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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/XX/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /XX/ No / /
(Cover page 1 of 2 pages)
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /XX/
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. Indicate the number of shares outstanding of
each of the registrant's classes of common stock, as of the latest practicable
date.
Common Stock, par value $5.00 per share:
Market value held by non-affiliates
at March 22, 1995 $114,574,592
Outstanding at March 22, 1995 3,950,848 shares
Documents Incorporated by Reference
(1) Portions of the registrant's Annual Report to Shareholders for the
year ended December 31, 1994 are incorporated by reference into Parts
I and II.
(2) Portions of the Proxy Statement dated March 6, 1995 relating to the
1994 Annual Meeting of Stockholders of the Registrant is incorporated
by reference into Part III.
(Cover page 2 of 2 pages)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part 1 Page
------ ----
<S> <C>
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Farmers and Mechanics National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Commercial Banking and Related Services . . . . . . . . . . . . . . . . . . . . . 1
Personal Banking Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Banking Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bank Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Adequacy Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
New Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part II
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Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part III
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Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 10
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 13
Part IV
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Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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PART I
ITEM 1. BUSINESS
F&M Bancorp ("Bancorp") is a bank holding company registered under the
Bank Holding Company Act of 1956. It is incorporated in Maryland and commenced
operations in 1984 when Farmers and Mechanics National Bank (the "Bank") became
its wholly-owned subsidiary. The Bank is the only direct subsidiary of
Bancorp and at December 31, 1994 was the largest bank in terms of assets and
deposits headquartered in the Frederick, Maryland area.
Farmers and 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. It conducts a general banking and trust company business through
20 offices located in Frederick, Carroll, and Montgomery Counties, Maryland.
The Bank had total assets of $675,256,000, total deposits of $576,545,000, and
total net loans of $453,750,000 at December 31, 1994.
Commercial Banking and Related Services
The Bank provides credit facilities and related services for the
business community. The Bank offers various types of commercial lending
products, including lines of credit, term loans, agricultural loans, real
estate and construction loans, and other forms of secured financing. It also
provides checking accounts, certificates of deposit, business financial
services including various cash management programs, and night depository
services.
Personal Banking Services
The Bank provides a wide range of personal banking services to
individuals at each of the Bank's branch offices. Included in the services
offered at most locations are interest-bearing and noninterest-bearing checking
accounts, savings accounts, tiered money market deposit accounts, certificates
of deposit, individual retirement accounts, home mortgage loans, home equity
loans, home improvement loans, installment and other personal loans including
automobile and other consumer financing, VISA(R) credit card services, and safe
deposit boxes. The Bank has 21 24-hour automated teller machines ("ATMs") in
various locations in the Frederick County area offering limited banking
services. The Bank affiliated with the MOST(R) network in 1990 and joined the
national and international ATM CIRRUS(R) network in 1992. Through system
enhancements PLUS(R) ATM, MasterCard, and Independence cards can be accepted at
all locations.
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Trust Services
The individual trust services offered by the Bank include the
administration of estates, and service as trustee of living, testamentary and
insurance trusts, agency accounts, custodial accounts, employee benefit
accounts, and self-directed IRA's.
Competition
The Bank operates in a highly competitive environment that has
intensified in the past several years as a result of interstate banking and the
entry into the market of new and diverse financial institutions not subject to
the regulatory restrictions of domestic banks and bank holding companies.
Profit margins in the traditional banking business of lending and deposit
gathering are more difficult to maintain as deregulation has allowed nonbanking
institutions to offer alternative services to many of the Bank's customers.
Competitors include not only other commercial banks, but also savings and loan
associations, credit unions, money market funds, mortgage companies, leasing
companies, and a wide variety of other financial service companies.
Employees
At December 31, 1994, Bancorp and its subsidiaries had 304 full-time
and 50 part-time employees.
Supervision and Regulation
Banking Regulation
The Bank is subject to supervision and regulation by the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), and the Federal Deposit Insurance Corporation (the
"FDIC") and is subject to examination by the Comptroller of the Currency. The
official having primary supervisory authority over the Bank is the Comptroller
of the Currency. 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, 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 law imposes limitations on loans by the Bank to Bancorp and on
the amount of dividends that the Bank may declare. (See Note 15 of the Notes
to Consolidated Financial Statements in the 1994 Annual Report to Shareholders
on page 41, which is incorporated herein by reference.) The Bank may establish
branch banking offices throughout Maryland with the prior approval of the
Comptroller of the Currency. Mergers of the Bank with any
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other bank would require approval of, and involve review by, various
governmental agencies.
Bank Holding Company Act
Bancorp is registered with the Federal Reserve Board as a bank holding
company and is subject to supervision and examination by the Federal Reserve
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. Maryland law permits bank holding companies in Maryland to
participate in regional interstate banking affiliations with bank holding
companies in Delaware, the District of Columbia, Pennsylvania, Virginia, West
Virginia, and ten additional states in the Southeastern United States. In
addition, after prior approval, Bancorp may engage directly or indirectly in
certain activities closely related to banking without geographical restriction.
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 Federal Reserve 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 Federal Reserve Board also
regulates certain debt obligations of bank holding companies.
Capital Adequacy Guidelines
The Federal Reserve Board and the Comptroller of the Currency have
historically determined the adequacy of a depository institution's capital
resources by comparison of its capital to its assets. The leverage capital
ratio measures the adequacy of capital in relation to the extent to which the
institution has leveraged its assets. The risk-weighted assets ratio measures
the adequacy of capital after weighting the risk inherent in the assets.
The capital adequacy guidelines require depository institutions to
maintain a minimum leverage capital ratio of 3 percent Tier 1 capital
(primarily shareholders' equity) to total 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, up to 25 percent of Tier 1 capital. Tier 1 capital
excludes certain allowances for loan or lease losses, subordinated debt, and
other intangible assets. At December 31, 1994, Bancorp's leverage capital
ratio was 8.92 percent.
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Bancorp must also meet a total capital to risk-weighted assets ratio
(risk-based capital ratio) of 8.00 percent, measuring the amount and nature of
the assets and commitments currently at risk. The risk-based capital rules
specify four categories of asset or commitment risk, with each category being
assigned a weight of 0 percent through 100 percent depending upon the risk
involved. Each asset or commitment of Bancorp is categorized and weighted
appropriately, and its capital is then compared to the aggregate value of such
risk-weighted assets or commitments to determine if additional capital is
required. At least 50 percent of the capital must be made up of Tier 1 capital
elements. At December 31, 1994, Bancorp's total risk-based capital ratio was
12.89 percent.
The Comptroller of the Currency has capital adequacy ratios for the
Bank that are consistent with those for Bancorp.
Monetary Policy
The earnings and growth of Bancorp and the Bank are affected by
general economic conditions as well as by monetary policies of regulatory
authorities, including the Federal Reserve System, which regulates the national
money supply in order to mitigate recessionary and inflationary pressures.
Among the techniques available to the Federal Reserve System are engaging in
open market transactions in United States 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 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 the Bank or Bancorp cannot be
predicted.
New Legislation
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. During 1994, the federal
banking regulatory agencies continued efforts to develop regulations to
implement the new law. Among other things, FDICIA provides increased funding
for the Bank Insurance Fund of the FDIC and provides for expanded regulation of
depository institutions and their affiliates, including parent holding
companies and requires the development of a risk-based assessment system. A
brief summary of certain provisions of FDICIA follows.
In December 1992, a rule promulgated by the FDIC requiring "prompt
corrective action" when an insured institution's capital falls to certain
levels took effect. 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
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institution's capital level declines. The rule defines five capital ratios
which are as follows:
<TABLE>
<CAPTION>
Total Tier-1 Tier-1
Risk-Based Risk-Based Leverage
Capital Category Ratio Ratio Ratio
---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Well capitalized greater than or equal to 10% greater than or equal to 6% greater than or equal to 5%
Adequately capitalized greater than or equal to 8% greater than or equal to 4% greater than or equal to 4%
Undercapitalized less than 8% less than 4% less than 4%
Significantly undercapitalized less than 6% less than 3% less than 3%
Critically undercapitalized(1)
</TABLE>
(1) Ratio of tangible equity to total assets of 2 percent or less.
On the basis of these criteria, Bancorp is considered "well capitalized."
Under FDICIA, only a well capitalized depository institution may
accept brokered deposits without prior regulatory approval. FDICIA generally
now requires full-scope on-site annual examinations of all insured depository
institutions by the appropriate Federal banking agency although the examination
may occur at longer intervals for small well-capitalized or state chartered
banks. The Federal banking agencies are required to set compensation
standards, but not specific salary levels or ranges, for insured depository
institutions that prohibit excessive compensation, fees or benefits to
officers, directors, employees and principal shareholders. FDICIA also
contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts. FDICIA has also greatly expanded the range of merger, purchase and
assumption, and deposit transfer transactions involving banks and savings
associations, that are exempt from payment of exit and entry fees upon the
transfer of deposits between the FDIC's Bank Insurance Fund and the FDIC's
Savings Association Insurance Fund. The Federal banking agencies have adopted
uniform standards for extensions of credit secured by real estate or made to
finance the construction of improvements on real estate.
The FDIC has also issued a regulation implementing risk-based
FDIC-insurance premiums. Under the regulation, each depository institution is
assigned to one of nine risk classifications based upon certain capital and
supervisory measures and, depending upon its classification, will be assessed
premiums ranging from 23 cents to 31 cents per each $100 of deposits. The Bank
is currently being assessed at a premium rate of 23 cents per each $100 of
deposits.
It is anticipated that FDIC-insurance assessment rates will be reduced
dramatically later in 1995 when the Bank Insurance Fund is
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expected to reach its statutory funding goal of 1.25% of insured deposits.
Under Section 305 of FDICIA, the federal banking regulatory agencies
are required to revise risk-based capital guidelines to take adequate account
of interest rate risk. In late 1993, the federal banking agencies issued a
joint notice of proposed rule-making which would establish procedures for
measuring banks' interest rate risk ("IRR") exposures and methods for
determining the amount of required capital. Under this proposal, IRR would be
measured as the change in the net economic value of a bank for a specified
change in interest rates. The change in an institution's net economic value
would be defined as the change in the present value of its assets minus the
change in the present value of its liabilities plus or minus the change in the
present value of its off-balance sheet contracts. Evaluation of IRR exposure
would be based on a bank's internal model, if approved as adequate, or a basic
supervisory model. Certain low risk banks would be exempted from additional
reporting requirements. Under this proposal, the amount of capital a bank may
need to account for IRR will be determined by either a "Minimum Capital
Standard" approach, which imposes a minimum capital charge based on the amount
of measured IRR exposure in excess of a supervisory threshold, or by a "Risk
Assessment" approach which assesses the need for capital based on a
case-by-case analysis of IRR exposure in conjunction with certain other
qualitative factors such as internal controls, overall financial condition,
earnings capacity, capital base, and the level of other risks which may impair
future earnings or capital.
The FDIC issued a final rule, effective July 2, 1993, implementing
Section 112 of FDICIA, which requires state member banks and other insured
depository institutions with $500 million or more in total assets as of the
beginning of each fiscal year to obtain annual independent audits, to submit
certain management reports to regulatory agencies, and to establish audit
committees of their boards of directors composed of independent directors.
As a consequence of the extensive regulations that have been adopted
or proposed under FDICIA, management anticipates that the cost of doing
business will continue to increase.
In 1994, the Riegle Community Development and Regulatory Improvement
Act was enacted. Among other things, the act provides for the promotion and
expansion of specialized limited-purpose community development financial
institutions, expands home ownership equity protection, encourages small
business capital formation and provides for paperwork reduction and regulatory
improvements designed to reduce "regulatory burden."
The Riegel-Neal Interstate Banking and Branching Efficiency Act was
also passed in late 1994. Under the act, out-of-state bank acquisitions will
be permitted after September 29, 1995 subject to
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certain concentration limits. Also, beginning on June 1, 1997, interstate
branching is permitted unless a state elects to "opt out" of interstate
branching by enacting its own legislation. Alternatively, a state may choose
to allow interstate branching earlier than June 1, 1997.
As a result of this legislation, an even greater degree of competition
will result in the banking industry. Bancorp may be brought into competition
with institutions with which it does not presently compete. The effect of this
increased competition on Bancorp's future earnings cannot be predicted.
The foregoing references to laws and regulations which are applicable
to Bancorp and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws
and regulations.
Statistical Information
The following supplementary information required under Guide 3 for the
respective periods and at the indicated respective dates is set forth on the
pages indicated below in the 1994 Annual Report to Shareholders, which is
incorporated herein by reference. The information should be read in
conjunction with the related consolidated financial statements and notes
thereto.
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<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Selected Financial Information 17
Average Balances, Interest, and Average Rates 18-19
Analysis of Changes in Net Interest Income 20
Investment Portfolio Distribution 22
Investment Portfolio Analysis 22
Loan Portfolio Mix 23
Loan Maturities and Interest Sensitivity 23
Average Deposits and Rates Paid 23
Maturity of Time Deposits of $100,000 or More 23
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 23
Nonperforming Assets and Contractually Past Due Loans 24
Potential Problem Loans 25
Allowance for Credit Losses 25-26
Allocation of Allowance for Credit Losses 27
</TABLE>
ITEM 2. PROPERTIES
The Bank owns a fee simple interest in the land and building located
at 110 Thomas Johnson Drive, Frederick, Maryland which is used to house its
principal executive offices and its main banking office. Construction of a
four-story addition to this headquarters building is planned to begin in 1995.
Of the remaining 19 banking offices of the Bank at December 31, 1994,
10 were owned and nine were leased. The Bank began construction on a new
branch in December, 1994 on land previously owned on East Patrick Street in
Frederick. This branch should be completed in the second quarter, 1995. The
Bank will also be constructing a branch on leased land in Germantown, Maryland
to increase accessibility for Montgomery County customers. This branch is
targeted for completion in the third quarter, 1995. Of the 24 ATMs owned by
the Bank at December 31, 1994, eight were located at branch sites owned by the
Bank, eight were located in branch offices leased by the Bank and eight were
located on land
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leased by the Bank separate from branch locations. Long-term leases covering
the nine branch locations expire from 2002 to 2016, including the original
lease terms plus renewal options. Long-term leases covering the ATM sites
expire from 1995 to 2024, including the original lease terms plus renewal
options. Additional information concerning rent expense is included in Note
13, on pages 39 and 40 of the 1994 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Bancorp and the Bank are subject to various legal proceedings which
are incidental to the ordinary course of business. In the opinion of the
management, there are no material pending legal proceedings to which Bancorp or
the Bank are a party or which involve any of their property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information concerning the price of and dividends on the registrant's
Common Stock and related stockholder matters is included on the inside back
cover of the 1994 Annual Report to Shareholders under the heading
"SHAREHOLDERS' INFORMATION" and is incorporated herein by reference.
Information concerning restrictions on the ability of the Bank to transfer
funds in the form of dividends to Bancorp is included in Note 15 on page 41 of
the 1994 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Information on page 17 of the 1994 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 18 through 28 in the 1994 Annual Report to
Shareholders is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, notes to consolidated
financial statements, and report of independent auditors on pages 29 through
42, inclusive, of Bancorp's 1994 Annual Report to Shareholders are incorporated
herein by reference.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Auditors 42
Consolidated Balance Sheets,
December 31, 1994 and 1993 29
Consolidated Statements of Income,
Three Years Ended 1994 30
Consolidated Statements of Changes
In Shareholders' Equity,
Three Years Ended 1994 31
Consolidated Statements of Cash Flows
Three Years Ended 1994 32
Notes to Consolidated Financial
Statements 33 - 42
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants took place within the last twenty-four months
nor did any disagreement with accountants on accounting or financial
disclosures arise during that time.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The text and table under "Election of Directors-Information
Concerning Nominees" located on the third page through the sixth page,
inclusive, of Bancorp's Proxy Statement dated March 6, 1995 are
incorporated herein by reference.
(b) The following is a list of the names and ages of all the
executive officers of Bancorp and the Bank as of December 31, 1994 and
all persons chosen to become executive officers since that date. All
executive officers are elected to serve for a one year period. There
are no arrangements or understandings between such persons and any
other person pursuant to which they were selected an officer.
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<TABLE>
<CAPTION>
Position with Bancorp Position with the Bank
and year elected and year elected
Name and Age or appointed or appointed
-------------------- ----------------------- -----------------------
<S> <C> <C>
Charles W. Hoff, III Chairman of the Board Chairman of the Board
age 60 (1993) & Chief Executive (1993) & Chief Executive
Officer (1983) Officer (1981)
Faye E. Cannon President & Chief President & Chief
age 45 Operating Officer (1993) Operating Officer (1993)
David R. Stauffer Vice President Executive Vice President
age 47 (1990) (1990)
Alice E. Stonebreaker Assistant Secretary & Senior Vice President
age 48 Assistant Treasurer (1985) & Cashier
(1983) (1985)
Gordon M. Cooley Secretary (1991) Senior Vice President
age 41 and Legal Officer (1990) & House Counsel
(1987) (1987)
Kenneth M. Sabanosh Vice President & Senior Vice President
age 51 Treasurer (1992) & Comptroller
(1987) (1987)
James C. Akers Senior Vice President
age 53 (1983) & Data Processing
Manager (1981)
Wayne F. Fox Senior Vice President
age 48 (1990) & Commercial Division
Manager (1993)
C. Richard Miller, Jr. Senior Vice President
age 46 (1989)
Ronald O. Shirey Senior Vice President
age 54 (1988)
Patti A. Stuckey Senior Vice President
age 51 (1989) & Trust Division
Manager (1988)
Philip D. Topper Senior Vice President
age 52 (1988)
Ronald C. Whitmore Senior Vice President
age 46 (1992)
</TABLE>
(c) Bancorp is not required to furnish information on certain
significant employees pursuant to instructions contained in the form
for this report.
(d) There is no family relationship between any director,
executive officer, or person nominated or chosen by Bancorp to become
a director or executive officer, except that Ms. Cannon and Ms.
Stonebreaker are sisters and Mr. Cooley is the son-in-law of Director
H. Deets Warfield, Jr.
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(e) Each of the executive officers of Bancorp and Farmers and
Mechanics National Bank, except for Messrs. Fox and Stauffer, has been
an officer of Farmers and Mechanics National Bank for more than five
years.
Mr. Fox joined the Bank in December, 1990 as senior vice president and
branch administrator. In 1992 he assumed the position of loan sales
division manager and in 1993 the position of commercial division
manager. Prior to joining the Bank he was a vice president and
commercial loan and business development officer with Maryland
National Bank in Frederick. He had been with Maryland National since
1968. Mr. Stauffer joined the Bank in September, 1990 as an executive
vice president in the Loan Sales Group after serving as executive vice
president and senior loan officer at Citizens Bank of Washington,
Washington, D.C., beginning in November, 1989. Prior to that he was a
senior vice president and division manager with Maryland National
Bank. He had been with Maryland National Bank since 1970.
(f) None of the events described in the instructions to the form
of this report have occurred during the past five years to the
knowledge of Bancorp.
