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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, 1995
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 19, 1996 $128,771,440
Outstanding at March 19, 1996 4,421,337 shares
Documents Incorporated by Reference
(1) Portions of the registrant's Annual Report to Shareholders for the
year ended December 31, 1995 are incorporated by reference into Parts
I and II.
(2) Portions of the Proxy Statement dated March 13, 1996 relating to the
1996 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> <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
Interstate Banking . . . . . . . . . . . . . . . . . . . 4
Monetary Policy . . . . . . . . . . . . . . . . . . . . . 5
Legislation . . . . . . . . . . . . . . . . . . . . . . . 5
Statistical Information . . . . . . . . . . . . . . . . . . 5
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 7
Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . 7
Additional
Item Executive Officers of the Registrant . . . . . . . . . . . . 7
Part II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 7
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . 7
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 7
Item 8 Financial Statements and Supplementary Data . . . . . . . . . 8
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . 8
Part III
- --------
Item 10 Directors and Executive Officers of the Registrant . . . . . 8
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . 10
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 10
Item 13 Certain Relationships and Related Transactions . . . . . . . 11
Part IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 4
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, 1995 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 24
offices located in Frederick, Carroll, and Montgomery Counties, Maryland. The
Bank had total assets of $739,857,000, total deposits of $621,057,000, and
total loans, net of unearned income, of $484,694,000 at December 31, 1995.
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 and its mobile banking unit, Express Bank.
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 (through an agent bank relationship), and safe deposit
boxes. The Bank has an expanding network of 24-hour automated teller machines
("ATMs") and cash dispensers throughout its market area offering limited
banking services. The Bank is affiliated with the MOST(R), CIRRUS(R), and
MAC(R) networks. 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, insurance companies, and a wide variety of other financial service
companies.
Employees
At December 31, 1995, Bancorp and its subsidiaries had 345 full-time and
26 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,
compensation policies, and other aspects of operations are subject to
regulation by the appropriate Federal supervisory authorities and the
applicable banking laws of the State of Maryland. The 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 1995 Annual Report to Shareholders on page 44, 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
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with any 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. After prior approval or notice, Bancorp may acquire other
banks and bank holding companies and engage directly or indirectly in certain
activities closely related to banking. Bancorp must give prior notice of
certain purchases or redemptions of its outstanding equity securities. Bancorp
and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease, sale of
property, or furnishing of services.
The 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. Tier 1 capital excludes goodwill and other
disallowed intangibles, certain deferred tax assets and any net unrealized loss
on marketable equity securities. At December 31, 1995, Bancorp's leverage
capital ratio was 9.14 percent.
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
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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, 1995,
Bancorp's total risk-based capital ratio was 13.81 percent.
The Comptroller of the Currency has capital adequacy ratio requirements
for the Bank that are consistent with those for Bancorp.
The FDIC requires "prompt corrective action" when an insured institution's
capital falls to certain levels. This rule restricts or prohibits certain
activities and requires an insured institution to submit a capital restoration
plan when it becomes undercapitalized. The restrictions and prohibitions
become more severe as an institution's capital level declines. 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 greater greater
than or than or than or
equal to 10% equal to 6% equal to 5%
Adequately capitalized greater greater greater
than or than or than or
equal to 8% equal to 4% 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."
Risk-based capital standards address concentrations of interest rate risk
("IRR") as qualitative factors to be considered in evaluating overall capital
adequacy. A bank may be required to hold additional capital for IRR if it has
been determined that internal interest risk management processes are inadequate
or a significant exposure to interest rate risk has been identified.
Interstate Banking
Since Bancorp is adequately capitalized, it may participate in interstate
affiliations with banks and bank holding companies located in any state,
although states may limit the eligibility of banks to be acquired to those in
existence for a period of time but no longer than five years. No bank holding
company may acquire more than 10 percent of the nationwide insured deposits or
more than 30 percent of deposits in any state; however, states may waive the 30
percent limit. In addition, beginning June 1, 1997, banks
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may branch across state lines either by merging with banks in other states or
by establishing new branches in other states. The date relating to interstate
branching through mergers may be accelerated by any state, and such mergers may
be prohibited by any state. The provision relating to establishing new
branches in another state requires a state's specific approval. Maryland
permits interstate branching both by mergers and establishing new branches,
effective September 29, 1995; however, until June 1, 1997 this provision is
subject to the reciprocity requirements that banks from another state may
branch into Maryland only if Maryland banks may branch into that state.
