<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
----------------------
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from -- to --
Commission file number 0-12638
F&M BANCORP
(Exact name of registrant as specified in its charter)
Maryland 52-1316473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Thomas Johnson Drive
Frederick, Maryland 21702
(Address of principal executive offices) (zip code)
301-694-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock $5 par value, 4,412,641 shares outstanding as of October
31, 1995.
Exhibit index located on page 21.
<PAGE> 2
2
F&M BANCORP
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I FINANCIAL INFORMATION PAGE
--------------------- ----
Consolidated Balance Sheets (Unaudited),
September 30, 1995 and 1994 and December 31, 1994 3
Consolidated Statements of Income (Unaudited),
Three and Nine Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1995 and 1994 5
Consolidated Statements of Changes in Shareholders'
Equity (Unaudited), Nine Months Ended September 30, 1995
and Twelve Months Ended December 31, 1994 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE> 3
3
CONSOLIDATED BALANCE SHEETS (Unaudited)(Note 2)
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands, September 30 September 30 December 31
except per share amounts) 1995 1994 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 21,024 $ 21,511 $ 23,326
Federal funds sold 4,100 1,223 2,100
-------- -------- --------
Total cash and cash equivalents 25,124 22,734 25,426
-------- -------- --------
Interest-bearing deposits with banks -- 199 100
-------- -------- --------
Loans held for sale 362 1,505 149
-------- -------- --------
Investment securities
Held-to-maturity, fair value
$86,385, $37,930, and $89,588,
respectively 84,388 39,073 91,654
Available-for-sale, at fair value 82,665 122,092 77,649
-------- -------- --------
Total investment securities 167,053 161,165 169,303
-------- -------- --------
Loans, net of unearned income 496,506 454,755 480,399
Less: Allowance for credit losses (5,595) (5,894) (5,793)
-------- -------- --------
Net loans 490,911 448,861 474,606
-------- -------- --------
Bank premises and equipment, net 15,730 12,803 13,714
Other real estate owned 2,707 3,563 3,559
Interest receivable 5,055 4,159 4,757
Intangible assets 5,404 579 4,501
Other assets 9,129 7,492 7,744
-------- -------- --------
Total assets $721,475 $663,060 $703,859
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 86,733 $ 83,014 $ 90,575
Interest-bearing 522,852 482,229 511,604
-------- -------- --------
Total deposits 609,585 565,243 602,179
Federal funds purchased and
securities sold under agreements
to repurchase 36,280 23,269 31,959
Other short-term borrowings 1,853 7,014 1,933
Accrued interest and other
liabilities 6,446 5,806 5,906
-------- -------- --------
Total liabilities 654,164 601,332 641,977
-------- -------- --------
Shareholders' equity
Common stock, par value $5 per
share; authorized 10,000,000
shares; issued and outstanding
4,412,550 shares, 4,200,039
shares, and 4,204,626 shares,
respectively 22,063 21,000 21,023
Surplus 24,608 19,936 20,126
Retained earnings 21,617 22,418 23,706
Net unrealized loss on
securities available for sale (977) (1,626) (2,973)
-------- -------- --------
Total shareholders' equity 67,311 61,728 61,882
-------- -------- --------
Total liabilities and shareholders'
equity $721,475 $663,060 $703,859
======== ======== ========
</TABLE>
<PAGE> 4
4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)(Note 2)
F&M BANCORP and Subsidiary
<TABLE>
<CAPTION>
Nine month period Three month period
(Dollars in thousands, ended September 30 ended September 30
except per share amounts) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $33,335 $27,375 $11,306 $ 9,640
Interest and dividends on investment
securities
Taxable 4,210 4,181 1,399 1,323
Tax-exempt 2,670 2,713 883 887
Interest on federal funds sold 139 200 118 25
Interest on deposits with banks 1 18 -- 6
------- ------- ------- -------
Total interest income 40,355 34,487 13,706 11,881
------- ------- ------- -------
Interest Expense
Interest on deposits 15,724 12,048 5,533 4,100
Interest on federal funds purchased
and securities sold under
agreements to repurchase 1,683 839 497 308
Interest on other short-term
borrowings 165 49 19 22
------- ------- ------- -------
Total interest expense 17,572 12,936 6,049 4,430
------- ------- ------- -------
Net interest income 22,783 21,551 7,657 7,451
Provision for credit losses 950 685 350 225
------- ------- ------- -------
Net interest income after provision
for credit losses 21,833 20,866 7,307 7,226
------- ------- ------- -------
Noninterest Income
Trust income 1,134 755 398 285
Service charges on deposit accounts 2,169 1,578 763 584
Gains on sales of securities 8 -- 8 --
Gains (losses) on sales of property 13 679 2 (2)
Other operating income 2,166 2,084 693 814
------- ------- ------- -------
Total noninterest income 5,490 5,096 1,864 1,681
------- ------- ------- -------
Noninterest Expenses
Salaries and employee benefits 9,929 9,081 3,406 3,024
Occupancy and equipment expense 2,292 2,029 823 657
Other operating expense 7,384 6,707 2,157 2,195
------- ------- ------- -------
Total noninterest expenses 19,605 17,817 6,386 5,876
------- ------- ------- -------
Income before provision for
income taxes 7,718 8,145 2,785 3,031
Provision for income taxes 1,963 2,192 737 821
------- ------- ------- -------
Net Income $ 5,755 $ 5,953 $ 2,048 $ 2,210
======= ======= ======= =======
Earnings per Common Share
Based on weighted average shares
outstanding of 4,407,840 for
1995, 4,391,468* for 1994 $ 1.31 $ 1.36* $ 0.47 $ 0.51*
======= ======= ======= =======
Dividends per Share $ .56 $ .53* $ .20 $ .18*
======= ======= ======= =======
</TABLE>
* Reflects restatement for stock dividend.