(g) Bancorp is not required to furnish this information because of
the absence of the conditions under which it is required.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Compensation Committee Report on Executive
Compensation" located on the ninth page through the tenth page, and "Directors'
Fees and Deferred Compensation Plan" located on the eleventh page of Bancorp's
Proxy Statement dated March 6, 1995 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section under "Security Ownership of
Management" and the notes thereto located on the second page and the
information contained in the section under "Security Ownership of Certain
Beneficial Owners" located on the third page of Bancorp's Proxy Statement dated
March 6, 1995 is incorporated herein by reference.
12
<PAGE> 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Certain Transactions with Directors and Officers"
located on the twelfth page of Bancorp's Proxy Statement dated March 6, 1995 is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Filed documents:
(1) Financial Statements:
See listing in Item 8.
(2) Financial Statement Schedules:
Schedules I and II, inclusive, are omitted because of
the absence of the conditions under which they are
required.
(3) Exhibits:
3.1 Articles of Incorporation of F&M Bancorp with
all Articles of Amendment. Filed as an
exhibit with the quarterly report on Form
10-Q for the second quarter of 1989 and
incorporated herein by reference.
3.2 By-Laws of F&M Bancorp. Filed as an exhibit
to Registration Statement on Form S-14 (File
No. 2-88390) and incorporated herein by
reference.
10.1 1983 Stock Option plan of F&M Bancorp as
amended in April, 1991. Filed as Exhibit 4.1
to Registration Statement on Form S-8 (File
No. 33-39942) and incorporated herein by
reference.
10.2 Unfunded Deferred Compensation Plan for
Non-Employee Directors of F&M Bancorp. Filed
as Exhibit 10-F to Registration Statement on
Form S-14 (File No. 2-88390) and incorporated
herein by reference.
13
<PAGE> 17
10.3 Farmers and Mechanics National Bank Executive
Supplemental Income Plan as amended in March
1990. Filed as Exhibit 10.3 to the Annual
Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-12638) and
incorporated herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan.
Filed as Prospectus to Registration Statement
on Form S-8 (File No. 33-39941) and
incorporated herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock
Purchase Plan. Filed as Prospectus to
Registration Statement on Form S-3 (File No.
33-39940) and incorporated herein by
reference.
11. Statement re: computation of per share
earnings.
13. 1994 Annual Report to Shareholders of F&M
Bancorp.
21. Subsidiaries of F&M Bancorp.
23. Consent of Independent Accountants.
24. Power of Attorney.
27. Financial Data Schedule
(b) No reports on Form 8-K were filed by Bancorp during the last
quarter of 1994.
14
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
F&M BANCORP
(Registrant)
Dated: March 23, 1995 By: /s/Charles W. Hoff, III
--------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
March 23, 1995 /s/Charles W. Hoff, III
-------------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
March 23, 1995 /s/Faye E. Cannon
------------------------------
Faye E. Cannon
President & Chief Operating
Officer
Principal Financial &
Accounting Officer:
March 23, 1995 /s/Kenneth M. Sabanosh
-------------------------------
Kenneth M. Sabanosh
Vice President and Treasurer
A Majority of the Board
of Directors
March 23, 1995 /s/R. Carl Benna*
-------------------------------
R. Carl Benna
Director
15
<PAGE> 19
March 23, 1995 /s/John D. Brunk*
-------------------------------
John D. Brunk
Director
March 23, 1995 /s/Beverly B. Byron*
------------------------------
Beverly B. Byron
Director
March 23, 1995 /s/Faye E. Cannon*
------------------------------
Faye E. Cannon
Director
March 23, 1995 /s/Martha E. Church*
------------------------------
Martha E. Church
Director
March 23, 1995 /s/Albert H. Cohen*
------------------------------
Albert H. Cohen
Director
March 23, 1995 /s/George B. Delaplaine, Jr.*
------------------------------
George B. Delaplaine, Jr.
Director
March 23, 1995 /s/Maurice A. Gladhill*
------------------------------
Maurice A. Gladhill
Director
March 23, 1995 /s/Charles W. Hoff, III*
------------------------------
Charles W. Hoff, III
Director
March 23, 1995 /s/Charles A. Nicodemus*
------------------------------
Charles A. Nicodemus
Director
March 23, 1995 /s/H. Deets Warfield, Jr.*
------------------------------
H. Deets Warfield, Jr.
Director
16
<PAGE> 20
March 23, 1995 /s/John C. Warfield*
------------------------------
John C. Warfield
Director
March 23, 1995 /s/Thomas R. Winkler*
------------------------------
Thomas R. Winkler
Director
*by Charles W. Hoff, III
Attorney-in-fact
March 23, 1995 /s/Charles W. Hoff, III
------------------------------
Charles W. Hoff, III
17
<PAGE> 21
EXHIBIT INDEX
<TABLE>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Articles of Incorporation of F&M Bancorp with
all Articles of Amendment. Filed as an
exhibit with the quarterly report on Form
10-Q for the second quarter of 1989 and
incorporated herein by reference.
3.2 By-Laws of F&M Bancorp. Filed as an exhibit
to Registration Statement on Form S-14 (File
No. 2-88390) and incorporated herein by
reference.
10.1 1983 Stock Option plan of F&M Bancorp as
amended in April, 1991. Filed as Exhibit 4.1
to Registration Statement on Form S-8 (File
No. 33-39942) and incorporated herein by
reference.
10.2 Unfunded Deferred Compensation Plan for
Non-Employee Directors of F&M Bancorp. Filed
as Exhibit 10-F to Registration Statement on
Form S-14 (File No. 2-88390) and incorporated
herein by reference.
10.3 Farmers and Mechanics National Bank Executive
Supplemental Income Plan as amended in March
1990. Filed as Exhibit 10.3 to the Annual
Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-12638) and
incorporated herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan.
Filed as Prospectus to Registration Statement
on Form S-8 (File No. 33-39941) and
incorporated herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock
Purchase Plan. Filed as Prospectus to
Registration Statement on Form S-3 (File No.
33-39940) and incorporated herein by
reference.
11. Statement re: computation of per share
earnings.
13. 1994 Annual Report to Shareholders of F&M
Bancorp.
21. Subsidiaries of F&M Bancorp.
23. Consent of Independent Accountants.
24. Power of Attorney.
27. Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ending December 31 ,
--------------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Earnings per share:
Primary
Income before cumulative
effect of change in
accounting principle $2.00 $1.92 $1.81
Net Income 2.00 1.92 1.81
Fully diluted
Income before cumulative
effect of change in
accounting principle $1.99 $1.92 $1.81
Net Income 1.99 1.92 1.81
</TABLE>
Primary and fully diluted earnings per share are calculated using the following
number of adjusted weighted average shares outstanding:
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Primary 3,981,580 3,965,784 3,937,813
Fully diluted 3,989,838 3,965,640 3,940,961
</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 at December 31, 1994,
1993, and 1992, of 3,938,805, 3,924,310, and 3,917,997, 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.
-1-
<PAGE> 1
EXHIBIT 13
F&M BANCORP 1994 Annual Report
[PHOTO]
LEVERAGING OUR
UNIQUE TALENTS
<PAGE> 2
CONTENTS
2 Letter to Shareholders
4 Building on Our Basic Values
6 Reinvesting in the Community
10 Leveraging Our Unique Talents
12 Recognizing Opportunities
17 Selected Financial Information
18 Management's Discussion and Analysis
29 Consolidated Financial Statements
33 Notes to Consolidated Financial Statements
42 Report of Independent Auditors
43 Directors and Officers
NOTICE OF
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday,
April 11, 1995, at the Corporate Headquarters, 110 Thomas Johnson Drive,
Frederick, Maryland 21702.
The annual report on Form 10-K filed with the Securities and Exchange
Commission is available without charge upon written request to: Kenneth M.
Sabanosh, Vice President and Treasurer, F&M Bancorp, 110 Thomas Johnson Drive,
Post Office Box 518, Frederick, Maryland 21705
<PAGE> 3
FINANCIAL HIGHLIGHTS
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $51,695 $49,609 $51,439
Net income 7,956 7,603 7,117
Cash dividends paid 3,079 2,952 2,762
Return on average assets(1) 1.26% 1.27% 1.25%
Return on average equity(1) 13.57% 13.90% 14.23%
AT YEAR END
Assets $675,256 $617,668 $583,729
Loans, net of unearned income 459,272 396,337 389,819
Deposits 576,296 522,154 498,377
Shareholders' equity 59,249 58,639 52,345
Loans to deposits 79.69% 75.90% 78.22%
Allowance for credit losses to loans 1.20% 1.38% 1.45%
PER SHARE(2)
Net income $ 2.02 $ 1.94 $ 1.82
Cash dividends paid .78 .75 .70
Year end book value(1) 15.01 14.91 13.35
</TABLE>
(1) Calculations and amounts for 1994 and 1993 reflect the effects of
adopting Financial Accounting Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," on December 31, 1993.
(2) Each year restated for five percent stock dividend declared in 1994.
<PAGE> 4
TO OUR SHAREHOLDERS
Record earnings, growth in assets, geographic expansion and strong financial
results on many fronts have made 1994 an excellent year for F&M Bancorp.
Net income set a record for the third year in a row, reaching $7,956,000, an
increase of 4.6 percent over 1993. While the profitable sale of three former
branch sites contributed to this gain, strong performance in our core business
lines--retail, commercial banking, and trust and investment management
services--were the basis of our positive financial performance. Also
contributing to this gain was our consistent commitment to quality in our loan
portfolio, which enabled us to reduce our provision for credit losses. F&M's
charge-offs and delinquencies remain well below industry averages.
Noninterest income has become an increasingly important component of
profitability in our industry. To help us consider alternative sources of such
revenue this year, we utilized a variety of resources. As a result, fee-based
income, excluding property and security gains, increased a healthy 3.2 percent
during 1994.
Income tax planning also played a role in F&M's profitability. During 1994, we
implemented tax planning strategies that reduced our overall effective tax
rate.
Rising interest rates in 1994 substantially reduced mortgage loan activity.
Total loans, however, increased: We generated more than $60 million in net new
loans this year. Our net loan growth as of year end was nearly 16 percent. Much
of this growth came from consumer lending through aggressive promotion of our
indirect loan business. Home equity loans also increased. Commercial lending,
which includes real estate development and financing for small- and
medium-sized businesses, saw substantial growth due, in part, to an aggressive
calling program targeting both new and existing corporate clients.
Total assets reached a record $675,256,000 at year end, an increase of 9.3
percent over year-end 1993. Deposits increased 10.4 percent. Contributing to
this increase was our acquisition of three branches of Standard Federal Savings
Association, which we purchased through the Resolution Trust Corporation. This,
and a pending merger with the Bank of Brunswick--announced in December of 1994
and expected to be finalized during the second quarter of 1995--is part of our
strategy to expand F&M's delivery system into compatible markets.
The Standard Federal offices we acquired are located in northern Montgomery
County in the communities of Gaithersburg, Germantown and Olney. Plans are now
underway to construct an additional full-service office in Germantown at the
juncture of Routes 27 and 355. This reach into northern Montgomery County is a
natural extension of our market area and allows us to not only better serve
Frederick's commuting population, but also to create new customer relationships
in a very attractive geographic area. Construction has also begun on a new East
Patrick Street office in Frederick, a full-service facility that will increase
convenience for customers who work or live along the I-70 eastern corridor.
We completed the reconfiguration of our existing branch network in 1994,
closing and consolidating branches in several locations. Throughout this
process, our goal was to increase customer access and convenience while
reducing noninterest expenses. F&M's regional branch network now has 20 offices
and 21 24-hour ATMs. In 1995, we will break ground for a $4.5 million,
four-story addition to our headquarters in Frederick, creating work space that
is critically needed now and to accommodate the growth we anticipate during the
next decade.
F&M's Trust and Investment Management Group enjoyed another year of record
growth. New business generated in the form of assets under management totaled
$37,900,000 in 1994. At year end, the total market value of assets under
management on behalf of trust customers reached $196,400,000.
2 | 3
<PAGE> 5
We are pleased to report that during 1994 the market value of F&M Bancorp stock
increased approximately 24 percent, and that a five percent stock dividend was
distributed to shareholders during the second quarter. Earnings per share on
net income increased to $2.02 in 1994 compared with $1.94 in 1993 as restated
for the stock dividend. Shares traded averaged 48,900 shares per month in 1994
compared with 25,700 shares per month in 1993.
Special thanks for their years of service go to retiring F&M employees Mary Jo
Clark, Bobbie J. Russel and JoAnn A. Thompson. And we note with great sadness
the passing of J. Richard Crouse, D.D.S., member of our Board of Directors;
Harold B. Duvall, Director Emeritus; Alden Fisher, member of our Advisory
Council; Reginald A. White, Assistant Vice President; and Jacquelyn M. Shortt,
Branch Officer.
During 1994, as part of our ongoing strategic planning process, we identified
important goals that will continue to enhance F&M's strength as we move toward
the new millennium. We intend to continue our strong asset growth while
expanding our geographic reach into compatible new markets.
Equally important, during 1994 we reaffirmed the values and principles that
have made F&M so successful over the past 178 years. This statement recognizes
the four constituencies we serve: our customers, who we place foremost in all
that we do; our shareholders, who expect an appropriate return on their
investment; bank associates, who ensure excellence in the delivery of our
products and services; and the community, in which we, as a locally owned and
managed financial services organization, are a proud participant. In this
annual report we celebrate our corporate values as embodied in the passion our
associates bring to their pursuits outside the workplace. Such personal
enthusiasms inevitably enliven and enrich the work environment for all of us at
F&M.
We look forward to continued growth and prosperity for F&M in the coming year.
[PHOTO]
/s/ CHARLES W. HOFF, III
------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
[PHOTO]
/s/ FAYE E. CANNON
------------------
Faye E. Cannon
President and
Chief Operating Officer
<PAGE> 6
At the core of our strategic planning this year was a statement of corporate
values that reaffirmed our commitment to providing excellent financial products
and services when, where and how our customers need them. That means continuing
to offer the top quality, personal service and market leadership F&M customers
have come to expect from us. But, with lifestyles that are increasingly mobile
and growing numbers of commuters in our market area, that also means making a
strong commitment to electronic banking.
BUILDING ON OUR BASIC VALUES
This year, in addition to strengthening our ATM network, we invested resources
to enhance our electronic and telephone-based banking services. F&M customers
now can pick up any touch-tone phone and link in with our ExpressLine to
transfer funds between F&M accounts, verify balances, order checks, obtain
information about their mortgages, check on the latest savings and loan rates
or locate the nearest F&M branch office or ATM Bank Center.
Strengthening customer loyalty through new products and services was also an
important priority during 1994. Our new VISA(R) CheckCard, a debit card that
functions like a check or cash for purchasing goods and services, brings
customers added convenience. And a line of mutual funds and annuities, added
this year through a relationship with Financial Horizons, Inc., provides more
ways for our customers to take advantage of other non-traditional savings and
investment options.
Although mortgage activity in our region declined, we were able to realize
success with our Afford-A-Home program, which makes mortgage monies available
to low- and medium-income homebuyers. This program places first-time home
ownership within the grasp of individuals and families who would not otherwise
be able to own a home.
[GRAPH] -- Total Deposits
4 | 5
<PAGE> 7
[PHOTO]
FLO NORMAN
TELLER
"IT'S A CONCRETE FOUNDATION OF VALUES THAT WE BRING TO THE CHILDREN," SAYS FLO
NORMAN OF THE VIDEO GROUP FOR YOUNGSTERS AGE FOUR THROUGH SECOND GRADE THAT SHE
SUPERVISES ON SUNDAY EVENINGS AT HER CHURCH. "WE SHOW VIDEOS THAT HELP THE
CHILDREN THINK ABOUT THEIR LIVES AND TALK ABOUT HOW THEY CAN APPLY THE THINGS
THEY LEARN HERE TO THEIR OWN LIFE EVERY DAY. WE EMPHASIZE THEMES OF RESPECT FOR
OTHER PEOPLE AND RESPECT FOR OURSELVES."
AS A TELLER PROVIDING SUPPORT TO ANY BRANCH NEEDING SALES AND SERVICE
PERSONNEL, FLO SAYS, "EACH OF F&M'S 20 BRANCH OFFICES HAS ITS OWN PERSONALITY,
INFLUENCED BY THE COMMUNITY IN WHICH IT IS LOCATED. BUT THERE IS A CONSISTENT
FEELING FOR TREATING OUR CUSTOMERS AND OUR CO-WORKERS THE WAY WE WOULD LIKE TO
BE TREATED OURSELVES."
<PAGE> 8
In a highly competitive marketplace that has caused many commercial lenders to
cut prices in order to stimulate business, we increased our loan portfolio by
almost 16 percent without sacrificing the quality of our loans and by
establishing pricing that combines value for our customers with a fair return
for the bank. We are building our commercial banking business around the
concepts of value and service. Our success this year signifies that we are
right on track, and that customers want the individual attention and
responsiveness that comes from working with a locally owned and managed bank.
REINVESTING IN THE COMMUNITY
We are proud of the fact that we are generating income through lending at a
time when many banks are forced to rely on their investment portfolios for
profits. We are also proud of maintaining our loan to deposit ratio, now at 80
percent, because it means that we are reinvesting money in the community,
helping diverse businesses prosper and grow, thus fulfilling a fundamental
tenet of our corporate philosophy.
F&M is able to attract a broad base of clients in diverse industries through
the breadth of our products. Customers turn to us as a financing resource for
everything from working capital and inventory loans to receivables financing
and lines of credit.
In the year to come, we will continue to aggressively seek new
commercial business while looking for ways to make banking with F&M simpler and
more efficient for the growing market segment of small and medium-size
businesses in our area.
[GRAPH] -- Loans
6 | 7
<PAGE> 9
[PHOTO]
RIC PAXTON
COMMERCIAL REAL ESTATE CALLING OFFICER
"IT TAKES A SURPRISING AMOUNT OF PLANNING," SAYS LOAN OFFICER AND CHILI PEPPER
GROWER RIC PAXTON. RIC GROWS ABOUT 15 VARIETIES OF CHILI PEPPERS EACH YEAR,
FROM THE ORNAMENTAL PURPLE-LEAVED NUMEX TWILIGHT CHILI TO THE MIGHTY HABANERO,
HOTTEST OF THE HOT. "IF YOU DON'T GET AN EARLY START PLANTING SEEDS INDOORS IN
THE WINTER, THEN YOU RISK HAVING THE PLANTS DAMAGED BY FROST BEFORE YOU CAN
COMPLETE YOUR HARVEST IN THE FALL. YOU REALLY HAVE TO THINK AHEAD."
RIC BELIEVES THAT THINKING AHEAD IS AN ESSENTIAL UNDERPINNING TO OUR SUCCESSES
AT F&M AS WELL. "EVEN DURING THE DOWNTURN OF THE ECONOMY OVER THE PAST FEW
YEARS, F&M CONTINUED TO EXERCISE SOUND LENDING PRACTICES," HE SAYS. "NOW THAT
THE MARKET IS OPENING UP MORE, WE STILL FOCUS ON MAKING SURE THAT THE ACTIONS
WE TAKE AND THE TRANSACTIONS WE CLOSE MAKE SENSE OVER THE LONG TERM."
