ITEM 1. BUSINESS
THE COMPANIES:
GENERAL: F&M Bancorp ("the 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, 2000, Bancorp had consolidated assets of $1.795 billion, total loans of $1.220 billion, total deposits of $1.364 billion, and total shareholders' equity of $158 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.
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 44 full-service offices and 56 automated teller machines located in Frederick, Carroll, Montgomery, Baltimore and Howard
Counties, Maryland, 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 internet 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 10 community offices, 21 automated teller machines, and other electronic banking systems in Washington and Allegany Counties, MD.
BANK DEPOSIT AND LENDING ACTIVITIES: As of December 31, 2000, the Bank had deposits of $1.182 billion and the Savings Bank had deposits of $182 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, 2000, the Bank had $1.029 billion in loans representing approximately 66% of its total assets of $1.540 billion and the Savings Bank had approximately $197 million in loans representing approximately 78% of its total assets of $252 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.
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, 2000, Bancorp had no full-time equivalent employees. As of that date, the Bank and its subsidiaries had 657 full-time equivalent employees and the Savings Bank and its subsidiaries had 113 full-time equivalent employees. A total of 770 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. Bancorp's growth strategy may include the use of strategic acquisitions, and it regularly evaluates opportunities and conducts due diligence activities in connection with possible transactions. As a result, discussions and, in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur.
SUPERVISION AND REGULATION
The Bancorp and its bank subsidiaries are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of customers and depositors. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. In addition, the Bancorp and its subsidiaries are subject to general U.S. federal laws and regulations and to the laws and regulations of the states in which they conduct their businesses. Described below are material elements of selected laws and regulations applicable to the Corporation and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.
BANK HOLDING COMPANY REGULATION: F&M Bancorp is registered with the Federal Reserve Board (the "FRB") 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.
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 REGULATIONS: Farmers and Mechanics National Bank ("the Bank") is subject to supervision and regulation by the Comptroller of the Currency ("OCC"), the Board, and the Federal Deposit Insurance Corporation ("FDIC") as of December 31, 2000. On December 14, 2000 the Bank announced that it had made application with the Maryland State Commissioner of Financial Regulation to become a state chartered Bank. Approval from the Commissioner would make the Bank subject to supervision by the State of Maryland, with the Federal Reserve Bank serving as the primary regulator. The Bank would no longer be supervised by 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. 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 REGULATIONS: 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.
SUPPORT OF SUBSIDIARY BANKS: Under FRB policy, the Bancorp is expected to act as a source of financial strength to, and to commit resources to support it's banking subsidiaries. This support may be required at times when, absent such FRB policy, the Bancorp may not be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority in payment.
A depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC insured depository institution or any assistance provided by the FDIC to any commonly controlled FDIC insured depository institution "in danger of default." Default is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Liability for the losses of commonly controlled depository institutions can lead to the failure of some or all depository institutions in a holding company structure, if the remaining institutions are unable to pay the liability assessed by the FDIC. Any obligation or liability owed by a subsidiary bank to its parent company is subordinate to the subsidiary bank's cross-guarantee liability for losses of commonly controlled depository institutions.
PAYMENT OF DIVIDENDS AND OTHER RESTRICTIONS: The Bancorp is a legal entity separate and distinct from its subsidiaries. There are various legal and regulatory limitations on the extent to which the Bancorp's subsidiaries, including its bank and savings bank subsidiaries, can finance or otherwise supply funds to the Bancorp. See Note 14, Regulatory Restrictions, Notes to Consolidated Financial Statements, 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, 2000 and 1999.
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, 2000, Bancorp's tangible capital ratio was 8.84%.
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, 2000, Bancorp's Tier 1 and Total risk-weighted capital ratios were 11.84% and 12.86%, respectively.
The FDIC requires "prompt corrective action" when an insured institution's capital falls to certain levels. This rule restricts or prohibits certain activities and requires an insured institution to submit a capital restoration plan when it becomes undercapitalized. The restrictions and prohibitions become more severe as an institution's capital level declines.
Capital adequacy guidelines also provide for consideration of interest rate risk in the overall determination of a bank's minimum capital requirement. The guidelines explicitly provide that a bank's exposure to declines in the economic value of its capital due to changes in interest rates is a factor to be considered in evaluating capital adequacy.
For additional information pertaining to capital adequacy and interest rate risk management, see Management's Discussion and Analysis of Financial Condition and Results of Operations,
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. Also known as the "Financial Services Modernization Act" the Act became effective March 12, 2000. This 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 list of financial activities, any activity which in the future is deemed by the FRB 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 previous permissible activities standard. The broader standard allows 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.
The act also contains rules requiring the Bancorp and its subsidiaries to safeguard the confidentiality of any "nonpublic personal information" that it has about a customer. These provisions generally restrict the ability of the Bancorp to transfer information about consumers to nonaffliated third parties and require the Bancorp to provide certain privacy-related notices to consumers.
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.
ITEM 2.