<PAGE> 5
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(Note 2)
F&M BANCORP and Subsidiary
<TABLE>
<CAPTION>
September 30 September 30
(Dollars in thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,755 $ 5,953
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for credit losses 950 685
Provision for other real estate owned 418 210
Depreciation and amortization 899 816
Amortization of intangibles 393 50
Net premium amortization on investment securities 87 447
Decrease (increase) in interest receivable (298) 77
Increase (decrease) in interest payable 220 (24)
Accretion of net loan origination fees (81) (258)
Gain on sales of equipment (7) (17)
Gain on sales/calls of securities available for sale (8) --
Gain on sales of other real estate owned (6) (662)
Decrease (increase) in loans held for sale (213) 7,191
Increase in other assets (2,621) (587)
Increase in other liabilities 320 596
------- -------
Net cash provided by operating activities 5,808 14,477
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities-held to maturity (3,306) (8,765)
Purchases of investment securities-available for sale (25,029) (20,061)
Proceeds from calls of securities-held to maturity 255 --
Proceeds from sales/calls of securities-available for sale 6,139 2,230
Proceeds from maturing securities-available for sale 23,708 32,288
Proceeds from maturing securities-held to maturity 3,736 2,239
Net increase in loans (17,174) (39,361)
Purchases of premises and equipment (2,945) (1,048)
Proceeds from sales of equipment 37 22
Intangible assets (1,296) 3
Proceeds from sales of other real estate owned 511 876
Other investing activities (71) (196)
------- -------
Net cash used in investing activities (15,435) (31,773)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits,
interest-bearing checking, savings and money market
accounts (27,060) 18,538
Net increase (decrease) in certificates of deposit 34,466 (1,843)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 4,321 (7,108)
Net increase (decrease) in other short-term borrowings (80) 5,000
Cash dividends paid (2,486) (2,326)
Dividend reinvestment plan (40) (40)
Proceeds from issuance of common stock 320 216
Repurchase of common stock (116) (68)
------- -------
Net cash provided by financing activities 9,325 12,369
------- -------
Net decrease in cash and cash equivalents (302) (4,927)
Cash and cash equivalents at beginning of period 25,426 27,661
------- -------
Cash and cash equivalents at end of period $25,124 $22,734
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $17,352 $12,960
Cash payments for income tax 1,974 2,268
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired with formation of
real estate partnership $ -- $ 644
Less: Minority interest in consolidated subsidiary -- (644)
------- -------
Net -- --
Fair value adjustment for securities available
for sale, net of deferred income taxes payable
(benefits) 1,996 (3,137)
</TABLE>
<PAGE> 6
6
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)(Note 2)
F&M BANCORP and Subsidiary
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
(Dollars in thousands Common Retained Available
except per share amounts) Stock Surplus Earnings for Sale Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $18,728 $15,811 $22,589 $ 1,511 $58,639
Effect of pooling (Note 2) 1,288 512 691 -- 2,491
Net income -- -- 8,151 -- 8,151
Dividend reinvestment plan -- -- (46) -- (46)
Stock dividend 933 3,473 (4,406) -- --
Cash dividends paid
($.70* per share) -- -- (3,132) -- (3,132)
Stock options exercised
(22,521 shares) 113 368 -- -- 481
Stock repurchased
(7,688 shares) (39) (38) (141) -- (218)
Fair value adjustment for
securities available
for sale, net -- -- -- (4,484) (4,484)
------- ------- ------- ------- -------
Balance at December 31, 1994 21,023 20,126 23,706 (2,973) 61,882
Net income -- -- 5,755 -- 5,755
Dividend reinvestment plan -- -- (40) -- (40)
Stock dividend 984 4,257 (5,241) -- --
Cash dividends paid
($.56 per share) -- -- (2,486) -- (2,486)
Stock options exercised
(15,002 shares) 76 244 -- -- 320
Stock repurchased
(3,917 shares) (20) (19) (77) -- (116)
Fair value adjustment for
securities available
for sale, net -- -- -- 1,996 1,996
------- ------- ------- ------- -------
Balance at September 30, 1995 $22,063 $24,608 $21,617 $ (977) $67,311
======= ======= ======= ======= =======
</TABLE>
* Reflects restatement for stock dividend.