<PAGE> 10
[PHOTO]
8 | 9
<PAGE> 11
[PHOTO]
MARILYN YOST
VICE PRESIDENT AND
TRUST OFFICER
"WE JUST FINISHED OUR MID-WINTER BIRD COUNT, AND LET ME TELL YOU IT WAS COLD
AND WINDY OUT THERE," SAYS TRUST OFFICER, BIRDER AND MARYLAND ORNITHOLOGICAL
SOCIETY MEMBER MARILYN YOST. BUT IT'S IMPORTANT WORK, SHE ADDS, SAYING THAT
PERSONAL INVOLVEMENT BY AMATEUR ORNITHOLOGISTS IN THESE NEIGHBORHOOD AND
REGIONAL COUNTS HELPS SCIENTISTS TRACK THE NESTING AND MIGRATORY PATTERNS OF
VARIOUS SPECIES OF BIRDS. "I DON'T JUST ENJOY LOOKING FOR THE RARE AND UNUSUAL
BIRDS OUT THERE, ALTHOUGH I DID ENJOY SPOTTING A RARE RAZORBILL OFF ASSATEAGUE
ISLAND A YEAR OR SO AGO. BUT I LIKE TO SEE THE CHICKADEES, CARDINALS AND
BLUEJAYS, TOO."
PERSONAL INVOLVEMENT IS PART AND PARCEL OF HER WORK WITH F&M'S TRUST CLIENTS AS
WELL. "OUR CUSTOMERS ARE ALL AGES, AND THEIR NEEDS VARY ALL ACROSS THE BOARD,"
SHE SAYS. "EVEN THOUGH THE TRUST AND INVESTMENT MANAGEMENT GROUP--LIKE THE REST
OF THE BANK--IS GROWING, WE HAVE NOT LOST THAT PERSONAL TOUCH THAT MAKES
CLIENTS FEEL COMFORTABLE. A PERSONAL APPROACH TO SERVICE IS PART OF OUR
CORPORATE PHILOSOPHY AT F&M."
<PAGE> 12
In keeping with our strategic goal of matching our technology to our customers'
needs, this year we became the first bank in Maryland to offer area merchants
point-of-sale technology that allows them to use a single terminal for all
credit card and debit transactions. By offering this technology and working
with merchants to implement it, we increased the merchant services side of our
credit card business and brought greater efficiency to our own transaction
processing operations.
LEVERAGING OUR UNIQUE TALENTS
During 1994 we also began evaluating all of our back-room data processing
operations with an eye toward cutting costs, whether by reconfiguring those
operations internally or by outsourcing. In 1995, we will expand this
assessment process to other aspects of our operations as well.
Considerable energy was devoted to objectives-based training during 1994.
Utilizing a combination of seminars, workshops and self-paced work
assignments, we averaged 81 hours of internal training per employee. This
activity supports a dual goal. First, it enables F&M to uphold its reputation
for offering customers the highest level of service. Second, it gives our
employees a chance to improve their skills, explore their potential and learn
how to bring creativity and innovation to their jobs.
All training at F&M-whether in sales and service, product knowledge, managerial
skills, computer skills or sign language, to name just a few areas-is based on
clear objectives that are ultimately measured on the job. Our belief that
knowledgeable associates are the key to our success today and in the future is
made tangible in the results of our efforts: Our cross-sell ratio has risen
significantly during the past two years, enabling us to strengthen our
relationships with existing customers even as we expand our market reach to new
customers.
[GRAPH] -- Electronic Banking
10 | 11
<PAGE> 13
[PHOTO]
STEVE BECK
ACCOUNTANT
"ATTENTION TO DETAIL IS WHAT SEPARATES THE CARS THAT WIN TROPHIES FROM THE ONES
THAT DON'T," SAYS STEVE BECK, PICTURED HERE WORKING ON A FRIEND'S 1966 MUSTANG
COUPE. AN ACCOUNTANT IN F&M'S COMPTROLLER'S OFFICE, STEVE IS A ALSO A DEDICATED
RESTORER OF CLASSIC CARS AND IS CURRENTLY RESTORING HIS OWN 1968 SHELBY
MUSTANG. "FOR EXAMPLE, SOME ENTHUSIASTS SIMPLY PAINT THE ENGINE COMPONENTS A
GENERIC SILVER OR BLACK. I STRIVE TO RESTORE EVERYTHING TO MATCH THE ORIGINAL
SPECIFICATIONS AND DETAILS, SO THAT THE CAR LOOKS EXACTLY LIKE IT DID THE DAY
IT LEFT THE FACTORY." MAKING AN ANALOGY TO BANKING THAT EXPRESSES A FUNDAMENTAL
ATTITUDE AT F&M, HE SAYS, "YOU REALLY HAVE TO HAVE AN EYE FOR DETAIL AND BE
WILLING TO WORK AS HARD ON THE SMALLEST COMPONENTS AS YOU DO ON THE LARGEST
ONES SO THAT, IN THE END, YOU GET IT ALL JUST RIGHT."
<PAGE> 14
A significant contributor of revenue to the bank, F&M's Trust business
continued to grow at a healthy pace in 1994. Our Trust and Investment
Management Group added $37.9 million in new business and generated $1.1 million
in fee-based income during 1994.
RECOGNIZING OPPORTUNITIES
Demand for trust services in our market area is strong, but has traditionally
centered around trust management and the settlement of estates. This year, we
embarked on a concerted information campaign to broaden our reach into new
markets, such as the growing number of young professionals living in the
communities we serve. We are successfully getting the word out that F&M's trust
and investment services meet the needs of individuals of all ages, from those
just beginning to save for the future to those seeking greater security in
retirement. In fact, investment management now represents more than 45 percent
of assets under management.
The Trust Group offers a full range of investment services that can be
hand-tailored to meet individual or corporate needs, plus the personal service
that can only come from a locally owned and managed trust department.
Management of trusts, IRAs, estate planning and settlement, a variety of
investment accounts and expert investment management are just a few of the
services that appeal to an ever-widening base of clients. To keep pace with and
continue to grow this business, we added five new people this year, including a
full-time attorney, an investment officer and a trust business development
officer who will focus on cultivating new individual and corporate business in
the year ahead.
[GRAPH] -- Trust
12 | 13
<PAGE> 15
[PHOTO]
STACEY KEILHOLTZ
BRANCH MANAGER
"I ALWAYS START WITH A VISION OF WHAT SOMETHING WILL BECOME," SAYS STACEY
KEILHOLTZ OF HER FURNITURE REFINISHING PROJECTS. STACEY IS THE MANAGER OF F&M'S
EMMITSBURG BRANCH OFFICE. "LOOKING FORWARD TO THE END RESULT IS WHAT GETS YOU
GOING. THEN, AS YOU START TO SEE YOUR VISION COME TO LIFE IN THE BEAUTY OF THE
PIECE, THAT'S WHERE THE MOTIVATION TO KEEP ON GOING COMES FROM."
STACEY BELIEVES THAT IT IS A VISION OF THE FUTURE THAT IS MOVING F&M FORWARD AS
WELL. "THERE HAVE BEEN A LOT OF CHANGES FOR THE BETTER OVER THE PAST FEW YEARS.
WE USED TO SIT BACK AND LET THE PEOPLE COME TO US. NOW WE GO TO THE PEOPLE TO
FIND OUT WHAT THEY NEED AND WANT FROM US. WE WANT TO REMAIN THE MARKET LEADER
IN OUR COMMUNITY. TO DO THAT, WE EMPHASIZE TRAINING FOR EMPLOYEES, A PERSONAL
STYLE OF CUSTOMER SERVICE AND A SHARED VISION OF WHAT F&M IS NOW AND WILL BE IN
THE FUTURE."
<PAGE> 16
[PHOTO]
FRANK WHITE
MICROCOMPUTER
COORDINATOR
"IT'S THE CHALLENGE THAT I LOVE," SAYS MICROCOMPUTER COORDINATOR AND BICYCLIST
FRANK WHITE. "HILLS ARE MY FAVORITE THINGS. YOU SEE THEM, SIZE THEM UP AND MAKE
DECISIONS ABOUT HOW YOU ARE GOING TO APPROACH THEM. SUCCESSFULLY REACHING THE
TOP OF THE HILL MAKES THE RIDE DOWN THE OTHER SIDE MUCH MORE SATISFYING." FRANK
CYCLES 100 TO 200 MILES A WEEK SO THAT HE'S READY FOR THE BIG RIDES, LIKE THE
MS 150, A CHARITABLE TWO-DAY, 150-MILE RIDE ON THE EASTERN SHORE OF MARYLAND
THAT BENEFITS THE NATIONAL MULTIPLE SCLEROSIS FOUNDATION.
FRANK POINTS TO DETERMINATION AND STAMINA AS ATTRIBUTES NECESSARY FOR GOING THE
DISTANCE. "I SEE THAT SAME SPIRIT EMBODIED IN F&M EMPLOYEES," HE ADDS. "AT
EVERY LEVEL OF THIS ORGANIZATION YOU SEE AN ATTITUDE THAT SAYS WE WILL DO WHAT
WE NEED TO DO TO GET THE TASKS DONE, AND DONE CORRECTLY. WORKING INDIVIDUALLY
AND AS A TEAM, WE'LL GET TO WHERE WE ARE GOING." IT IS A SPIRIT THAT BODES WELL
FOR F&M'S FUTURE.
14 | 15
<PAGE> 17
[PHOTO]
<PAGE> 18
FINANCIAL REVIEW
[GRAPH] -- Net Income
[GRAPH] -- Cash Dividends Paid Per Share
[GRAPH] -- Total Average Assets
[GRAPH] -- Total Average Equity
16 | 17
<PAGE> 19
SELECTED FINANCIAL INFORMATION
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS
Interest income $45,004 $43,687 $45,790 $48,243 $48,289
Interest expense 17,144 16,623 19,524 25,952 26,944
Net interest income 27,860 27,064 26,266 22,291 21,345
Provision for credit losses 900 1,500 2,615 1,800 1,100
Net interest income after
provision for credit losses 26,960 25,564 23,651 20,491 20,245
Net gains (losses) on sales of securities -- 2 619 -- (19)
Other noninterest income 6,691 5,920 5,030 4,350 3,507
Noninterest expenses 22,794 20,755 19,425 16,896 15,750
Income before provision for
income taxes and cumulative effect
of change in accounting principle 10,857 10,731 9,875 7,945 7,983
Provision for income taxes 2,901 3,128 2,758 2,063 2,344
Income before cumulative effect of change in
accounting principle 7,956 7,603 7,117 5,882 5,639
Cumulative effect of accounting change -- -- -- 1,023 --
Net income 7,956 7,603 7,117 4,859 5,639
PER SHARE DATA(1)
Income before cumulative effect of change in
accounting principle $2.02 $1.94 $1.82 $1.50 $1.42
Net income 2.02 1.94 1.82 1.24 1.42
Cash dividends paid .78 .75 .70 .69 .69
PRO FORMA AMOUNTS ASSUMING THE
METHOD OF ACCOUNTING ADOPTED IN
1991 FOR DEFERRED COMPENSATION
HAD BEEN APPLIED RETROACTIVELY
Net income $5,882 $5,578
Earnings per common share(1) 1.50 1.40
DIVIDEND PAYOUT RATIO(2) 38.61% 38.66% 38.46% 55.65% 48.59%
AVERAGE RATIOS(3)
Return on assets
Income before cumulative effect of
change in accounting principle 1.26% 1.27% 1.25% 1.11% 1.10%
Net income 1.26% 1.27% 1.25% 0.92% 1.10%
Return on equity
Income before cumulative effect of
change in accounting principle 13.57% 13.90% 14.23% 12.45% 12.42%
Net income 13.57% 13.90% 14.23% 10.28% 12.42%
Shareholders' equity to total assets 9.26% 9.16% 8.79% 8.91% 8.88%
OTHER INFORMATION(3)
Total average assets $633,453 $597,189 $568,898 $530,417 $511,399
Total average equity 58,633 54,688 50,006 47,251 45,398
</TABLE>
(1) Each year restated for five percent stock dividend declared in 1994.
(2) Reflects the per share percentage relationship of cash dividends paid
to net income.
(3) Calculations and amounts for 1994 and 1993 reflect the effects of
adopting Financial Accounting Board Statement No.115, "Accounting for
Certain Investments in Debt and Equity Securities," on December 31,
1993.
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
F&M Bancorp and Subsidiary
The following discussion provides an overview of the financial condition and
results of operation of F&M Bancorp and its subsidiary ("Bancorp"), for each
year from 1992 through 1994. This discussion is intended to assist readers in
their analysis of the accompanying consolidated financial statements and notes
thereto.
OVERVIEW
The year 1994 was a year of record earnings and above average growth in total
assets. Record earnings were achieved during a period of improved economic
conditions and with the completion of the restructuring of our branch delivery
system. Above average growth in total assets was achieved through the
acquisition of three branch offices from the Resolution Trust Corporation. Net
income for 1994 set a new record for the third straight year, reaching
$7,956,000, an increase of $353,000 or 4.6 percent over 1993's net income of
$7,603,000. In 1992, net income was $7,117,000. Per share earnings were $2.02
in 1994, $1.94 in 1993, and $1.82 in 1992. Per share earnings for 1993 and 1992
have been restated for the five percent stock dividend distributed to
shareholders on May 23, 1994.
Return on average total assets was 1.26 percent for 1994, 1.27 percent
for 1993, and 1.25 percent for 1992. Return on average equity was 13.57 percent
for 1994, 13.90 percent for 1993, and 14.23 percent for 1992.
RESULTS OF OPERATIONS
Net Interest Income.
The principal source of Bancorp's earnings is net interest income, which is the
sum of interest and certain fees generated by earning assets minus interest
paid on deposits and other funding sources. Earning assets consist primarily of
loans and invest-
TABLE 1. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------- ------------------------------- -----------------------------
Average Interest Average Average Interest Average Average Interest Average
(Dollars in thousands) Balances Income Rate Balances Income Rate Balances Income Rate
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets
Federal funds sold $ 5,490 $ 222 4.04% $ 10,477 $ 322 3.07% $ 8,159 $ 294 3.60%
---------------------------------------------------------------------------------------------------------------------------------
Investment securities(1)
Taxable 101,125 5,227 5.17 94,456 5,217 5.52 81,966 5,262 6.42
Tax-exempt(2) 67,401 5,404 8.02 59,786 5,009 8.38 50,863 4,685 9.21
---------------------------------------------------------------------------------------------------------------------------------
Total investment
securities(2) 168,526 10,631 6.31 154,242 10,226 6.63 132,829 9,947 7.49
---------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans
held for sale(2) 419,877 36,160 8.61 395,865 35,016 8.85 394,288 37,334 9.47
---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
and average yield(2) 593,893 47,013 7.92 560,584 45,564 8.13 535,276 47,575 8.89
---------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning Assets
Cash and due from banks 19,575 18,085 16,691
Interest receivable 3,762 3,746 4,019
Bank premises
and equipment, net 12,150 11,542 11,188
Other assets 9,616 9,027 6,659
Less: Allowance for
credit losses (5,543) (5,795) (4,935)
---------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning
assets 39,560 36,605 33,622
---------------------------------------------------------------------------------------------------------------------------------
Total assets $633,453 $597,189 $568,898
=================================================================================================================================
</TABLE>
(1) Average balances and the related average rate are based on amortized
cost.
(2) Interest and yields on obligations of states and political
subdivisions and tax-exempt loans are computed on a taxable equivalent
basis using the U.S. statutory tax rate of 34 percent. In addition,
loan fee income is included in the interest income calculations, and
nonaccrual loans are included in the average loan base upon which the
interest rate earned on loans is calculated.
(3) Net interest spread is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets
and of interest expense to interest-bearing liabilities.
(4) Net interest margin is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets
and of interest expense to earning assets.
18 | 19
<PAGE> 21
ment securities. Deposits are the primary funding source. Other funding sources
include repurchase agreements, federal funds purchased, and other borrowed
funds. Net interest income is impacted by changes in the volume and mix of
earning assets and funding sources, market interest rates, the demand for
loans, and the availability of deposits. Other factors such as management
policies, competition, fiscal and debt management policies of the federal
government, monetary policy of the Federal Reserve Board, and other regulatory
requirements may also have a significant impact on changes in net interest
income from one period to the next.
Average balances and rates on major categories of interest-earning
assets and interest-bearing liabilities during the past three years appear in
Table 1. Net interest income on a taxable-equivalent basis was $29,869,000 in
1994 compared with $28,941,000 in 1993, an increase of $928,000 or 3.2 percent.
Total average earning assets increased 5.9 percent during 1994 compared with
1993 primarily as a result of our success in raising deposits, which provided
us with the funds to invest in loans and securities. The composition of average
earning assets remained relatively stable during the year when compared with
1993. Total average interest-bearing liability balances were 5.4 percent
higher in 1994 compared with 1993, while average noninterest-bearing deposit
balances were 9.7 percent higher.
Yields on most categories of earning assets as well as rates on most
interest-bearing deposit balances declined in 1994 compared with 1993, but not
to the extent that they did from 1992 to 1993. Yields and rates continued to
decline even though market rates were increasing during the year, reflecting
the effect of long-term assets and liabilities. The yield on federal funds
sold, which is a short-term asset, increased with market rates, as did the
rates paid on short-term borrowings and certificates of deposit $100,000 and
over.
The average yield on earning assets declined to 7.92 percent
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------ ------------------------------ ------------------------------
Average Interest Average Average Interest Average Average Interest Average
(Dollars in thousands) Balances Expense Rate Balances Expense Rate Balances Expense Rate
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing Liabilities
Interest-bearing deposits
Checking $ 64,042 $ 1,470 2.30% $ 57,841 $ 1,499 2.59% $ 52,111 $ 1,639 3.15%
Savings 107,293 2,969 2.77 100,411 2,948 2.94 91,477 3,250 3.55
Money market accounts 89,692 2,655 2.96 83,490 2,524 3.02 81,320 3,012 3.70
Certificates of deposit
under $100,000 175,668 7,679 4.37 172,713 7,816 4.53 170,975 9,281 5.43
Certificates of deposit
$100,000 and over 25,106 1,081 4.31 22,951 934 4.07 28,789 1,458 5.06
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 461,801 15,854 3.43 437,406 15,721 3.59 424,672 18,640 4.39
---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased
and securities
sold under agreements
to repurchase 29,539 1,208 4.09 28,902 854 2.95 25,008 825 3.30
Other short-term
borrowings 1,931 82 4.25 1,679 48 2.86 1,699 59 3.47
---------------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings 31,470 1,290 4.10 30,581 902 2.95 26,707 884 3.31
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities and average
rate incurred 493,271 17,144 3.48 467,987 16,623 3.55 451,379 19,524 4.33
---------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing Liabilities
Demand deposits 76,076 69,329 62,595
Other liabilities 5,473 5,185 4,918
---------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 81,549 74,514 67,513
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 574,820 542,501 518,892
Shareholders' equity 58,633 54,688 50,006
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $633,453 $597,189 $568,898
---------------------------------------------------------------------------------------------------------------------------------
Net interest earnings $ 29,869 $28,941 $28,051
=================================================================================================================================
Net interest spread(3) 4.44% 4.58% 4.56%
=================================================================================================================================
Net interest margin(4) 5.03% 5.16% 5.24%
=================================================================================================================================
</TABLE>
<PAGE> 22
in 1994 from 8.13 percent in 1993, a 21 basis point decline. The average
rate paid on interest-bearing liabilities declined to 3.48 percent from 3.55
percent in 1993, a seven basis point decline. As a result, the net interest
spread (the difference between the average yield on earning assets and the
average rate paid on interest-bearing liabilities) declined 14 basis points
to 4.44 percent.