ITEM 2. PROPERTIES
The following describes the location and general character of the principal offices and other materially important physical properties of Bancorp and its subsidiaries.
The Bank owns a fee simple interest in its principal executive offices and main banking facility, totaling approximately 115,000 square feet, located at 110 Thomas Johnson Drive, Frederick, MD. The Savings Bank owns a fee simple interest in its principal executive office and main banking facility, with approximately 39,000 square feet, located at 122-128 West Washington Street, Hagerstown, MD. Keller Stonebraker leases approximately 8,000 square feet for its headquarters office located at 1120 Professional Court, Hagerstown, MD, from a partnership in which Keller Stonebraker's executive officers hold a 30% limited partnership interest. Bancorp acquired, in its merger with Monocacy Bancshares, Inc., a fee simple interest in the 43,500 square foot headquarters building of Taneytown Bank & Trust Company located at 222 East Baltimore Street, Taneytown, MD. Out of a total of 54 full-service branch offices of the Bank and the Savings Bank at December 31, 2000, 29 were owned and 25 were leased. Information concerning Bancorp's lease commitments is included in Note 12, Commitments and Contingencies, Notes to Consolidated Financial Statements.
ITEM 3.
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, in the opinion of the management, there were no legal matters pending as of December 31, 2000 which would have a material effect on the consolidated financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders since the 2000 Annual Shareholder meeting.
PART II
ITEM 5.
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. Incorporated herein by reference is the information on the last page of the Bancorp's 2000 annual report to shareholders Form 10-K under the heading "Stock Price and Dividends".
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION F&M BANCORP AND SUBSIDIARIES
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(1) Reflects the percentage relationship of cash dividends paid to basic earnings per share.
ITEM 7.
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 ("the Bancorp") for the three years in the period ended December 31, 2000, 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 pooling-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-interests transactions.
FORWARD-LOOKING STATEMENTS
Certain information included in the following section of this report, other than historical information, may contain 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.
2000 COMPARED TO 1999
OVERVIEW
The U. S. economy continued at a moderately strong pace in the first half of 2000, continuing its tenth successive year of expansion. Economic expansion continued amidst growing concerns over potential inflation, excessive consumer spending and tight labor markets. These concerns prompted the Federal Reserve Bank to raise short-term rates a quarter of a percentage point in February and March of 2000 and a half of a percentage point in May of 2000. As a result of these rate increases, the economy in the second half of 2000 slowed more rapidly than businesses anticipated causing some backup in inventories. The equity markets fell and lenders turned more cautious. This tightening of financial conditions contributed to a restraint on consumer spending. Against this background, economic conditions within the Bancorp's operating area in Maryland remained generally strong and credit quality has remained at traditionally strong levels.
The Bancorp's net income for 2000 totaled $19.3 million or $1.75 per diluted share compared with $13.1 million or $1.18 per diluted share in 1999. Results for both years included nonrecurring charges and gains, which totaled $(187) thousand after-tax in 2000 and $3.8 million after-tax in 1999 primarily for merger-related expenses. Excluding the after-tax impact of nonrecurring charges, net income on an operating basis was $19.1 million or $1.73 per diluted share in 2000 versus $16.9 million or $1.53 per diluted share in 1999.
TABLE 1. NET INCOME EXCLUDING SPECIAL ITEMS
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(1) Diluted earnings per share
RESULTS OF OPERATIONS
The Bancorp's operating results for the year reflected strong revenue growth, with total revenues rising $7.1 million or 8.1% to $93.8 million. Increases occurred in both net interest income and fee-generating business as Bancorp's strategies and growth initiatives continued to generate strong revenue momentum. Credit losses continued to be modest while loan quality remained strong. The Bancorp continues to initiate technology enhancements and capitalize on acquisition synergies to moderate expense growth.
NET INTEREST INCOME
F&M Bancorp's principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest income for purposes of analysis, is presented on a tax-equivalent basis to recognize associated tax benefits. The presentation provides a basis for comparison of yields with taxable earning assets. The discussion on net interest income should be read in conjunction with Table 2--"Average Balances, Interest, and Average Rates (Consolidated)" and Table 3--"Analysis of Changes in Net Interest Income."
The Bancorp's taxable equivalent net interest income rose $3.1 million or 4.8% in 2000 to $68.2 million. Strong loan demand, particularly in commercial real estate and residential mortgage lending, drove the increase, resulting in a net yield on interest-earning assets of 7.97% or 27 basis points higher than 1999. Most of the new loan growth was funded with the proceeds from maturing securities, core deposit growth and alternative funding sources such as the Federal Home Loan Bank.
Average yields on both sides of the balance sheet increased from 1999 as the overall rate environment increased throughout 2000. The increase in rates had a greater effect on interest-bearing liabilities due to a spike in the short-term rates that these instruments were tied to. Although securities yields increased, the impact on the net interest margin was minimized, due to shrinking volumes and its smaller proportion of interest-earning assets. During 2000, the securities portfolio was allowed to decline to fund part of the loan growth. At December 31, 2000, there were more than sufficient securities to meet the collateral needs for public funds deposits and other financial arrangements requiring the pledging of securities.