<PAGE> 7
7
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
The foregoing financial statements are unaudited; however, in the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of F&M Bancorp's significant accounting policies is set
forth in Note 1 to the consolidated financial statements in it's Annual Report
on Form 10-K for 1994.
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
Note 2. Acquisition
On May 31, 1995, F&M Bancorp consummated its merger with the Bank of Brunswick,
Brunswick, Maryland, in a tax-free exchange of stock. Shareholders of the Bank
of Brunswick received 10.74 shares of F&M Bancorp stock for each of the 24,000
shares of the Bank of Brunswick capital stock and cash in lieu of any
fractional share. The merger was accounted for as a pooling-of-interests.
Accordingly, the consolidated financial statements have been restated to
include the accounts of the Bank of Brunswick.
The combined and separate results of operations for the Bank of Brunswick and
F&M Bancorp preceding the merger are as follows:
<TABLE>
<CAPTION>
Bank
(Dollars in thousands) of F&M
For the Three Months Ended September 30,1994 Brunswick Bancorp Combined
- -------------------------------------------- --------- ------- --------
<S> <C> <C> <C>
Total income $549 $13,013 $13,562
Net income 63 2,147 2,210
Net income per share .51 .51
</TABLE>
<TABLE>
<CAPTION>
Bank
of F&M
For the Nine Months Ended September 30, 1994 Brunswick Bancorp Combined
- -------------------------------------------- --------- ------- --------
<S> <C> <C> <C>
Total income $1,631 $37,952 $39,583
Net income 147 5,806 5,953
Net income per share 1.40 1.36
</TABLE>
Total income and net income of the Bank of Brunswick for the periods during
1995 prior to affiliation totalled $563,000 and $55,000 through March 31, 1995
and $949,000 and $32,000 through May 31, 1995.
<PAGE> 8
8
Note 3. Investment Securities
<TABLE>
<CAPTION>
Investment securities are summarized as follows:
- ------------------------------------------------------------------------
September 30, 1995
- ------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 52,964 $ 161 $288 $ 52,837
Obligations of states
and political sub-
divisions 3,233 54 7 3,280
Mortgage-backed
securities 24,036 41 320 23,757
- ------------------------------------------------------------------------
Total-debt securities 80,233 256 615 79,874
Equity securities 2,791 -- -- 2,791
- ------------------------------------------------------------------------
Total available-for-sale: 83,024 256 615 82,665
- ------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 7,021 301 -- 7,322
Obligations of states
and political
subdivisions 66,634 1,417 229 67,822
Mortgage-backed
securities 10,733 508 -- 11,241
- ------------------------------------------------------------------------
Total held-to-maturity 84,388 2,226 229 86,385
- ------------------------------------------------------------------------
Total investment
securities $167,412 $2,482 $844 $169,050
========================================================================
</TABLE>
<PAGE> 9
9
Notes to Consolidated Financial Statements (continued)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
September 30, 1994
- -----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 50,768 $ 3 $1,439 $ 49,332
Obligations of states
and political sub-
divisions 32,721 837 73 33,485
Mortgage-backed
securities 39,014 25 1,965 37,074
- -----------------------------------------------------------------------
Total-debt securities 122,503 865 3,477 119,891
Equity securities 2,201 -- -- 2,201
- -----------------------------------------------------------------------
Total available-for-sale: 124,704 865 3,477 122,092
- -----------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 4,020 13 60 3,973
Obligations of states
and political
subdivisions 34,599 88 1,188 33,499
Other debt securities 300 2 -- 302
Mortgage-backed
securities 154 2 -- 156
- -----------------------------------------------------------------------
Total held-to-maturity 39,073 105 1,248 37,930
- -----------------------------------------------------------------------
Total investment
securities $163,777 $970 $4,725 $160,022
=======================================================================
</TABLE>
<PAGE> 10
10
Notes to Consolidated Financial Statements (continued)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
December 31, 1994
- ----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 50,804 $ -- $1,573 $ 49,231
Obligations of states
and political sub-
divisions 2,234 11 20 2,225
Mortgage-backed
securities 25,696 1 1,730 23,967
- -----------------------------------------------------------------------
Total-debt securities 78,734 12 3,323 75,423
Equity securities 2,226 -- -- 2,226
- -----------------------------------------------------------------------
Total available-for-sale: 80,960 12 3,323 77,649
- -----------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 11,062 3 97 10,968
Obligations of states
and political