The net interest margin (the ratio of taxable-equivalent net interest
income to earning assets) declined 13 basis points as the rate of growth in
earning assets (5.9 percent) exceeded the rate of growth in net interest income
(3.2 percent). The net interest margin considers the contribution of assets
funded by interest-free sources. The excess of the interest-earning assets over
interest-bearing liabilities represents the amount of funds contributed by
noninterest-bearing funding sources in the form of demand deposits and capital.
In order to more fully understand changes in net interest income and its effect
on the net interest margin, these changes must be analyzed in terms of changes
in average balances and changes in yields and rates.
The effect on net interest income of changes in average balances
("volume") and yields and rates ("rates") are quantified in Table 2. As shown,
net interest income improved in 1994 due to volume related increases totaling
$2,039,000, offset in part by rate related declines totaling $1,111,000.
Management monitors Bancorp's balance sheet to insulate net interest income
from significant swings caused by interest rate volatility. If market rates
were to either increase or decrease in 1995, corresponding changes in asset mix
and funding sources and rates would be considered to avoid a negative impact on
net interest income. Bancorp's policies concerning asset/liability management
are further discussed in the section titled "Interest Rate Risk."
Noninterest Income.
Noninterest income, exclusive of nonrecurring securities and property gains,
increased $185,000 or 3.2 percent in 1994 compared with 1993. In 1994,
management placed a strategic emphasis on increasing this source of revenue,
from both existing products and services and through the development of
additional fee-based products and services. During the year, several new
revenue enhancing products were introduced including a debit card and enhanced
merchant point-of-sale services. In the third quarter, we contracted to have
Financial Horizons, Inc. offer alternative investment products to our
customers, by leasing space in our branch network. Additionally, a revised fee
schedule which reflects a more competitive pricing structure was introduced. As
a result of this emphasis, significant increases were noted in several
components of noninterest income. Deposit and other service fees increased
$339,000 or 18.3 percent, bank card income increased $209,000 or 13.2 percent,
trust income increased $53,000 or 4.9 percent, and miscellaneous sources of
other operating income increased $165,000 or 26.5 percent. These gains were
offset by a decrease of $581,000 or 91.8 percent in gains recognized from sales
of loans in the secondary market. The precipitous rise in market interest rates
TABLE 2. ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------------
1994 over 1993 1993 over 1992
------------------------------------------- ----------------------------------------------
Due to Due to
Change in(1) Change in(1)
Increase -------------------------- Increase ------------------------
(In thousands) (Decrease) Volume Rates (Decrease) Volume Rates
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans(2)(3) $1,144 $2,034 $ (890) $(2,318) $ 650 $(2,968)
Interest and dividends on
investment securities:
Taxable 10 352 (342) (45) 744 (789)
Tax-exempt(4) 395 617 (222) 324 771 (447)
Interest on federal funds sold (100) (183) 83 28 75 (47)
----------------------------------------------------------------------------------------------------------------------------------
Total 1,449 2,820 (1,371) (2,011) 2,240 (4,251)
----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 133 755 (622) (2,919) 373 (3,292)
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 354 18 336 29 122 (93)
Interest on other short-term
borrowings 34 8 26 (11) (1) (10)
----------------------------------------------------------------------------------------------------------------------------------
Total 521 781 (260) (2,901) 494 (3,395)
----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 928 $2,039 $(1,111) $ 890 $1,746 $ (856)
==================================================================================================================================
</TABLE>
(1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) Included in the change in interest income are increased fees on loans
of $2,000 for the year ended December 31, 1994 over 1993 and decreased
fees on loans of $64,000 for the year ended December 31, 1993 compared
with 1992.
(3) Tax-equivalent adjustments of $172,000 for 1994, $174,000 for 1993,
and $192,000 for 1992 are included in the calculation of rate changes
for interest and fees on loans.
(4) Tax-equivalent adjustments of $1,837,000 for 1994, $1,703,000 for
1993, and $1,593,000 for 1992 are included in the calculation of rate
changes for tax-exempt investment securities.
20 | 21
<PAGE> 23
during 1994 acted to reduce both the volume of saleable loans and their value
in the secondary market. Gains from sales of property increased $586,000 due
principally to the sale of three former branch locations which were closed as
part of Bancorp's branch reconfiguration plan.
Noninterest Expenses.
Noninterest expense is composed primarily of costs associated with personnel,
bank premises and equipment, and regulatory fees. Bancorp's noninterest
expense increased $2,039,000 or 9.8 percent in 1994 compared with 1993.
Salaries and employee benefits, the largest component of noninterest income,
increased $1,045,000 or 9.9 percent. This increase is due in large measure to
normal promotional and merit increases. In addition, the average number of
full-time equivalent employees increased 1.6 percent in 1994. Health insurance
costs, payroll taxes, and 401(k) plan contributions also increased $133,000,
$82,000, and $103,000, respectively, compared with the prior year. Bancorp
continually monitors its staffing needs in an effort to provide adequate levels
of staff to assure quality customer service. Other operating expense increased
$912,000 or 11.8 percent compared with 1993. The most significant components of
the increase were attributable to bank card processing fees, which registered
an increase of $291,000 or 24.6 percent as a result of higher transaction
volumes, and professional services, which increased $264,000. The increase in
professional service costs were coincident with the implementation of strategic
initiatives designed to strengthen Bancorp's ability to provide quality service
to its customers, improve fee income, and position itself for continued growth.
Other real estate owned expenses declined $178,000 in 1994 due to decreases in
the provisions for decline in value and selling expenses of $192,000 compared
with the prior year. In 1995, noninterest expenses are expected to increase due
to the acquisition activities discussed in Notes 2 and 19 to the accompanying
consolidated financial statements and the planned opening of two de novo branch
offices.
Income Taxes.
Income tax expense amounted to $2,901,000 in 1994 compared with $3,128,000 in
1993. Tax expense varies from one year to the next with changes in the level of
income before taxes, changes in the amount of tax-exempt interest income, and
the relationship of these changes to each other.
Bancorp's effective tax rate for 1994 was 27 percent compared with 29
percent in 1993. The decline in the effective tax rate in 1994 was assisted by
the realization of tax benefits from tax planning strategies implemented in the
second quarter. Bancorp's income tax expense differs from the amount computed
at statutory rates primarily due to tax-exempt interest from certain loans and
investment securities.
As indicated in Note 1 to the accompanying consolidated financial
statements, effective January 1, 1993, Bancorp changed its method of accounting
for income taxes from the deferred method to the asset and liability method
required by Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes." As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect on prior years of
adopting Statement No. 109 as of January 1, 1993, and its effect on 1993
earnings was not significant.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Bancorp's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 3
indicates how Bancorp has managed these elements. Average funding uses
increased $33,309,000 or 5.9 percent in 1994 compared with a $25,308,000 or 4.7
percent increase in 1993. In 1994, funds generated by deposits were invested in
securities until loan demand increased during the last half of the year.
Earning assets in 1993 reflected higher levels of securities and federal funds
sold and only a slight increase in loans.
TABLE 3. SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------- --------------------------------- ---------
Average Increase Average Increase Average
(Dollars in thousands) Balance (Decrease) % Balance (Decrease) % Balance
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING USES:
Federal funds sold $ 5,490 $ (4,987) (47.6)% $ 10,477 $ 2,318 28.4% $ 8,159
Taxable investment securities 101,125 6,669 7.1 94,456 12,490 15.2 81,966
Tax-exempt investment securities 67,401 7,615 12.7 59,786 8,923 17.5 50,863
Loans, net 419,877 24,012 6.1 395,865 1,577 0.4 394,288
---------------------------------------------------------------------------------------------------------------------------------
Total uses $ 593,893 $ 33,309 5.9% $ 560,584 $ 25,308 4.7% $ 535,276
=================================================================================================================================
FUNDING SOURCES:
Interest-bearing checking $ 64,042 $ 6,201 10.7% $ 57,841 $ 5,730 11.0% $ 52,111
Savings 107,293 6,882 6.9 100,411 8,934 9.8 91,477
Money market accounts 89,692 6,202 7.4 83,490 2,170 2.7 81,320
Certificates of deposit
Under $100,000 175,668 2,955 1.7 172,713 1,738 1.0 170,975
$100,000 and over 25,106 2,155 9.4 22,951 (5,838) (20.3) 28,789
Short-term borrowings 31,470 889 2.9 30,581 3,874 14.5 26,707
Noninterest-bearing funds (net)(1) 100,622 8,025 8.7 92,597 8,700 10.4 83,897
---------------------------------------------------------------------------------------------------------------------------------
Total sources $ 593,893 $ 33,309 5.9% $ 560,584 $ 25,308 4.7% $ 535,276
=================================================================================================================================
</TABLE>
(1) Noninterest-bearing liabilities and shareholders' equity less
noninterest-earning assets.
<PAGE> 24
Investment securities consist of two categories: available-for-sale
and held-to-maturity. Securities classified as held-to-maturity are those
securities that Bancorp has both the positive intent and ability to hold to
maturity and are carried at amortized cost. Securities classified as
available-for-sale are those securities which Bancorp intends to hold for an
indefinite period of time but not necessarily to maturity. These securities may
be sold as part of 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 in the accompanying consolidated balance sheet. The year-end investment
portfolio balance declined from last year by 3.3 percent to accommodate strong
loan growth. The percentage of the investment portfolio allocated to the
held-to-maturity and available-for-sale categories was 52.6 percent and 47.4
percent, respectively, at December 31, 1994 compared with 16.2 percent and 83.8
percent at year-end 1993. On December 31, 1994, Bancorp elected to transfer
available-for-sale securities having an amortized cost of $50,140,000 and a
fair value of $48,713,000 to the held-to-maturity category.
Table 4 presents the amortized cost of the investment portfolio at
December 31, 1994. The composition of the investment portfolio reflects
management's objectives of providing a liquid portfolio of both U.S. government
obligations and other investments with minimum levels of credit and interest
rate risk combined with an acceptable level of earnings. The average balance of
investment securities increased 9.3 percent in 1994 compared with 16.1 percent
in 1993. Average investment yield declined 32 basis points to 6.31 percent as
higher yielding securities were called or matured. Investment purchases in 1994
were primarily
TABLE 4. INVESTMENT PORTFOLIO DISTRIBUTION-BOOK VALUE (AMORTIZED COST)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
(In thousands) 1994(1) 1993(1) 1992
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 57,849 $ 55,824 $ 48,388
Obligations of states and
political subdivisions 69,968 65,343 53,162
Mortgage-backed securities 37,208 43,778 35,373
Other securities 2,226 2,101 300
---------------------------------------------------------------------------------------------
$167,251 $167,046 $137,223
=============================================================================================
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for amortization
of premiums and accretion of discounts, which differs from the amounts
reflected in the consolidated balance sheets due to fair value
adjustments made in accordance with Financial Accounting Standards
Board Statement No. 115.
concentrated in bank-qualified tax-exempt securities and U.S. Treasury and
government agency securities. Table 5 presents the approximate weighted average
taxable-equivalent yield and the maturity information for the portfolio at
December 31, 1994. The average maturity of the portfolio lengthened slightly
from 2.9 years in 1993 to 3.4 years in 1994. It is management's opinion that
none of the obligations in the investment portfolio present any material risk
characteristics which should be disclosed. Substantially all of the obligations
of states and political subdivisions are rated A or higher by Moody's Investors
Service,
TABLE 5. INVESTMENT PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
December 31, 1994
Maturing in:
---------------------------------------------------------------------------------------------------------------------------------
One year After one After five
or less through five years through ten years Total
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE(1):
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $25,924 4.50% $23,880 5.26% $ 1,000 5.03% $ 50,804 4.86%
Obligations of states and
political subdivisions(2) -- -- 2,234 8.46 -- -- 2,234 8.46
Mortgage-backed securities(3) 1,762 6.50 20,655 6.10 3,279 6.17 25,696 6.14
Equity securities -- -- -- -- -- -- 2,226 6.80
---------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 27,686 4.62 46,769 5.78 4,279 5.91 80,960 5.42
---------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies -- -- 7,045 4.59 -- -- 7,045 4.59
Obligations of states and
political subdivisions(2) 7,262 9.25 28,027 8.67 32,445 7.21 67,734 8.03
Mortgage-backed securities(3) -- -- 9,119 5.05 2,393 5.13 11,512 5.06
---------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 7,262 9.25 44,191 7.18 34,838 7.06 86,291 7.30
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities $34,948 5.58% $90,960 6.47% $39,117 6.94% $167,251 6.40%
=================================================================================================================================
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for amortization
of premiums and accretion of discounts, which differs from the amounts
reflected in the 1994 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 34%.
(3) Estimated prepayment assumptions have been considered in the
maturities for mortgage-backed securities based upon historical
trends.
22 | 23
<PAGE> 25
TABLE 6. LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development $ 19,454 4.2% $ 20,873 5.3% $ 17,850 4.6% $ 19,872 5.1% $ 14,033 3.8%
Secured by farmland 6,093 1.3 5,777 1.4 5,773 1.5 4,398 1.1 4,370 1.2
Residential mortgage 103,750 22.6 101,031 25.5 113,905 29.2 125,092 32.3 119,427 32.6
Other mortgage 81,297 17.7 70,958 17.9 77,858 20.0 106,929 27.6 56,075 15.3
Loans to farmers 1,815 0.4 1,810 0.4 1,074 0.3 1,821 0.5 2,162 0.6
Commercial and industrial 44,371 9.7 32,340 8.2 31,193 8.0 23,195 6.0 72,745 19.9
Consumer 197,213 42.9 158,197 39.9 136,562 35.0 99,932 25.8 91,042 24.8
Other loans 5,289 1.2 5,425 1.4 5,736 1.4 5,923 1.6 6,602 1.8
---------------------------------------------------------------------------------------------------------------------------------
Total loans $ 459,282 100.0% $396,411 100.0% $389,951 100.0% $ 387,162 100.0% $366,456 100.0%
=================================================================================================================================
</TABLE>
Loans are classified according to security, borrower, or purpose. Information
required to reclassify certain loan balances in 1990 to conform with the
classification methodology used in the other years presented is unavailable.
TABLE 7. LOAN MATURITIES
AND INTEREST SENSITIVITY(1)
<TABLE>
<CAPTION>
December 31, 1994
Maturing in:
----------------------------------------------------------------------------------------------
After one
In one year through After
(In thousands) or less(2) five years five years Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate
Construction and
land development $ 7,929 $11,525 $ -- $19,454
Secured by farmland 1,138 4,529 426 6,093
Loans to farmers 846 967 2 1,815
Commercial and industrial 31,973 12,177 221 44,371
Other loans 1,329 500 3,460 5,289
----------------------------------------------------------------------------------------------
Total $ 43,215 $29,698 $4,109 $77,022
==============================================================================================
Rate Sensitivity:
Predetermined rate $12,014 $1,298
Floating rate 17,684 2,811
----------------------------------------------------------------------------------------------
Total $29,698 $4,109
==============================================================================================
</TABLE>
(1) Excludes real estate mortgage loans and consumer loans.
(2) Includes demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts.
TABLE 9. MATURITY OF TIME DEPOSITS
OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
(In thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Maturing in:
3 months or less $10,010 $ 6,693 $10,387
Over 3 months
through 6 months 7,403 6,264 6,758
Over 6 months
through 12 months 5,550 7,105 2,509
Over 12 months 5,110 5,453 2,500
-----------------------------------------------------------------------------
Total $28,073 $ 25,515 $22,154
=============================================================================
</TABLE>
TABLE 10. FEDERAL FUNDS PURCHASED AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
End of period outstanding $31,959 $30,377 $26,215
Highest month-end balance 33,984 31,791 27,565
Average balance 29,539 28,902 25,008
Average rate of interest:
At end of year 5.28% 2.99% 2.99%
During year 4.09% 2.95% 3.30%
</TABLE>
TABLE 8. AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------------------
Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 76,076 --% $ 69,329 --% $ 62,595 --%
----------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits
Demand 64,042 2.30 57,841 2.59 52,111 3.15
Money market 89,692 2.96 83,490 3.02 81,320 3.70
Savings 107,293 2.77 100,411 2.94 91,477 3.55
Time 200,774 4.36 195,664 4.47 199,764 5.38
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 461,801 3.43 437,406 3.59 424,672 4.39
----------------------------------------------------------------------------------------------------------------------
Total average deposits $ 537,877 2.95% $506,735 3.10% $ 487,267 3.83%
======================================================================================================================
</TABLE>
<PAGE> 26
Inc. and approximately 78.3 percent are rated AAA. The aggregate book value of
obligations issued in the states of Pennsylvania and New Jersey were $6,854,000
and $6,738,000, respectively, which exceeds 10 percent of shareholders' equity
at December 31, 1994. The related fair values were $6,777,000 and $6,559,000,
respectively.
Average loans increased by 6.1 percent in 1994 compared with 0.4
percent in 1993. In 1994, loan demand was generally strong in all sectors
reflecting the improved economic conditions in Bancorp's market area. As
reflected in Table 6, year-end total gross loans increased $62.9 million or
15.9 percent in 1994 after increasing only 1.7 percent in 1993. The most
significant growth occurred in consumer loans, which increased 24.7 percent,
and commercial and industrial loans, which increased 37.2 percent. Based on
current economic conditions, it is anticipated that loan demand will continue
to remain strong in 1995, but future market rate increases may curtail demand
in certain sectors of the loan portfolio. Bancorp has no concentration of loans
where the aggregate of such a group of similar loans exceeds 10 percent of
total loans at December 31, 1994.
Deposits represent Bancorp's largest and most important funding
source. Average deposits increased 6.1 percent in 1994 compared with 1993. This
deposit growth was achieved despite the increasing competition for funds in
Bancorp's market area, which is indicative of Bancorp's strong reputation for
safety and soundness and its emphasis on core deposit accumulation and
retention as a basis for sound growth and profitability.
RISK ELEMENTS
Nonperforming Assets.
Table 11 summarizes Bancorp's nonperforming assets and contractually past due
loans for the past five years. Nonperforming assets at December 31, 1994
totaled $5,645,000 or 1.22 percent of the total of year-end loans and other
real estate owned. The year-earlier total was $4,660,000 or 1.17 percent.