The Bancorp funds it's balance sheet with a balanced mix of retail core deposits, customer repurchase agreements and wholesale funding products. During 2000, the average cost of funds increased 40 basis points due to higher rates on most funding sources. In addition to a less favorable average rate environment, a less favorable mix in core deposit funding also impacted the Bancorp's net interest margin. Most of the deposit increase was in the Bancorp's T-bill Plus money market product.
The combined effect of the change in mix and higher deposit rates resulted in a 23 basis point increase in the average cost of deposits.
Noninterest-bearing funds had a positive effect on net interest margin. The average balances of both shareholders' equity and noninterest-bearing liabilities increased a total of $11.2 million or 5.7%, while the average balance of noninterest-bearing assets declined $1.9 million or 1.6%. The net effect was an additional $13.1 million in noninterest-bearing funds available to fund interest-earning assets. Noninterest-bearing demand deposits contributed $12.5 million of the increase in available noninterest-bearing funds.
Borrowed funds increased $69.2 million or 38.1% as the Bancorp sought to fund loan growth. These funds were primarily short-term in nature and the average rate paid on all borrowed funds increased by 90 basis points to 5.96%.
Future growth in net interest income will depend upon consumer and commercial loan demand, growth in deposits and the general level of interest rates. Please refer to the section entitled "Market Risk and Asset/Liability Management" for further discussion of the impact of current trends on net interest income in 2000.
TABLE 2. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
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(1) 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.
TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME
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(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.
PROVISION FOR CREDIT LOSSES
Provisions for credit losses are charges to earnings to bring the total allowance for credit losses to a level considered by management as adequate to provide for estimated losses based on management's evaluation of the collectibility of the loan portfolio. Management considers the nature of the loan portfolio, credit-concentrating trends in historical loan experience, specific impaired loans and economic conditions. Management also considers the level of problem assets that the Bancorp classifies in accordance with regulatory requirements. The provision for credit losses was $3.2 million in 2000, which was $1.3 million higher than in 1999. This increase in the provision resulted primarily from growth in commercial and commercial real estate loans which carry higher levels of credit risk.
NONINTEREST INCOME
Total noninterest income rose $3.8 million or 15.1% to $28.8 million for the year. Growth occurred in all major categories except gains on sale of loans from mortgage banking activities, with the highest increases in insurance income, deposit account service charges and alternative investment/stock brokerage income. Management expects total noninterest income to continue to increase in 2001, based on a stable but slower economic growth outlook and continued focus on insurance, deposit account services, technology-based banking, and financial and investment advisory services.
Insurance commission income grew $1.1 million or 16.1% to $7.9 million, principally due to the integration of Keller Stonebreaker and Potomac Basin insurance subsidiaries into the referral network of the bank's and savings bank's customer base. Team-based selling efforts between the insurance
subsidiaries and the bank affiliates have brought a vast array of consumer and commercial insurance products to the community bank customer.
Revenues from service charges on deposit accounts rose $822 thousand or 11.6%. This increase resulted from the conversion of Commercial & Farmers Bank customers to the Bank's deposit fee schedule in March 2000 as well as the overall level of new deposit account customers.
Commissions and fees from alternative investments and brokerage services increased $303 thousand or 8.4% to $3.9 million. This increase is associated with the expansion of The Investment Center, an affiliation with Raymond James Financial Services, as well as fee increases in the trust services business. The experts in these groups provide innovative financial solutions individually designed for the affluent, emerging affluent and small business customer. A full range of products is offered including, trust services, portfolio management, financial planning, estate planning, brokerage services, investment counseling and insurance.
Bank card income rose $535 thousand or 26.4% to $2.6 million. This income is derived from debit card interchange transactions. The increase in this product results from increased consumer acceptance of the service, greater marketing focus to raise awareness and higher consumer spending.
Gains on sales of loans from mortgage banking activities declined $576 thousand or 26.0% to $1.6 million for the year, reflecting reduced sales of fixed-rate mortgages due to lower origination volumes. Rising interest rates resulted in a shift in consumer demand toward adjustable-rate mortgages, which are generally held in the loan portfolio. Rising interest rates also slowed refinancing activity, resulting in lower origination fees which are also included in this category.
TABLE 4. ANALYSIS OF CHANGES IN NONINTEREST INCOME
NONINTEREST EXPENSE
Total noninterest expense declined $4.4 million or 6.6%, primarily due to nonrecurring charges taken in 1999. In 1999, the Bancorp incurred merger expenses of $5.0 million related to the Patapsco Valley Bancshares merger. Excluding these merger charges, noninterest expense on an operating basis totaled $62.5 million in 2000 and grew $292 thousand or less than 1% from 1999's expense level of $62.2 million. In 2001, noninterest expense is expected to continue to increase moderately with investments in strategic initiatives offset by aggressive cost containment efforts.
