66% 0.73% 1.39% 1.80% 2.30%
Nonperforming assets to total assets 0.43% 0.45% 0.93% 1.18% 1.46%
Allowance for credit losses times nonperforming loans 2.11 2.57 1.60 1.57 1.40
Allowance for credit losses times nonperforming assets 1.77 1.96 1.00 0.80 0.64
(1) LOANS ARE PLACED ON NONACCRUAL STATUS WHEN, IN THE OPINION OF MANAGEMENT,
REASONABLE DOUBT EXISTS AS TO THE FULL, TIMELY COLLECTION OF INTEREST OR
PRINCIPAL OR A SPECIFIC LOAN MEETS THE CRITERIA FOR NONACCRUAL STATUS
ESTABLISHED BY REGULATORY AUTHORITIES. WHEN A LOAN IS PLACED ON NONACCRUAL
STATUS, ALL INTEREST PREVIOUSLY ACCRUED BUT NOT COLLECTED IS REVERSED
AGAINST CURRENT PERIOD INTEREST INCOME. NO INTEREST IS TAKEN INTO INCOME
ON NONACCRUAL LOANS UNLESS RECEIVED IN CASH OR UNTIL SUCH TIME AS THE
BORROWER DEMONSTRATES SUSTAINED PERFORMANCE OVER A PERIOD OF TIME IN
ACCORDANCE WITH CONTRACTUAL TERMS.
(2) OTHER REAL ESTATE OWNED INCLUDES: BANKING PREMISES NO LONGER USED FOR
BUSINESS PURPOSES, REAL ESTATE ACQUIRED BY FORECLOSURE (IN PARTIAL OR
COMPLETE SATISFACTION OF DEBT) OR OTHERWISE SURRENDERED BY THE BORROWER
TO BANCORP'S POSSESSION. OTHER REAL ESTATE OWNED IS RECORDED AT THE LOWER
OF COST OR FAIR VALUE ON THE DATE OF ACQUISITION OR TRANSFER FROM LOANS.
WRITE-DOWNS TO FAIR VALUE AT THE DATE OF ACQUISITION ARE CHARGED TO THE
ALLOWANCE FOR CREDIT LOSSES. SUBSEQUENT TO TRANSFER, THESE ASSETS ARE
ADJUSTED THROUGH A VALUATION ALLOWANCE TO THE LOWER OF THE NET CARRYING
VALUE OR THE FAIR VALUE (NET OF ESTIMATED SELLING EXPENSES) BASED ON
PERIODIC APPRAISALS.
(3) NONACCRUAL LOANS ARE NOT INCLUDED.
POTENTIAL PROBLEM LOANS
At December 31, 1999, there were $26.7 million in loans that management had
reasonable concerns might become contractually past due or be classified as a
nonperforming asset. These loans are subject to the same close attention and
regular credit reviews as extended to loans past due 90 days or more and
nonperforming assets.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level, which in management's
judgment is adequate to absorb losses inherent in the loan portfolio. The
adequacy of the allowance for credit losses is reviewed regularly by management.
Additions to the allowance are made by charges to the provision for credit
losses. On a quarterly basis, a comprehensive review of the allowance is
performed considering such factors as the levels of loans outstanding, loss
experience, delinquency levels, certain individual loan reviews, and an
evaluation of the regional and national economic environment. The methodology
for assessing the appropriateness of the allowance consists of three primary
elements:
- The Formula Allowance. The formula allowance is calculated by applying
historically determined loss factors to outstanding business loans based
on credit risk ratings and for pools of homogeneous loans. Individually
risk rated loan loss factors are determined using average annual net
charge-off rates for the most recent two years. Pooled loans are loans
that are homogeneous in nature such as consumer installment and residential
mortgage loans. Pooled loan loss factors are based on net charge-offs
experienced over the past year. The historic loss factors on the risk rated
loans and the pooled loans are then considered for either positive or
negative adjustment in an attempt to reflect the current dynamics of the
portfolios. These adjustments in the loss factors are tied to management's
evaluation of a number of factors including: 1) changes in the trend of the
volume and severity of past due, classified and non-accrual assets;
2) changes in the nature and volume of the portfolio; 3) changes in lending
policies, underwriting standards, or collection practices; 4) changes in
the experience, ability, depth of lending management and staff;
5) portfolio concentrations; and 6) changes in the national or local
economy.
- Specific Allowances for Identified Problem Loans. The amount of specific
reserves is determined through a loan-by-loan analysis of non-performing
loans. The analysis considers expected future cash flows, the value of
collateral or other factors that may impact the borrower's ability to
repay.
- The Unallocated Allowance. The unallocated portion of the allowance is
based on loss factors that cannot be associated with specific loans or
loan categories. These factors include management's subjective
evaluation of such conditions as credit quality trends, collateral
values, portfolio concentrations, specific industry conditions in the
regional economy, regulatory examination results, internal audit and
loan review findings, recent loss experiences in particular portfolio
segments, etc. The unallocated portion of the allowance for losses
reflects management's attempt to ensure that the overall reserve
appropriately reflects a margin for the imprecision necessarily inherent
in estimates of credit losses.
19
As reflected in Table 13, at December 31, 1999 the allowance for loan losses
was $13.1 million, or 1.17% of total loans and 211% of total non-accrual loans.
This compares to an allowance for loan losses at December 31, 1998 of $14.2
million, equivalent to 1.44% of total loans and 257% of non-accrual loans. Net
charge-offs during 1999 were $32 thousand less than 1998.
Table 13, Analysis of Allowance for Credit Losses, shows a five-year history
of activity reflecting relative stability in both the annual charge-off ratio
and the level of the allowance related to total loans. Bancorp had loans
amounting to approximately $6.2 million and $5.5 million at December 31, 1999
and December 31, 1998, respectively, that were specifically classified as
impaired and included in non-accrual loans in Table 12.
At December 31, 1999 the allowance for loan losses was $13.1 million,
consisting of $11.4 million representing the formula allowance, a $317 thousand
specific allowance, and a $1.4 million unallocated allowance. Table 14,
Allocation of Allowance for Credit Losses, discloses management's allocation of
the allowance to various loan categories. This reflects the underlying trends in
loan growth and the change in mix. As they are estimates, this allocation is not
intended to limit the amount of the allowance available to absorb losses from
any type of loan and should not be viewed as an indicator of the specific amount
or specific loan category in which future charge-offs may ultimately occur.
During 1999 management reduced the size of the provision for loan losses due
to the following factors:
- Improvements in net charge-offs in the indirect
installment loan portfolio.
- Continued net recoveries in the commercial portfolios.
- Reserve adequacy as measured against the various ratios tracked regularly
and by comparison to peer Banks.
See NOTE 4, Loans, Notes to Consolidated Financial Statements, for
disclosures pertaining to impaired loans and the specific allowance related
thereto.
While management believes the allowance for credit losses was adequate at
December 31, 1999, the estimate of losses and related allowance may change in
the near term due to economic and other uncertainties inherent in the estimation
process.
TABLE 13. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding less
average unearned income(1) $1,116,658 $993,104 $954,115 $868,356 $856,695
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for credit losses at beginning of year $ 14,241 $ 13,685 $ 13,302 $ 12,479 $ 14,094
- ------------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 586 1,053 879 617 3,559
Commercial and industrial 388 532 220 405 1,455
Consumer 4,144 4,093 4,474 3,660 3,084
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 5,118 5,678 5,573 4,682 8,098
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate 310 430 441 470 452
Commercial and industrial 371 235 151 1,180 85
Consumer 1,969 2,513 2,454 2,033 1,700
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 2,650 3,178 3,046 3,683 2,237
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,468 2,500 2,527 999 5,861
- ------------------------------------------------------------------------------------------------------------------------------------
Additions charged to operating expense 1,295 3,056 2,910 1,822 4,246
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for credit losses at end of year $ 13,068 $ 14,241 $ 13,685 $ 13,302 $ 12,479
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans outstanding 0.22% 0.25% 0.26% 0.12% 0.68%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDES LOANS HELD FOR SALE.
20
TABLE 14. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
% GROSS % GROSS %GROSS % GROSS
(DOLLARS IN THOUSANDS) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $ 1,612 6.1% $ 1,830 7.5% $ 2,304 7.5% $ 2,161 7.4%
Residential mortgage 653 27.4 973 27.8 932 27.4 794 27.7
Other mortgage 3,960 24.8 3,566 22.8 3,418 20.4 3,451 20.4
Commercial and industrial 2,388 15.3 1,976 13.6 1,819 14.6 1,818 13.5
Consumer 3,073 25.4 3,630 26.7 4,264 28.8 2,959 29.0
Unallocated 1,382 1.0 2,266 1.6 948 1.3 2,119 2.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total allowance for credit losses $13,068 100.0% $14,241 100.0% $13,685 100.0% $13,302 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) REFLECTS THE PERCENTAGE OF LOANS IN EACH CATEGORY TO TOTAL LOANS.
YEAR 2000 COMPUTER READINESS
This disclosure is provided pursuant to the Securities and Exchange Commission's
Interpretation entitled "Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisors, Investment Companies and Municipal
Securities Issuers" effective August 4, 1998.
The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year (such
as "98" for the year 1998). Bancorp has undertaken to review its operating and
information technology systems and other mechanical equipment such as elevators
to identify systems in which the Year 2000 issue exists and to undertake the
necessary renovation or replacement of these systems so that the companies will
continue to operate as usual after January 1, 2000.
In July 1997, Bancorp established a Year 2000 issue task team comprised of
representatives across functional lines representing all of its subsidiaries.
The Year 2000 issue task team developed a Year 2000 issue assurance plan to
coordinate and direct its efforts. The plan was approved by the board of
directors on September 11, 1997. The task team provides quarterly reports to the
board outlining the status of its efforts and its anticipated work in the coming
quarter.
The assurance plan is composed of five phases: 1) awareness; 2) assessment;
3) renovation; 4) validation; and, 5) implementation, which mirror guidelines
developed by the Federal Financial Institutions Examination Council ("FFIEC") to
deal with the Year 2000 issue. The assurance plan includes a timeline for
completion of all tasks identified. As of December 31, 1999, all critical tasks
are current according to the timeline. Activities under each of the phases are
ongoing as new vendor and customer relationships are created.
The task team has received guidance from various regulators including the
OCC, Securities and Exchange Commission ("SEC"), OTS, and FFIEC.
The task team established a program to educate all associates regarding the
Year 2000 issue both for internal systems and as the issue may affect customers.
Education of customers is continuing through periodic information in the form of
brochures, seminars, a toll free information line, a web page, and participation
in community forums. Both activities are consistent with the Year 2000 customer
communication outline issued by the FFIEC on February 17, 1999.
All vendors who supply hardware, software and/or services of any type which
may be affected by this issue have been identified and contacted. A total of
four hundred eighty-eight (488) products and services are represented by this
vendor listing and have been categorized as either mission critical (those that
directly impact daily operations), concern (those that can be replaced with
manual processes), or low priority (little or no impact on daily operations).
Vendors have been surveyed as to their Year 2000 issue readiness. The task team
has confirmed vendor responses by testing products and services where possible
to verify their readiness.
Of the one hundred twenty-four (124) products and services identified as
mission critical:
- Forty-two (42) are not date sensitive and are deemed Year
2000 issue ready.
- Nineteen (19) cannot be tested internally. The progress of these service
providers' efforts addressing the Year 2000 issue are being closely
monitored. All nineteen (19) advise that their products and/or services
are either Year 2000 issue ready now or will be in advance of January 1,
2000. Examples of products and/or services that are not capable of
internal testing include utilities and communications services.
- Sixty-three (63) have been successfully tested.
Bancorp relies on Kirchman Corporation's Dimension 3000 software for
maintaining customer accounting records. Kirchman is a provider of accounting
systems for more than 1,000 banking clients worldwide. Kirchman's internal
methodologies addressing Year 2000 issues have been reviewed and have received
ITAA*2000 certification by the Information Technology Association of America, an
independent non-profit organization. Further, Kirchman systems have passed all
internal tests, and testing is complete.