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.
Legislation
There is legislation currently pending in Congress centered on reforming
certain provisions of the Glass-Steagall Act which prohibit commercial banks
from underwriting securities or otherwise engaging in investment banking
activities. Passage of this legislation, as currently proposed, is not
expected to have a material effect on Bancorp's consolidated financial
statements.
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 1995 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 18
Average Balances, Interest, and Average Rates 20-21
Analysis of Changes in Net Interest Income 22
Investment Portfolio Distribution 24
Investment Portfolio Analysis 24
Loan Portfolio Mix 25
Loan Maturities and Interest Sensitivity 25
Average Deposits and Rates Paid 25
Maturity of Time Deposits of $100,000 or More 25
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 25
Nonperforming Assets and Contractually Past Due Loans 26
Potential Problem Loans 26
Allowance for Credit Losses 27
Allocation of Allowance for Credit Losses 28
</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 the corporate headquarters building began in the third
quarter of 1995 and is expected to be completed by year-end 1996.
Of the remaining 23 banking offices of the Bank at December 31, 1995, 13
were owned and 10 were leased. Of the 30 ATMs owned by the Bank at December
31, 1995, ten were located at branch sites owned by the Bank, ten were located
in branch offices leased by the Bank and ten were located on land leased by the
Bank separate from branch locations. Long-term leases covering the ten branch
locations expire from 2002 to 2016, including the original lease terms plus
renewal options. Long-term leases covering the ATM sites expire from 1997 to
2024, including the original lease terms plus renewal options. Additional
information concerning rent
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expense is included in Note 13, on page 43 of the 1995 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 1995.
ADDITIONAL
ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The text under Item 10(b) "Directors and Executive Officers of the
Registrant" is incorporated in this Part I by reference.
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 page 48 of the 1995
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 44 of the 1995 Annual Report to Shareholders and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Information on page 18 of the 1995 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 19 through 30 of Bancorp's 1995 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 31 through 46
of Bancorp's 1995 Annual Report to Shareholders are incorporated herein by
reference.
<TABLE>
<CAPTION>
Pages
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<S> <C>
Report of Independent Auditors 46
Consolidated Balance Sheets,
December 31, 1995 and 1994 31
Consolidated Statements of Income,
Three Years Ended 1995 32
Consolidated Statements of Changes
In Shareholders' Equity,
Three Years Ended 1995 33
Consolidated Statements of Cash Flows
Three Years Ended 1995 34
Notes to Consolidated Financial
Statements 35 - 46
</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 pages 3 through 6 of Bancorp's Proxy
Statement dated March 13, 1996 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, 1995 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 61 (1993) & Chief Executive (1993) & Chief Executive
Officer (1983) Officer (1981)
Faye E. Cannon President & Chief President & Chief
age 46 Operating Officer (1993) Operating Officer (1993)
David R. Stauffer Vice President Executive Vice President
age 48 (1990) (1990)
Alice E. Stonebreaker Assistant Secretary & Senior Vice President
age 49 Assistant Treasurer (1985) & Cashier
(1983) (1985)
Gordon M. Cooley Secretary (1991) Senior Vice President
age 42 and Legal Officer (1990) & House Counsel
(1987) (1987)
Kenneth M. Sabanosh Vice President & Senior Vice President
age 52 Treasurer (1992) & Comptroller
(1987) (1987)
Wayne F. Fox Senior Vice President
age 49 (1990) & Commercial Division
Manager (1993)
C. Richard Miller, Jr. Senior Vice President
age 47 (1989)
Ronald O. Shirey Senior Vice President
age 55 (1988)
Patti A. Stuckey Senior Vice President
age 52 (1989) & Trust Division
Manager (1988)
Philip D. Topper Senior Vice President
age 53 (1988)
Ronald C. Whitmore Senior Vice President
age 47 (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.
(e) Each of the executive officers of Bancorp and Farmers and Mechanics
National Bank has been an officer of Farmers and Mechanics National Bank
for more than five years.
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(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 pages 9 through 10 and "Directors' Fees and Deferred
Compensation Plan" located on page 11 of Bancorp's Proxy Statement dated March
13, 1996 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 page 2, and the information
contained in the section under "Security Ownership of Certain Beneficial
Owners" located on page 3 of Bancorp's Proxy Statement dated March 13, 1996 is
incorporated herein by reference.