The Bancorp's efficiency ratio (the ratio of noninterest expense to the sum of net interest income on a tax equivalent basis and noninterest income) decreased to 64.40% for December 31, 2000 from 73.52% at December 31, 1999.
Total personnel expense grew $70 thousand or 0% for 2000. Salaries expense rose $501 thousand or 1.8%, primarily due to expanded incentive pay for revenue-generation provided for by the Bancorp's Stakeholders Incentive Pay Program and successful recruiting of a large number of open positions. Employee benefits declined by $431 thousand or 7.3% to $5.5 million primarily due to favorable experience in medical and health programs.
Merger-related expense decreased to $318 thousand in 2000 from $5.0 million in 1999. These expenses are largely associated with legal and accounting fees, severance payments, contract terminations, and similar expenses incurred in 1999 related to the acquisition and merger of Patapsco Valley Bancshares, Inc. which closed on December 30, 1999.
Professional services increased $205 thousand or $7.9% due to increased outsourcing of non-strategic processes as well as fee increases for audit, legal and tax services. Telephone expense increased $232 thousand or 14.4% primarily due to the Bancorp's increased geographic reach into Howard County as a result of the recent bank acquisition. Computer software and maintenance costs rose $348 thousand or 23.1%. The increase reflected continuing growth in technology investments to improve customer service and provide productivity enhancements to the organization.
TABLE 5. ANALYSIS OF CHANGES IN NONINTEREST EXPENSE
INCOME TAXES
Income tax expense increased by 64% to $8.5 million for 2000, from $5.2 million for 1999, largely related to a 52% increase 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 the 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 to 30.5% for 2000 compared with 28.4% for 1999.
FINANCIAL CONDITION
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 management ("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.
TABLE 6. INVESTMENT PORTFOLIO DISTRIBUTION--AMORTIZED COST(1)
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(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.
TABLE 7. INVESTMENT PORTFOLIO ANALYSIS--DECEMBER 31, 2000
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(1) Reflects the cost of securities purchased, adjusted for amortization of premiums and accretion of discounts, which differs from the amounts reflected in the 2000 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 6, Investment Portfolio Distribution, displays the year-end amortized cost of the investment securities portfolio, which increased to $441 million at December 31, 2000 from $431 million at December 31, 1999.
As shown in Table 7, Investment Portfolio Analysis, the amortized cost of AFS securities totaled $352 million and represented 80% of the total securities portfolio and 20% of consolidated total assets at December 31, 2000. AFS securities provide substantial liquidity, chiefly for unexpected loan growth or deposit withdrawal requirements. Conversely, HTM securities, which amounted to $89.4 million, or 20% of the total portfolio at December 31, 2000, 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, 2000. All obligations of states and political subdivisions were rated A or higher by either Moody's Investors Service or Standard and Poors, and approximately 85% were rated AAA at December 31, 2000.
LOANS: Average loans increased 16% in 2000, whereas total loans at December 31, 2000 increased 9% to $1.2 billion from $1.1 billion at December 31, 1999 as shown in Table 8, Loan Portfolio Mix. This loan growth was fueled by a strong economy in F&M Bancorp's lending area. Given management's outlook for a slower growth economic environment in 2001, management anticipates that loan growth will moderate from the strong demand witnessed in 2000.
In response to 2000's strong economy, construction lending increased $13.2 million or 19.5% and commercial real estate rose $16.2 million or 5.9%. Other commercial loans increased $11.6 million or
6.8%. Consumer loans continued to show strong increases of $25.8 million or 9.1% fueled primarily by increases in indirect automobile sales financing and home equity loans. Residential mortgages increased $41.6 million or 13.6% as rising interest rates shifted consumer appetites to adjustable rate mortgages that are held in this loan portfolio.
Management believes that its underwriting standards are conservative and consistently applied. Although geographically focused on its growing primary marketplace, which has proven to be economically vibrant and stable over the years, Bancorp's credit risk is well diversified as to loan type and average loan size.
TABLE 8. LOAN PORTFOLIO MIX
TABLE 9. LOAN MATURITIES AND INTEREST SENSITIVITY(1) AT DECEMBER 31, 2000
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(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 10, Average Deposits and Rates Paid, increased by 2% in 2000 over 1999. Noninterest checking and interest checking grew by 7.1% and 6.2%, respectively. Money market
accounts grew substantially, generating $59.3 million or 29.9% growth in deposits, primarily in the T-bill Plus money market product. Consumers showed a strong preference for the flexibility and competitive rates of these accounts. Savings and certificate of deposit customers also migrated to the T-bill Plus accounts which is reflected in the lower balances in those products.
Table 11, Maturity of Time Deposits $100,000 or More, reflects a growth rate of 16% for 2000, most notably in the over 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 levels of 10% of total deposits.