21
The task team has developed procedures for assessing Year 2000 issue risk for
its funds providers, including depositors, which are intended to manage and
limit potential risks associated with large or significant concentrations of
retail and commercial deposits. The Year 2000 issue readiness of providers of
lines of credit have been reviewed.
The task team has also established procedures, utilizing the standard risk
classifications employed to manage credit risk, for reviewing the Year 2000
issue readiness of borrowers. Loan relationships with balances exceeding
$250,000, or which are particularly computer reliant, have been reviewed. No
relationships are adversely risk rated because of Year 2000 issue risk.
Bancorp's existing contingency plan has been enhanced to provide responses
for Year 2000 issues. The contingency planning committee adopted the five phase
model as recommended by the FFIEC and OCC advisory letter 98-7 and had an
updated plan by December 31, 1998, as required by the regulators. Testing of
business resumption plans was substantially complete at March 31, 1999. Bancorp
believes its efforts, and those of its third-party providers, will effectively
address Year 2000 issues before January 1, 2000. Because Bancorp is so reliant
on third-party providers (whose products and services cannot be effectively
tested such as utilities and telecommunications services) for support, Bancorp's
normal business operations could be disrupted in the event one or more
third-party providers fail to provide products and services as contracted. The
most reasonably likely worst case Year 2000 issue scenario identified to date
involves Bancorp's inability, for short periods, to provide services to
customers. The worst case scenario is mitigated somewhat by an ability to
manually process customer transactions, by the geographic penetration of our
branch network, and by alternative service delivery methods, which include both
proprietary and network ATMs, PC banking, telephone banking, and Express Bank,
Bancorp's full-service mobile branch. Power and telecommunication services are
critical, but might be interrupted for only a part of the branch network.
Bancorp has a generator to provide power to operate computer systems and, by
contract, has geographically remote facilities served by alternative sources of
power to process work, if needed. Longer periods of disruption could affect
Bancorp's ability to develop new business and could increase costs of operation
and decrease revenues. Bancorp has generators placed strategically in its branch
network to allow for continued operations in the event of power interruptions.
The generators will enhance Bancorp's ability to conduct business as usual in
any natural disaster, in addition to any Year 2000 issue related power outage.
UPDATE POST DECEMBER 31, 1999
Bancorp experienced no significant problem during the December 31 - January 2nd
weekend. Business continued as usual over the weekend and commencing January 3,
2000. All systems were successfully tested by 12 Noon on January 1st. No systems
interruptions related to Year 2000 issues have been experienced through February
15, 2000. Third party service providers whose systems could not be tested prior
to January 1, 2000 also have continued to provide essentially uninterrupted
service. Noted problems were minor and were handled through Bancorp's
contingency planning process. No loan relationships in excess of $250,000 have
been identified which have experienced payment or credit risk concerns as a
result of Year 2000 issues. Bancorp plans to continue to monitor systems at
February 28 and 29, 2000 for Year 2000 issue related problems. Bancorp's
contingency plans are designed to address any such problems. The most reasonably
likely Year 2000 issue worst case scenario continues to be as identified above.
As of February 15, 2000, Bancorp has spent a total of $461,000 addressing
Year 2000 issues from a total budget of $525,000. Bancorp does not anticipate
any significant additional expenses. Work is done predominantly by existing
associates as part of their normal work responsibilities. Bancorp does not
separately track these internal costs which are principally payroll related.
Costs for dealing with Year 2000 issues are being provided from operating
revenues.
ASSET AND LIABILITY MANAGEMENT
The primary objectives for Bancorp's asset/liability management policies are to
identify opportunities to maximize net interest income while ensuring adequate
liquidity and carefully managing interest rate risk. Bancorp's asset liability
policies are approved by the Board of Directors and administered by Bancorp's
asset/liability management committee ("ALCO"), which is primarily composed of
executive officers. ALCO's principal responsibilities include:
- Monitoring corporate financial performance.
- Determining liquidity requirements.
- Establishing interest rates, indices, and terms for loan and deposit
products.
- Assessing and evaluating the competitive rate environment.
- Reviewing and ratifying investment portfolio transactions under established
policy guidelines.
- Monitoring and measuring interest rate risk.
22
LIQUIDITY
Liquidity management involves the ability to meet the demand for funds from both
depositors and borrowers with either balance sheet assets or access to
incremental borrowings. These needs are met with cash on hand, the sale of
non-cash assets, or with funds received from depositors or lenders. The primary
focus of liquidity management is to match the cash inflows and outflows within
Bancorp's natural market for loans and deposits. The primary cash and liquidity
management tools are short-term investments, FHLB borrowings and repurchase
agreements. Secondary liquidity is provided by the investment securities
portfolio.
Asset liquidity includes monitoring the amount of available cash on hand and
assets maturing in the near term, limiting the amount of securities that may be
pledged, and maintaining relatively short duration of investment securities.
Tables 6 and 8 show a combined total of $110.2 million of investment securities
and certain loans coming due within 12 months, or 6.4% of total assets at
December 31, 1999.
Funding liquidity is monitored primarily by the ratio of loans to deposits.
As loan growth resumed in 1999, the loan-to-deposit ratio increased sharply to
85% at December 31, 1999 from 77% one year earlier. Funding liquidity is also
augmented by a wide variety of borrowing sources including the FHLB and credit
lines available through correspondent banking relationships.
MARKET RISK
Market risk is defined as the future changes in market prices that increase
or decrease the value of financial instruments, i.e., cash, investments,
loans, deposits and debt. Included in market risk are interest rate risk,
foreign currency exchange risk, commodity price risk, and other relevant
market risks. The primary source of market risk is interest rate risk. Market
risk-sensitive financial instruments are entered into for purposes other than
trading.
Interest rate risk refers to the exposure of earnings and capital to changes
in interest rates. The magnitude of the effect of changes in market rates
depends on the extent and timing of such changes and on Bancorp's ability to
adjust. The ability to adjust is controlled by the time remaining to maturity on
fixed-rate obligations, the contractual ability to adjust rates prior to
maturity, competition, and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on earnings and capital.
Re-pricing risk arises largely from timing differences in the pricing of assets
and liabilities. Reinvestment risk refers to the reinvestment of cash flows from
interest payments and maturing assets at lower rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same
time or in the same magnitude such that assets and liabilities with the same
maturity are not affected equally. Yield curve risk refers to unequal movements
in interest rates across a full range of maturities.
In determining the appropriate level of interest rate risk, Bancorp considers
the impact on earnings and capital of the current outlook for interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies, and other factors. To effectively measure and manage interest rate
risk, traditional cumulative gap and simulation analyses are used to determine
the impact on net interest income and the market value of portfolio equity
("MVE"). Bancorp attempts to manage interest rate sensitivity on the basis of
when assets and liabilities will reprice as opposed to when they can reprice.
Cumulative gap analysis presents the net amount of assets and liabilities
that will most likely reprice through specified periods if there are no changes
in balance sheet mix. Using that analysis, the effect of changes in market
interest rates, both rising and falling, on net interest income can be
calculated. Because of inherent limitations in traditional cumulative gap
analysis, however, ALCO also employs more sophisticated interest rate risk
measurement techniques. Simulation analysis is used to subject the current
re-pricing conditions to rising and falling interest rates in increments and
decrements of 100, 200, and 300 basis points, and to determine how net interest
income varies under alternative interest rate and business activity scenarios.
ALCO also measures the effects of changes in interest rates on the MVE, i.e.,
the net present value of all future cash flows from financial instruments
expressed as the percentage change in portfolio value of equity for any given
change in prevailing interest rates. Table 15 presents MVE at December 31, 1999.
TABLE 15. EFFECTS OF CHANGES IN INTEREST RATES ON MVE AT DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE HYPOTHETICAL HYPOTHETICAL
CHANGE IN OF PORTFOLIO CHANGE INCREASE BOARD
INTEREST RATES EQUITY INCREASE/(DECREASE) (DECREASE) LIMIT(1)
- ------------------------------------------------------------------------------------------------------------------------------------
300 bp rise $112,141 $(27,362) (19.6)% (30.0)%
200 bp rise 121,184 (18,319) (13.1)% (20.0)%
100 bp rise 130,313 (9,190) (6.6)% (10.0)%
Base scenario 139,503 -- -- --
100 bp decline 151,719 12,216 8.8% (10.0)%
200 bp decline 159,927 20,424 14.6% (20.0)%
300 bp decline 168,049 28,546 20.5% (30.0)%
(1) ESTABLISHED BY BANCORP'S BOARD OF DIRECTORS
23
Computations of prospective effects of hypothetical interest rate changes are
based on many assumptions, including relative levels of market interest rates,
loan prepayments and changes in deposit levels. They are not intended to be a
forecast and should not be relied upon as indicative of actual results. Further,
the computations do not contemplate certain actions that management could take
in response to changes in interest rates. At December 31, 1999 and 1998, the
changes in net interest income and or MVE calculated under these alternative
methods were within limits established by the Board of Directors and monitored
by ALCO.
CAPITAL RESOURCES
It is Bancorp's policy to maintain a level of capital sufficient to protect the
company's depositors, creditors, and shareholders, and to support Bancorp's
growth. The principal source of capital is retained earnings.
The Board, the OCC and the OTS maintain capital adequacy guidelines
applicable to Bancorp, the Bank, and the Savings Bank, respectively, as
disclosed in Note 15, Shareholders' Equity, Notes to Consolidated Financial
Statements. Under each measure, Bancorp and its subsidiaries were substantially
in excess of the minimum regulatory requirements and, by definition, were "well
capitalized" at December 31, 1999 and 1998.
In accordance with regulatory guidelines, fair value adjustments to
shareholders' equity for changes in the fair value of investment securities
classified as available-for-sale are excluded from the calculations.
EFFECTS OF CHANGING PRICES
Inasmuch as virtually all of a financial institution's assets and liabilities
are monetary in nature, changes in interest rates, or the price paid for money,
may have a significant effect on earnings performance. Interest rates, though
affected by inflation, do not necessarily move in the same direction, or in the
same magnitude, as the prices of other goods and services. Movements in interest
rates are a result of the perceived changes in the rate of inflation and the
effects of monetary and fiscal policies. Reference to NET INTEREST INCOME AND
MARKET RISK in this section will assist the reader's understanding of how
Bancorp is positioned to address changing interest rates.
Several major categories of noninterest expense are more directly affected by
inflationary factors such as salaries and employee benefits and other operating
expenses. Management endeavors to overcome, or mitigate, the effects of
inflation by seeking opportunities to improve operating efficiency and
productivity, and by developing strategies for growth that will exceed the
projected rate of inflation.
1998 COMPARED TO 1997
OVERVIEW
Net income for 1998 decreased 7.9% to $14.6 million, or $1.33 per diluted share,
from $15.9 million, or $1.46 per diluted share, for 1997, largely reflecting the
influence of special items in both years as set forth in Table 1. Excluding
special items in both years, net (operating) income increased 5% to $16.5
million, or $1.50 per diluted share, from $15.6 million, or $1.43 per share for
1997.
SPECIAL ITEMS--1998
Special items for 1998, as shown in Table 1 on an after-tax basis, included
$2.332 million of merger-related expense, or $0.21 per share. This amount
included $192 thousand ($0.01 per share) of merger-related expenses pertaining
to the 1998 integration of core processing systems and administrative functions
at the Savings Bank, acquired in November 1996, $190 thousand ($0.01 per share)
related to the May 1998 acquisition of KS, and $1.922 million ($0.19 per share)
related to the acquisition and integration of TBT. A special provision for
possible loan losses related to the acquisition of TBT amounted to $460 thousand
after tax, or $0.04 per share. The integration of TBT's core processing systems
and administrative functions was completed in February 1999. Net securities
gains realized by TBT during 1998 amounted to $661 thousand ($0.06 per share),
and Bancorp realized a net gain of $270 thousand ($0.02 per share) on the sale
of bank-owned real estate.
SPECIAL ITEMS--1997
Special items for 1997, as shown in Table 1 on an after-tax basis, included a
$552 thousand gain on the sale of the credit card merchant processing business
($0.06 per share). Recognizing the difficulty in achieving sufficient economies
of scale over the near term, Bancorp elected to exit this highly competitive
line of business in favor of alternatives expected to produce greater
profitability over the long term. TBT incurred litigation costs of $177 thousand
($0.02 per share) and realized a $110 thousand gain on the sale of loans in 1997
($0.01 per share) and a $59 thousand gain on the sale of investment securities
($0.01).