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\ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Certain Transactions with Directors and Officers" located
on page 12 of Bancorp's Proxy Statement dated March 13, 1996 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.
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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. 1995 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 1995.
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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 25, 1996 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 25, 1996 /s/Charles W. Hoff, III
-------------------------------
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
March 25, 1996 /s/Faye E. Cannon
------------------------------
Faye E. Cannon
President & Chief Operating
Officer
Principal Financial &
Accounting Officer:
March 25, 1996 /s/Kenneth M. Sabanosh
-------------------------------
Kenneth M. Sabanosh
Vice President and Treasurer
A Majority of the Board
of Directors
March 25, 1996 /s/R. Carl Benna*
-------------------------------
R. Carl Benna
Director
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March 25, 1996 /s/John D. Brunk*
-------------------------------
John D. Brunk
Director
March 25, 1996 /s/Beverly B. Byron*
------------------------------
Beverly B. Byron
Director
March 25, 1996 /s/Faye E. Cannon*
------------------------------
Faye E. Cannon
Director
March 25, 1996 /s/Martha E. Church*
------------------------------
Martha E. Church
Director
March 25, 1996 /s/Albert H. Cohen*
------------------------------
Albert H. Cohen
Director
March 25, 1996 /s/George B. Delaplaine, Jr.*
------------------------------
George B. Delaplaine, Jr.
Director
March 25, 1996 /s/Maurice A. Gladhill*
------------------------------
Maurice A. Gladhill
Director
March 25, 1996 /s/Charles W. Hoff, III*
------------------------------
Charles W. Hoff, III
Director
March 25, 1996 /s/Charles A. Nicodemus*
------------------------------
Charles A. Nicodemus
Director
March 25, 1996 /s/H. Deets Warfield, Jr.*
------------------------------
H. Deets Warfield, Jr.
Director
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March 25, 1996 /s/John C. Warfield*
------------------------------
John C. Warfield
Director
March 25, 1996 /s/Thomas R. Winkler*
------------------------------
Thomas R. Winkler
Director
*by Faye E. Cannon
Attorney-in-fact
March 25, 1996 /s/Faye E. Cannon
------------------------
Faye E. Cannon
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EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ending December 31 ,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Earnings per share:
Primary
Net Income 1.84 1.84 1.76
Fully diluted
Net Income 1.84 1.83 1.76
</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,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Primary 4,452,660 4,438,187 4,421,984
Fully diluted 4,459,458 4,446,850 4,421,833
</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, 1995,
1994, and 1993, of 4,409,089, 4,393,312, and 4,378,445, 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
FINANCIAL HIGHLIGHTS
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1995 1994(1) 1993(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $64,303 $54,095 $52,033
Net income 8,199 8,151 7,763
Cash dividends paid 3,368 3,132 3,004
Return on average assets(2) 1.15% 1.23% 1.24%
Return on average equity(2) 12.53% 13.32% 13.59%
AT YEAR END
Assets $739,854 $703,859 $646,604
Loans, net of unearned income 484,694 480,399 415,632
Deposits 621,057 602,179 548,548
Shareholders' equity 70,019 61,882 61,130
Loans to deposits 78.04% 79.78% 75.77%
Allowance for credit losses to loans 1.27% 1.21% 1.37%
PER SHARE(3)
Net income $ 1.86 $ 1.86 $ 1.77
Cash dividends paid .76 .71 .69
Year end book value(2) 15.86 14.06 13.93
</TABLE>
(1) Restated to reflect the acquisition of the Bank of Brunswick
consummated on May 31, 1995, and accounted for as a pooling of
interests.
(2) Calculations reflect the effects of adopting Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," on December 31, 1993.
(3) Each year restated for the stock dividend declared in 1995.
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders
will be held at 10:00 a.m. on Tuesday,
April 16, 1996, at the Holiday Inn FSK,
Room FSK B, 5400 Holiday Drive,
Frederick, Maryland 21703.
<PAGE> 2
TO OUR SHAREHOLDERS
For F&M Bancorp, 1995 was characterized by a high level of strategic business
activity. During a year in which we made significant investments for long-term
profitability, our net income rose to $8,199,000. While representing a modest
increase over 1994's reported income of $8,151,000, the real story of 1995 was
that of a community bank implementing planned initiatives that will take its
franchise into the 21st century.