TABLE 10. AVERAGE DEPOSITS AND RATES PAID
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
BORROWINGS: Short-term borrowings increased $119.7 million to $207.6 million on average in 2000 and long-term borrowings decreased $50.5 million to $43.4 million due to called or matured advances in 2000. With the spike in interest rates that occurred in 2000, the Bancorp elected to maintain short-term funding in anticipation of potentially lower rates in the near future. Much of the remaining growth reflected in 2000 short-term borrowings resulted from expanded relationships with our business customers through our money management repurchase agreement product.
TABLE 12. SHORT-TERM BORROWINGS
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Short-term Advances from Federal Home Loan Bank
LIQUIDITY MANAGEMENT
The goal of liquidity management is to ensure the Bancorp's ability to meet current and future obligations, including loan commitments, deposit withdrawals, liability maturities and other commitments, and to ensure that the Bancorp is well positioned to take advantage of business opportunities in a timely and cost-efficient manner. The Bancorp manages liquidity at both the parent and subsidiary levels through active management of the balance sheet.
Parent company liquidity comes from short-term investments that can be sold immediately and from dividends and interest income from subsidiaries. At December 31, 2000, F&M Bancorp had $4.8 million in interest-bearing balances at Farmers & Mechanics National Bank. During 2000, amounts available for the payment of dividends aggregated $21.1 million.
Liquidity at the Bank and the Savings bank is derived from their ability to generate core deposits from a large, diversifed customer base and their ability to purchase noncore money market funds in the U.S. The Bank's ability to attract funds in the wholesale markets rests on its strength of capital, collateral availability, earnings, reputation and high quality assets. The Bank draws on a diverse base of wholesale funding sources, including large certificates of deposit, federal funds purchased, and securities sold under repurchase agreement. The Bank and the Savings Bank also have extensive access to funds from their membership in the Federal Home Loan Bank of Atlanta.
Asset liquidity is maintained through temporary investments, maturity management and the ability to liquidate securities in the available for sale portfolio. In addition, the Bancorp limits the level, maturity and concentrations of noncore funding through policy and internal guidelines. Management regularly reviews liquidity positions and reviews liquidity with the Board of Directors on a semi-annual basis.
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
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 rate risk, commodity price risk, and other relevant market risks. Bancorp's 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 Bancorp's earnings and capital to changes in interest rates. This risk is driven by potential mismatches resulting in timing differences in the repricing of assets, liabilities and the potential impact of explicit and embedded options. The goal of asset/liability management is to maintain high-quality and consistent growth of net interest income, while maintaining acceptable levels of risk to changes in interest rates, and acceptable levels of capital and liquidity. This goal is achieved by influencing the maturity and repricing of business and by managing discretionary portfolios.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on Bancorp's 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 all 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 on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies, and other factors. The Bancorp uses a number of tools to measure interest rate risk, including simulating net interest income, monitoring the sensitivity of the net present value of the balance sheet, and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods.
Management believes that interest rate risk is best measured by simulation modeling which calculates expected net interest income based on projected interest-earning assets and interest-bearing liabilities. The model projections are based upon historical trends and management's expectations of balance sheet growth patterns, spreads to market rates, historical market rate relationships, prepayment behavior, current and expected product offerings and sales activities. Various sensitivity analyses are performed on a regular basis to segregate interest rate risk into separate components and understand the risk attributable to prepayments, caps and floors, and other options. Assumption testing is performed to understand the degree of impact from changing key assumptions such as the speed of prepayments, the interest rate elasticity of core deposit rates and balance sheet growth. The Bancorp's policy guideline limit for net interest income simulation is a negative impact to net interest income of 15.0 percent for the up or down 300 basis points scenarios when compared with the flat rate scenario. Management has generally maintained a risk position well within the policy guideline level. The model indicated the impact of a 300 basis point rise in rates over the next 12 months would cause approximately a 1.8 percent increase in net interest income at December 31, 2000. A 300 basis point decrease in rates over the next 12 months would cause approximately a 2.3 percent decrease in net interest income.
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.
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, 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, 2000 and 1999.
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 in 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.
RISK ELEMENTS
NONPERFORMING ASSETS: Table 13, Nonperforming Assets and Contractually Past-Due Loans, displays a five-year history of steadily declining nonperforming assets. Totaling just $3.7 million, or 0.21% of total consolidated assets at December 31, 2000, Bancorp reduced its nonperforming assets at an average annual rate of 28% over the period shown, largely reflecting substantial progress by the Savings Bank in dealing with the legacy of the late-1980s.
Loans that were past due 90 days or more and not classified as nonperforming totaled $1.2 million at December 31, 2000, or 0.10% of year-end total loans, compared with $1.5 million one year earlier, or 0.14% of total loans at December 31, 1999. Historically, there has been no direct correlation between loans past due 90 days or more and nonperforming loans or loan losses.
TABLE 13. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
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(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, 2000, there were $14.5 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.
As reflected in Table 14, at December 31, 2000 the allowance for loan losses was $13.2 million, or 1.08% of total loans and 496% of total non-accrual loans. This compares to an allowance for loan losses at December 31, 1999 of $13.1 million, equivalent to 1.17% of total loans and 211% of non-accrual loans. Net charge-offs during 2000 were $604 thousand more than 1999.