Pursuant to the provisions of the Plan and Agreement to Merge with Home
Federal, compensatory payments were recognized in 1997 for two executive
officers who elected to resign during the year. Such compensation expense
totaled $294 thousand ($0.03 per share) and was to be paid over a 24-month
period.
24
NET INTEREST INCOME
Net interest income, on a tax-equivalent basis, increased 2% to $63.0 million
for 1998, from $62.0 million for 1997. The yield on average earning assets
decreased 22 basis points. Although there was an increased reliance on borrowed
funds in 1998, the average rate paid on interest-bearing liabilities declined
one basis point assisted by lower average rates paid on core deposit products.
The net interest margin decreased to 3.83% for 1998, from 4.05% for 1997.
NONINTEREST INCOME
Noninterest income increased 17.6% in 1998, to $26.3 million, from $22.4 million
in 1997. Excluding special items of an unusual or nonrecurring nature described
below, noninterest income from continuing operations increased 7% in 1998.
Included in the results for 1998 were net investment securities gains of $1.0
million realized by TBT in the eleven-month period prior to the merger and a
$467 thousand gain realized by Bancorp on the sale of real estate previously
used as a branch office facility. Noninterest income for 1997 included a $179
thousand gain on the sale of loans and $89 thousand in gains on sales of
investment securities by TBT. Bancorp realized a $900 thousand gain on the sale
of the credit card merchant processing business discussed earlier. If the
operating income recognized in 1997 from this line of business was also
eliminated, comparable noninterest income before special items increased 12% in
1998.
Trust income declined 2% in 1998. Excluding approximately $240 thousand
represented by an unusually large estate administration fee realized in 1997,
the underlying rate of increase in trust income was 8% for 1998. Trust assets
under management, having declined significantly related to the late-summer 1998
stock market correction, rebounded to close 1998 at $432 million, 13% above $383
million in assets under management at year-end 1997.
Service charges on deposit accounts increased 4% in 1998, to $6.8 million,
from $6.5 million for 1997 related largely to transaction volume.
Insurance income increased 14.0% to $5.8 million for 1998 from $5.1 million
for 1997 related to increased sales of consumer and commercial business
insurance products.
Gains on sales of loans increased 160% to $3.9 million for 1998 from $1.5
million for 1997. The historically low mortgage rate environment that was
sustained throughout 1998 triggered high refinancing volume.
Other operating income declined 14% to $5.5 million for 1998 from $6.4
million for 1997 principally related to the mid-year 1997 sale of the credit
card merchant processing business and the termination of revenue therefrom.
NONINTEREST EXPENSE
Total noninterest expense, sometimes referred to as overhead expense, increased
11.5% to $63.4 million for 1998 from $56.9 million for 1997. Excluding merger
related expense and other special items of an unusual or nonrecurring nature as
disclosed in Table 1 and discussed below, noninterest expense increased 2%
reflecting stringent cost controls and significant efficiencies realized through
the 1998 integration of the Savings Bank's core processing systems and
administrative functions.
Salaries increased 11% to $28.1 million for 1998 from $25.3 million for 1997.
Excluding $454 thousand in 1997 compensation expense recognized pursuant to the
provisions of an agreement with the Savings Bank, salaries increased 14%
attributed to merit increases, new hires, promotions, and performance-based
incentive payments.
Pension and other employee benefits increased 8.2% to $6.3 million for 1998
from $5.8 million for 1997.
Merger-related expense increased to $3.2 million for 1998 from $0.5 million
for 1997 largely associated with legal and accounting fees, severance payments,
contract terminations, and similar expenses incurred in connection with the
acquisition and merger of Monocacy Bancshares, Inc. which closed on November 30,
1998.
Occupancy and equipment expense increased 5.7% to $9.6 million for 1998 from
$9.0 million for 1997.
Other operating expense remained flat at $16.3 million for both 1998 and
1997.
INCOME TAXES
Income tax expense decreased 8.5% to $5.6 million for 1998, from $6.1 million
for 1997. The effective tax rate was 28.3% for 1998 compared with 27.9% for
1997.
FINANCIAL CONDITION
Total assets were $1.620 billion at December 31, 1998, up $141.0 million, or
10%, from a year earlier. The increase was principally reflected in loans, which
were funded by a variety of sources, the largest component being long-term
borrowings, closely followed by certificates of deposit and interest-bearing
checking products. The capital position was strengthened as the increase in
average shareholders' equity, 8.2% over 1997, outpaced the 6.3% growth in
average assets leading to an increase in the average equity capital-to-assets
ratio to 9.60% for 1998, from 9.42% for 1997. All capital ratios were
substantially in excess of regulatory minimums for Bancorp and its subsidiaries
at each of the years ended December 31, 1998 and 1997.
25
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses was increased by 5%, to $3.1 million for 1998,
from $2.9 million for 1997. The ratio of net charge-offs to average loans
outstanding decreased slightly to 0.25% for 1998, from 0.26% for 1997.
NONPERFORMING ASSETS
Continuing a trend extending over the previous four years, nonperforming assets
declined further in 1998, by 47% to $7.2 million at December 31, 1998, from
$13.7 million at year-end 1997. The ratio of nonperforming assets to total
assets declined to 0.45% at December 31, 1998 from .93% one year earlier.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth on pages 23 and 24 of this
Form 10-K and is expressly incorporated herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of F&M Bancorp:
We have audited the accompanying consolidated balance sheets of F&M Bancorp (a
Maryland bank holding company) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of F&M Bancorp's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of Monocacy Bancshares, Inc., a bank holding
company acquired during 1998 in a transaction accounted for as a
pooling-of-interests, as discussed in Note 2, for the year ended December 31,
1997. Such statements are included in the consolidated financial statements of
F&M Bancorp and subsidiaries and reflect 18% of consolidated total income for
1997. These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts included for
Monocacy Bancshares, Inc., is based solely on the report of the other auditors.
We did not audit the consolidated financial statements of Patapsco Valley
Bancshares, Inc., a bank holding company acquired during 1999 in a transaction
accounted for as a pooling-of-interests, as discussed in Note 2, for the years
ended December 31, 1998 and 1997. Such statements are included in the
consolidated financial statements of F&M Bancorp and subsidiaries and reflect
10% of consolidated total assets at December 31, 1998, and 11% and 9% of
consolidated total income for 1998 and 1997, respectively. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Patapsco Valley Bancshares, Inc.,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of F&M Bancorp and subsidiaries as of December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Vienna, Virginia
January 18, 2000
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Monocacy Bancshares, Inc.
We have audited the consolidated balance sheet of Monocacy Bancshares, Inc. and
Subsidiaries as of December 31, 1997, and the related consolidated statements of
income and comprehensive income, changes in stockholders' equity, and cash flows
for the year then ended. These consolidated statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monocacy
Bancshares, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Stegman & Company
Baltimore, Maryland
January 23, 1998
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patapsco Valley Bancshares, Inc. and Subsidiaries
Ellicott City, Maryland
We have audited the consolidated balance sheet of Patapsco Valley Bancshares,
Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the two-year period ended December 31, 1998. 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Patapsco Valley Bancshares, Inc. and Subsidiaries as of December 31, 1998, and
the consolidated results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Rowles & Company, LLP
Baltimore, Maryland
March 2, 1999
27
F&M Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 60,888 $ 54,587
Federal funds sold 11,304 28,956
Interest-bearing deposits with banks 14,128 17,970
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 86,320 101,513
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 15,497 28,529
Investment securities:
Held-to-maturity, fair value of $97,357 in 1999 and $100,478 in 1998 99,416 98,231
Available-for-sale, at fair value 317,945 337,377
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 417,361 435,608
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income of $70 in 1999 and $520 in 1998 1,114,734 991,756
Less: Allowance for credit losses (13,068) (14,241)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 1,101,666 977,515
- ------------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 35,494 36,280
Other real estate owned, net 1,185 1,705
Interest receivable 10,080 10,183
Intangible assets 6,696 7,298
Other assets 45,035 21,859
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 98,490 77,325
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,719,334 $1,620,490
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 188,154 $ 190,080
Interest-bearing 1,125,919 1,095,181
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,314,073 1,285,261
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 94,083 61,427
Other short-term borrowings 48,183 14,776
Long-term borrowings 100,578 94,246
Accrued interest and other liabilities 18,597 16,593
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,575,514 1,472,303
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized 50,000,000 shares;
issued and outstanding 10,999,621 in 1999 and 10,439,434 in 1998 54,998 52,196
Surplus 78,248 65,020
Retained earnings 18,951 30,694
Accumulated other comprehensive (loss) income (8,377) 277
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 143,820 148,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,719,334 $1,620,490
====================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
28
F&M Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 86,339 $ 87,371 $ 85,620
Interest and dividends on investment securities:
Taxable 19,424 16,480 15,272
Tax-exempt 5,984 4,688 4,800
Interest on deposits with banks 1,099 1,386 367
Interest on federal funds sold 952 1,095 952
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 113,798 111,020 107,011
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Checking 3,163 3,024 2,966
Savings 4,175 4,628 5,012
Money market accounts 6,732 5,293 4,355
Certificates of deposit 28,779 29,322 27,761
Interest on federal funds purchased and securities sold under
agreements to repurchase 3,304 2,680 2,407
Interest on Federal Home Loan Bank borrowings 5,796 5,529 4,907
Interest on other short-term borrowings 92 151 191
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 52,041 50,627 47,599
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 61,757 60,393 59,412
Provision for credit losses 1,295 3,056 2,910
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 60,462 57,337 56,502
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 2,864 2,671 2,715
Service charges on deposit accounts 7,083 6,810 6,524
Insurance income 6,887 5,793 5,083
Gains on sales of loans 2,219 3,930 1,513
Net gains on sales of securities 10 1,104 76
Net (losses) gains on sales of property (14) 450 17
Other operating income 5,939 5,531 6,426
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 24,988 26,289 22,354
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 28,392 28,052 25,262
Pension and other employee benefits 5,956 6,256 5,783
Merger-related expense 5,044 3,217 480
Occupancy and equipment expense 9,315 9,555 9,038
Other operating expense 18,501 16,313 16,289
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 67,208 63,393 56,852
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 18,242 20,233 22,004
Provision for income taxes 5,179 5,600 6,119
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 13,063 $ 14,633 $ 15,885
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (losses) gains on securities $ (8,659) $ (787) $ 1,335
Reclassification adjustment for gains (losses) included in income 5 678 47
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (8,654) (109) 1,382
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 4,409 $ 14,524 $ 17,267
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE--BASIC
Based on weighted average shares outstanding of 10,981,125 in 1999,
10,888,985 in 1998, and 10,838,750 in 1997 $ 1.19 $ 1.34 $ 1.47
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE--DILUTED
Based on weighted average shares outstanding of 11,040,986 in 1999,
11,004,812 in 1998, and 10,911,406 in 1997 $ 1.18 $ 1.33 $ 1.46
- ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
29
F&M Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES PAR VALUE SURPLUS EARNINGS (LOSS) INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 8,798,457 $43,993 $48,551 $ 38,212 $ (996) $129,760
Net income -- -- -- 15,885 -- 15,885
Dividend reinvestment plan 8,260 41 264 (83) -- 222
Cash dividends paid ($.61 per share) -- -- -- (6,573) -- (6,573)
Stock consideration for options exercised (9,514) (48) (59) (221) -- (328)
Stock options exercised 52,097 260 1,147 -- -- 1,407
Stock dividend 415,482 2,078 6,351 (8,429) -- --
Other comprehensive income -- -- -- -- 1,382 1,382
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 9,264,782 46,324 56,254 38,791 386 141,755
Net income -- -- -- 14,633 -- 14,633
Dividend reinvestment plan 18,080 89 426 (126) -- 389
Cash dividends paid ($.92 per share) -- -- -- (10,023) -- (10,023)
Stock consideration for options exercised (3,217) (16) (19) (90) -- (125)
Stock options exercised 56,930 285 1,382 -- -- 1,667
Stock dividend 1,102,859 5,514 6,977 (12,491) -- --
Other comprehensive loss -- -- -- -- (109) (109)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 10,439,434 52,196 65,020 30,694 277 148,187
Net income -- -- -- 13,063 -- 13,063
Dividend reinvestment plan 10,620 55 171 (138) -- 88
Cash dividends paid ($.97 per share) -- -- -- (10,646) -- (10,646)