We continue to experience growth in our noninterest income. Fee income
generated by our Trust and Investment Management Group grew by more than 36
percent in 1995. Assets under management climbed $45.8 million to $242 million.
As a locally owned and managed trust group, we plan to continue to leverage
this business opportunity by adding resources that will strengthen our customer
relationships while meeting the increased demand for our services.
Our goal of generating noninterest revenue at a level competitive with peer
institutions was realized in 1995. With such income now representing 1.05
percent of the Bank's total average assets, this revenue segment is now
reaching industry standards. Operational changes implemented in 1995 as a
result of a strategic evaluation of our business practices contributed greatly
to our progress in this area.
In 1995, we were encouraged by loan growth in two key areas: in our Commercial
Loan Department, where growth topped $10 million; and in our Commercial Real
Estate Department, where growth exceeded $13 million. Fee income associated
with these loans totaled $215,000 and generated more than $5 million in new
deposits for the Bank. We attribute our success to an aggressive calling
initiative that resulted in nearly 600 prospect and 900 customer contacts
throughout the year. Commercial lending will continue to be a focus for F&M in
1996 as we capitalize on our base of operations in Montgomery County.
The quality of our loan portfolio remains enviable. 1995 net charge-offs and
delinquencies remain well below industry averages. In light of recent national
trends of rising delinquencies in consumer credit, we have made a special
provision of $600,000 to our loan loss reserve this year.
As part of our long-term strategic planning effort, F&M has and will continue
to actively pursue growth through exploiting our lines of business and through
acquisition strategies. Merger and acquisition activity was significant in
1995. In June, we completed the full-bank acquisition through merger of the
Bank of Brunswick, increasing deposits by approximately $26 million and adding
two more full-service offices to our retail delivery network. We are confident
that our investment in this new customer base, and the accompanying new
business opportunities, will provide continued long-term returns to our
shareholders.
Extending our reach into new and existing geographic markets has been an
ongoing strategic initiative. This year, we further solidified our presence in
northern Montgomery County and Frederick County by adding to our network of
community offices through the acquisition of two offices of First Union Bank.
We were pleased to add their Frederick office on Baughman's Lane and their
Olney office to our franchise. We opened a new full-service facility on East
Patrick Street in Frederick and we have completed construction of our
full-service office at Germantown Crossings.
Perhaps no factor contributed more to our increased presence throughout the
region this year than Express Bank. Throughout Frederick, western Carroll, and
northern Montgomery counties, this mobile banking unit has been turning heads
and providing all of the responsive service our customers have come to expect
from our traditional community offices. As it brings the full range of banking
services to bank-at-work regional businesses, retirement communities, community
events, and commuter parking centers, we expect to further penetrate new
markets in the coming year.
As a result of these planned growth initiatives, five full-service offices were
added to our retail network by year-end, for a total of 24 community offices
throughout Frederick, Carroll, and Montgomery counties. And we continue to grow
our proprietary ATM network. With the addition of seven new ATM locations this
year, the number of 24-hour banking centers and cash dispensers in F&M's
electronic network now totals 32.
As part of our ongoing strategy to evaluate the effective delivery of our
products and services, F&M entered into an agent bank relationship with MBNA
America Bank, N.A., to issue and service our credit card portfolio. Our
association with MBNA, one of the nation's largest credit card issuers, will
allow F&M's credit card customers to enjoy a host of additional features and
services, including 24-hour operator-assisted customer service, 30-minute
responses to credit line increase requests, and periodic promotional programs.
Our decision to sell our cardholder credit card business was made after careful
examination of a very competitive market and F&M's desire to enhance the
benefits of
2 | 3
<PAGE> 3
our card product for our customers. The sale of these credit card receivables
has provided the Bank with increased liquidity and greater resources to meet
the additional credit needs of both existing customers and prospective
borrowers.
To support our ongoing commitment to meeting our customers' unique investment
needs, we announced our partnership with Essex Corporation, one of the nation's
leading third-party providers of alternative investment services. Essex
Corporation will provide our retail customers with a full range of mutual fund
and annuity products through each of our 24 community offices. Essex
Corporation replaces Financial Horizons, Inc., our former third-party provider,
which has chosen to exit this line of business to focus on other sectors of
their business.
In addition to the four quarterly cash dividends, a 5 percent stock dividend
was distributed to F&M shareholders during the second quarter of 1995.