Table 14, 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 $2.7 million and $6.2 million at December 31, 2000 and December 31, 1999, respectively, that were specifically classified as impaired and included in non-accrual loans in Table 13.
At December 31, 2000 the allowance for loan losses was $13.2 million, consisting of $12.1 million representing the formula allowance, a $140 thousand specific allowance, and a $1.0 million unallocated allowance. Table 15, 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.
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, 2000, 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 14. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
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(1) Excludes loans held for sale.
TABLE 15. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
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(1) Reflects the percentage of loans in each category to total loans.
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. 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.
SPECIAL ITEMS 1999: Special items for 1999 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 Taneytown Bank & Trust Company ("TBT"), $115 thousand ($0.01 per share) related to the July 1999 acquisition of Potomac Basin Group Associates, Inc., and $3.608 million ($0.33 per share) related to the acquisition of Patapsco Valley Bancshares (which includes C&F). The integration of Commercial & Farmer's ("C&F"), core processing systems and administrative functions was completed in March, 2000.
SPECIAL ITEMS 1998: Special items for 1998 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 Home Federal Corporation ("the Savings Bank"), acquired in November 1996, $190 thousand ($0.01 per share) related to the May 1998 acquisition of Keller Stonebraker Insurance, Inc., 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.
NET INTEREST INCOME: Net interest income, on a tax-equivalent basis, increased 3% to $65.1 million for 1999, from $63.0 million for 1998. The yield on average earning assets decreased 38 basis points. Although there was an increased reliance on borrowed funds in 1999, the average rate paid on interest-bearing liabilities declined 22 basis points. The net interest margin decreased to 4.28% for 1999, from 4.48% for 1998.
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.
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.
Alternative investment and stockbrokerage income increased 16% in 1999, resulting primarily from an increase in estate administration fees, mutual fund and annuity sales.
Other operating income increased 2% to $5.2 million for 1999 from $5.1 million for 1998.
NONINTEREST EXPENSE: Total noninterest 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 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 10% decrease in income before taxes. The effective tax rate was 28.4% for 1999 compared with 27.7% for 1998.
FINANCIAL CONDITION: Total assets were $1.719 billion at December 31, 1999, up $98.8 million, or 6%, from a year earlier. The increase was principally reflected in loans, which were funded by a variety of sources, the largest component being short-term borrowings. All capital ratios were substantially in excess of regulatory minimums for Bancorp and its subsidiaries at each of the years ended December 31, 1999 and 1998.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES: The provision for credit losses was decreased by 58%, to $1.3 million for 1999, from $3.1 million for 1998. The ratio of net charge-offs to average loans outstanding decreased to 0.22% for 1999, from 0.25% for 1998.
NONPERFORMING ASSETS: Nonperforming assets increased slightly in 1999, by 1.6% to $7.4 million at December 31, 1999, from $7.2 million at year-end 1998. The ratio of nonperforming assets to total assets declined to 0.43% at December 31, 1999 from .45% one year earlier.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in "Market Risk and Asset/Liability Management" of this Form 10-K and is expressly incorporated herein by this reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of F&M Bancorp is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements.
In meeting its responsibility both for the integrity and fairness of these statements and information, management depends on the accounting system and related internal controls that are designed to provide reasonable assurance that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and proper and reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of internal controls should not exceed the related benefits. As an integral part of internal controls, the Bancorp contracts with Arthur Andersen to maintain a professional staff of internal auditors who monitor compliance with and assess the effectiveness of internal controls and coordinate audit coverage with the independent auditors.
The Audit Committee of F&M Bancorp's Board of Directors, composed solely of outside directors, meets regularly with the Bancorp's management, internal auditors, and independent auditors to review matters relating to financial reporting, internal controls and the nature, extent and results of the audit effort. The independent auditors and internal auditors have direct access to the Audit Committee with or without management present.
The financial statements have been audited by Arthur Andersen LLP, independent auditors, who render an independent professional opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which the Bancorp's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures which include reviewing the internal controls and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are presented fairly in all material respects.
REPORT OF INDEPENDENT AUDITORS
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, 2000 and 1999, 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, 2000. 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 statement of income and comprehensive income 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 year ended December 31, 1998. Such statement is included in the consolidated financial statements of F&M Bancorp and subsidiaries and reflects 11% of consolidated total income for 1998. That statement was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Patapsco Valley Bancshares, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of F&M Bancorp and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
[LOGO]
Vienna, Virginia January 16, 2001
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 the year ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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.
[LOGO]
Baltimore, Maryland March 2, 1999
F&M BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
F&M BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
F&M BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
F&M BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
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, Howard, Montgomery and Washington Counties, MD, with additional community office presence in Allegany, and Baltimore County, 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 a provision of $4,401,000 in 2000 and benefits of $5,444,000 and $69,000 in 1999 and 1998, respectively.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, are 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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) improvements, and by accelerated methods for equipment. The estimated useful lives for computing depreciation and amortization are as follows:
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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) plus 19,786 shares, 59,861 shares, and 115,827 shares, represented by outstanding stock options assumed to be exercised for the years ended December 31, 2000, 1999 and 1998, 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 and is included in alternative investment and stock brokerage income in the accompanying statements of income and comprehensive income.