Stock consideration for options exercised (11,554) (58) (50) (81) -- (189)
Stock options exercised 105,437 527 1,444 -- -- 1,971
Stock dividend 455,684 2,278 11,663 (13,941) -- --
Other comprehensive loss -- -- -- -- (8,654) (8,654)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 10,999,621 $54,998 $78,248 $ 18,951 $(8,377) $143,820
- ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
30
F&M Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,063 $ 14,633 $ 15,885
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 1,295 3,056 2,910
Provision for other real estate owned -- 2 156
Depreciation and amortization 3,764 3,272 3,298
Amortization of intangibles 1,152 790 767
Net premium amortization on investment securities 342 37 423
Deferred income taxes 416 (532) (453)
Amortization (accretion) of net loan origination costs (fees) 24 (168) (41)
Gains on sales of property 14 (450) (17)
Gains on sales/calls of securities (10) (1,104) (76)
(Increase) decrease in loans held for sale 13,032 (17,765) 806
Decrease (increase) in interest receivable 103 69 (938)
Increase in other assets (23,176) (814) (743)
Increase in interest payable 194 999 398
Increase (decrease) in other liabilities 1,810 251 (449)
Gains on sales of loans (2,219) (3,930) (1,513)
Other operating activities 7,250 1,741 881
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,054 87 21,294
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities to be held-to-maturity (20,215) (26,729) (7,722)
Purchases of investment securities available-for-sale (185,232) (453,300) (195,010)
Proceeds from calls of securities held-to-maturity -- 17,038 8,420
Proceeds from sales/calls of securities available-for-sale 14,976 156,645 88,466
Proceeds from maturing securities available-for-sale 175,938 209,194 106,889
Proceeds from maturing securities held-to-maturity 18,507 6,103 3,719
Net increase in loans (125,471) (9,847) (67,189)
Purchases of premises and equipment (3,701) (5,367) (4,812)
Proceeds from sales of property 2 4,173 1,699
Other investing activities 518 (608) (764)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (124,678) (102,698) (66,304)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits, interest-bearing
checking, savings and money market accounts 57,681 67,438 18,955
Net (decrease) increase in certificates of deposits (28,869) 44,766 17,000
Net increase in federal funds purchased and securities sold under
agreements to repurchase 32,656 13,514 2,800
Net increase (decrease) in other short-term borrowings 33,407 (42,476) (7,926)
Net increase (decrease) in long-term borrowings 6,332 50,384 28,691
Cash dividends paid (10,646) (10,023) (6,573)
Dividend reinvestment plan 88 389 222
Proceeds from issuance of common stock 1,782 1,542 1,079
Other financing activities -- (445) 8
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 92,431 125,089 54,256
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (15,193) 22,478 9,246
Cash and cash equivalents at beginning of year 101,513 79,035 69,789
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 86,320 $ 101,513 $ 79,035
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 55,856 $ 50,064 $ 47,522
Cash payments for income tax 5,180 6,522 7,599
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value adjustment for securities available for sale, net of income taxes (8,654) (109) 1,382
Transfers of securities from the held-to-maturity portfolio to the
available-for-sale portfolio -- -- 24,027
Loans originated on sale of real estate owned held for sale -- -- 1,320
Net transfer to real estate owned held for sale from loans receivable -- 705 73
Transfers of loans to held for sale -- -- --
Retirement of common stock 44 117 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
F&M Bancorp (the "Parent Company") is a bank holding company that provides its
customers with banking and bank-related financial services through its wholly
owned subsidiaries, Farmers & Mechanics National Bank and Subsidiaries (the
"Bank") and Home Federal Savings Bank and Subsidiaries (the "Savings Bank"). The
Bank and the Savings Bank offer various loan, deposit and other financial
products and services to individuals and commercial businesses located primarily
within the State of Maryland. The primary market area encompasses Frederick,
Carroll, Montgomery and Washington Counties, MD, with additional community
office presence in Allegany, Baltimore, and Howard Counties, MD and Adams
County, PA. The Bank and the Savings Bank maintain correspondent banking
relationships that allow them to execute daily federal funds transactions on an
unsecured basis.
The accounting and reporting policies and practices of F&M Bancorp and
Subsidiaries ("Bancorp") conform with United States generally accepted
accounting principles ("GAAP") and with prevailing practice in the banking
industry. The following is a summary of Bancorp's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation. In the Parent Company financial
statements, investment in subsidiaries is accounted for using the equity method
of accounting.
COMPREHENSIVE INCOME
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. Other comprehensive
income consists entirely of unrealized gains (losses) on available-for-sale
securities. Income taxes allocated to other comprehensive income amounted to
benefits of $5,444,000 and $69,000 in 1999 and 1998, respectively, and a
provision of $869,000 in 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PRESENTATION OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, cash items in the process of clearing, federal
funds sold, and interest-bearing deposits with banks. Generally, federal funds
are sold for one-day periods.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or fair value.
Fair value is estimated to equal the carrying amount due to the anticipated
short holding period of these loans.
INVESTMENT SECURITIES
Bancorp classifies its investment securities as held-to-maturity ("HTM"),
available-for-sale ("AFS"), or trading.
Securities classified as HTM are those debt securities that Bancorp has both
the positive intent and ability to hold until maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income using the
interest method.
Securities classified as AFS are equity securities with readily determinable
fair values and those debt securities that Bancorp intends to hold for an
indefinite period of time but not necessarily to maturity. These securities may
be sold as part of Bancorp's asset/liability management strategy, in response to
significant movements in interest rates, for liquidity needs, for regulatory
capital considerations, or for other similar purposes. These securities are
carried at fair value, with any unrealized gains and losses included in other
comprehensive income as a separate component of shareholders' equity, net of the
related deferred tax effect.
Securities classified as trading, if any, are those securities bought and
held principally for the purpose of selling them in the near term. These
securities are carried at fair value, with any unrealized gains and losses
included in noninterest income in the consolidated statement of income and
comprehensive income.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
included in interest income in the consolidated statements of income and
comprehensive income. Realized gains and losses, if any, determined based on the
adjusted cost of the specific securities sold, are reported in noninterest
income in the consolidated statements of income and comprehensive income.
32
INTEREST AND FEES ON LOANS
Interest on loans is accrued at the contractual rate on the principal amount
outstanding. However, the accrual of interest is discontinued when reasonable
doubt exists as to the full, timely collection of interest or principal. Loans
on which the accrual of interest has been discontinued, which includes impaired
loans, are designated as nonaccrual loans. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans only when they are brought
current with respect to interest and principal and when, in management's
judgment, the loans are estimated to be fully collectible as to both principal
and interest.
Loan fees and related direct costs of loan origination are deferred and
recognized over the life of the loan as a component of interest income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (the "allowance") is maintained at a level
which, in management's judgment, is adequate to absorb losses inherent in the
loan portfolio.
The adequacy of the allowance is reviewed regularly by management. Additions
to the allowance are made by charges to the provision for credit losses. On a
quarterly basis, a comprehensive review of the adequacy of the allowance is
performed considering factors such as historical relationships among loans
outstanding, loss experience, delinquency levels, individual loan reviews, and
evaluation of the present and future local and national economic environment.
Management's estimates regarding the allowance are subject to change related to
economic and other uncertainties inherent in the estimation process.
BANK PREMISES AND EQUIPMENT
Bank premises, furniture and equipment, and leasehold improvements are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are computed principally by the straight-line method for bank
premises and leasehold improvements, and by accelerated methods for equipment.
The estimated useful lives for computing depreciation and amortization are as
follows:
YEARS
- -------------------------------------------------------------------------------------------
Bank premises 15 to 50
Furniture and equipment 3 to 10
Leasehold improvements 10 to 25
Leasehold improvements are amortized over the shorter of the terms of the
leases or their estimated useful lives. Major alterations and improvements to
bank premises are capitalized and depreciated over the remaining useful life of
the asset. Gains and losses on dispositions are included in net income in the
year of disposition. Maintenance and repairs are reflected in noninterest
expense as incurred.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") includes: banking premises no longer used for
business operations, real estate acquired in foreclosure (in partial or complete
satisfaction of debt), or otherwise surrendered by the borrower to Bancorp's
possession.
OREO is recorded at the lower of cost or fair value on the date of
acquisition. Write-downs to fair value at the date of acquisition are charged to
the allowance for credit losses. Subsequently, OREO is adjusted through a
valuation allowance to the lower of net carrying value or fair value (net of
estimated selling expenses) based upon periodic appraisals. Adjustments arising
from changes in the valuation allowance and operating expenses are reflected in
noninterest expense, and gains and losses realized on disposition are reflected
in noninterest income.
INTANGIBLE ASSETS
Intangible assets represent the excess of the fair value of liabilities assumed
over the fair value of tangible assets acquired in branch office acquisitions.
These intangible assets are initially amortized over a period of 10 years using
the straight-line method subject to periodic review and acceleration should
subsequent events and circumstances dictate.
INCOME TAXES
FASB Statement No. 109, "Accounting for Income Taxes," is applied in calculating
the provision for income taxes. As prescribed therein, provisions for income
taxes are based on taxes payable or refundable for the current year (after
exclusion of nontaxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences between the amount of
taxable income and pre-tax financial income, and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
33
PER SHARE DATA
Earnings per share ("EPS") are computed and presented in accordance with FASB
Statement No. 128, "Earnings Per Share." As prescribed therein, the presentation
of primary EPS has been replaced with the dual presentation of basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing net income
available to common shareholders ("numerator") by the weighted-average number of
common shares outstanding for the period after giving retroactive effect to
stock dividends and stock splits ("denominator"). Diluted EPS reflects the
potential dilution that could occur if outstanding stock options or other
contracts to issue common stock, if any, were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of Bancorp. Diluted EPS is equal to the numerator divided by the
denominator plus 59,861 shares, 115,827 shares, and 72,656 shares represented by
outstanding stock options assumed to be exercised for the years ended December
31, 1999, 1998 and 1997, respectively.
TRUST ASSETS AND INCOME
Assets held in an agency or fiduciary capacity are not assets of Bancorp and,
accordingly, are not included in the accompanying consolidated balance sheets.
Trust income is recorded on an accrual basis.
DEFERRED COMPENSATION
The cost of supplemental retirement benefits (deferred compensation) payable to
certain key employees is accrued over their service periods to the date such
employees, or their beneficiaries, are fully eligible for benefits.
STOCK COMPENSATION
Employee stock options are recorded under the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and disclosures pertaining to fair value-based
accounting of stock options under the provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," are included in Note 9. FASB
Statement No. 123 provides for a fair value-based method of accounting for stock
options and similar equity transactions to be reported in the financial
statements, or alternatively, disclosure of the fair-value impact on net income
and EPS, on a pro forma basis, in the notes to consolidated financial
statements.
RECLASSIFICATIONS
Certain reclassifications to prior year amounts have been made to conform with
the current year presentation.
2. ACQUISITIONS
On December 30, 1999, Bancorp completed the acquisition of all of the
outstanding capital stock of Patapsco Valley Bancshares, Inc. ("PVB"), Ellicott
City, Maryland, in a tax-free transaction, and the merger of its principal
subsidiary, Commercial & Farmers Bank ("C&F"), into the Bank. Shareholders of
PVB received 1.18 newly issued shares of Bancorp Common Stock, or a total of
1,635,872 shares for all 1,386,748 outstanding shares of PVB and cash in lieu of
each fractional share at the rate of $21.88. At closing, PVB had reported total
assets of $173.2 million, loans of $119 million, and deposits of $150.5 million.
On July 15, 1999, Bancorp consummated a merger with Potomac Basin Group
Associates, Inc. ("PB"), in a tax-free exchange of shares of stock. PB is a
Beltsville, MD-based, full-line independent insurance agency specializing in
corporate employee benefit plans.