subdivisions 68,741 18 1,993 66,766
Other debt securities 200 1 -- 201
Mortgage-backed
securities 11,651 2 -- 11,653
- -----------------------------------------------------------------------
Total held-to-maturity 91,654 24 2,090 89,588
- -----------------------------------------------------------------------
Total investment
securities $172,614 $ 36 $5,413 $167,237
=======================================================================
</TABLE>
<PAGE> 11
11
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Effective December 31, 1993, F&M Bancorp ("Bancorp") adopted Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires the use of fair
value accounting for certain investment categories. Applying the new
accounting and reporting standards prescribed in the Statement, Bancorp
classifies its investments in debt and equity securities into two categories:
held-to-maturity and available-for-sale.
Securities classified as held-to-maturity are those debt securities that
Bancorp has both the positive intent and ability to hold to 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 available-for-sale are equity securities with readily
determinable fair values and those debt securities that Bancorp intends to hold
for an indefinite period of time but not necessarily to maturity. These
securities may be sold as part of its asset/liability management strategy, or
in response to significant movements in interest rates, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value, with any unrealized gains and losses reported as a
separate component of shareholders' equity, net of the related deferred tax
effect.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
included in interest income in the consolidated statements of income. Realized
gains and losses, if any, determined based on the adjusted cost of the specific
securities sold, are reported as a separate line item in noninterest income in
the consolidated statements of income.
<PAGE> 12
12
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The amortized cost and estimated fair values of investments at September 30,
1995 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
(in thousands) Cost Value
- ------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $ 24,570 $ 24,627
After 1 but within 5 years 27,425 27,274
After 5 years but within 10 years 4,202 4,216
Mortgage-backed securities 24,036 23,757
Equity securities 2,791 2,791
- ------------------------------------------------------------------
Total available-for-sale 83,024 82,665
- ------------------------------------------------------------------
Held-to-maturity:
Within 1 year 8,375 8,438
After 1 but within 5 years 34,595 35,678
After 5 years but within 10 years 30,685 31,028
Mortgage-backed securities 10,733 11,241
- ------------------------------------------------------------------
Total held-to-maturity 84,388 86,385
- ------------------------------------------------------------------
Total investment securities $167,412 $169,050
==================================================================
</TABLE>
The amortized cost of investment securities pledged to secure public deposits,
securities sold under repurchase agreements, and for other purposes as required
and permitted by law, totaled $78,358,000 at September 30, 1995.
Proceeds from calls of debt securities held to maturity for the period ended
September 30, 1995 were $255,000. No gains or losses were realized on those
calls.
Proceeds from sales/calls of debt securities available for sale for the period
ended September 30, 1995 were $6,139,000. Gross gains of $11,000 and gross
losses of $3,000 were realized on those sales/calls.
Proceeds from sales of debt securities available for sale totaled $2,230,000
for the period ended September 30, 1994. No gains or losses were realized on
those sales.
<PAGE> 13
13
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Note 4. Loans
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
September 30, December 31,
- -----------------------------------------------------------------------------
(In thousands) 1995 1994 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans
Construction and land development $ 19,921 $ 18,522 $ 21,193
Secured by farmland 6,276 6,179 6,132
Secured by 1 to 4 family
residential properties 114,899 114,048 115,873
Other 88,385 78,369 86,430
Loans to farmers 1,536 1,728 1,815
Commercial and industrial loans 50,615 45,832 44,584
Loans to individuals for household,
family, and other personal
expenditures 198,916 173,912 186,435
Credit card loans 11,027 10,897 12,199
All other loans and lease financing
receivables 4,931 5,268 5,738
- -----------------------------------------------------------------------------
Totals $496,506 $454,755 $480,399
=============================================================================
</TABLE>
Loans to states, political subdivisions, and industrial revenue bonds are
included in all other loans in the schedule above and in total loans in the
statement of condition.