Nonperforming loans were $2,086,000 or 0.45 percent of year-end loans versus
$1,579,000 or 0.40 percent at December 31, 1993, and $2,073,000 or 0.53 percent
at December 31, 1992. Non-residential real estate loans were the single largest
segment of total nonaccrual loans, totaling $1,830,000 and $1,100,000 at
December 31, 1994 and 1993, respectively. The amount of loans past due 90 days
or more that were not classified as nonperforming loans totaled $213,000 at
December 31, 1994 compared with $563,000 at December 31, 1993. 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 Bancorp's loan portfolio. Management believes that the amounts of
its nonperforming loans are modest in relation to the size of the loan
portfolio.
Other real estate owned comprises the single largest segment of
nonperforming assets. At December 31, 1994, other real estate owned, net of the
valuation allowance, was $3,559,000 or 0.77 percent of the total of year-end
loans and other real estate owned compared with $3,081,000 or 0.77 percent a
year earlier.
TABLE 11. NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans(1) $2,086 $1,579 $2,073 $1,025 $3,749
Restructured loans(2) -- -- -- -- --
Other real estate owned
net of valuation allowance(3) 3,559 3,081 3,272 2,135 --
-----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $5,645 $4,660 $5,345 $3,160 $3,749
=============================================================================================================================
Loans past due 90 or more days
as to interest or principal(4) $213 $563 $738 $1,462 $1,784
=============================================================================================================================
Nonperforming loans to
year-end loans 0.45% 0.40% 0.53% 0.26% 1.02%
Nonperforming assets to year-end loans
and other real estate owned 1.22% 1.17% 1.36% 0.81% 1.02%
Year-end allowance for credit
losses times nonperforming loans 2.65x 3.46x 2.73x 4.02x 1.08x
Year-end allowance for credit
losses times nonperforming assets 0.98x 1.17x 1.06x 1.30x 1.08x
</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) Restructured loans are "troubled debt restructurings" as defined in
Financial Accounting Standards Board Statement No. 15. Nonaccrual
loans and past due loans are not included in this category. There were
no material troubled debt restructurings in any period presented.
(3) 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.
(4) Nonaccrual loans are not included.
24 | 25
<PAGE> 27
Excluding the minority interest in the real estate asset of the limited
partnership referenced in Note 6 of the accompanying consolidated financial
statements, other real estate owned, net of the valuation allowance, declined
$216,000 from prior year levels. Bancorp continues efforts to expedite
disposition of these properties.
Potential Problem Loans.
At December 31, 1994, Bancorp had $25,641,000 in loans to borrowers who were
currently experiencing financial difficulties such that management had concerns
that such loans might, in the future, become classified as nonaccrual or
delinquent. Payments were current for 82.9 percent of these loans and 73.1
percent was fully secured by real estate. Potential problem loans totaled
$31,779,000 at December 31, 1993. The decrease of $6,138,000 in the amount of
these loans in 1994 is a reflection of a continued improvement in credit
quality. These loans are subject to constant management attention and their
classification is reviewed periodically. When evaluating the quality of the
loan portfolio, management uses a classification system that categorizes
potential problem loans into three groups: other loans especially mentioned,
substandard, or doubtful/loss. All loans categorized according to this system
are included in potential problem loans or in Table 11.
Allowance for Credit Losses.
Annual provisions are made to maintain the allowance for credit losses at
levels determined by management to be necessary to adequately absorb possible
losses in the loan portfolio and off-balance sheet credits. Principal factors
in management's analysis of the adequacy of the allowance are the historical
relationships among loans outstanding, loss experience, delinquency levels,
individual loan reviews, the current level of the allowance, a continuing
evaluation of the present and future local and national economic environment
and the various trade sectors in Bancorp's trading area, and regular and
frequent reviews of portfolio quality by federal bank supervisory authorities
and internal examination staff. Table 12 shows certain information related to
the allowance and the credit losses of Bancorp for the last five years. The
provision for credit losses charged to earnings was $900,000 in 1994, exceeding
net charge-offs by $62,000. The provision was lower by $600,000, or 40.0
percent from the $1,500,000 in 1993. Net charge-offs for 1994 were $838,000 or
0.20 percent of average loans compared with $1,695,000 or 0.43 percent in 1993.
The decline in net charge-offs was primarily concentrated in the commercial
real estate portfolio. Although the allowance coverages shown in Table 11
declined from prior year levels, management believes its allowance for credit
losses is adequate to cover anticipated credit losses at December 31, 1994.
During 1995, management will continue to carefully monitor its loan portfolio
and the current economic environment.
TABLE 12. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding
less average unearned income(1) $417,589 $392,161 $390,667 $375,412 $347,635
======================================================================================================================
Allowance for credit losses
at beginning of year $5,460 $5,655 $4,117 $4,044 $3,194
----------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 27 754 484 43 36
Commercial and industrial 35 160 317 1,330 7
Consumer 1,977 1,623 839 826 552
----------------------------------------------------------------------------------------------------------------------
Total loans charged off 2,039 2,537 1,640 2,199 595
----------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate 68 18 107 1 9
Commercial and industrial 18 2 45 106 17
Consumer 1,115 822 411 365 319
----------------------------------------------------------------------------------------------------------------------
Total recoveries 1,201 842 563 472 345
----------------------------------------------------------------------------------------------------------------------
Net charge-offs 838 1,695 1,077 1,727 250
----------------------------------------------------------------------------------------------------------------------
Additions charged to
operating expense 900 1,500 2,615 1,800 1,100
----------------------------------------------------------------------------------------------------------------------
Allowance for credit
losses at end of year $5,522 $5,460 $5,655 $4,117 $4,044
======================================================================================================================
Ratio of net charge-offs to
average loans outstanding .20% .43% .28% .46% .07%
======================================================================================================================
</TABLE>
(1) Excludes loans held for sale.
<PAGE> 28
As indicated in Note 18 of the accompanying consolidated financial
statements, Bancorp is required to adopt, beginning January 1, 1995, a new
accounting standard which prescribes the recognition criteria for loan
impairment and the measurement methods for certain impaired loans whose terms
are modified in a troubled debt restructuring. The effect of initially applying
the new standard is reported as part of the provision for credit losses.
Adoption of the new standard will not have a material impact on the provision
for credit losses.
Table 13 presents an allocation of the allowance to various loan
categories. This allocation does not 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 categories in which future
charge-offs may ultimately occur.
Environmental Liability.
Bancorp runs a risk in its lending activities that a particular borrower might
sustain adverse financial circumstances as a result of the cost of compliance
or remediation following failure to comply with environmental laws. Borrowers
could, as a result, be unable to repay loans previously extended. Additionally,
collateral values may decline. Bancorp seeks to avoid both circumstances by
understanding the business of the borrower. An environmental risk assessment is
completed for each borrower and each parcel of real property collateral to
evaluate the potential for environmental risk and to assist with quantifying
the risk, if any. Bancorp periodically monitors existing credits for
environmental liability.
ASSET AND LIABILITY MANAGEMENT
The primary objective of our asset/liability management program is to identify
opportunities for maximizing net interest margins while ensuring adequate
liquidity and carefully managing interest rate risk. Our Asset/Liability
Committee manages these objectives through the establishment of policies
regarding balance sheet structure, funding practices, and interest rate
sensitivity.
Liquidity.
Liquidity management involves our ability to meet the borrowing needs and
deposit withdrawal requirements of customers and to provide adequate funds to
support asset growth. Liquidity is provided by strategies to attract and retain
deposits, principal and interest payments on loans, fee income, interest
payments on and maturities of investment securities, and other cash flows from
operations. Providing liquidity in a profitable manner is especially important
in today's environment of deregulation and volatile money markets. Bancorp
maintains a substantial base of core demand, savings, and money market account
deposits supplemented by other deposits of varying maturities and rates.
Deposit products comprised 93.6 percent of average interest-bearing liabilities
in 1994 compared with 93.5 percent in 1993. This deposit base will be enhanced
in 1995 by Bancorp's recent acquisition activities. Core deposits are
supplemented by a stable base of customers who utilize repurchase agreements as
a money management vehicle. Reliance on certificates of deposit in excess of
$100,000 is minimal, averaging only 5.4 percent of total average
interest-bearing deposits during 1994 compared with 5.2 percent in 1993. The
loan to deposit ratio, excluding loans held for sale, averaged 77.6 percent in
1994 compared with 77.4 percent in the prior year. Table 5 reflects the
maturity distribution of the $167,251,000 of investment securities at December
31, 1994, of which 20.9 percent will mature within one year and an additional
54.4 percent between one and five years. Bancorp was also a net seller of
federal funds during the year. Correspondent relationships are maintained with
several larger banks to access purchases of federal funds when needed. Also
available as a secondary liquidity source are secured advances from the Federal
Home Loan Bank of Atlanta. In the loan portfolio, emphasis is directed to
granting loans with short maturities and floating rates where possible.
Interest Rate Risk.
Interest rate risk management refers to the vulnerability of earnings to
changes in the levels of interest rates and seeks to avoid fluctuating net
interest margins and to enhance consistent
TABLE 13. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and
land development $ 951 4.2% $2,112 5.3% $1,771 4.6% $ 589 5.1% $ 723 3.8%
Residential mortgage 178 22.6 115 25.5 473 29.2 33 32.3 -- 32.6
Other 718 17.7 651 17.9 296 20.0 196 27.6 -- --
Commercial and industrial 1,229 9.7 671 8.2 1,482 8.0 1,952 6.0 1,969 19.9
Consumer 1,850 42.9 1,220 39.9 893 35.0 479 25.8 252 24.8
Unallocated 596 2.9 691 3.2 740 3.2 868 3.2 1,100 18.9
-----------------------------------------------------------------------------------------------------------------------------
Total allowance
for credit losses $5,522 100.0% $5,460 100.0% $5,655 100.0% $4,117 100.0% $4,044 100.0%
=============================================================================================================================
</TABLE>
(1) Reflects the percentage of loans in each category to total loans.
26 | 27
<PAGE> 29
growth of net interest income through periods of changing interest rates.
Bancorp uses the concept of natural hedges to manage its interest rate risk.
Derivative financial instruments, such as futures, forwards, swaps, options
contracts, or other financial instruments with similar characteristics are not
utilized. By managing the maturity and repricing characteristics of its
interest-earning assets and funding sources, Bancorp can effectively control
its net interest margins, liquidity position, asset growth, and capital
requirements.
Rates on different assets and liabilities within the same maturity
category adjust differently to changes in interest rates at varying degrees
over different periods of time. Although certain assets and liabilities have
the capacity to move in reaction to a change in rates, they may not always do
so. 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. Table 14 summarizes Bancorp's interest rate sensitivity at December
31, 1994. The cumulative gap position represents the net amount of assets and
liabilities that will most likely reprice through the period indicated, given
no changes in the balance sheet mix. The effect on income depends upon the
level and direction of any change in rates. In periods of rising interest
rates, net asset sensitive positions generally have the effect of increasing
earnings. In periods of declining interest rates, this cumulative position has
the opposite effect.
Since it is difficult to predict the movement of interest rates,
management tries to maintain a relatively balanced sensitivity position, while
not forgoing any opportunity to benefit from current rate conditions. As
indicated in Table 14, Bancorp had a net asset sensitive position of
$30,711,000 within the one year time frame. This position would indicate that
Bancorp has the potential for increased earnings if market interest rates
continue to rise in the next twelve months.
Due to inherent limitations in this traditional gap analysis technique
for measuring interest sensitivity, management also employs more sophisticated
interest sensitivity measurement tools to analyze the volatility of net
interest income as a result of changes in interest rates. Simulation models are
used to subject the current repricing gap positions to rising and falling
incremental changes in interest rates of 100, 200, and 300 basis points, and to
forecast how net interest income varies under alternative interest rate and
business activity scenarios. Management also measures the effects of changes in
interest rates on the market value of assets, liabilities, and
off-balance-sheet contracts.
CAPITAL RESOURCES
The Federal Reserve Board and the Comptroller of the Currency have historically
determined the adequacy of a depository institution's capital resources by
comparison of its capital to its assets. Specifically, capital adequacy was
based on the ratios of primary capital to total assets and total capital to
total assets.
The Federal Reserve Board and the Comptroller have adopted capital adequacy
guidelines requiring Bancorp and the Bank, respectively, to maintain specific
minimum amounts of tangible shareholders' equity and additional amounts based
upon the amount and nature of their assets and commitments currently at risk.
The risk rules specify four categories of asset or commitment risk. Each asset
and commitment of Bancorp is categorized and weighted appropriately, and
capital is then compared to the aggregate value of such risk-weighted assets
and commitments to determine if additional capital is required. These
risk-based capital standards became effective at year-end 1990. At December 31,
1994, Bancorp's ratio of total capital to risk-weighted assets was 12.89
percent as compared to the regulatory guideline for 1994 of 8.00 percent.
Banking organizations must also maintain a minimum ratio of 3.00
percent Tier 1 capital (primarily shareholders' equity) to total assets
(leverage ratio), although most banking organizations are expected to maintain
ratios of at least 100 to 200 basis points above the 3.00 percent minimum.
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.
TABLE 14. INTEREST RATE SENSITIVITY ANALYSIS(1)
<TABLE>
<CAPTION>
at December 31, 1994
1-30 31-90 91-180 181-270 271-365 1-3 3-5 Beyond
(In thousands) days days days days days years years 5 years Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 2,100 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2,100
Investment securities(2) 4,614 7,144 8,794 17,756 11,474 59,579 24,106 28,320 161,787
Loans, net 98,057 31,791 43,485 42,987 45,807 170,145 7,109 12,144 451,525
------------------------------------------------------------------------------------------------------------------------------------
Total $ 104,771 $ 38,935 $ 52,279 $60,743 $57,281 $229,724 $ 31,215 $ 40,464 $615,412
====================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits $ 45,245 $ 54,211 $ 56,556 $46,970 $46,424 $158,511 $ 81,513 $ 525 $489,955
Short-term borrowings 33,892 -- -- -- -- -- -- -- 33,892
------------------------------------------------------------------------------------------------------------------------------------
Total $ 79,137 $ 54,211 $ 56,556 $46,970 $46,424 $158,511 $ 81,513 $ 525 $523,847
====================================================================================================================================
INTEREST SENSITIVITY GAP
Period $ 25,634 $ (15,276) $ (4,277) $13,773 $10,857 $ 71,213 $ (50,298) $ 39,939 $91,565
Cumulative 25,634 10,358 6,081 19,854 30,711 101,924 51,626 91,565 91,565
</TABLE>
(1) Excludes nonaccrual loans and other nonrate-sensitive assets.
(2) Reflects fair value adjustments for securities available for sale.
<PAGE> 30
TABLE 15. REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
Percent of
Regulatory
(Dollars in thousands) Amount Assets
-----------------------------------------------------------------------------
<S> <C> <C>
Tangible capital $58,405 8.92%
Tangible capital requirements 3.00
-----------------------------------------------------------------------------
Excess 5.92%
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Percent of
Risk-Weighted
(Dollars in thousands) Amount Assets
-----------------------------------------------------------------------------
<S> <C> <C>
Core capital (Tier 1) $58,405 11.77%
Risk-based capital requirements 4.00
-----------------------------------------------------------------------------
Excess 7.77%
=============================================================================
Core and supplementary capital (Total) $63,927 12.89%
Risk-based capital requirements 8.00
-----------------------------------------------------------------------------
Excess 4.89%
=============================================================================
</TABLE>
EFFECTS OF CHANGING PRICES
A bank's asset and liability structure is substantially different from that of
an industrial company, in that virtually all assets and liabilities of a bank
are monetary in nature. Accordingly, changes in interest rates may have a
significant impact on a bank's 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. Movement in interest rates
is a result of the perceived changes in inflation and the effects of monetary
and fiscal policies. Reference to the various supplemental information shown
elsewhere in this annual report will assist in the understanding of how well
Bancorp is positioned to react to changing interest rates.
Many categories of noninterest expense are more directly affected by
the effects of inflation. This is especially true of personnel costs and other
operating expenses. Management is constantly searching for ways to increase the
efficiency of Bancorp's operation to minimize inflation's impact. In the
future, as was the case in 1994, the growth of Bancorp's noninterest expenses
may be determined to a greater extent by the rate of growth in bank operations
rather than the rate of inflation. As in the past, management will continually
monitor noninterest expenses.
YEAR ENDED DECEMBER 31, 1993
COMPARED WITH 1992
Bancorp earned $7,603,000 or $1.94 per share in 1993 compared with $7,117,000
or $1.82 per share in 1992. Per share earnings have been restated for the five
percent stock dividend distributed in 1994. Return on average total assets was
1.27 percent for 1993 and 1.25 percent for 1992. Return on equity was 13.90
percent in 1993 and 14.23 percent in 1992. The increase in net income for 1993
reflected improvement in the quality of the loan portfolio and the effects of
the declining interest rate environment.
Net interest income on a taxable-equivalent basis was $28,941,000 in
1993 compared with $28,051,000 in 1992, an increase of $890,000 or 3.2 percent.
This increase resulted from increases totaling $1,746,000 due to changes in
volume which were offset by decreases totaling $856,000 caused by changes in
rates.
Total average earning assets increased $25,308,000 or 4.7 percent from
1992 to 1993. The average rate earned on these assets declined 76 basis points
as the average rates earned on all categories of earning assets declined from
1992 to 1993. Average rates paid on funding sources declined 78 basis points
for the same period. Therefore, the net interest spread increased two basis
points to 4.58 percent in 1993. The net interest margin declined 8 basis points
to 5.16 percent in 1993 when compared with 1992 because the percentage increase
in average earning assets was greater than the percentage increase in net
interest income. The margin was also negatively affected by the decreased value
of noninterest-bearing funds in the lower interest rate environment.
Noninterest income, exclusive of securities gains, increased $890,000
or 17.7 percent in 1993 compared with 1992. Trust fees increased $320,000 or
41.5 percent as the market value of assets under management increased from
$159,190,000 to $178,918,000. Bank card income increased 14.1 percent in 1993
compared with 1992. Gains from sales of mortgage loans increased $105,000 in
1993 over 1992 as the low interest rate environment triggered high levels of
refinancing activity.
Noninterest expenses increased $1,330,000 or 6.8 percent in 1993
compared with 1992. Salaries and benefits increased $539,000 or 5.4 percent due
to increases in performance-based bonuses and profit-sharing plan
contributions, as well as the establishment of a matching contribution program
for 401(k) plan participants. Stationery and supplies expense increased
$194,000 or 37.0 percent in 1993 when compared with 1992 due to additional
costs associated with regulatory compliance. Bank card processing fees
increased $190,000 or 19.1 percent due to increased transaction volumes.
Income tax expense totaled $3,128,000 in 1993 compared with $2,758,000
in 1992. Bancorp's effective tax rate for 1993 was 29 percent compared with 28
percent in 1992. The effective tax rates reflect the benefit of tax-exempt
loans and investment securities.
Bancorp had total assets of $617,668,000 as of December 31, 1993, up
$33,939,000 or 5.8 percent over a year earlier. During 1993, total average
assets increased 5.0 percent and average earning assets increased 4.7 percent.