On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. ("MNOC"), headquartered in Taneytown, MD, in a tax-free
exchange of stock, and the merger of its principal subsidiary, Taneytown Bank &
Trust Company ("TBT"), into the Bank. Shareholders of MNOC received 1.251 newly
issued shares of Bancorp Common Stock, or a total of 2,267,790 shares, for all
1,812,777 outstanding shares of MNOC and cash in lieu of each fractional share
at the rate of $33.696. At closing, TBT had reported total assets of $304.3
million, loans of $167.0 million, and deposits of $243.8 million.
On May 29, 1998, Bancorp completed the acquisition of Keller Stonebraker
Insurance, Inc. ("KS"), a Hagerstown, MD-based independent insurance agency, in
a tax-free exchange of shares.
On November 15, 1996, Bancorp completed its merger with Home Federal
Corporation ("HF"), Hagerstown, MD, in a tax-free exchange of stock.
Shareholders of HF received .49535 shares of newly issued Bancorp Common Stock,
or a total of 1,247,791 shares, for all 2,519,010 shares of HF Common Stock and
cash in lieu of each fractional share at the rate of $23.90. At closing, the
Savings Bank, HF's principal subsidiary, had total assets of $230.1 million,
loans of $154.0 million, and deposits of $162.7 million.
All five acquisitions are accounted for as poolings of interests.
34
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments at December 31, 1999
and 1998, summarized by contractual maturity, are presented in a table that
follows. Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with, or without, call or
prepayment penalties.
Proceeds from sales/calls of investment securities available-for-sale during
1999 were $14,976,000. Gross gains of $36,000 and gross losses of $26,000 were
realized on those sales. Proceeds from sales/calls of investment securities
available-for-sale during 1998 were $156,645,000. Gross gains of $1,162,000 and
gross losses of $83,000 were realized on those sales. Proceeds from calls of
investment securities held-to-maturity during 1998 were $17,038,000. Gross gains
of $25,000 were realized on those calls.
Proceeds from sales/calls of investment securities available-for-sale during
1997 were $88,466,000. Gross gains of $128,000 and gross losses of $58,000 were
realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1997 were $8,420,000. Gross gains of $6,000 were
realized on those calls.
The carrying value of investment securities pledged to secure public
deposits, securities sold under repurchase agreements, Federal Home Loan Bank
(the "FHLB") advances, and for other purposes as required and permitted by law,
totaled $164,604,000 at December 31, 1999, and $169,393,000 at December 31,
1998.
Interest earned on obligations of states and political subdivisions is exempt
from federal income taxes. However, the federal interest expense deduction is
limited for interest deemed to be incurred to purchase or carry tax-exempt
obligations. Such tax-exempt securities composed 31.1% and 29.0% of the total
carrying value of the investment portfolio at December 31, 1999 and 1998,
respectively.
INVESTMENT SECURITIES
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies:
Within 1 year $ 12,529 $ 1 $ 37 $ 12,493
After 1 but within 5 years 70,939 8 1,871 69,076
After 5 but within 10 years 54,086 -- 2,829 51,257
- ------------------------------------------------------------------------------------------------------------------------------------
137,554 9 4,737 132,826
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions:
Within 1 year 1,040 2 -- 1,042
After 1 but within 5 years 4,338 9 27 4,320
After 5 but within 10 years 22,755 -- 900 21,855
After 10 years 14,360 -- 1,222 13,138
- ------------------------------------------------------------------------------------------------------------------------------------
42,493 11 2,149 40,355
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 136,506 9 6,358 130,157
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 316,553 29 13,244 303,338
Equity securities 14,875 -- 268 14,607
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $331,428 $ 29 $13,512 $317,945
- ------------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of states and political subdivisions:
Within 1 year $ 7,389 $ 35 $ -- $ 7,424
After 1 but within 5 years 33,298 258 83 33,473
After 5 but within 10 years 18,514 10 429 18,095
After 10 years 30,017 -- 1,743 28,274
- ------------------------------------------------------------------------------------------------------------------------------------
89,218 303 2,255 87,266
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 10,198 16 123 10,091
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 99,416 $319 $ 2,378 $ 97,357
- ------------------------------------------------------------------------------------------------------------------------------------
35
INVESTMENT SECURITIES
DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies:
Within 1 year $ 24,903 $ 29 $ 22 $ 24,910
After 1 but within 5 years 57,065 347 13 57,399
After 5 but within 10 years 49,190 288 96 49,382
- ------------------------------------------------------------------------------------------------------------------------------------
131,158 664 131 131,691
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions:
Within 1 year 545 1 -- 546
After 1 but within 5 years 5,282 99 -- 5,381
After 5 but within 10 years 16,285 323 19 16,589
After 10 years 19,973 136 214 19,895
- ------------------------------------------------------------------------------------------------------------------------------------
42,085 559 233 42,411
- ------------------------------------------------------------------------------------------------------------------------------------
Other bonds:
After 1 but within 5 years 2,328 9 -- 2,337
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 140,374 275 485 140,164
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 315,945 1,507 849 316,603
- ------------------------------------------------------------------------------------------------------------------------------------
Equity securities 20,977 73 276 20,774
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $336,922 $1,580 $1,125 $337,377
- ------------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of states and political subdivisions:
Within 1 year $ 7,471 $ 72 $ -- $ 7,543
After 1 but within 5 years 29,868 953 -- 30,821
After 5 but within 10 years 25,855 925 -- 26,780
After 10 years 20,563 216 140 20,639
- ------------------------------------------------------------------------------------------------------------------------------------
83,757 2,166 140 85,783
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 14,474 221 -- 14,695
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 98,231 $2,387 $ 140 $100,478
- ------------------------------------------------------------------------------------------------------------------------------------
4. LOANS
Loans consist of the following:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Construction and land development $ 67,452 $ 73,934
Secured by farmland 7,884 8,452
Residential mortgage 305,834 275,955
Other mortgage 276,414 226,380
Agricultural loans 656 560
Commercial and industrial loans 170,379 134,573
Consumer loans 283,000 264,199
Other loans 3,115 7,703
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $1,114,734 $991,756
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to states and political subdivisions and industrial revenue bonds are
included in other loans and in total loans in the consolidated balance sheets.
Interest income from these loans is included in interest and fees on loans in
the consolidated statements of income and comprehensive income.
36
Transactions in the allowance for credit losses were:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $14,241 $13,685 $13,302
Provision for credit losses 1,295 3,056 2,910
Recoveries of loans previously charged-off 2,650 3,178 3,046
Loans charged off (5,118) (5,678) (5,573)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $13,068 $14,241 $13,685
- ------------------------------------------------------------------------------------------------------------------------------------
In the ordinary course of business, directors and officers of the Bank, the
Savings Bank, and their affiliates, were customers of, and had other
transactions with the Bank and/or the Savings Bank. Loan transactions with
directors and officers were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons, and neither
involved more than normal risk of collectibility nor presented other unfavorable
features. The aggregate dollar amount of all loans to officers, directors, and
their affiliates was $10,526,000 and $16,592,000 at December 31, 1999 and 1998,
respectively. During 1999, $18,054,000 of new loans were made, or became
reportable, and repayments and other decreases totaled $24,120,000.
The loan portfolio includes loans that are not currently accruing interest
income. The total outstanding principal amount of these loans at December 31,
1999, 1998, and 1997, and the effect on interest income for the years then
ended, are as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Principal balance $5,462 $5,544 $8,554
Gross amount of interest which would have been
recorded under original terms $ 427 $ 468 $ 847
Recorded interest income on these loans $ 309 $ 167 $ 246
The net reduction in interest income on renegotiated loans was not material
in 1999, 1998, and 1997. At December 31, 1999, there were no material
commitments to lend additional funds to borrowers whose loans had been modified
in troubled debt restructurings or were in a nonaccrual status.
Loans amounting to approximately $3,441,000 and $2,508,000 at December 31,
1999 and 1998, respectively, were specifically classified as impaired and are
included in nonaccrual loans disclosed above. The average balance of impaired
loans amounted to $1,857,000 and $9,083,000 for the years ended December 31,
1999 and 1998, respectively. Cash receipts totaling $1,618,000 and $2,512,000
during 1999 and 1998, respectively, were applied to reduce the principal balance
of those impaired loans, and no interest income was recognized. The specific
allowance for credit losses related to these impaired loans was and $317,000 and
$296,000 at December 31, 1999 and 1998, respectively.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Bank premises and land $33,688 $33,247
Furniture and equipment 28,594 27,983
Leasehold improvements 3,537 3,348
- ------------------------------------------------------------------------------------------------------------------------------------
65,819 64,578
Less accumulated depreciation and amortization 30,325 28,298
- ------------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net $35,494 $36,280
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization related to premises and equipment in the
consolidated statements of income and comprehensive income amounted to
$3,764,000 in 1999, and $3,272,000 in 1998, and $3,298,000 in 1997.
37
6. DEPOSITS
The carrying amounts of deposits are as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 188,154 $ 190,080
Interest-bearing:
Checking 203,725 174,790
Savings 173,011 179,453
Money market accounts 214,886 177,771
Certificates of deposits:
Under $100,000 435,302 484,263
$100,000 and over 98,995 78,904
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $1,314,073 $1,285,261
- ------------------------------------------------------------------------------------------------------------------------------------
7. BORROWINGS
SHORT-TERM BORROWINGS
Short-term borrowings include securities sold under agreements to repurchase,
which are secured transactions with customers and generally mature in one day.
Short-term borrowings may also include balances in the treasury tax and loan
account, federal funds purchased, which are unsecured overnight borrowings from
other financial institutions, and advances from the FHLB, which are secured
either by 1-4 family residential properties, FHLB Stock, or other
mortgage-related assets.
Unused lines of credit for short-term borrowings totaled approximately
$388,443,000 at December 31, 1999.
The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum balance at any month end during the year $156,337 $105,765
Average balance for the year 89,425 81,787
Weighted average rate for the year 4.74% 5.08%
Weighted average rate at year end 5.08% 4.40%
Estimated fair value $142,266 $ 76,203
LONG-TERM BORROWINGS
The table below presents a summary of long-term advances from the FHLB:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Due within 1 to 5 years $ 31,704 $37,121
Due after 5 years through 10 years 68,745 56,991
Due after 10 years 129 134
- ------------------------------------------------------------------------------------------------------------------------------------
$100,578 $94,246
- ------------------------------------------------------------------------------------------------------------------------------------
These advances had weighted average interest rates of 5.31% and 5.29% at
December 31, 1999 and 1998, respectively. These advances are secured either by a
blanket floating lien on all real estate mortgage loans secured by 1-4 family
residential properties, FHLB Stock, or other mortgage-related assets. All
advances carry a fixed rate. In 2000, 2001 and 2004, $44.5 million, $25.0
million and $10.0 million, respectively, of advances are convertible at the
FHLB's option to a variable rate based on LIBOR.
38
8. INCOME TAXES
Significant components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowances for credit and other real estate owned losses $ 4,479 $4,922
Unrealized losses on securities available for sale 5,162 --
Deferred compensation 1,636 1,645
Intangibles 1,191 1,202
Other 1,296 1,158
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 13,764 8,927
Valuation allowance for deferred tax assets (474) (474)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets after valuation allowance 13,290 8,453
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization 1,222 1,150
Unrealized gains on securities available for sale -- 119
Other 356 355
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,578 1,624
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $11,712 $6,829
- ------------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory income tax rate to the provision for income
taxes attributed to continuing operations included in the consolidated
statements of income and comprehensive income, is as follows:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax $18,242 $20,233 $22,004
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax at statutory rate 6,385 7,081 7,701
(Decreases) increases in tax resulting from:
Tax-exempt interest income (2,261) (1,805) (1,805)
State income taxes, net of federal income tax benefit 264 321 415
Other 791 3 (192)
- ------------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 5,179 $ 5,600 $ 6,119
- ------------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 28.4% 27.7% 27.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Significant components of the provision for income taxes attributed to
continuing operations are as follows:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Currently payable:
Federal $4,429 $5,805 $5,839
State 334 327 733
- ------------------------------------------------------------------------------------------------------------------------------------
Total currently payable 4,763 6,132 6,572
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred 416 (532) (453)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $5,179 $5,600 $6,119
- ------------------------------------------------------------------------------------------------------------------------------------
The components of the provision for deferred tax expense (benefit) are as
follows:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses $443 $(601) $(174)
Amortization of intangibles 11 (261) (128)
Other (38) 330 (151)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit) $416 $(532) $(453)
- ------------------------------------------------------------------------------------------------------------------------------------
39
9. EMPLOYEE BENEFITS
THE BANK PROFIT SHARING PLAN
Retirement benefits are provided through a Section 401(k) profit sharing plan
(the "Plan") to employees meeting certain age and service eligibility
requirements. The annual profit sharing contribution to the Plan is
discretionary, based primarily on earnings, and amounted to $520,000 for 1999,
$478,000 for 1998, and $540,000 for 1997. The Plan also provides for employer
matching contributions up to 4% of eligible compensation dependent on the level
of voluntary contributions. Employer matching contributions totaled $352,000 in
1999, $343,000 in 1998, and $268,000 in 1997.