We wish to extend our best wishes and thanks to retiring F&M associates Geneva
B. Delphey, Ruth V. Fogle, Joann K. Krantz, Patricia A. Smith, and Edith M.
Troupe. We note with sadness the passing of Herbert L. Daugherty and Frank R.
Martin, members of F&M's Advisory Council; Millard M. Rice, member emeritus of
F&M's Advisory Council; and Gideon T. Darkis, a former credit card operations
manager.
Ensuring F&M's competitiveness as a progressive community bank requires our
deliberate investment of resources to support our strategic initiatives for
long-term growth and profitability. Just as important, we depend on the
creativity, innovation, and dedication of our associates to set these
initiatives in motion. When the dynamics of vision and action come together, as
they have for F&M in 1995, the result is a community bank strongly positioned
for continued prosperity. We look forward to this prospect, and the tangible
differences it will make to our shareholders and customers in the years ahead.
/s/ CHARLES W. HOFF, III /s/ FAYE E. CANNON
[PHOTO]
Charles W. Hoff, III
Chairman of the Board and
Chief Executive Officer
[PHOTO]
Faye E. Cannon
President and
Chief Operating Officer
<PAGE> 4
TANGIBLE DIFFERENCES
1995 was a year marked by extraordinary activity for F&M. We have reaffirmed
our position as a full-service community bank and our intention to remain one.
But we have also taken the necessary, and tangible, steps to become a
progressive community bank. The differences can be found in many places.
[PHOTO]
4 | 5
<PAGE> 5
[PHOTO]
THE COMMUNITY 6
DELIVERY OF SERVICES 8
CUSTOMER RELATIONS 10
REVENUE CENTERS 12
THE BANK'S REACH 14
<PAGE> 6
TANGIBLE DIFFERENCES IN THE COMMUNITY
A community bank is defined not so much by size as by the role it plays in the
lives of those within its reach. F&M has always been a responsible and
responsive corporate citizen, but in 1995 the Bank and our associates found new
ways to make a difference.
Our work with the Western Maryland Interfaith Housing Development Corporation,
which helps provide affordable housing for disadvantaged families and the
elderly, has been particularly rewarding. This year, the Federal Home Loan Bank
recognized our partnership's success by awarding a major grant and a Community
Support Award to the WMIHDC. And our involvement in the Frederick City Housing
Authority's HOPE I project has assisted low- and moderate-income families in
becoming first-time homeowners. Our civic activities were far-reaching as well.
F&M played a lead role as the City of Frederick celebrated its 250th
anniversary. A capital project donor and Founding Sponsor of the series of
events, F&M--a city resident for 178 years--was a visible and meaningful
presence throughout the year. There were other reasons to celebrate. In
September, we rededicated our historic Citizens community office on the
downtown Frederick corner of Market and Patrick streets. This structure stands
as a splendid example of careful preservation and is, at the same time, a
state-of-the-art branch. By linking the original structure with adjacent
bank-owned space on South Market Street, F&M has integrated full disabled
accessibility as part of the magnificent main building. The project has drawn
rave reviews from customers and preservationists alike.
Perhaps the greatest impact, however, has been made by F&M executives and
associates. Through thousands of hours spent in service to local cultural,
human service, and educational organizations, they have done much to enrich the
communities we serve.
6 | 7
<PAGE> 7
[PHOTO]
AS EXECUTIVE DIRECTOR OF THE WESTERN MARYLAND INTERFAITH HOUSING DEVELOPMENT
CORPORATION, JIM UPCHURCH HAS A VISION: TO BRING RELIGIOUS, FINANCIAL,
GOVERNMENT, AND PRIVATE ORGANIZATIONS TOGETHER TO ADDRESS THE REGION'S
AFFORDABLE HOUSING SHORTAGE. SINCE 1990, MR. UPCHURCH AND THE WMIHDC, WITH SOME
HELP FROM F&M, HAVE BEEN DOING JUST THAT. "WHEN WE GOT STARTED IN 1990, WE
LOOKED FOR A BANK WITH A HISTORY OF COMMUNITY SERVICE. F&M WAS AT THE TOP,"
SAYS MR. UPCHURCH. "THEY'VE INVESTED A GREAT DEAL IN LEARNING ABOUT AFFORDABLE
HOUSING ISSUES. NOT ALL BANKS ARE WILLING TO DO THAT." THROUGH A LINE OF CREDIT
EXTENDED BY THE BANK, WMIHDC RECENTLY OPENED THE HARRY AND JEANETTE WEINBERG
HOUSE, A FOUR-STORY, 23-UNIT RESIDENCE FOR THE ELDERLY LOCATED NEAR MARKET
STREET IN FREDERICK. OF THE PROJECT, MR. UPCHURCH SAYS, "THERE'S A REAL
DIFFERENCE WITH THIS KIND OF INVOLVEMENT. WE'RE PROVIDING FINANCING FOR A
PROJECT THAT WILL SERVE THE COMMUNITY'S BEST INTERESTS--NOT JUST THIS YEAR, BUT
FOR GENERATIONS TO COME."