The allowance for credit losses is maintained at a level which, in management's
opinion, is considered adequate to provide for possible loan losses on loans
currently held in the loan portfolio.
Note 5. Bank Premises and Equipment
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
September 30, December 31,
- ------------------------------------------------------------------------------
(In thousands) 1995 1994 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $17,223 $14,492 $15,349
Furniture and equipment 10,651 9,444 9,733
Leasehold improvements 967 967 967
- ------------------------------------------------------------------------------
28,841 24,903 26,049
Less accumulated depreciation
and amortization (13,111) (12,100) (12,335)
- ------------------------------------------------------------------------------
Net premises and equipment $15,730 $12,803 $13,714
==============================================================================
</TABLE>
<PAGE> 14
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
F&M Bancorp's net income for the third quarter of 1995 was $2,048,000
or 47 cents per share, a decrease of $162,000 or 7.3 percent compared with the
third quarter of last year. Year-to-date net income was $5,755,000 or $1.31
per share and $5,953,000 or $1.36 per share for the first nine months of 1995
and 1994, respectively. Earnings per share for prior periods have been
restated to reflect the stock dividend distributed in May, 1995.
<TABLE>
<CAPTION>
Net Interest Income (Taxable-Equivalent Basis)
- -------------------------------------------------------------------------------------------------------------------------------
Third Quarter Nine Months
- -------------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Federal funds sold $ 7,843 5.97% $ 2,240 4.43% $ 3,128 5.94% $ 7,505 3.56%
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities(1)(2)
Taxable 95,816 5.84 102,270 5.20 98,406 5.71 108,193 5.17
Tax-exempt 68,255 7.83 67,716 7.93 68,490 7.87 68,458 8.00
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities 164,071 6.67 169,986 6.29 166,896 6.59 176,651 6.27
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned interest 494,127 9.11 443,016 8.67 491,435 9.11 429,887 8.55
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 666,041 8.46 615,242 7.98 661,459 8.46 614,043 7.84
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits
Checking 67,340 2.11 65,613 2.26 67,493 2.26 65,095 2.31
Savings 111,464 2.77 118,195 2.76 112,360 2.89 117,419 2.77
Money Market 87,726 3.21 92,411 3.00 87,579 3.45 91,905 2.94
Certificates of deposit
under $100,000 226,794 5.64 179,599 4.31 214,816 5.42 180,443 4.26
Certificates of deposit
$100,000 and over 31,302 5.88 23,570 4.31 28,259 5.63 23,813 4.06
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 524,626 4.18 479,388 3.39 510,507 4.12 478,675 3.37
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 33,909 5.81 27,604 4.43 38,550 5.84 29,762 3.77
Other 1,572 4.80 1,847 4.73 3,594 6.14 1,731 3.78
- -------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 35,481 5.77 29,451 4.45 42,144 5.86 31,493 3.77
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
- -----------------------
liabilities 560,107 4.28 508,839 3.45 552,651 4.25 510,168 3.39
- -------------------------------------------------------------------------------------------------------------------------------
Interest-free funds 105,934 -- 106,403 -- 108,808 -- 103,875 --
- -------------------------------------------------------------------------------------------------------------------------------
Total funding 666,041 3.60 615,242 2.86 661,459 3.55 614,043 2.82
===============================================================================================================================
Net interest earnings* $8,155 $7,952 $24,296 $23,073
===============================================================================================================================
Net interest spread 4.18% 4.53% 4.21% 4.45%
===============================================================================================================================
Net yield on earning assets 4.86% 5.12% 4.91% 5.02%
===============================================================================================================================
</TABLE>
*Includes the following taxable-equivalent adjustments: Third quarter - $498
thousand in 1995 and $501 thousand in 1994; nine months - $1,513 thousand in
1995 and $1,522 thousand in 1994. Each represents a pro forma amount of net
interest income (above the amount reported in the income statement) that
adjusts the yield on tax-exempt assets to a basis equivalent to that of taxable
assets.
(1) Excludes fair value adjustments.
(2) Includes interest-bearing deposits with banks.
<PAGE> 15
15
Compared with the same periods last year, net income for both the quarter and
year-to-date was impacted by noninterest expenses associated with the
significant expansion of the bank's retail delivery system through branch
acquisition and merger activities which began in the fourth quarter of last
year, including three offices of the former Standard Federal Savings
Association, the Bank of Brunswick, and two First Union offices.