TBT, which was merged with and into the Bank on November 30, 1998, had a
401(k) contributory thrift plan which was terminated in conjunction with the
merger. Contributions to this plan, included in pension and other employee
benefits expense, were $79,000 for 1998 and $75,000 for 1997.
THE SAVINGS BANK PROFIT SHARING PLAN
Prior to 1999, the Savings Bank provided a retirement savings plan and
trust, which was a deferred compensation plan (401(k)) and a profit sharing
plan (the "Savings Plan") for all employees who met certain age and
eligibility requirements. The Savings Plan allowed eligible participants to
defer up to 15% of their annual salary and allowed the Savings Bank to
contribute to the 401(k) part of the Savings Plan on a matching basis. The
Savings Bank could also elect to contribute a portion of its profits to the
profit sharing portion of the Savings Plan. During 1999, the Savings Plan
merged into the Plan.
Contributions were made based on matching $0.50 of every dollar up to 5% of
the employee's salary. The Savings Bank's additional matching contribution
amounted to $57,000 in 1998 and $58,000 in 1997. In addition, the Savings Bank
made profit sharing contributions of $180,000 and $135,000 in 1998 and 1997,
respectively.
DEFINED BENEFIT PLAN
C&F, which was merged with and into the Bank on December 30, 1999, has a
defined benefit pension plan covering substantially all of the employees, and
a supplemental plan covering certain executives. Benefits were based on years
of service and the employee's highest average rate of earnings for the five
consecutive years during the last ten years before retirement. C&F made
contributions to the plan in amounts sufficient to satisfy minimum funding
standards determined using the frozen entry age actuarial method. Assets of
the plan are held in trust and invested in listed stocks and bonds.
The following table sets forth the financial status of the plans:
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $1,163,145 $1,186,949
Actual return on plan assets 74,004 202,051
Benefits paid (151,301) (225,855)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,085,848 1,163,145
- ------------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year 1,688,200 1,629,910
Service cost 186,737 93,367
Interest cost 113,140 104,997
Benefits paid (151,301) (225,855)
Actuarial (loss) gain (30,165) 85,781
Change in discount rate (183,250) --
Curtailment (300,711) --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,322,650 1,688,200
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (236,802) (525,055)
Unamortized prior service cost (103,772) (119,077)
Unamortized net gain (296,700) (103,816)
Unamortized net obligation from transition (4,662) 171,981
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued pension expense $ (641,936) $ (575,967)
- ------------------------------------------------------------------------------------------------------------------------------------
Net pension expense includes the following components:
Service cost $ 186,737 $ 93,367
Interest cost 113,140 104,997
Expected return on assets (94,536) (94,146)
Net amortization and deferral (2,721) (5,018)
- ------------------------------------------------------------------------------------------------------------------------------------
Net pension expense $ 202,620 $ 99,200
- ------------------------------------------------------------------------------------------------------------------------------------
40
Assumptions used in the accounting for net pension
expense were:
Discount rates 7.75% 7.00%
Rate of increase in compensation levels 5.00% 5.00%
Long-term rate of return on assets 8.00% 8.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Effective December 30, 1999, benefits for participants of the defined benefit
pension plan which covered substantially all of the C&F employees, were frozen
and will not increase after that date. The curtailment of $300,711 reflected
under the section "Change in benefit obligation" is a result of the plan being
frozen.
C&F also had contributory thrift plans qualifying under Section 401(k) of the
Internal Revenue Code. All employees age 21 or more with one year of service
were eligible for participation in the plans. C&F's contributions to these
plans, included in expenses, were $370,765, $84,812, and $36,335 for 1999, 1998,
and 1997, respectively.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
Supplemental retirement benefits (deferred compensation) for certain key
employees are provided under an Executive Supplemental Income Plan (the "ESIP").
Benefits payable under the ESIP are integrated with other retirement benefits
expected to be received by ESIP participants, including those under the 401(k)
profit sharing plan. Amounts paid under the ESIP will be partially or fully
recovered through life insurance policies purchased on the lives of the
participants.
Deferred compensation costs charged to expense for the years ended December
31, 1999, 1998, and 1997, were $392,000, $372,000, and $344,000, respectively.
OTHER BENEFITS
Both the Savings Bank and Bancorp maintain a director's deferred compensation
program pursuant to which directors may elect to defer their fees for attending
meetings in order to provide retirement benefits. The expense for these benefits
was $161,000, $117,000, and $128,000, for 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Bancorp has an Employee Stock Purchase Plan (the "ESPP") whereby eligible
employees may authorize payroll deductions ranging from $120 to $2,400 per year
for the purpose of acquiring Bancorp Common Stock at current market prices. To
encourage employee participation in the ESPP, Bancorp contributes an additional
20% of each participant's voluntary payroll deduction. Bancorp's contributions
amounted to $7,000, $17,000, and $11,000 for 1999, 1998, and 1997, respectively.
Contributions to the ESPP are typically transmitted to Bancorp's designated
agent to acquire Bancorp Common Stock in the open market. Under the terms of the
ESPP, shares may also be purchased directly from Bancorp at current market
prices. A total of 63,814 shares of Bancorp Common Stock are reserved for this
purpose. Bancorp pays all administrative costs of the ESPP and, at its
discretion, reserves the right to amend, modify, suspend, or terminate the ESPP
at any time.
STOCK OPTION PLANS
Bancorp has a 1983 Stock Option Plan, a 1995 Stock Option Plan and a 1999 Stock
Option Plan (collectively the "Employee Plans") which are coordinated in their
administration and similar in their terms and conditions for key employees.
Bancorp also has a 1999 Non-Employee Director Stock Option Plan (the "Director
Plan") which is similar in its terms and conditions to the Employee Plans except
as noted below. The Employee Plans permit the granting of both incentive stock
options and nonqualified stock options to purchase Bancorp Common Stock, while
the Director Plan permits only the granting of nonqualified stock options. The
Employee Plans require the exercise price per share for incentive stock options
and nonqualified stock options not to be less than 100% and 85%, respectively,
of the fair market value of a share of Common Stock on the date of grant and may
be exercised in increments commencing after one year from the date of grant.
Employee Options are fully exercisable after four years from the date of grant
and expire after 10 years. The Director Plan requires the exercise price per
share for nonqualified stock options to not be less than 100% of the fair market
value of a share of Common Stock on the date of grant and are fully exercisable
after 6 months from the date of grant and expire after 10 years.
41
OPTIONS ISSUED
AND OUTSTANDING PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 277,478 $10.15 to $25.16
Exercised (58,463) 10.15 to 25.16
Granted 92,399 13.85 to 23.22
Terminated (7,610) 17.56 to 25.16
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 303,804 10.15 to 25.16
Exercised (61,620) 10.15 to 25.16
Granted 69,396 16.10 to 32.09
Terminated (6,595) 18.41 to 32.09
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 304,985 10.15 to 32.09
Exercised (102,192) 10.15 to 32.09
Granted 95,757 19.49 to 30.83
Terminated (17,227) 23.22 to 32.09
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 281,323 $10.15 to $32.09
At December 31, 1999, there were 172,949 options exercisable at prices
ranging from $10.15 to $32.09. Shares reserved for future grants totaled 479,329
at December 31, 1999.
The Plans are accounted for pursuant to the provisions of APB Opinion No. 25.
Had compensation cost for the Plans been determined in accordance with the
provisions of FASB Statement No. 123 (see Note 1), net income and earnings per
share would have been reduced to the following pro forma amounts:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income: As reported $13,063 $14,633 $15,885
Pro forma 12,917 14,252 15,371
EPS: As reported, basic 1.19 1.34 1.47
As reported, diluted 1.18 1.33 1.46
Pro forma, basic 1.18 1.31 1.42
Pro forma, diluted 1.17 1.30 1.41
Because the FASB Statement No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of the cost to be expected in future
years.
A summary of the status of the Plans at December 31, 1999 and 1998, and
changes during the years then ended, is presented as follows:
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 304,985 $19.34 303,804 $17.69
Granted 95,757 29.90 69,396 24.34
Exercised (102,192) 16.82 (61,620) 16.28
Forfeited (17,227) 29.38 (6,595) 24.29
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 281,323 23.23 304,985 19.34
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 172,949 19.30 237,658 17.04
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year -- 29.90 -- 31.94
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1999
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AS OF 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
$10.15-$15.00 56,976 3.19 $12.48 56,976 $12.48
15.01- 20.00 48,133 7.33 18.06 48,133 18.06
20.01- 25.00 46,688 6.12 23.80 36,891 23.95
25.01- 30.00 21,077 6.21 25.16 16,220 25.16
30.01- 32.09 108,449 9.04 30.56 14,729 31.63
- ------------------------------------------------------------------------------------------------------------------------------------
$10.15-$32.09 281,323 6.87 $23.23 172,949 $19.30
- ------------------------------------------------------------------------------------------------------------------------------------
42
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998, and 1997, respectively: risk-free
interest rates of 6.8%, 6.7%, and 6.5%; expected dividend yields of 4.8%, 4.8%,
and 4.8%; expected lives of 2.96, 2.96, and 3.11 years; and expected volatility
of 21%, 19%, and 15%.
10. OTHER OPERATING INCOME AND EXPENSE
Other operating income in the consolidated statements of income and
comprehensive income includes the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Bank card income $2,039 $1,558 $1,852
Other 3,900 3,973 4,574
- ------------------------------------------------------------------------------------------------------------------------------------
Total other operating income $5,939 $5,531 $6,426
- ------------------------------------------------------------------------------------------------------------------------------------
Other operating expense in the consolidated statements of income and
comprehensive income includes the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Stationery and supplies 1,437 1,439 1,437
Professional services 2,607 2,845 2,448
Postage 1,122 1,084 1,040
Telephone 1,608 1,338 1,117
Computer software and maintenance 1,504 882 628
Other real estate owned expense 78 262 199
Amortization of intangibles 1,152 790 767
Other 8,993 7,673 8,653
- ------------------------------------------------------------------------------------------------------------------------------------
Total other operating expense $18,501 $16,313 $16,289
- ------------------------------------------------------------------------------------------------------------------------------------
Transactions in the allowances for other real estate owned are summarized as
follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $425 $ 1,792 $2,016
Provision for increase (decline) in value and selling expenses -- 2 156
Losses charged to the allowances (51) (1,369) (374)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $374 $ 425 $1,798
- ------------------------------------------------------------------------------------------------------------------------------------
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
F&M BANCORP BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 6,518 $ 4,450
Investment securities
Available-for-sale, at fair value 3,368 3,222
Investment in subsidiaries 134,952 140,425
Other assets 1,806 2,313
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $146,644 $150,410
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 2,824 $ 2,223
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock 54,998 52,196
Surplus 78,248 65,020
Retained earnings 18,951 30,694
Accumulated other comprehensive income (8,377) 277
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 143,820 148,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $146,644 $150,410
- ------------------------------------------------------------------------------------------------------------------------------------
43
F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME
Interest on investment securities $ 306 $ 256 $ 155
Interest expense on borrowings -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 306 256 155
Dividends from subsidiaries 10,743 12,185 6,722
Other income 4 68 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 11,053 12,509 6,877
EXPENSE 1,386 801 534
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax benefits and
Equity in undistributed earnings of subsidiaries 9,667 11,708 6,343
Income tax benefit (121) (149) (127)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 9,788 11,857 6,470
Equity in undistributed earnings of subsidiaries 3,275 2,776 9,415
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $13,063 $14,633 $15,885
- ------------------------------------------------------------------------------------------------------------------------------------
F&M BANCORP STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 13,063 $ 14,633 $15,885
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of organization costs -- -- 6
Decrease (increase) in other assets 507 (1,727) 60
Increase (decrease) in other expenses payable 601 1,490 (36)
Equity in undistributed earnings of subsidiaries (3,275) (2,776) (9,415)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,896 11,620 6,500
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (255) (1,076) (2,186)
Acquisition of stock -- (200) (75)
Other investing activity 44 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (211) (1,276) (2,261)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (10,646) (10,023) (6,573)
Dividends reinvested 88 389 222
Other financing activities 1,941 1,761 1,091
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,617) (7,873) (5,260)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,068 2,471 (1,021)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 4,450 1,979 3,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,518 $ 4,450 $ 1,979
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available-for-sale,
net of income taxes $ (8,654) $ (109) $ 1,382
44
12. COMMITMENTS AND CONTINGENCIES
LEASES
Bancorp conducts part of its branch banking operations from leased
facilities. The initial terms of the leases range from a period of 1-25
years. Most of the existing leases contain options which allow renewals for
periods up to 20 years. In addition to minimum rentals, certain leases have
escalation clauses based upon various price indexes and include provisions
for the payment of taxes, insurance and maintenance.