JAMES UPCHURCH . EXECUTIVE DIRECTOR, WMIHDC
"WE LOOKED FOR A BANK WITH A HISTORY OFCOMMUNITY SERVICE. F&M WAS AT THE TOP."
<PAGE> 8
TANGIBLE DIFFERENCES IN DELIVERY OF SERVICES
What can technology do for an institution rooted in personalized customer
service? A great deal, as F&M is proving each day. With this year's Board of
Directors approval of the Bank's technology plan, F&M remains ahead of the
curve--in both planning and implementation.
Since undertaking our strategic planning process several years ago, our goal
has been to provide an integrated system for frontline associates. Our
investment in technology during 1995 and our decision to enhance our in-house
core processing functions will allow us to provide seamless, prompt, and
standardized service at the front lines and throughout the Bank. The resulting
reduction in overhead and increased efficiency will contribute to making F&M a
stronger, more responsive bank.
The differences in delivery of services can be found elsewhere. Upgrades to our
technical environment and expanded office automation will allow us to offer
enhanced products and services for the benefit of our customers. A range of
customer information will be at the fingertips of Bank associates in every
department and in every community office. As a result, our associates can
devote more time to serving the individual needs of our customers.
Other changes in our product line offer broader banking options for customers.
In October, F&M joined the MAC(R) network, which provides our customers with
ATM access at an additional 18,000 locations in 34 states. The number of
24-hour ATMs has grown to 27, and we have added 24-hour cash dispensers at the
National Emergency Training Center and at a high-traffic Sheetz convenience
store. For the growing ranks of our commuting customers, F&M community offices
have adopted extended banking hours. By reengineering our business processes
and by providing this degree of flexibility to our customers, F&M is fast
becoming the model for progressive community banks.
8 | 9
<PAGE> 9
[PHOTO]
FOR PMP--A PROPERTY AND CONDOMINIUM/HOMEOWNER ASSOCIATION MANAGEMENT
COMPANY--THE CHALLENGE OF PROCESSING 7,000 TO 8,000 CHECKS AND DEPOSITING THEM
INTO 50 DIFFERENT CHECKING ACCOUNTS EACH MONTH CALLED FOR INNOVATIVE CASH
MANAGEMENT SOLUTIONS. "SORTING AND PROCESSING THE MAIL AND CHECKS ALONE WOULD
BE MORE THAN ONE PERSON COULD HANDLE," EXPLAINS PMP CHIEF EXECUTIVE OFFICER ED
THOMAS. "WE CHOSE F&M BECAUSE I WANTED TO KEEP OUR BANKING RELATIONSHIP LOCAL
AND CUT DOWN ON THE DELAYS IN PROCESSING TIME," SAYS MR. THOMAS, NOTING THE
ALTERNATIVES OF BANK PROCESSING CENTERS IN RICHMOND, BALTIMORE, AND COLUMBIA.
BUT WHEN MR. THOMAS SELECTED F&M TO HANDLE ITS PROCESSING NEEDS, HE NEVER
SUSPECTED THE RELATIONSHIP WOULD LEAD TO COMPETITIVE ADVANTAGES FOR PMP IN
OTHER AREAS. THE UPSHOT OF THIS DYNAMIC RELATIONSHIP HAS BEEN THE DEVELOPMENT
OF A NEW DIRECT-DEBIT FEATURE, DEVELOPED JOINTLY BY PMP AND F&M, THAT ALLOWS
RESIDENTS TO PAY THEIR HOMEOWNER OR CONDOMINIUM FEES TO PMP
ELECTRONICALLY--THROUGH F&M. IT'S A FEATURE NOT CURRENTLY OFFERED BY PMP'S
COMPETITORS. "F&M WAS WILLING TO INVEST IN OUR SYSTEMS AND IT'S LED TO A
SUPERIOR PRODUCT," SAYS MR. THOMAS. "WE'RE ELATED AND I CAN'T SAY ENOUGH ABOUT
F&M'S WILLINGNESS TO SERVE US."