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.
All four acquisitions were accounted for as pooling of interests.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments at December 31, 2000 and 1999, 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 2000 were $2,941,000. Gross gains of $633,000 were realized on those sales. 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.
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 $226,957,000 at December 31, 2000, and $164,604,000 at December 31, 1999.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED) purchase or carry tax-exempt obligations. Such tax-exempt securities composed 28.6% and 31.1% of the total carrying value of the investment portfolio at December 31, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
Loans consist of the following:
Loans to states and political subdivisions and industrial revenue bonds are included in commercial and industrial 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.
Transactions in the allowance for credit losses were:
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 did not involve 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 $14,280,000 and $12,346,000 at December 31, 2000 and 1999, respectively. During 2000, $16,194,000 of new loans were made, or became reportable, and repayments and other decreases totaled $14,260,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED) The loan portfolio includes loans that are not currently accruing interest income. The total outstanding principal amount of these loans at December 31, 2000, 1999, and 1998, and the effect on interest income for the years then ended, are as follows:
The net reduction in interest income on renegotiated loans was not material in 2000, 1999, and 1998. At December 31, 2000, there were no material commitments to lend additional funds to borrowers whose loans had been modified in troubled debt restructurings or were in a nonaccrual status.
Loans amounting to approximately $2,190,000 and $3,441,000 at December 31, 2000 and 1999, respectively, were specifically classified as impaired and are included in nonaccrual loans disclosed above. The average balance of impaired loans amounted to $3,590,000 and $1,857,000 for the years ended December 31, 2000 and 1999, respectively. Cash receipts totaling $1,002,124 and $1,618,000 during 2000 and 1999, 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 $140,000 and $317,000 at December 31, 2000 and 1999, respectively.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
Depreciation and amortization related to premises and equipment in the consolidated statement of income and comprehensive income amounted to $3,617,000 in 2000, and $3,764,000 in 1999, and $3,272,000 in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEPOSITS
The carrying amounts of deposits are as follows:
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 Federal Home Loan Bank ("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 $344,249,000 at December 31, 2000.
The table below presents selected information on the combined totals of repurchase agreements and other short-term borrowings:
LONG-TERM BORROWINGS: The table below presents a summary of long-term FHLB advances:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS (CONTINUED) These advances had weighted average interest rates of 5.39% and 5.31% at December 31, 2000 and 1999, 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 2008, a $10.0 million advance is convertible at the FHLB's option to a variable rate based on LIBOR.
8. INCOME TAXES
Significant components of deferred tax assets and liabilities are as follows:
A reconciliation of the statutory income tax rate to the provision for income taxes included in the consolidated statements of income and comprehensive income, is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED) Significant components of the provision for income taxes are as follows:
The components of the provision for deferred tax expense (benefit) is as follows:
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 $685,000 for 2000, $520,000 for 1999, and $478,000 for 1998. 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 $802,000 in 2000, $352,000 in 1999, and $343,000 in 1998.
Taneytown Bank & Trust Company ("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.
HOME FEDERAL CORPORATION ("THE SAVINGS BANK") PROFIT 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. In addition, the Savings Bank made profit sharing contributions of $180,000 in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED) DEFINED BENEFIT PLAN: Commercial & Farmers Bank ("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 these plans in amounts sufficient to satisfy minimum funding standards determined using the frozen entry age actuarial method. Assets of these plans are held in trust and invested in listed stocks and bonds.
The following table sets forth the financial status of these plans:
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED) participation in the plans. C&F's contributions to these plans, included in expenses, were $370,765 and $84,812 for 1999 and 1998,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, 2000, 1999 and 1998 were $154,000, $392,000, and $372,000, 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 in order to provide retirement benefits. The expense for these benefits was $160,000, $161,000, and $117,000, for 2000, 1999, and 1998, 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 $28,000, $7,000, and $17,000, for 2000, 1999, and 1998, 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 PLAN: 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED) 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.
At December 31, 2000, there were 175,943 options exercisable at prices ranging from $10.15 to $32.09. Shares reserved for future grants totaled 408,726 at December 31, 2000.
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:
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED) A summary of the status of the Plans at December 31, 2000 and 1999, and changes during the years then ended, is presented as follows:
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000
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 2000, 1999, and 1998, respectively: risk-free interest rates of 4.9%, 6.8%, and 6.7%; expected dividend yields of 5.2%, 4.8%, and 4.8%, expected lives of 3.06, 2.96, and 2.96 years; and expected volatility of 23%, 21%, and 19%.