Total rental expense was as follows:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Bank premises $2,069 $1,841 $1,578
Equipment 153 43 46
- ------------------------------------------------------------------------------------------------------------------------------------
Total rental expense $2,222 $1,884 $1,624
- ------------------------------------------------------------------------------------------------------------------------------------
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1999 are:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
2000 $ 2,006
2001 1,890
2002 1,536
2003 1,369
2004 1,205
Later years 4,762
- ------------------------------------------------------------------------------------------------------------------------------------
Total minimum payments required $12,768
CONTINGENCIES
Bancorp is subject to various legal proceedings which are incidental to the
ordinary course of business. It is management's opinion that there were no legal
matters pending as of December 31, 1999 which would have a material effect on
the consolidated financial statements.
CREDIT EXTENSION COMMITMENTS
Bancorp is a party to financial instruments in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit, which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated financial statements.
Exposure to credit loss, in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit, is represented by the contractual amount of those instruments. The same
credit policies are applied to commitments and conditional obligations as are
applied to on-balance sheet instruments.
A summary of the contractual amount of exposure under these financial
instruments is as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contractual amounts represent
credit risk:
Commitments to extend credit $245,691 $205,529
Stand-by letters of credit 11,546 15,188
Commitments to extend credit are agreements to lend to customers as long as
there are no violations of any conditions established in the contracts. Certain
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon. Accordingly, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's credit worthiness is
evaluated on a case-by-case basis, and the amount of collateral or other
security obtained, if any, is based upon management's assessment of credit risk.
Collateral varies, but may include deposits held in financial institutions, U.S.
Treasury or other marketable securities, accounts receivable, inventory,
property and equipment, personal residences, income-producing commercial
properties, and land under development. Personal guarantees are also obtained to
provide added security for certain commitments.
45
Stand-by letters of credit are conditional commitments issued to guarantee
the performance of a contract to a third party and are used primarily to
guarantee the installation of real property infrastructure and similar
transactions. Credit risk involved in issuing letters of credit is essentially
the same as that involved in lending and may involve collateral and personal
guarantees as deemed appropriate.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and fair value estimates of
financial instruments at December 31, 1999 and 1998. All fair value estimates
were made at a specific point in time and were based on existing on- and
off-balance sheet financial instruments without consideration of the value of
anticipated future business or the value of assets and liabilities that were not
considered financial instruments. These estimates do not reflect any premium or
discount that could result from a block sale of a particular instrument. Because
of the absence of a genuine market for a significant portion of these financial
instruments, fair value estimates were based on judgments regarding risk
characteristics, economic conditions, and other subjective factors and
uncertainties that do not allow such estimates to be made with precision.
Changes in assumptions or methodologies could have a significant effect on the
estimates.
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 86,320 $ 86,320 $ 101,513 $ 101,513
Loans held for sale 15,497 15,497 28,529 28,529
Investment securities held-to-maturity 99,416 97,357 98,231 100,478
Investment securities available-for-sale 317,945 317,945 337,377 337,377
Net loans 1,101,666 1,097,546 977,515 987,770
Interest receivable 10,080 10,080 10,183 10,183
Financial liabilities:
Deposits 1,314,073 1,315,925 1,285,261 1,177,662
Short-term borrowings 142,266 142,266 76,203 76,203
Long-term borrowings 100,578 101,421 94,246 95,346
Interest payable 3,844 3,844 3,651 3,651
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
Because of the short-term nature of these financial instruments, carrying
amounts were deemed to approximate fair value.
LOANS HELD FOR SALE
Fair value was deemed equal to the carrying amounts because of the anticipated
short holding period of these instruments.
INVESTMENT SECURITIES
Fair value for obligations of state and political subdivisions was estimated by
an independent pricing service using a pricing matrix, and the fair value for
all other debt securities was based on quoted market prices or dealer quotes.
LOANS
Fair value was estimated by segregating the portfolio into categories having
similar financial characteristics. Each loan category was then further segmented
into fixed-rate and variable-rate interest terms and by their status as
performing or nonperforming.
The fair value of performing loans was estimated by discounting estimated
future cash flows using discount rates equal to the current rates at which
similar loans would be made with similar credit ratings and for the same
remaining maturity except that, in the absence of increased credit risk, the
carrying amount was generally deemed to approximate fair value for variable-rate
loans because of the frequent repricing of these instruments at market rates.
The fair value of nonperforming loans was based principally on recent
external appraisals. If appraisals were not available, estimated cash flows were
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
were judgmentally determined using available market information and specific
borrower information.
46
INTEREST RECEIVABLE
Because of the short-term nature of interest receivable, fair value was deemed
to approximate carrying amounts.
DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest-bearing
deposits, interest-bearing checking, savings, and money market accounts, was
equal to the carrying amount. Carrying amount approximates fair value for
variable-rate certificates of deposit, and fixed-rate certificates of deposit
with original maturities of 12 months or less, because of the frequent repricing
of these instruments at market rates. The fair value for all other fixed-rate
certificates of deposit was estimated by discounting contractual cash flows
using discount rates equal to the rates currently offered for deposits of
similar remaining maturities.
SHORT-TERM BORROWINGS
Because of the frequent repricing of these instruments at current market rates,
fair value was deemed to approximate the carrying amounts.
LONG-TERM BORROWINGS
Fair value was estimated by discounting contractual cash flows using discount
rates equal to the current rates for long-term borrowings with similar remaining
maturities.
INTEREST PAYABLE
Because of the short-term nature of interest payable, fair value was deemed to
approximate carrying amounts.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Carrying amounts for commitments to extend credit and standby letters of credit
represent the deferred income attributed to these unrecognized financial
instruments. The majority of commitments to extend credit and standby letters of
credit are at variable rates and/or have relatively short maturities. Therefore,
fair value of these financial instruments were deemed to closely approximate
their carrying amounts, which were immaterial.
14. REGULATORY RESTRICTIONS
RESTRICTIONS ON DIVIDENDS
Approval of the Comptroller of the Currency is required to pay dividends which
exceed the Bank's net profits for the current year plus its retained net profits
for the preceding two years. Amounts available for the payment of dividends
during 1999 aggregated $22,885,000. The rules and regulations of the OTS require
prenotification of dividend payments by the Savings Bank, and such payments may
not exceed prescribed formulas without OTS approval. Also, the Savings Bank's
earnings appropriated to loan loss reserves and deducted for federal income tax
purposes are not available for dividends without the payment of taxes at the
then current income tax rates on the amount used.
RESTRICTIONS ON LENDING FROM AFFILIATES TO PARENT
Section 23A of the Federal Reserve Act (the "Act") prohibits affiliates from
transferring funds to the Parent Company in the form of loans or advances
exceeding 10% of its capital stock and surplus, as defined in the Act. In
addition, all loans or advances to nonbank affiliates must be secured by
specific collateral. Based on this limitation, there was approximately
$15,629,000 available for loans or advances to the Parent Company as of December
31, 1999, at which time there were no material loans or advances outstanding.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average daily reserve balances with the Federal
Reserve Bank. The amount of these required reserves, calculated based on
percentages of certain deposit balances, was $12,645,000 at December 31, 1999.
15. SHAREHOLDERS' EQUITY
CAPITAL REQUIREMENTS
Bancorp, the Bank, and the Savings Bank are required by regulation to maintain
specified minimum levels of capital. Under the regulatory framework pertaining
to prompt corrective action, each entity is considered to be "well-capitalized"
at December 31, 1999, as disclosed in the following table:
BANCORP THE BANK THE SAVINGS BANK
- ------------------------------------------------------------------------------------------------------------------------------------
COMPONENTS ACTUAL REQUIRED COMPONENTS ACTUAL REQUIRED COMPONENTS ACTUAL REQUIRED
OF CAPITAL RATIO RATIO OF CAPITAL RATIO RATIO OF CAPITAL RATIO RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Tangible capital $146,155 8.48% 3.00% $117,412 7.85% 3.00% $19,280 8.10% 1.50%
Core capital 146,155 12.27 4.00 117,412 10.93 4.00 19,280 8.10 3.00
Core and supplementary capital 159,223 13.37 8.00 128,467 11.96 8.00 21,220 13.68 8.00
47
DIVIDEND REINVESTMENT PLAN
Registered shareholders are eligible to participate in Bancorp's Dividend
Reinvestment and Stock Purchase Plan (the "DRP"). The DRP allows participants to
purchase additional shares of Bancorp Common Stock, at a 5% discount to the
market price, through the automatic reinvestment of cash dividends.
Additionally, shareholders may make optional cash payments of $25 to $3,000 in a
single calendar quarter to purchase additional shares at 100% of the market
price. Typically, DRP shares are purchased in the open market by Bancorp's
agent, but the DRP also provides for purchases directly from Bancorp at current
market prices. A total of 63,814 shares are reserved for direct purchase.
Bancorp absorbs all costs of administering the DRP and reserves the right to
amend, modify, suspend, or terminate the DRP at its discretion.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of unaudited quarterly results of operations:
THREE MONTHS ENDED THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
DEC.31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) 1999 1999 1999 1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $29,520 $28,521 $27,956 $27,801 $28,060 $27,836 $27,621 $27,503
Interest expense 13,721 12,922 12,756 12,642 13,198 12,716 12,488 12,225
Net interest income 15,799 15,599 15,200 15,159 14,862 15,120 15,133 15,278
Provision for credit losses 345 100 325 525 1,275 625 525 631
Income before provision for income taxes 893 5,690 5,373 6,286 1,609 6,029 5,790 6,805
Net income 421 4,120 4,042 4,480 1,320 4,312 4,176 4,825
Earnings per common share:
Net income, basic 0.04 0.37 0.37 0.41 0.12 0.40 0.38 0.44
Net income, diluted 0.04 0.37 0.37 0.41 0.12 0.39 0.38 0.44
17. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," which calls for derivatives to be recognized in the
consolidated balance sheet at fair value and for subsequent changes in fair
value to be recognized in the consolidated statement of income. However, because
non-derivative and non-financial transactions are still measured using a mix of
historical and current prices, the Statement keeps special accounting for gains
and losses when derivatives are used in qualifying hedges of assets,
liabilities, and future transactions. The Statement unifies qualifying criteria
for hedges involving all kinds of derivatives, requiring that a company
document, designate, and assess the effectiveness of its hedges. For hedges that
meet the Statement's criteria, the derivative's gains and losses will be allowed
to offset gains and losses on, or forecasted cash flows of, the hedged item.
Among a number of other provisions, the Statement will also allow entities to
reclassify available-for-sale and held-to-maturity securities without calling
into question management's intent for the remainder of its securities
portfolios.