Loans decreased as a percentage of average earning assets from 73.7 in 1992 to
70.6 in 1993 due to weak commercial and industrial loan demand. Growth in
consumer loans, particularly in the indirect automobile loan market, offset the
decline in other types of loans. The investment portfolio increased 16.1
percent on average during 1993 and increased to 27.5 percent of average earning
assets compared with 24.8 percent of average earning assets in 1992.
Total average interest-bearing deposits were 3.0 percent higher in
1993 compared with 1992, with increases in all categories except large
certificates of deposit, which were not necessary due to the lack of loan
demand. Although there was growth in all other categories, as a result of
customer preferences, there was a shift in balances from certificates of
deposit to the more liquid savings and demand accounts. Average short-term
borrowings increased 14.5 percent to comprise 6.5 percent of average
interest-bearing liabilities during 1993 compared with 5.9 percent of average
interest-bearing liabilities during 1992, as commercial customers were
attracted to the earnings provided by our repurchase agreement accounts. Total
shareholders' equity was $58,639,000 at December 31, 1993, a 12.0 percent
increase over the 1992 year-end total of $52,345,000.
28 | 29
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
December 31,
---------------------------------
(Dollars in thousands, except per share amounts) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 15) $ 22,132 $ 16,848
Federal funds sold 2,100 7,275
----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents (Notes 1 and 14) 24,232 24,123
----------------------------------------------------------------------------------------------------------------------
Loans held for sale (Notes 1 and 14) 149 8,696
----------------------------------------------------------------------------------------------------------------------
Investment securities (Notes 1, 3, and 14)
Held-to-maturity, fair value of $84,405 in 1994 and
$28,159 in 1993 86,291 27,487
Available-for-sale, at fair value 77,649 142,021
----------------------------------------------------------------------------------------------------------------------
Total investment securities 163,940 169,508
----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income of $10 in 1994 and $74 in 1993
(Notes 1, 4, and 14) 459,272 396,337
Less: Allowance for credit losses (Notes 1, 4, and 18) (5,522) (5,460)
----------------------------------------------------------------------------------------------------------------------
Net loans 453,750 390,877
----------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net (Notes 1 and 5) 12,927 11,870
Other real estate owned (Notes 1, 6, and 11) 3,559 3,081
Interest receivable (Note 14) 4,573 4,059
Intangible assets (Note 1) 4,501 633
Other assets 7,625 4,821
----------------------------------------------------------------------------------------------------------------------
33,185 24,464
----------------------------------------------------------------------------------------------------------------------
Total assets $675,256 $617,668
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Notes 2, 7, 14, and 19)
Noninterest-bearing $ 86,341 $ 72,594
Interest-bearing 489,955 449,560
----------------------------------------------------------------------------------------------------------------------
Total deposits 576,296 522,154
Short-term borrowings (Notes 8 and 14)
Federal funds purchased and
securities sold under agreements to repurchase 31,959 30,377
Other short-term borrowings 1,933 2,014
Accrued interest and other liabilities (Note 14) 5,819 4,484
----------------------------------------------------------------------------------------------------------------------
Total liabilities 616,007 559,029
----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
----------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Note 16)
Common stock, par value $5 per share; authorized 10,000,000 shares;
issued and outstanding 3,946,984 in 1994 and 3,745,651 in 1993
(Note 10) 19,735 18,728
Surplus 19,614 15,811
Retained earnings (Note 15) 22,873 22,589
Net unrealized gain (loss) on securities available for sale (Note 1) (2,973) 1,511
----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 59,249 58,639
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $675,256 $617,668
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 32
CONSOLIDATED STATEMENTS OF INCOME
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
(Dollars in thousands, except per share amounts) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Notes 1 and 4) $35,988 $34,842 $37,142
Interest and dividends on investment securities (Note 1)
Taxable 5,227 5,217 5,262
Tax-exempt 3,567 3,306 3,092
Interest on federal funds sold 222 322 294
----------------------------------------------------------------------------------------------------------------------------
Total interest income 45,004 43,687 45,790
----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits
Checking 1,470 1,499 1,639
Savings 2,969 2,948 3,250
Money market accounts 2,655 2,524 3,012
Certificates of deposit under $100,000 7,679 7,816 9,281
Certificates of deposit $100,000 and over 1,081 934 1,458
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,208 854 825
Interest on other short-term borrowings 82 48 59
----------------------------------------------------------------------------------------------------------------------------
Total interest expense 17,144 16,623 19,524
----------------------------------------------------------------------------------------------------------------------------
Net interest income 27,860 27,064 26,266
Provision for credit losses (Notes 1, 4, and 18) 900 1,500 2,615
----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 26,960 25,564 23,651
----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income (Note 1) 1,144 1,091 771
Service charges on deposit accounts 2,193 1,854 1,789
Net gains on sales of securities -- 2 619
Net gains on sales of property 725 139 32
Other operating income (Note 11) 2,629 2,836 2,438
----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,691 5,922 5,649
----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries 9,516 8,822 8,406
Pension and other employee benefits (Note 10) 2,104 1,753 1,630
Occupancy expense (Notes 5 and 13) 1,437 1,392 1,306
Equipment expense (Notes 5 and 13) 1,085 1,048 1,040
Other operating expense (Note 11) 8,652 7,740 7,043
----------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 22,794 20,755 19,425
----------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 10,857 10,731 9,875
Provision for income taxes (Notes 1 and 9) 2,901 3,128 2,758
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,956 $ 7,603 $ 7,117
============================================================================================================================
EARNINGS PER COMMON SHARE
Based on weighted average shares outstanding of 3,938,805 in 1994,
3,924,310 in 1993, and 3,917,997 in 1992 (Note 1) $2.02 $1.94 $1.82
============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30 | 31
<PAGE> 33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
Three years ended December 31, 1994
----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
Common Retained on Securities
(Dollars in thousands, except per share amounts) Stock Surplus Earnings Available for Sale Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991 $18,646 $15,542 $13,784 $ -- $47,972
Net income -- -- 7,117 -- 7,117
Dividend reinvestment plan -- -- (18) -- (18)
Cash dividends paid ($.70 per share) -- -- (2,762) -- (2,762)
Stock options exercised (3,639 shares) 18 18 -- -- 36
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 18,664 15,560 18,121 -- 52,345
Net income -- -- 7,603 -- 7,603
Dividend reinvestment plan -- -- (21) -- (21)
Cash dividends paid ($.75 per share) -- -- (2,952) -- (2,952)
Stock repurchase (11,368 shares) (57) (47) (162) -- (266)
Stock options exercised (24,151 shares) 121 298 -- -- 419
Fair value adjustment for securities
available for sale, net -- -- -- 1,511 1,511
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 18,728 15,811 22,589 1,511 58,639
Net income -- -- 7,956 -- 7,956
Dividend reinvestment plan -- -- (46) -- (46)
Cash dividends paid ($.78 per share) -- -- (3,079) -- (3,079)
Stock repurchase (7,688 shares) (39) (38) (141) -- (218)
Stock options exercised (22,521 shares) 113 368 -- -- 481
5% stock dividend (186,500 shares) 933 3,473 (4,406) -- --
Fair value adjustment for securities
available for sale, net -- -- -- (4,484) (4,484)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $19,735 $19,614 $22,873 $(2,973) $59,249
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,956 $ 7,603 $ 7,117
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for credit losses 900 1,500 2,615
Provision for other real estate owned 270 462 325
Depreciation and amortization 1,020 1,009 993
Amortization of intangibles 134 38 --
Net premium amortization on investment securities 512 932 865
Decrease (increase) in interest receivable (514) (64) 799
Increase (decrease) in interest payable 424 (137) (390)
Deferred income tax benefits (153) (369) (1,055)
Accretion of net loan origination fees (249) (174) (264)
Gain on sales of property (725) (139) (32)
Gain on sales of securities -- (2) (619)
Decrease (increase) in loans held for sale 8,547 (4,152) (4,544)
Decrease (increase) in other assets 64 (299) (211)
Increase (decrease) in other liabilities 227 (292) 785
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,413 5,916 6,384
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment secutities -- (82,748) (79,806)
Purchases of investment securities to be held to maturity (10,140) -- --
Purchases of investment securities available for sale (31,835) -- --
Proceeds from sales/calls of investment securities -- 11,517 27,421
Proceeds from calls of investment securities available for sale 2,230 -- --
Proceeds from maturing investment securities available for sale 37,602 -- --
Proceeds from maturing investment securities -- 40,478 36,235
Net increase in loans (63,524) (8,798) (5,291)
Purchases of premises and equipment (2,113) (1,807) (1,509)
Proceeds from sales of property 949 894 210
Intangible assets (4,002) (671) --
Other investing activities (252) (68) --
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (71,085) (41,203) (22,740)
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, interest-bearing
checking, savings and money market accounts 37,227 16,249 35,207
Net increase (decrease) in certificates of deposit 16,915 7,528 (13,232)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 1,582 4,162 5,792
Net increase (decrease) in other short-term borrowings (81) 135 (130)
Cash dividends paid (3,079) (2,952) (2,762)
Dividend reinvestment plan (46) (21) (18)
Proceeds from issuance of common stock 481 419 36
Repurchase of common stock (218) (266) --
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,781 25,254 24,893
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 109 (10,033) 8,537
Cash and cash equivalents at beginning of year 24,123 34,156 25,619
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,232 $ 24,123 $ 34,156
=================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 16,720 $ 16,760 $ 19,914
Cash payments for income tax 3,083 4,135 3,601
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 -- -- --
Loan amounts transferred to other real estate owned -- 759 1,632
Fair value adjustment for securities available for sale,
net of deferred income taxes payable (benefits) (4,484) 1,511 --
</TABLE>
See notes to consolidated financial statements.
32 | 33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F&M Bancorp and Subsidiary
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 subsidiary, Farmers and Mechanics National Bank (the "Bank"). The
Bank offers various loan, deposit, and other financial service products to its
customers. The Bank's customers include individuals and commercial enterprises
located within the State of Maryland. Its principal market area encompasses
Frederick County and portions of the adjacent counties within the State.
The accounting and reporting policies and practices of F&M Bancorp and its
subsidiary ("Bancorp") conform with generally accepted accounting principles
and with prevailing practice within 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 the Bank. All material inter-company accounts and transactions are
eliminated in consolidation. In Parent Company financial statements, the
investment in subsidiary is accounted for using the equity method of
accounting.
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, and
federal funds sold. Generally, federal funds are sold for one-day periods.
Loans Held for Sale.
Loans held for sale are carried at the lower of aggregate cost or fair value.
Fair value is estimated to equal the carrying amount due to the anticipated
short holding period of these loans.
Investment Securities.
Effective December 31, 1993, 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. 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.
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 holding gains and
losses included in earnings.
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.
Interest and Fees on Loans.
Interest on loans is accrued at the contractual rate on the principal amount
outstanding. 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 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 the judgment of management, 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 is available to absorb losses inherent in the
credit extension process. The entire allowance is available to absorb losses
related to the loan portfolio and other extensions of credit, including
off-balance sheet credit exposures.
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 adequacy of
the allowance is performed. This assessment is made in the context of
historical losses, as well as existing economic conditions.
Bank Premises and Equipment.
Bank premises, equipment, and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed principally by the straight-line method for bank premises and
leasehold improvements and by accelerated methods for equipment. The estimated
useful lives for computing depreciation and amortization are as follows:
<TABLE>
<CAPTION>
Years
---------------------------------------------------
<S> <C>
Bank premises 15 to 50
Furniture and equipment 3 to 10
Leasehold improvements 10 to 25
</TABLE>
<PAGE> 36
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 reflected in the
consolidated statements of income in the year of disposition. Maintenance and
repairs are charged to expense as incurred.
Other Real Estate Owned.
Other real estate owned includes: banking premises no longer used for business
operations, real estate acquired by foreclosure (in partial or complete
satisfaction of debt), and real estate that has been substantively foreclosed.
In-substance foreclosures include loans where the borrower has little or no
equity in the collateral, repayment of the loan is expected to come from the
sale or operation of the collateral, and it is doubtful that the borrower can
rebuild equity in the foreseeable future.
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 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
expenses. Gains or losses realized on disposition are reflected in noninterest
income. Reference should also be made to Note 6.
Intangible Assets.
Intangible assets represent the excess of the fair value of liabilities assumed
over the fair value of tangible assets acquired in branch acquisitions. These
intangible assets are being amortized using the straight-line method over the
estimated periods benefited of ten years.
Income Taxes.
For the year ended December 31, 1992, the provision for income taxes was
computed based on reported income adjusted for differences that will never
enter into the determination of taxes under applicable tax laws. Deferred
income taxes were provided for timing differences between items of income and
expense reported in the financial statements and those reported for income tax
purposes. The differences related principally to provisions for credit losses.
Effective January 1, 1993, Bancorp changed from the deferred method of
accounting for income taxes to an asset and liability method in accordance with
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes." (See Note 9).
As prescribed in Statement No. 109, provisions for income taxes are
based on taxes payable or refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal securities) and
deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted
income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Per Share Data.
Earnings per share is based on the weighted average number of shares
outstanding during each year after giving retroactive effect to stock dividends
and stock splits. No material dilution results from the assumed exercise of
stock options.
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 financial
statements. Trust income is recorded on a cash basis and would not be
materially different using the accrual method.
Deferred Compensation.
Bancorp is accruing the cost of supplemental retirement benefits (deferred
compensation) payable to certain key employees over their service periods to
the date those employees, or their beneficiaries, are fully eligible for
benefits.
Reclassifications.
Certain reclassifications to prior year amounts have been made to conform with
the current year presentation.
2. ACQUISITIONS
On November 18, 1994, Bancorp executed a purchase and assumption agreement with
the Resolution Trust Corporation in which it acquired certain assets and
assumed $36.9 million in deposit liabilities of three Montgomery County,
Maryland branches of Standard Federal Savings Association. The transaction was
accounted for using the purchase method of accounting.
On December 9, 1994, Bancorp announced it had reached an agreement to
acquire all of the outstanding capital stock of the Bank of Brunswick in a
tax-free exchange transaction. Under the terms of the agreement the Bank of
Brunswick will merge into Farmers and Mechanics National Bank. The exchange
rate will be computed based on 2.5 times the net tangible book value of the
Bank of Brunswick common stock at the date of closing, but in no event shall
less than nine shares of Bancorp common stock be exchanged for each share of
the Bank of Brunswick common stock. The acquisition is subject to the approval
of federal regulatory authorities, and is expected to be consummated by June,
1995. The Bank of Brunswick operates two branch offices in Frederick County,
Maryland, and reported assets totaling $28.6 million as of December 31, 1994.
During 1993, Bancorp purchased certain assets and assumed $9.2 million
in deposits associated with the Thurmont, Maryland branch of the First National
Bank of Maryland. Additionally, in 1993 Bancorp purchased certain assets and
assumed $3.6 million in deposits associated with the Frederick, Maryland branch
of the Citizens Bank of Maryland. Both transactions were accounted for using
the purchase method of accounting.
34 | 35
<PAGE> 37
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments at December 31, 1994
and 1993, summarized by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.
<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
Within 1 year $25,924 $-- $ 321 $25,603
After 1 but
within 5 years 23,880 -- 1,125 22,755
After 5 but
within 10 years 1,000 -- 127 873
----------------------------------------------------------------------------------------------------------------------
50,804 -- 1,573 49,231
----------------------------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions
After 1 but
within 5 years 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 securities
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
After 1 but
within 5 years $ 7,045 $-- $ -- $ 7,045
----------------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions
Within 1 year 7,262 -- -- 7,262
After 1 but
within 5 years 28,027 12 153 27,886
After 5 but
within 10 years 32,445 6 1,751 30,700
----------------------------------------------------------------------------------------------------------------------
67,734 18 1,904 65,848
----------------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities 11,512 -- -- 11,512
----------------------------------------------------------------------------------------------------------------------
Total securities to be
held to maturity(1) $86,291 $18 $1,904 $84,405
======================================================================================================================
</TABLE>
(1) On December 31, 1994, Bancorp transferred investment securities
available for sale having an amortized cost of $50,140,000 and a fair
value of $48,713,000 to the held-to-maturity category. The fair value
at the date of transfer is reflected as amortized cost in the table
above. The net unrealized loss of $1,427,000 on these transferred
securities continues to be reported as a separate component of
shareholders' equity, net of the related deferred tax effect, and
shall be amortized over the remaining lives of the securities using
the interest method.
<TABLE>
<CAPTION>
December 31, 1993
---------------------------------------------------------------------------------
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
Within 1 year $ 19,115 $ 214 $ -- $ 19,329
After 1 but
within 5 years 35,709 89 76 35,722
After 5 but
within 10 years 1,000 -- 3 997
----------------------------------------------------------------------------------------------------------------------
55,824 303 79 56,048
----------------------------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions
Within 1 year 5,684 101 -- 5,785
After 1 but
within 5 years 29,168 1,783 -- 30,951
After 5 but
within 10 years 3,004 131 -- 3,135
----------------------------------------------------------------------------------------------------------------------
37,856 2,015 -- 39,871
----------------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities 43,778 457 234 44,001
----------------------------------------------------------------------------------------------------------------------
Total debt securities 137,458 2,775 313 139,920
Equity securities 2,101 -- -- 2,101
----------------------------------------------------------------------------------------------------------------------
Total securities
available for sale $139,559 $2,775 $313 $142,021
======================================================================================================================
Held-to-maturity:
Obligations of states and
political subdivisions
After 5 but
within 10 years $ 27,487 $ 730 $ 58 $ 28,159
----------------------------------------------------------------------------------------------------------------------
Total securities to be
held to maturity $ 27,487 $ 730 $ 58 $ 28,159
======================================================================================================================
</TABLE>
Fair value was estimated using various pricing methods. Fair value for
obligations of states and political subdivisions was estimated by an
independent pricing service using a pricing matrix. Fair value for all other
debt securities was estimated using multiple independent pricing services to
arrive at an average price.
Proceeds from sales of investment securities during 1993 were
$11,517,000. Gross gains of $35,000 and gross losses of $33,000 were realized
on those sales during 1993. Proceeds from sales of investment securities
available for sale totaled $2,230,000 in 1994. No gross gains or losses were
realized on those sales.
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 $78,510,000 at December 31, 1994 and
$71,614,000 at December 31, 1993.
Interest earned on obligations of states and political subdivisions is
exempt from federal income taxes. However, the federal interest expense
deduction is limited for interest deemed to be incurred to purchase or carry
these tax-exempt obligations. These tax-exempt securities comprised 42.7
percent and 39.7 percent of the total carrying value of the investment
portfolio at December 31, 1994 and 1993, respectively.
<PAGE> 38
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------------------
(In thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans
Construction and
land development $ 19,454 $ 20,873
Secured by farmland 6,093 5,777
Secured by 1 to 4 family
residential properties 103,750 101,031
Other 81,297 70,958
Loans to farmers 1,815 1,810
Commercial and industrial loans 44,371 32,340
Loans to individuals for
household, family, and
other personal expenditures 185,014 146,550
Credit card loans 12,199 11,647
All other loans 5,289 5,425
----------------------------------------------------------------------------------------------------------------------
Total loans $ 459,282 $ 396,411
======================================================================================================================
</TABLE>
Loans to states and political subdivisions, and industrial revenue
bonds are included in all other loans and in total loans in the consolidated
balance sheets. Interest income from these loans is included in interest and
fees on loans in the consolidated statements of income.