For the third quarter of 1995, net interest income on a taxable-equivalent
basis increased $203,000 or 2.6 percent compared with the same period last
year. Net interest income on a taxable-equivalent basis increased $1,223,000
or 5.3 percent for the nine month period ended September 30, 1995 compared with
the same period last year. The net interest spread declined 35 basis points
and 24 basis points for the quarter and year-to-date, respectively, when
compared with the same periods last year. The net interest margin (net
interest income on a taxable-equivalent basis as a percent of earning assets)
for the quarter and year-to-date declined 26 basis points and 11 basis points,
respectively when compared with the same periods last year.
The average rate earned on earning assets for the current nine month period was
62 basis points higher compared with the same period last year and 48 basis
points higher for the current quarter compared with the same quarter last year.
In 1995, both the quarterly rate and the year-to-date rate earned were 8.46
percent indicating that market rates were flat during the current three month
period. Average earning assets increased by 8.3 percent for the current
quarter compared with average earning assets for the same quarter last year.
Average earning assets for the nine month period ended September 30, 1995
increased 7.7 percent compared with average earning assets for the nine month
period ended September 30, 1994.
Continuing a trend established in the last half of 1994, loan demand remained
strong. Average loans increased 11.5 percent and 14.3 percent for the quarter
and year-to-date, respectively, compared with the same periods last year. For
the current quarter, this increase in average loans was funded principally by
core deposits. For the current year-to-date, the increase was partially funded
from the proceeds of maturing investment securities, a reduction in federal
funds sold, and other short-term borrowings. The shift in the earning asset
mix coupled with higher market interest rates has acted to improve the earning
asset yield compared with prior year periods.
The average rate paid on interest-bearing liabilities for the current nine
month period was 86 basis points higher compared with the average rate paid for
the same period last year and 83 basis points higher for the current quarter
compared with the same quarter last year. The quarterly rate paid of 4.28
percent for the current quarter was 3 basis points higher than the 4.25 percent
<PAGE> 16
16
paid this year-to-date, indicating that liability rates have also stabilized.
Average deposits increased 9.4 percent for the quarter and 6.7 percent
year-to-date compared with average deposits for the same periods last year.
Branch acquisition activities contributed significantly to this increase.
Reversing a trend of the last several years, customers are now shifting their
deposits to higher yielding certificates of deposit from savings and money
market accounts to lock-in higher yields. In addition, competition between
financial service providers to acquire and retain deposits has acted to drive
liability rates higher. An increased reliance on higher cost, short-term
borrowing which was required to assist with funding loan demand also acted to
drive the average rate paid on interest-bearing liabilities upward.
Management continually monitors Bancorp's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility
using the concept of natural hedges. As market rates change, corresponding
changes in asset mix, funding sources and pricing are considered to avoid a
negative impact on net interest income.
<TABLE>
<CAPTION>
TABLE 1. INTEREST RATE SENSITIVITY ANALYSIS AT SEPTEMBER 30, 1995 (1)
Total
Total Greater quarter
1-30 31-90 91-180 181-365 within than end
(In thousands) days days days days 1 year 1 year balance
- -------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
Assets:
Federal funds
sold $ 4,100 $ -- $ -- $ -- $ 4,100 $ -- $ 4,100
Investment
securities (2) 6,963 7,706 9,865 21,437 45,971 118,291 164,262
Loans, net 96,350 21,816 34,570 78,563 231,299 257,370 488,669
-------- -------- -------- -------- -------- -------- --------
Total $107,413 $ 29,522 $ 44,435 $100,000 $281,370 $375,661 $657,031
======== ======== ======== ======== ======== ======== ========
Interest-bearing
Liabilities:
Deposits $ 44,893 $ 49,643 $ 53,093 $115,570 $263,199 $259,606 $522,805
Short-term
borrowings 38,133 -- -- -- 38,133 -- 38,133
-------- -------- -------- -------- -------- -------- --------
Total $ 83,026 $ 49,643 $ 53,093 $115,570 $301,332 $259,606 $560,938
======== ======== ======== ======== ======== ======== ========
Interest
Sensitivity Gap:
Period $ 24,387 $(20,121) $ (8,658) $(15,570) $(19,962) $116,055 $ 96,093
Cumulative 24,387 4,266 (4,392) (19,962) (19,962) 96,093 96,093
</TABLE>
(1) Excludes nonaccrual loans and other nonrate-sensitive assets.
(2) Reflects fair value adjustments for securities available for sale.
<PAGE> 17
17
Bancorp attempts to measure the interest rate sensitivity of its assets and
liabilities on the basis of when they will reprice as opposed to when they can
reprice. Since it is difficult to predict the movement of interest rates,
management's objective is to maintain a relatively balanced sensitivity
position, while not foregoing any opportunity to benefit from current rate
conditions. As indicated in Table 1 on page 16, Bancorp had a net liability
sensitive position of $19,962,000 within the one year horizon at September 30,
1995. This position would indicate that Bancorp has the potential for
decreased earnings if market rates were to rise in the next twelve months.