For calendar-year companies such as Bancorp, the Statement, as amended by
SFAS No. 137, will take effect beginning January 1, 2001. Historically, Bancorp
has not made use of hedges and other financial derivatives and is unable to
predict the impact, if any, that the application of Statement No. 133 will have
on consolidated financial statements issued after 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants on accounting and
financial disclosure.
48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS.
Information set forth under the caption "Election of Directors" on pages 4
through 5 of Bancorp's definitive 2000 Proxy Statement furnished to shareholders
in connection with its Annual Meeting on April 18, 2000 (the "2000 Proxy
Statement") with respect to the name of each nominee or director, that person's
age, positions and offices with Bancorp, business experience, directorships in
other public companies, service on Bancorp's Board and certain family
relationships, and information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 14 of the 2000 Proxy
Statement with respect to Section 16 matters, is hereby incorporated by
reference.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS.
Following are the names and ages of all executive officers of Bancorp as of
December 31, 1999 and all persons chosen to become executive officers since that
date. All executive officers are elected to serve a one-year period. There are
no arrangements or understandings between such persons and any other person
pursuant to which they were selected as an officer.
FAYE E. CANNON, age 50, President of Bancorp and the Bank since 1993 and
Chief Executive Officer of Bancorp and the Bank since 1996.
DAVID R. STAUFFER, age 52, Vice President of Bancorp since 1990 and Senior
Executive Vice President and Chief Operating Officer of the Bank since 1999;
previously Executive Vice President of the Bank since 1990.
RICHARD W. PHOEBUS, age 61, Vice President of Bancorp since 1996, when
Savings Bank was acquired by Bancorp, and President and Chief Executive Officer
of the Savings Bank since 1981 and Chairman of the Board of the Savings Bank
since 1999.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
Pursuant to specific instructions related hereto, this section is inapplicable
to Bancorp.
(D) FAMILY RELATIONSHIPS.
There is no family relationship between any director, executive officer, or
person nominated or chosen to become a director or executive officer.
(E) BUSINESS EXPERIENCE.
All executive officers have been employed by Bancorp, the Bank, or the Savings
Bank more than five years.
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
Pursuant to specific instructions related hereto, none of the events identified
have occurred during the past five years as would be applicable to any director,
person nominated to become a director, or executive officer of Bancorp.
(G) PROMOTERS AND CONTROL PERSONS.
Pursuant to specific instructions related hereto, this section is inapplicable
to Bancorp.
ITEM 11. EXECUTIVE COMPENSATION
Information in the section under "Compensation Committee Report on Executive
Compensation" located on pages 6 and 7 and "Directors' Fees and Deferred
Compensation Plan" located on page 12 of the 2000 Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information in the section under "Security Ownership of Management" and the
notes thereto located on page 2, and "Security Ownership of Certain Beneficial
Owners" located on page 3 of the 2000 Proxy Statement is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in the section under "Certain Transactions with Directors and
Officers" located on page 12 of the 2000 Proxy Statement is hereby incorporated
by reference.
49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FILED DOCUMENTS:
(1) Financial Statements:
See listing in Item 8.
(2) Financial Statement Schedules:
Schedules I and II, inclusive, are omitted because of the absence of
the conditions under which they are required.
(3) Exhibits:
2 Agreement and Plan of Merger by and between F&M Bancorp and
Patapsco Valley Bancshares, Inc. Filed as Appendix A to
Registration Statement on Form S-4 (File #333-90083) and
incorporated herein by reference. Post effective Amendment
#1 to Deregister 39,939 shares was filed January 12, 2000,
(File # 333-90083).
3.1 Articles of Incorporation of F&M Bancorp with all Articles of
Amendment. Filed as exhibit 3.1 of the company's quarterly
report on Form 10-Q for the period ended September 30, 1997
and incorporated herein by reference.
3.2 By-Laws of F&M Bancorp with all amendments. Filed as
Exhibit 3.2 of the Company's quarterly report on Form 10-Q
for the period ended September 30, 1997 and incorporated
herein by reference.
4 Description of F&M Bancorp common stock and rights of security
holders. Filed as Exhibit 4 of the Company's quarterly report
on Form 10-Q for the period ended September 30, 1997 and
incorporated herein by reference.
10.1 1983 Stock Option Plan of F&M Bancorp as amended in
April, 1996. Filed as Exhibit 10.1 to Registration Statement
on Form S-8 (File #002-88390) and incorporated herein by
reference.
10.2 Unfunded Deferred Compensation Plan for Non-Employee Directors
of F&M Bancorp as amended and restated effective August 18,
1998. Filed as Exhibit 10.2 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.3 Farmers & Mechanics National Bank Executive Supplemental Income
Plan as amended and restated effective August 18, 1998.
Filed as Exhibit 10.3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated
herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan. Filed as Prospectus
to Registration Statement on Form S-8 (File #33-39941) and
incorporated herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock Purchase Plan.
Filed as Prospectus to Registration Statement on Form S-3 (File
#33-39940) and incorporated herein by reference.
10.6 1995 Stock Option Plan of F&M Bancorp. Filed as Exhibit 10.1
to Registration Statement on Form S-8 (File #333-02433) and
incorporated herein by reference.
10.7 Employment Agreement between F&M Bancorp, Home Federal Savings
Bank and Richard W. Phoebus, Sr. Filed as an Exhibit hereto and
incorporated herein by reference.
10.8 F&M Bancorp 1999 Employee Stock Option Plan. Filed as Exhibit
10.19 of the Company's quarterly report on Form 10-Q for the
period ended March 31, 1999 and incorporated herein by
reference.
10.9 F&M Bancorp 1999 Stock Option Plan for Non-Employee Directors.
Filed as Exhibit 10.20 of the Company's quarterly report on
Form 10-Q for the period ended March 31, 1999 and incorporated
herein by reference.
10.10 Form of F&M Bancorp Stock Options substituted for Patapsco
Valley Bancshares, Inc. stock options issued under the Patapsco
Valley Bancshares, Inc. Incentive Stock Option Plan, Director
Stock Option Plan and Employee Stock Option Plan. Filed as an
Exhibit hereto and incorporated herein by reference.
10.11 Form of F&M Bancorp Stock Options substituted for Home Federal
Corporation Stock Options granted under the Home Federal
Corporation 1988 Stock Option and Stock Appreciation Rights
Plan filed as Exhibit 99.3 to Registration Statement on Form
S-8 (File #333-16709) and incorporated herein by reference.
10.12 Form of F&M Bancorp stock options substituted for Monocacy
Bancshares, Inc. stock options issued under the Monocacy
Bancshares, Inc. 1994 Stock Incentive plan and the Monocacy
Bancshares, Inc. 1997 Independent Director Stock Option Plan.
Filed as an Exhibit hereto and incorporated herein by
reference.
10.13 F&M Bancorp Executive Deferred Compensation Plan adopted April
21, 1998. Filed as Exhibit 10.13 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
50
10.14 F&M Bancorp Change in Control Employment Agreement. Filed as
Exhibit 10.14 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
10.15 Employment Agreement for Michael K. Walsch dated as of July
31,1998. Filed as Exhibit 10.15 of the Company's Annual Report
on Form 10-K for the year ended December 31,1998 and
incorporated herein by reference.
10.16 Supplemental Retirement Plan Agreement dated November 17, 1994
by and between Taneytown Bank & Trust Company and Michael K.
Walsch. Filed as Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.17 Taneytown Bank & Trust Company Key Employee life insurance
program. Filed as Exhibit 10.17 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.18 Home Federal Corporation Deferred Compensation Plan for
Non-Employee Directors. Filed as Exhibit 10.18 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
and incorporated herein by reference.
11 Statement re: computation of per share earnings.
21 Subsidiaries of F&M Bancorp. Filed as an Exhibit hereto an
incorporated herein by reference.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
1. A report on Form 8-K, Item 5. Other Event, was filed on October
4, 1999 to announce the completion of the Potomac Basin Group
Associates, Inc. acquisition, effective July 15, 1999. (File
#000-12638).
2. A report on Form 8-K, Item 5 Other Event, was filed on October
25, 1999 to announce the signing of an amendment (Amendment
#1) to F&M Bancorp's Agreement & Plan of Merger with
Patapsco Valley Bancshares, Inc. ("Merger Agreement")
previously filed on Form 8-K on September 8, 1999 and as
amended and supplemented on Form 8-K/A filed on September
22, 1999 (File #000-12638).
3. A report on Form 8-K/A, Item 5. Other Event was filed on
November 1, 1999 to amend and supplement the report on Form
8-K filed on October 4, 1999 announcing F&M Bancorp's
completion of its acquisition of Potomac Basin Group
Associates, Inc. (File #000-12638).
4. A report on Form 8-K, Item 5. Other Event, was filed on
November 24, 1999 to announce the Office of the Comptroller
of the Currency's approval of F&M Bancorp's application to
merge its subsidiary Farmers & Mechanics National Bank with
Commercial & Farmers Bank, a subsidiary of Patapsco Valley
Bancshares, Inc., one of the conditions precedent to the
merger of Patapsco Valley Bancshares, Inc. with and into F&M
Bancorp (File #000-12638).
5. A report on Form 8-K, Item 5. Other Event, was filed on
December 15, 1999 announcing shareholder approval of the
merger of Patapsco Valley Bancshares, Inc. with and into F&M
Bancorp and establishing an anticipated date for the merger
(File #000-12638).
6. A report on Form 8-K, Item 2. Acquisition and Disposition of
Assets was filed on January 3, 2000 to announce the
completion of the Patapsco Valley Bancshares, Inc.
acquisition effective December 30, 1999.
7. A report on Form 8-K, Item 5. Other Event, was filed on
February 16, 2000 to publish 30 days of post-merger combined
operations to satisfy the risk sharing rules set forth in
SEC Accounting Series Release 135 (File # 000-12638).
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
F&M BANCORP (REGISTRANT)
Dated: March 17, 2000 By: /s/ FAYE E. CANNON
-----------------------------
Faye E. Cannon
PRESIDENT & CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICERS:
March 17, 2000 /s/ CHARLES W. HOFF, III
------------------------------------
Charles W. Hoff, III
CHAIRMAN OF THE BOARD
March 17, 2000 /S/ FAYE E. CANNON
------------------------------------
Faye E. Cannon
PRESIDENT & CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER:
March 17, 2000 /S/ ANNE K. WRIGHT
------------------------------------
Anne K. Wright
A MAJORITY OF THE BOARD OF DIRECTORS:
March 17, 2000 /S/ R. CARL BENNA
------------------------------------
R. Carl Benna
DIRECTOR
March 17, 2000 /S/ HOWARD B. BOWEN
------------------------------------
Howard B. Bowen
DIRECTOR
March 17, 2000 /S/ JOHN D. BRUNK
------------------------------------
John D. Brunk
DIRECTOR
March 17, 2000 /S/ BEVERLY B. BYRON
------------------------------------
Beverly B. Byron
DIRECTOR
March 17, 2000 /S/ FAYE E. CANNON
------------------------------------
Faye E. Cannon
DIRECTOR
52
March 17, 2000 /S/ ALBERT H. COHEN
------------------------------------
Albert H. Cohen
DIRECTOR
March 17, 2000 /S/ MAURICE A. GLADHILL
------------------------------------
Maurice A. Gladhill
DIRECTOR
March 17, 2000 /S/ HOWARD E. HARRISON III
------------------------------------
Howard E. Harrison III
DIRECTOR
March 17, 2000 /S/ CHARLES W. HOFF, III
------------------------------------
Charles W. Hoff, III
DIRECTOR
March 17, 2000 /S/ DONALD R. HULL
------------------------------------
Donald R. Hull
DIRECTOR
March 17, 2000 /S/ JAMES K. KLUTTZ
------------------------------------
James K. Kluttz
DIRECTOR
March 17, 2000 /S/ RICHARD W. PHOEBUS, SR.
------------------------------------
Richard W. Phoebus, Sr.
DIRECTOR
March 17, 2000 /S/ H. DEETS WARFIELD, JR.
------------------------------------
H. Deets Warfield, Jr.
DIRECTOR
March 17, 2000 /S/ THOMAS R. WINKLER
------------------------------------
Thomas R. Winkler
DIRECTOR
53