10. OTHER OPERATING INCOME AND EXPENSE
Other operating income and expense in the consolidated statements of income and comprehensive income includes the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER OPERATING INCOME AND EXPENSE (CONTINUED)
Transactions in the allowances for other real estate owned are summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
F&M BANCORP BALANCE SHEET (PARENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED) F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED) F&M BANCORP STATEMENTS OF CASH FLOWS (PARENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
LEASES: Bancorp conducts part of its branch banking operations from leased facilities. The initial terms of the leases range from a period of 1-25 years. Most of the existing leases contain options which allow renewals for periods up to 20 years. In addition to minimum rentals, certain leases have escalation clauses based upon various price indexes and include provisions for the payment of taxes, insurance and maintenance.
Total rental expense was as follows:
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, 2000 is:
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, 2000 that 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED) A summary of the contractual amount of exposure under these financial instruments is as follows:
Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Certain commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon. Accordingly, the total commitment amounts do not necessarily represent future cash requirements. Each customer's credit worthiness is evaluated on a case-by-case basis, and the amount of collateral or other security obtained, if any, is based upon management's assessment of credit risk. Collateral varies, but may include deposits held in financial institutions, U.S. Treasury or other marketable securities, accounts receivable, inventory, property and equipment, personal residences, income-producing commercial properties, and land under development. Personal guarantees are also obtained to provide added security for certain commitments.
Stand-by letters of credit are conditional commitments issued to guarantee the performance of a contract to a third party and are used primarily to guarantee the installation of real property infrastructure and similar transactions. Credit risk involved in issuing letters of credit is essentially the same as that involved in lending and may involve collateral and personal guarantees as deemed appropriate.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and fair value estimates of financial instruments at December 31, 2000 and 1999. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) such estimates to be made with precision. Changes in assumptions or methodologies could have a significant effect on the estimates.
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 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.
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, because of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) frequent repricing of these instruments at market rates. The fair value for 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.
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. Because of the frequent repricing of short-term borrowings at current market rates, fair value was deemed to approximate the carrying amounts for other borrowings.
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
RESTRICTION 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 2000 aggregated $21,097,000. The rules and regulations of the Office of Thrift Supervision ("OTS") require prenotification of dividend payments by Home Federal Corporation ("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.
RESTRICTION 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 $16,838,000 available for loans or advances to the Parent Company as of December 31, 2000, at which time there were no material loans or advances outstanding.
RESTRICTION 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 $19,990,000 at December 31,2000.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SHAREHOLDERS' EQUITY (CONTINUED) corrective action, each entity is considered to be "well-capitalized" at December 31, 2000, as disclosed in the following table:
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of unaudited quarterly results of operations:
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 and comprehensive 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 allows entities to reclassify held-to-maturity securities without calling into question management's intent for the remainder of its securities portfolios. On January 1, 2001 the Bancorp adopted this Statement and elected to reclassify its entire held-to -maturity portfolio into the available-for-sale portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FUTURE CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED) 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 2000.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants on accounting and financial disclosure.
PART III
ITEM 10.
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 2001 Proxy Statement furnished to shareholders in connection with its Annual Meeting on April 17, 2001 (the "2001 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 2001 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 51, President of Bancorp and Farmers & Mechanics National Bank ("the Bank") since 1993 and Chief Executive Officer of Bancorp and the Bank since 1996.
DAVID R. STAUFFER, age 53, 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 62, Vice President of Bancorp since 1996, when Savings Bank was acquired by Bancorp, and President and Chief Executive Officer of Home Federal Corporation ("the Savings Bank") since 1981 and Chairman of the Board of the Savings Bank since 1999.
KAYE A. SIMMONS, age 45, Treasurer of Bancorp since 2000 and Executive Vice President and Chief Financial Officer of the Bank since 2000. Prior to that time, Ms. Simmons served as Senior Vice President of Finance and Treasurer of Citizens Bancorp from 1990 to 1997.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES: Pursuant to specific instructions related hereto, this section is inapplicable to Bancorp.
(D) FAMILY RELATIONSHIPS: There is no family relationship between any director, executive officer, or person nominated or chosen to become a director or executive officer.
(E) BUSINESS EXPERIENCE: All executive officers have been employed by Bancorp, the Bank, or the Savings Bank more than five years, except Kaye A. Simmons who has been employed for one year.
(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.
ITEM 11. EXECUTIVE COMPENSATION
Information in the section under "Compensation Committee Report on Executive Compensation" and "Directors' Fees and Deferred Compensation Plan" located in the 2001 Proxy Statement is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in the section under "Security Ownership of Management" and the notes thereto, and "Security Ownership of Certain Beneficial Owners" located in the 2001 Proxy Statement is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in the section under "Certain Transactions with Directors and Officers" located in the 2001 Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14.
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:
(b) Reports on Form 8-K
1. 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. File #000-12638).
2. 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).
3. A report on Form 8-K, Item 2. Acquisition and Disposition of Assets, and Item 7. Financial Statement and Exhibits, was filed on March 13, 2000 to announce the completion of the Patapsco Valley Bancshares, Inc. acquisition effective December 30, 1999. (File # 000-12638).
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.
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.