Conversely, if market rates were to decline in the next twelve months, an
increase in earnings would be anticipated.
Due to inherent limitations in this traditional gap analysis technique for
measuring interest rate sensitivity, management also utilizes simulation
modeling to analyze the volatility of net interest income as a result of
changes in interest rates. The effects of changes in interest rates on the
market value of assets, liabilities, and off-balance sheet contracts is also
measured. At September 30, 1995 the changes in net interest income and/or
market value calculated under these alternative methods were within established
parameters.
The allowance for credit losses was $5,595,000 or 1.1 percent of loans
outstanding as of September 30, 1995 compared with $5,793,000 or 1.2 percent of
loans outstanding as of December 31, 1994 and $5,894,000 or 1.3 percent of
loans outstanding as of September 30, 1994. The provision for credit losses
increased for the three month and nine month periods ended September 30, 1995
by $125,000 and $265,000, respectively, compared with the same periods last
year, reflective of the loan growth experienced this year, higher charge-off
ratios and rising delinquency levels. Table 2 summarizes Bancorp's
nonperforming assets and contractually past due loans. A non-contingent
contract to sell one of the two remaining OREO properties is expected to settle
in the fourth quarter. The OREO carrying value after the sale will be
approximately $2.1 million. Included in the 90 day past due amount at
September 30, 1995 is approximately $600,000 for which full payoff is expected
to be received in the fourth quarter. Net charge-offs for the third quarter
increased $492,000 when compared with the third quarter of 1994 and increased
$652,000 for the current nine month period compared with the same nine month
period last year. Although there is no direct correlation between
nonperforming loans and ultimate loan losses, an analysis of the nonperforming
loans may provide some indication of the quality of the loan portfolio.
Management is closely monitoring delinquency levels and is accelerating
collection efforts. Management believes that the amounts of its nonperforming
loans are modest in relation to the size of the loan portfolio.
<PAGE> 18
18
TABLE 2. NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
<TABLE>
<CAPTION>
September 30 September 30 December 31
(Dollars in thousands) 1995 1994 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans(1) $1,328 $1,250 $2,086
Other real estate owned
net of valuation allowance(2)(4) 2,707 3,563 3,559
------ ------ ------
Total nonperforming assets $4,035 $4,813 $5,645
====== ====== ======
Loans past due 90 or more days
as to interest or principal(3) $1,569 $174 $213
====== ==== ====
Nonperforming loans to
year-end loans 0.27% 0.27% 0.43%
Nonperforming assets to
year-end loans and
other real estate owned 0.81% 1.05% 1.17%
Year-end allowance for credit
losses times nonperforming loans 4.21x 4.72x 2.78x
Year-end allowance for credit
losses times nonperforming assets 1.39x 1.22x 1.03x
</TABLE>
- ---------------------
(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 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), and real estate that has been substantively
foreclosed. 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.
(4) Includes minority interest in the real estate of a limited
partnership of $712,000, $680,000, $694,000 at September 30, 1995, September
30, 1994, and December 31, 1994 respectively.
Based upon management's analysis and review of the loan portfolio,
past loss experience, and current economic conditions, the amount in
the allowance for credit losses at September 30, 1995 is considered
adequate.
<PAGE> 19
19
Noninterest income increased 10.9 percent and 7.7 percent for the third quarter
and year-to-date respectively, compared with the same periods last year.
Comparative year-to-date noninterest income was impacted by non-recurring gains
totaling $676,000 realized from sales of former bank premises that occurred in
the second quarter of last year. Significant increases were achieved in trust
fees and service charges on deposit accounts. The increases result, in large
measure, from strategies undertaken in 1994 to increase noninterest income
coupled with higher deposits levels. Management continues to be actively
committed to increasing this source of revenue.
Noninterest expenses increased $510,000 or 8.7 percent for the third quarter
and $1,788,000 or 10.0 percent year-to-date compared with the same periods last
year. Expenses incurred in connection with Bancorp's branch acquisition
activities contributed significantly to the increase. The number of full-time
equivalent employees at September 30, 1995 was 372 compared with 353 at the
same period last year. Amortization of intangibles, included in other
operating expense, increased $133,000 and $343,000 for the quarter and
year-to-date, respectively, as a result of these acquisitions.
The provision for income taxes decreased $84,000 for the quarter, and $229,000
for the year-to-date when compared with the same periods last year. The
decrease was attributable to lower pre-tax income, increased tax-exempt income
as a percentage of pre-tax income, and the realization of tax benefits from tax
planning strategies implemented in the second quarter of last year.