The fair value of the loan portfolio at December 31, 1994 and 1993 was
estimated to be $451,315,000 and $393,538,000, respectively, compared with the
net loan carrying amounts of $453,750,000 and $390,877,000, respectively. Its
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 performing
and nonperforming loans.
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 to borrowers 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 due to the frequent repricing of these instruments at
market rates.
Fair value for nonperforming loans was based predominantly 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.
Due to the lack of a secondary market for the bulk of these financial
instruments, management has no basis to determine whether the fair value
presented above would be indicative of the value negotiated in an actual sale.
In the ordinary course of business, directors and officers of the
Bank, and their affiliates, were customers of, and had other transactions with
the Bank. Loan transactions with directors and officers were made on
substantially the same terms as those prevailing at the time for comparable
loans to other persons and neither involved more than normal risk of
collectibility nor presented other unfavorable features. The aggregate dollar
amount of all loans to all officers, directors, and their affiliates was
$29,960,000 and $22,279,000 at December 31, 1994 and 1993, respectively. During
1994, $61,584,000 of new loans were made or became reportable, and repayments
and other decreases totaled $53,903,000.
Transactions in the allowance for credit losses are:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $5,460 $5,655 $4,117
Provision for credit losses 900 1,500 2,615
Recoveries of loans
previously charged-off 1,201 842 563
Loans charged-off (2,039) (2,537) (1,640)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year $5,522 $5,460 $5,655
======================================================================================================================
</TABLE>
The loan portfolio includes loans that are not currently accruing
interest income. The total outstanding principal of these loans at December 31,
1994, 1993, and 1992, and the effect on income for the years then ended are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal balance $2,086 $1,579 $2,073
======================================================================================================================
Gross amount of interest which would
have been recorded under original terms $196 $202 $242
======================================================================================================================
Recorded interest income on these loans $41 $135 $100
======================================================================================================================
</TABLE>
The net reduction in interest income on renegotiated loans was not material
in 1994, 1993, and 1992. At December 31, 1994 there were no material
commitments to lend additional funds to borrowers whose loans had been modified
in troubled debt restructuring or were in a nonaccrual status.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
(In thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank premises and land $14,673 $13,745
Furniture and equipment 8,978 8,287
Leasehold improvements 967 857
----------------------------------------------------------------------------------------------------------------------
24,618 22,889
Less accumulated depreciation
and amortization (11,691) (11,019)
----------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net $12,927 $11,870
======================================================================================================================
</TABLE>
Depreciation and amortization in the consolidated statement of income amounted
to $1,020,000 in 1994, $1,009,000 in 1993, and $993,000 in 1992.
6. INVESTMENT IN REAL ESTATE PARTNERSHIP
In 1994, the Bank entered into a limited partnership agreement for the sole
purpose of developing into finished lots a property carried in other real
estate owned. Pursuant to the formation of this partnership, certain minority
interest contributions, totaling $684,000, were received. Due to its control of
the major operating and financial policies of the partnership, the Bank has
included the financial results of the partnership's operations within the
accompanying consolidated financial statements.
36 | 37
<PAGE> 39
7. DEPOSITS
The carrying amounts of deposits are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
(In thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing $ 86,341 $ 72,594
Interest-bearing
Checking 71,530 61,358
Savings 106,041 102,720
Money market accounts 94,241 84,253
Certificates of deposit
Under $100,000 190,070 175,714
$100,000 and over 28,073 25,515
----------------------------------------------------------------------------------------------------------------------
Total deposits $ 576,296 $ 522,154
======================================================================================================================
</TABLE>
The fair value of deposits at December 31, 1994 and 1993 was estimated
to be $576,066,000 and $524,593,000, respectively. The fair value of deposits
with no stated maturity, such as noninterest-bearing deposits, interest-bearing
checking, savings, and money market accounts, is equal to the carrying amount.
Carrying amount approximates fair value for variable-rate certificates of
deposits, and fixed-rate certificates with original maturities of 12 months or
less, due to the frequent repricing of these instruments at market rates. Fair
value for all other fixed-rate certificates of deposit was estimated by
discounting contractual cash flows using discount rates equal to the rates
currently offered for deposits of similar remaining maturities.
8. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of securities sold under agreements to
repurchase. Securities sold under agreements to repurchase are secured
transactions with customers and generally mature the day following the date
sold. Bancorp has also maintained an outstanding balance in its treasury tax
and loan account throughout the years. Short-term borrowings may also include
federal funds purchased, which are overnight borrowings from other financial
institutions, and advances from the Federal Home Loan Bank of Atlanta, which
are secured by a blanket floating lien on all real estate mortgage loans
secured by 1 to 4 family residential properties.
The table below presents selected information on the combined totals
of repurchase agreements and other short-term borrowings for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum balance at any
month end during the year $36,542 $33,780
Average balance for the year $31,470 $30,581
Weighted average rate for the year 4.10% 2.95%
Weighted average rate
on borrowings at year end(1) 5.28% 2.97%
Estimated fair value(2) $33,892 $32,391
</TABLE>
(1) The weighted average rates shown for borrowings at year end were
calculated by multiplying the effective rate for each transaction by
the principal amount and dividing the aggregate product by the total
principal outstanding.
(2) Due to the short maturities of these financial instruments, the
carrying amounts for repurchase agreements and other short-term
borrowings were deemed to approximate fair value at December 31, 1994
and 1993, respectively.
9. INCOME TAXES
Effective January 1, 1993, Bancorp adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes." As permitted under the new
rules, prior years' financial statements have not been restated. The cumulative
effect on prior years of adopting Statement No. 109 as of January 1, 1993 was
not significant.
Significant components of Bancorp's deferred tax assets and
liabilities as of December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $2,090 $2,095
Unrealized losses on
securities available for sale 1,765 --
Deferred compensation 1,110 1,163
Provision for other
real estate owned 322 223
Other 239 139
----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 5,526 3,620
Valuation allowance for
deferred tax assets -- --
----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets
after valuation allowance 5,526 3,620
----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains on securities
available for sale -- 951
Depreciation and amortization 254 275
Other 56 48
----------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 310 1,274
----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $5,216 $2,346
======================================================================================================================
</TABLE>
A reconciliation of the statutory income tax to the provision for
income taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
Asset and Deferred
liability method method
--------------------------------------------------------
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax $ 10,857 $ 10,731 $9,875
Tax rate 35% 35% 34%
----------------------------------------------------------------------------------------------------------------------
Income tax at statutory rate 3,800 3,756 3,357
Increases (decreases)
in tax resulting from:
Tax-exempt interest income (1,226) (1,148) (1,047)
State income taxes, net of
Federal income tax benefit 405 502 454
Other (78) 18 (6)
----------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 2,901 $ 3,128 $2,758
======================================================================================================================
Effective tax rate 27% 29% 28%
======================================================================================================================
</TABLE>
<PAGE> 40
Significant components of the provision for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $2,417 $2,657 $2,940
State 637 840 873
----------------------------------------------------------------------------------------------------------------------
Total currently payable 3,054 3,497 3,813
----------------------------------------------------------------------------------------------------------------------
Deferred tax (benefits)
Federal (137) (314) (871)
State (16) (55) (184)
----------------------------------------------------------------------------------------------------------------------
Total deferred tax (benefits) (153) (369) (1,055)
----------------------------------------------------------------------------------------------------------------------
Provision for income taxes $2,901 $3,128 $2,758
======================================================================================================================
</TABLE>
Within the provision for income taxes, the tax effect of investment
securities transactions amounted to a provision of $1,000 and $239,000 on gains
realized in 1993 and 1992, respectively.
The components of the provision for deferred tax (benefits) are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
Asset and Deferred
liability method method
------------------------------------------------------
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $ (5) $(343) $ (897)
Other (148) (26) (158)
----------------------------------------------------------------------------------------------------------------------
Deferred tax (benefits) $ (153) $(369) $ (1,055)
======================================================================================================================
</TABLE>
10. EMPLOYEE BENEFITS
Profit Sharing Plan.
Retirement benefits are provided through a Section 401(k) profit sharing 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 $384,000 for 1994, $343,000 for 1993, and
$326,000 for 1992. Effective for the 1993 Plan year, the Plan was amended to
provide for employer matching contributions of up to 2 percent of compensation
for eligible participants. Bancorp's additional matching contribution totaled
$162,000 in 1994 and $100,000 in 1993.
Executive Supplemental Income Plan.
Supplemental retirement benefits (deferred compensation) for certain key
employees are provided under an Executive Supplemental Income Plan. Benefits
payable under the Plan are integrated with other retirement benefits expected
to be received by plan participants, including those under the 401(k) profit
sharing plan. Amounts paid under this Plan 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, 1994, 1993, and 1992 were $255,000, $219,000, and $178,000,
respectively.
Employee Stock Purchase Plan.
Bancorp has an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions ranging from $120 to $2,400 per year for the
purpose of acquiring shares of common stock in Bancorp at current market
prices. To encourage employee participation in the Plan, Bancorp contributes an
additional amount equal to 20 percent of each participating employee's
voluntary payroll deduction. Contributions to the Plan are used by a designated
agent to acquire common shares of Bancorp, either in the open market or from
Bancorp at current market prices. Bancorp has reserved 52,500 shares of its
common stock for this Plan. Bancorp reserves the right to amend, modify,
suspend or terminate the Plan at any time at its discretion. Bancorp pays all
costs of administration of the Plan.
Stock Option Plan.
Bancorp has a Stock Option Plan for key employees. The Plan permits the
granting of both incentive stock options and non-qualified stock options to
purchase common stock of Bancorp. The exercise price per share for incentive
stock options and non-qualified stock options shall be not less than 100
percent and 85 percent, 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.
The following is a summary of transactions during the three years
ended December 31, 1994:
<TABLE>
<CAPTION>
Options issued
and outstanding Price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 137,600 $3.72 to $22.27
Exercised (3,819) 3.72 to 15.78
Granted 35,057 12.34
Terminated (10,574) 6.94 to 22.27
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 158,264 5.91 to 22.27
Exercised (25,349) 6.37 to 18.23
Granted 34,742 17.11
Terminated (6,000) 12.34 to 22.27
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 161,657 5.91 to 22.27
Exercised (22,832) 5.91 to 22.27
Granted 36,695 22.38
Terminated (3,990) 6.37 to 22.38
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 171,530 $6.94 to $22.38
======================================================================================================================
</TABLE>
At December 31, 1994 there were 100,216 options exercisable at prices
ranging from $6.94 to $22.38. Shares reserved for future grants totaled 35,188
at December 31, 1994.
38 | 39
<PAGE> 41
11. OTHER OPERATING INCOME AND EXPENSE
Other operating income in the consolidated statements of income include the
following for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank card income $1,790 $1,581 $1,386
Gains on sales of mortgage loans 52 633 528
Miscellaneous 787 622 524
----------------------------------------------------------------------------------------------------------------------
Total other operating income $2,629 $2,836 $2,438
======================================================================================================================
</TABLE>
Other operating expense in the consolidated statements of income
include the following for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance (including FDIC) $1,363 $1,309 $1,279
Stationery and supplies 760 719 525
Advertising 466 472 530
Professional services 875 611 658
Credit card processing 1,474 1,183 993
Postage 383 373 388
Directors fees 180 207 212
Telephone 278 224 232
Computer software and maintenance 414 359 315
Other real estate owned expenses 297 475 481
Miscellaneous 2,162 1,808 1,430
----------------------------------------------------------------------------------------------------------------------
Total other operating expense $8,652 $7,740 $7,043
======================================================================================================================
</TABLE>
Transactions in the allowances for other real estate owned are
summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $582 $325 $ --
Provision for decline in
value and selling expenses(1) 270 462 325
Losses charged to the allowances -- (205) --
----------------------------------------------------------------------------------------------------------------------
Ending balance $852 $582 $325
======================================================================================================================
</TABLE>
(1) Included in other real estate owned expenses.
12. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
F&M BANCORP BALANCE SHEETS (PARENT COMPANY)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(In thousands) 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,943 $ 2,944
Investment in subsidiary 56,325 55,739
Other assets -- 5
----------------------------------------------------------------------------------------------------------------------
Total assets $ 59,268 $ 58,688
======================================================================================================================
Liabilities and Shareholders' Equity
Total liabilities $ 19 $ 49
----------------------------------------------------------------------------------------------------------------------
Common stock 19,735 18,728
Surplus 19,614 15,811
Retained earnings 22,873 22,589
Net unrealized gain (loss)
on securities available for sale (2,973) 1,511
----------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 59,249 58,639
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 59,268 $ 58,688
======================================================================================================================
</TABLE>
F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $3,017 $2,811 $2,725
Other income 134 205 198
----------------------------------------------------------------------------------------------------------------------
Total income 3,151 3,016 2,923
Expenses 332 160 180
----------------------------------------------------------------------------------------------------------------------
Income before income tax expense
(benefits) and equity in
undistributed earnings of subsidiary 2,819 2,856 2,743
----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefits) (67) 17 7
----------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiary 2,886 2,839 2,736
Equity in undistributed earnings
of subsidiary 5,070 4,764 4,381
----------------------------------------------------------------------------------------------------------------------
Net income $7,956 $7,603 $7,117
======================================================================================================================
</TABLE>
F&M BANCORP STATEMENTS OF CASH FLOW (PARENT COMPANY)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
(In thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $7,956 $7,603 $7,117
Adjustments to reconcile net income
to net cash provided by operating
activities
Decrease (increase) in other assets 5 8 (3)
Increase (decrease) in other
expenses payable (30) 24 (3)
Equity in undistributed earnings
of subsidiary (5,070) (4,764) (4,381)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,861 2,871 2,730
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Cash dividends paid (3,079) (2,952) (2,762)
Stock transactions 217 132 18
----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,862) (2,820) (2,744)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (1) 51 (14)
Cash and cash equivalents at
beginning of year 2,944 2,893 2,907
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,943 $2,944 $2,893
======================================================================================================================
Non-cash Investing and Financing Activities
Fair value adjustment for securities
available for sale, net of deferred
income taxes payable (benefits) $(4,484) $1,511 --
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Leases.
The Bank conducts part of its branch banking operations from leased facilities.
The initial terms of the leases range from a period of five to 25 years. Most
of the existing leases contain options which enable the Bank to renew the
leases at fair rental value for periods of three to 20 years. In addition to
minimum rentals, certain leases have escalation clauses based upon various
price indexes and include provisions for additional payments for taxes,
insurance, and maintenance.
<PAGE> 42
Total rental expense was as follows for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
------------------------------------------------------------
<S> <C> <C>
Bank premises $329 $319 $302
Equipment 90 22 19
------------------------------------------------------------
Total rental expense $419 $341 $321
============================================================
</TABLE>
The future minimum rental payments required under operating leases
that have initial or remaining noncancelable lease terms in excess of one year
as of December 31, 1994 are:
<TABLE>
<CAPTION>
Year ending December 31, (In thousands)
---------------------------------------------------
<S> <C>
1995 $ 381
1996 361
1997 244
1998 219
1999 209
Later years 883
---------------------------------------------------
Total minimum payments required $ 2,297
===================================================
</TABLE>
Contingencies.
Bancorp is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of management, there were no legal
matters pending as of December 31, 1994, which would have a material effect on
its 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.
Bancorp's exposure to credit loss in the event of non-performance 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. Bancorp uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contractual amount of Bancorp's exposure under these
financial instruments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
(In thousands) 1994 1993
--------------------------------------------------------------------
<S> <C> <C>
Financial instruments
whose contractual amounts
represent credit risk:
Commitments to extend credit $105,692 $81,581
Standby letters of credit 13,240 8,791
</TABLE>
The carrying amount of commitments to extend credit at December 31, 1994 and
1993 totaled $23,000 and $26,000, respectively. The carrying amount of standby
letters of credit at December 31, 1994 and 1993, totaled $23,000 and $34,000,
respectively. These carrying amounts represent the deferred income arising from
these unrecognized financial instruments. The fair value of commitments to
extend credit at December 31, 1994 and 1993, totaling $28,000 and $26,000,
respectively, was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. The fair value of
standby letters of credit at December 31, 1994 and 1993, totaling $23,000 and
$61,000, respectively, was based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
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. Bancorp evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
or other security obtained, if deemed necessary by Bancorp upon extension of
credit, is based on management's credit evaluation. Collateral held varies but
may include deposits held in financial institutions; U.S. Treasury securities;
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.
Standby letters of credit are conditional commitments issued by
Bancorp to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to guarantee the installation of real property
infrastructure and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Bancorp holds collateral and obtains personal
guarantees supporting those commitments for which collateral or other security
is deemed necessary.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the estimated fair values of financial
instruments and their related carrying amounts. The methods and assumptions
used in estimating the fair values are disclosed in Note 1 and the additional
Notes referenced below.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1994 1993
---------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amounts Value Amounts Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and
cash equivalents(1) $ 24,232 $ 24,232 $ 24,123 $ 24,123
Loans held for sale (Note 1) 149 149 8,696 8,696
Investment securities to be
held to maturity (Note 3) 86,291 84,405 27,487 28,159
Investment securities
available for sale (Note 3) 77,649 77,649 142,021 142,021
Net loans (Note 4) 453,750 451,315 390,877 393,538
Interest receivable(1) 4,573 4,573 4,059 4,059
Financial Liabilities:
Deposits (Note 7) 576,296 576,066 522,154 524,593
Short-term borrowings
(Note 8) 33,892 33,892 32,391 32,391
Interest payable(1) 1,092 1,092 668 668
</TABLE>
(1) Due to short-term nature of these financial instruments, carrying
amount was deemed to approximate fair value.
40 | 41
<PAGE> 43
All fair value estimates are made at a specific point in time and are
based on existing on- and off-balance-sheet financial instruments without
consideration of the value of anticipated future business or the value of
assets and liabilities that are not considered financial instruments. These
estimates do not reflect any premium or discount that could result from a block
sale of a particular financial instrument. Due to the absence of a genuine
market for a significant portion of Bancorp's financial instruments, fair value
estimates are based on judgments regarding risk characteristics, current
economic conditions, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions or
estimation methodologies could significantly affect the estimates.
15. REGULATORY RESTRICTIONS
Restrictions on Dividends.
Approval of the Comptroller of the Currency is required to pay dividends which
exceed the Bank's net profits for the current year plus its retained net
profits for the preceding two years. Amounts available for the payment of
dividends during 1994 aggregated $17,232,000.
Restrictions on Lending from Bank to Parent.
Federal law imposes certain restrictions limiting the ability of the Bank to
transfer funds to the Parent Company in the form of loans or advances. Section
23A of the Federal Reserve Act prohibits the Bank from making loans or advances
to the Parent Company in excess of 10 percent of its capital stock and surplus,
as defined therein. In addition, all loans or advances to non-bank affiliates
must be secured by specific collateral. Based on this limitation, there was
approximately $6,482,000 available for loans or advances to the Parent Company
as of December 31, 1994. There were no loans or advances outstanding at
December 31, 1994.