Shareholder's equity totaled $67,311,000 at September 30, 1995, an increase of
8.8 percent compared with the 1994 year end level of $61,882,000 and an
increase of 9.0 percent from the year earlier level of $61,728,000. The fair
value of the available for sale portfolio increased $1,996,000 (net of deferred
taxes) since year end concurrent with the rebound in the bond market. Capital
levels are considered sufficient to absorb anticipated future price volatility.
Although capital ratios have declined from prior year levels due to the
addition of intangible assets associated with the recent branch acquisitions,
both our risk-based capital and our leverage capital ratios continue to exceed
regulatory guidelines as of September 30, 1995, as follows:
<TABLE>
<CAPTION>
Risk-based Capital
----------------------
Tier 1 Total Leverage
Capital Capital Ratio
------- ------- --------
<S> <C> <C> <C>
Actual 11.86% 12.91% 8.85%
Minimum 4.00% 8.00% 3.00%
------- ------- --------
Excess 7.86% 4.91% 5.85%
======= ======= ========
</TABLE>
<PAGE> 20
20
Fair value adjustments to shareholders' equity for changes in the fair value of
securities classified as available-for-sale are excluded from the calculation
of these capital ratios in accordance with regulatory guidelines.
<PAGE> 21
21
Item 6 Exhibits and Reports on Form 8-K Page
----
(a) Exhibits
11 Statement Re: Computation of per share earnings. 23
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Corporation during the
quarter ended September 30, 1995.
<PAGE> 22
22
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F&M BANCORP
-----------
(Registrant)
November 8, 1995 /s/Kenneth M. Sabanosh
- ---------------- --------------------------------
DATE KENNETH M. SABANOSH
VICE PRESIDENT AND TREASURER
<PAGE> 1
23
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Month Period Ended, Quarter Ending
September 30, September 30,
1995 1994 1995 1994
-------------------------------------------------
<S> <C> <C> <C> <C>
Earnings Per share:
Primary $1.29 $1.34 $ .46 $ .50
Fully
diluted $1.29 $1.34 $ .46 $ .50
</TABLE>
Primary and fully diluted earnings per share are calculated using the following
number of adjusted weighted average shares outstanding:
<TABLE>
<CAPTION>
Nine Month Period Ended, Quarter Ending
september 30, September 30,
1995 1994 1995 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
Primary 4,451,522 4,431,372 4,451,621 4,445,387
Fully
diluted 4,451,538 4,447,108 4,451,733 4,450,186
</TABLE>
The weighted average number of shares outstanding is adjusted to recognize the
dilutive effect, if any, of outstanding employee stock options on both a
primary and fully diluted basis.
The calculations of earnings per share above are based on the weighted average
number of shares outstanding including all common stock and common stock
equivalents in conformity with the instructions for Item 601 of Regulation S-K.
The calculation of earnings per share for financial reporting purposes is based
on the weighted average number of shares outstanding of 4,407,840 and 4,391,468
at September 30, 1995 and September 30, 1994, respectively, without giving
effect to the common stock equivalents resulting from the assumed exercise of
stock options, which do not dilute earnings per share by more than 3 percent,
in conformity with generally accepted accounting principles.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 21,024
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,665
<INVESTMENTS-CARRYING> 84,388
<INVESTMENTS-MARKET> 86,385
<LOANS> 496,506
<ALLOWANCE> 5,595
<TOTAL-ASSETS> 721,475
<DEPOSITS> 609,585
<SHORT-TERM> 38,133
<LIABILITIES-OTHER> 6,446
<LONG-TERM> 0
<COMMON> 22,063
0
0
<OTHER-SE> 45,248
<TOTAL-LIABILITIES-AND-EQUITY> 721,475
<INTEREST-LOAN> 33,335
<INTEREST-INVEST> 6,880
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 40,355
<INTEREST-DEPOSIT> 15,724
<INTEREST-EXPENSE> 17,572
<INTEREST-INCOME-NET> 22,783
<LOAN-LOSSES> 950
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 19,605
<INCOME-PRETAX> 7,718
<INCOME-PRE-EXTRAORDINARY> 7,718
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,755
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.91
<LOANS-NON> 1,328
<LOANS-PAST> 1,569
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 24,030
<ALLOWANCE-OPEN> 5,794
<CHARGE-OFFS> 2,309
<RECOVERIES> 1,160
<ALLOWANCE-CLOSE> 5,595
<ALLOWANCE-DOMESTIC> 4,816
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 779
</TABLE>