Restrictions on Cash and Due from Banks.
For the reserve maintenance period in effect at December 31, 1994 and 1993, the
Bank was required to maintain average daily reserve balances totaling
$9,230,000 and $8,335,000 respectively, with the Federal Reserve Bank.
16. SHAREHOLDERS' EQUITY
Capital Requirements.
Bancorp is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At December 31,
1994, Bancorp is required to have minimum Tier I and Total capital ratios of
4.00 percent and 8.00 percent, respectively. Bancorp's actual ratios at that
date were 11.77 percent and 12.89 percent, respectively. Banking organizations
must also maintain a minimum Tier I leverage ratio of 3.00 percent, although
most banking organizations are expected to maintain ratios of at least 100 to
200 basis points above the 3.00 percent minimum. Bancorp's leverage ratio at
December 31, 1994 was 8.92 percent.
Dividend Reinvestment Plan.
Bancorp offers a Dividend Reinvestment and Stock Purchase Plan (the "Plan") to
all Bancorp shareholders. The terms of this Plan allow participating
shareholders to purchase additional shares of common stock in Bancorp by
reinvesting the dividends paid on shares registered in their name, by making
optional cash payments, or both. Shares purchased under the Plan directly from
Bancorp with reinvested dividends can be acquired at 95 percent of current
market prices. Shares purchased under the Plan that were acquired in the open
market can be purchased at 95 percent of their acquisition cost. Optional cash
payments to this Plan are limited and may not exceed $3,000 in any calendar
quarter.
Contributions to the Plan will be used by a designated agent to
acquire common shares of Bancorp, either in the open market or from Bancorp at
current market prices. Bancorp has reserved 52,500 shares of its common stock
for this Plan. Bancorp reserves the right to amend, modify, suspend, or
terminate this Plan at any time at its discretion.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of Bancorp's unaudited quarterly results of
operations.
<TABLE>
<CAPTION>
1994 Three months ended
----------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $12,073 $11,357 $10,957 $10,617
Net interest income 7,335 7,105 6,848 6,572
Provision for credit losses 225 225 225 225
Gains (losses) on
sales of securities -- -- -- --
Income before
income taxes 2,923 2,940 2,523 2,471
Net income 2,150 2,147 1,852 1,807
Earnings per common share:
Net income(1) .55 .54 .47 .46
</TABLE>
<TABLE>
<CAPTION>
1993 Three months ended
----------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $10,881 $10,985 $10,997 $10,824
Net interest income 6,781 6,780 6,818 6,685
Provision for credit losses 375 375 375 375
Gains (losses) on
sales of securities (2) (1) -- 5
Income before
income taxes 2,453 2,733 2,645 2,900
Net income 1,803 1,961 1,885 1,954
Earnings per common share:
Net income(1) .46 .50 .48 .50
</TABLE>
(1) Restated for five percent dividend declared in 1994.
<PAGE> 44
18. FUTURE CHANGE IN ACCOUNTING PRINCIPLE
In May, 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan," which prescribes the
recognition criterion for loan impairment and the measurement methods for
certain impaired loans and loans whose terms are modified in a troubled-debt
restructuring. The Statement generally requires the measurement of impairment
to be based on the present value of expected future cash flows discounted at
the loan's original effective interest rate. Alternatively, impairment may be
measured by reference to a loan's observable market price or the fair value of
the collateral for a collateral dependent loan. In October, 1994, the Financial
Accounting Standards Board issued Statement No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure," which amends
Statement No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans.
Bancorp is required to adopt Statement No. 114, as amended by
Statement No. 118, beginning January 1, 1995. Although earlier adoption is
encouraged, restatement of previously issued financial statements is not
permitted. The effect of initially applying the Statement is required to be
reported as part of the provision for credit losses.
Adoption of this Statement will not materially affect Bancorp's
consolidated financial statements.
19. SUBSEQUENT EVENT
On January 31, 1995, Bancorp executed an agreement to purchase certain
assets and assume approximately $19.0 million in deposit liabilities of the
Frederick and Olney, Maryland offices of First Union National Bank of Maryland.
The agreement is subject to regulatory approval and is expected to be
consummated in the second quarter of 1995.
REPORT OF
INDEPENDENT AUDITORS
[KELLER BRUNER & COMPANY, LLC. LOGO]
Certified Public Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
F&M Bancorp
Frederick, Maryland
We have audited the accompanying consolidated balance sheets of F&M Bancorp and
its subsidiary as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1994, appearing on
pages 29 to 42 inclusive. These consolidated financial statements are the
responsibility of Bancorp management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of F&M
Bancorp and its subsidiary as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As described in Note 1 to the consolidated financial statements, in
1993 Bancorp changed its methods of accounting for investment securities and
income taxes.
/s/ KELLER BRUNER & COMPANY, L.L.C.
-----------------------------------
Frederick, Maryland
January 20, 1995, except for Note 19, as to which the date
is January 31, 1995.
42 | 43
<PAGE> 45
DIRECTORS & OFFICERS
F&M Bancorp Farmers and Mechanics National Bank
BOARD OF DIRECTORS(1)
--------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
R. Carl Benna
President
North American Housing Corporation
John D. Brunk
President
Frederick Produce Company, Inc.
Beverly B. Byron
Former Representative
United States Congress
Faye E. Cannon
President and
Chief Operating Officer
Martha E. Church, Ph.D.
President
Hood College
Albert H. Cohen
Investor and Building Consultant
George B. Delaplaine, Jr.
President
Great Southern Printing and
Manufacturing Company
Maurice A. Gladhill
President
Gladhill Tractor Mart, Inc.
Charles A. Nicodemus
Chairman of the Board
Frederick Mutual Insurance Company
H. Deets Warfield, Jr.
President
Damascus Motor Company, Inc.
John C. Warfield
President
The Frederick Motor Company
Thomas R. Winkler
Executive Vice President and
Chief Operating Officer
BioWhittaker, Inc.
M. Robert Ritchie, Jr.
H. Reese Shoemaker, Jr.
Herbert R. Staley
Directors Emeriti(2)
(1) Also Directors of Farmers and Mechanics National Bank
(2) Also Directors Emeriti of Farmers and Mechanics National Bank
OFFICERS
--------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
Faye E. Cannon
President and
Chief Operating Officer
Gordon M. Cooley
Secretary and Legal Officer
Kenneth M. Sabanosh
Vice President and Treasurer
David R. Stauffer
Vice President
Alice E. Stonebreaker
Assistant Secretary and
Assistant Treasurer
ADVISORY COUNCIL
--------------------------
Joseph D. Baker, II
R. Holmes Baker
James F. Black
John Nelson Bowers
Howard N. Boyer
Charles W. Burrier, Jr.
Alan L. Carroll, M.D.
George W. Cooley
Alvie N. Covell
John M. Culler, M.D.
Russell E. Delauter
Walter L. Engle
James E. Fitzgerald, Sr.
Joseph C. Free
Harry Y. George, Jr.
Bernard D. Gladhill
William U. Gladhill
Paul J. Green
Edward G. Higinbotham
Gary M. Himes
John S. Hollinger
Raymond R. Houck
William D. Jefferies
Charlotte W. Kerrigan
Glenwood D. King
Irving H. Kolker
Chester M. Leishear
James W. Linton, Jr.
Frank R. Martin
Richard L. Martin
Harold M. Molesworth, Jr.
William L. Moore
Ralph W. Morgan
C. Rodman Myers
Paul R. Niswander
Robert B. Ogle
Roscoe L. Pearce
Nelson M. Pittinger(1)
Robert L. Price
Millard M. Rice(1)
Donald E. Rough
G. Donald Shafer
Ernest R. Shriver
William A. Simmons
John W. Stroh, M.D.
James E. Stoner, Jr., M.D.
Harry H. Swomley, Jr.
William E. Wagner, Jr.
H. Deets Warfield, Jr.
Drainie B. Watson
Horace H. Waybright
Lila C. Wenner
Richard T. White
Maurice L. Williams
Thomas R. Winebrener
J. Trego Zimmerman
(1) Advisory Directors Emeriti
OFFICERS
--------------------------
EXECUTIVE OFFICE
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
Faye E. Cannon
President and
Chief Operating Officer
David R. Stauffer
Executive Vice President
Alice E. Stonebreaker
Senior Vice President
Patti A. Stuckey
Senior Vice President
SENIOR
VICE PRESIDENTS
James C. Akers
Gordon M. Cooley
Wayne F. Fox
C. Richard Miller, Jr.
Kenneth M. Sabanosh
Ronald O. Shirey
Philip D. Topper
Ronald C. Whitmore
VICE PRESIDENTS
Betty J. Baltzell
James W. Bear
Michael H. Bodnar
Samuel L. Brown, Jr.
Veronica M. Cleveland
Deborah A. Culler
Roger J. Dankel
Geneva B. Delphey
William W. Drummond
T. Hugh Engel
Kallie H. Forman
Mary Frances Gosnell
Darlene R. Green
Dawn M. Heaton
Eddie M. House
Eileen A. Hutzell
Joann K. Krantz
Raymond G. Mancini, Jr.
James C. Reeder, Jr.
Kathy A. Rohrer
Lee B. Smith
David S. Stalnaker
Riggs T. Webb, Jr.
Marilyn L. Yost
<PAGE> 46
ASSISTANT
VICE PRESIDENTS
John B. Bartlett, Jr.
Martin H. Burall
Anne K. Butt
Kevin D. Haymaker
Joy L. Kramer
Timothy J. McCollum
Lewis J. Myers, Jr.
Eric R. Paxton
Dale G. Phelps
Joyce P. Presby
Brad W. Young
Marilyn L. Young
Mary Ann Zuretti
SENIOR OFFICERS
S. Roger Adams, Jr.
Riley F. Andrews
Donna B. Barr
Ruth V. Fogle
Helen M. Gensel
Richard L. Hemp
Marian B. Kennedy
Donald L. Klingler
Roger F. Nicodemus
Steven A. Ott
Donald F. Reineke
Edith M. Troupe
Donna M. Wilkerson
Barbara J. Zavona
OFFICERS
Lawrence P. Allen
Patsy L. Barnes
Carolyn E. Bidle
Jayne B. Bongard
Shirley G. Bostian
Robert R. Burns
George T. Chaney II
Robert F. Cowdrey
Danny L. Dixon
Angela K. Dredden
Catherine Fekete
Patricia A. Griffith
Anne E. Halley
Carol L. Hodiak
Gudrun James
Desma K. Jenkins
Thomas E. Jenkins
Stacey A. Keilholtz
Deidre A. Lewis
B. Jane Littrell
Sharon K. McBride
Donna L. Moats
Kitty E. Nicodemus
Patricia T. Norwood
Glenna H. Padgett
Richard A. Pearrell
Lisa C. Perno
Barry R. Poffinberger
F. Joann Ramsburg
John R. Ratnavale
Jerry M. Reynolds
Richard L. Shank, Sr.
Linda L. Shifflett
Patricia A. Smith
Crystal L. Wiles
Larry R. Wisner
John D. Yee
ASSISTANT OFFICERS
Franklin R. Abrecht, Jr.
Cynthia G. Allen
Kimberly A. Arnold
Brucie J. Bassler
Margaret S. Callis
Bette E. Carpenter
Mary Ann Cooling
Mary L. Cullison
Rebecca A. Darcey
Frances L. Dempsey
Wanda J. Dennis
Sandra D. Dorsey
Arthur E. Fauble
Patty B. Friend
Patricia H. Gaither
Brenda L. Gastley
Charlene E. Haines
Diane L. Hazard
Connie L. Helinsky
Richard B. Israel
Dennis L. Jenkins
Lenora J. Kish
Wanda S. Lambert
Janita R. Lillard
Jane B. Lloyd
Anne J. Merritt
Gwendolyn M. Martin
Mary S. Molesworth
Cynthia J. More'
Shirley L. Myers
William H. Norwood, Jr.
Gail L. Pearrell
T. Faye Reburn
Charles W. Reeder
Peggy J. Rice
Bobbette S. Shafer
Gary L. Specht
Selene M. Stevens
Roxann M. Welch
Bonnie D. Wheat
LEGAL COUNSEL
Martz & Martz, P.A.
Miles & Stockbridge
Piper & Marbury
Shoemaker, Horman & Clapp
44 |
<PAGE> 47
CORPORATE HEADQUARTERS
110 Thomas Johnson Drive
Frederick, Maryland 21702
Telephone (301) 694-4000
SHAREHOLDERS' INFORMATION
F&M Bancorp
Quarterly Stock Prices and Dividends
<TABLE>
<CAPTION>
1994 1993
--------------------------------------- ----------------------------------------
Price Range Price Range
---------------------- -----------------------
Dividend Dividend
High Low Paid(1) High Low Paid(1)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 24 1/2 23 $.19 22 19 1/4 $.18
Second Quarter 25 1/4 22 1/4 .19 22 21 .19
Third Quarter 30 1/4 24 1/4 .20 23 3/4 20 .19
Fourth Quarter 30 1/2 28 1/2 .20 24 1/2 22 1/2 .19
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Bancorp stock is traded on the NASDAQ National Market.
Number of shareholders of record, December 31, 1994: 2,746
(1) Restated for five percent stock dividend declared in 1994.
BUSINESS PROFILE
F&M Bancorp (the "Parent Company" ) is a bank holding company incorporated
under the laws of the State of Maryland in 1983. Through a reorganization
effective July 1, 1984, it became the sole shareholder of Farmers and Mechanics
National Bank (the "Bank"). At the present time, the Bank is the only
subsidiary of the Parent Company.
Farmers and Mechanics National Bank was incorporated in 1865 as a
national banking association under the laws of the United States, and is the
successor to Maryland chartered banking institutions dating from 1817. In 1915,
the Bank acquired trust powers. It conducts a general banking and trust
company business through 20 offices located in Frederick, Carroll, and
Montgomery Counties, Maryland. The Bank's commercial banking services include
the acceptance of demand, savings, and time deposits and the making of various
types of loans to individuals and businesses.
The Bank's business is highly competitive. Competitors include not
only other major commercial banks, but also savings banks, savings and loan
associations, credit unions, money market funds, mortgage companies, leasing
companies, and a wide variety of other financial services companies. The Bank
is the largest bank in terms of assets and deposits headquartered in the
Frederick, Maryland area. At December 31, 1994, the Bank had approximately 304
full-time and 50 part-time employees. The Bank is a member of the Federal
Deposit Insurance Corporation and is an equal opportunity lender.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following list sets forth the name of the Registrant and each of
its subsidiaries, the states or other jurisdictions under which they are
organized, and the percentage ownership of the voting securities of each
corporation by its immediate parent.
<TABLE>
<CAPTION>
Name of Corporation and State Percentage of voting securities
under which organized owned by immediate parent
------------------------------ -------------------------------
<S> <C>
F&M Bancorp (Md.) --
Farmers and Mechanics National
Bank (U.S.) 100%
Key Holdings, Inc. (Md.) 100%
Monocacy Center Associates L.P. (VA) 60%
Key Management, Inc (DE) 100%
</TABLE>
-1-
<PAGE> 1
EXHIBIT 23
The Board of Directors
F&M Bancorp
We consent to incorporation by reference of our report dated January 20, 1995,
except for Note 19, as to which the date is January 31, 1995, relating to the
consolidated balance sheets of F&M Bancorp and its subsidiary as of December
31, 1994 and 1993 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1994, which report appears on page 42 of the 1994 F&M
Bancorp Annual Report and Form 10-K, in the following Registration Statements
of F&M Bancorp: Numbers 33-39941 and 33-39942 on Form S-8, and 33-39940 on
Form S-3.
Keller Bruner & Company L.L.C.
Frederick, Maryland
March 23, 1995
-1-
<PAGE> 1
Exhibit 24
F&M BANCORP
Power of attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned Officers and
Directors of F&M BANCORP, hereby constitute and appoint CHARLES W. HOFF, III
and FAYE E. CANNON, and each of them, the true and lawful agents and
attorneys-in-fact of the undersigned with full power and authority in said
agents and attorneys-in-fact, and in any one or more of them, to sign for the
undersigned and in their respective names as Officers and as Directors of the
Corporation a Form 10K for the period ended December 31, 1994, or other
appropriate form, of the Corporation to be filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and any amendments to such Form 10-K; hereby ratifying and
confirming all acts taken by such agents and attorneys-in-fact, or any one or
more of them, as herein authorized.
Dated: March 14, 1995
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/Charles W. Hoff, III Chairman of the Board,
------------------------------- Chief Executive Officer and Director
Charles W. Hoff, III (Principal Executive Officer)
/s/Kenneth M. Sabanosh Vice President and Treasurer
------------------------------- (Principal Financial Officer and Principal
Kenneth M. Sabanosh Accounting Officer)
/s/R. Carl Benna Director
-------------------------------
R. Carl Benna
/s/John D. Brunk Director
-------------------------------
John D. Brunk
/s/Beverly B. Byron Director
------------------------------
Beverly B. Byron
/s/Faye E. Cannon Director
------------------------------
Faye E. Cannon
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C>
/s/Martha E. Church Director
------------------------------
Martha E. Church,Ph.D.
/s/Albert H. Cohen Director
------------------------------
Albert H. Cohen
/s/George B. Delaplaine, Jr. Director
------------------------------
George B. Delaplaine, Jr.
/s/Maurice A. Gladhill Director
------------------------------
Maurice A. Gladhill
/s/Charles A. Nicodemus Director
------------------------------
Charles A. Nicodemus
/s/H. Deets Warfield, Jr. Director
------------------------------
H. Deets Warfield, Jr.
/s/John C. Warfield Director
------------------------------
John C. Warfield
/s/Thomas R. Winkler Director
------------------------------
Thomas R. Winkler
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 22,132
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,649
<INVESTMENTS-CARRYING> 86,291
<INVESTMENTS-MARKET> 84,405
<LOANS> 459,282
<ALLOWANCE> 5,522
<TOTAL-ASSETS> 675,256
<DEPOSITS> 576,296
<SHORT-TERM> 33,892
<LIABILITIES-OTHER> 5,819
<LONG-TERM> 0
<COMMON> 19,735
0
0
<OTHER-SE> 39,514
<TOTAL-LIABILITIES-AND-EQUITY> 675,256
<INTEREST-LOAN> 35,988
<INTEREST-INVEST> 8,794
<INTEREST-OTHER> 222
<INTEREST-TOTAL> 45,004
<INTEREST-DEPOSIT> 15,854
<INTEREST-EXPENSE> 17,144
<INTEREST-INCOME-NET> 27,860
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,794
<INCOME-PRETAX> 10,857
<INCOME-PRE-EXTRAORDINARY> 10,857
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,956
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
<YIELD-ACTUAL> 5.03
<LOANS-NON> 2,086
<LOANS-PAST> 213
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 25,641
<ALLOWANCE-OPEN> 5,460
<CHARGE-OFFS> 2,039
<RECOVERIES> 1,201
<ALLOWANCE-CLOSE> 5,522
<ALLOWANCE-DOMESTIC> 4,926
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 596
</TABLE>