ED THOMAS . CHIEF EXECUTIVE OFFICER, PMP, INC.
"F&M WAS WILLING TO INVEST IN OUR SYSTEMS AND
IT'S LED TO A SUPERIOR PRODUCT."
<PAGE> 10
TANGIBLE DIFFERENCES IN CUSTOMER RELATIONS
Personalized customer relationships are at the heart of any good bank. But
today, banking relationships are based on more than friendly rapport. Ease and
convenience of conducting banking transactions are determinants of equal
importance. Thanks to some innovative thinking, F&M is balancing these factors
well.
This year, F&M addressed its fundamental objective of enhancing customer
relations in exciting new ways. For example, a careful investigation of
alternative delivery systems led us to the development of Express Bank. This
mobile banking unit is the first of its kind on the East Coast to offer a full
line of financial products and services. Express Bank's available services
range from mortgage, personal loan, and business line of credit processing to
trust and investment management offerings. High-speed synchronous cellular
modems allow on-line communication with F&M's mainframe computer system. As
Express Bank helps F&M get to customers, it provides us with valuable
opportunities to build new relationships through this innovative outreach
effort.
The response to Express Bank has been overwhelmingly positive and its successes
are being shared on several fronts.The unit plays a significant role in the
Trust Group's calling program. And through Express Bank's bank-at-work
programs, F&M is building solid corporate customer relationships.
As Express Bank changes where our banking relationships are built, our
telephone banking unit changes when they take place. We have increased the
availability of Bank associates by extending our telephone banking operator
assistance from early morning to evening hours throughout the week. And through
ExpressLine, F&M's 24-hour voice-response system, customers can review account
information or transfer funds between accounts at any time, day or night.
To meet the challenges associated with serving an ever-broadening customer base
requires innovation. Our successes in 1995 are inspiration to continue breaking
new ground.
10 | 11
<PAGE> 11
[PHOTO]
WITH 250 EMPLOYEES AND THREE DAILY SHIFTS, FORMS DIRECT INCORPORATED HAS
SIGNIFICANT BANKING NEEDS, BUT NONE MORE IMPORTANT THAN THOSE OF ITS EMPLOYEES.
SO WHEN F&M APPROACHED THE DIRECT-MAIL PRODUCTION COMPANY'S CHIEF FINANCIAL
OFFICER, MAURICE DEPREY, ABOUT BRINGING EXPRESS BANK TO FDI, MR. DEPREY WAS
DELIGHTED. "WHEN WE WERE SEARCHING FOR A LOCAL COMMERCIAL BANK IN 1994, I HAD
SCOUTED AROUND AND FOUND THAT F&M WAS THE BEST COMMERCIAL BANK IN TOWN. THEIR
REPUTATION SHINES." F&M'S RESPONSIVENESS TO THE NEEDS OF FDI EMPLOYEES HAS WON
SIMILAR PRAISE FROM MR. DEPREY. F&M HAS ESTABLISHED EXPRESS BANK HOURS AT FDI
THAT COINCIDE WITH TWO COMPANY SHIFTS, EVERY OTHER WEEK. AND, AS A FULL-SERVICE
BANKING UNIT, EXPRESS BANK OFFERS FDI EMPLOYEES A RANGE OF F&M SERVICES. "I'M
HEARING GOOD THINGS FROM OUR EMPLOYEES ABOUT EXPRESS BANK AND THE BANK-AT-WORK
PROGRAM," SAYS MR. DEPREY. "THIS CONCEPT FITS OUR NEEDS VERY WELL."
MAURICE DEPREY . CHIEF FINANCIAL
OFFICER, FORMS DIRECT INCORPORATED
"I'M HEARING GOOD THINGS FROM OUR
EMPLOYEES ABOUT EXPRESS BANK."
<PAGE> 12
TANGIBLE DIFFERENCES IN REVENUE CENTERS
On Wall Street and on Main Street, financial institutions are grappling with
the issue of improving revenue. In 1995, margins narrowed and many of our peer
institutions struggled to strengthen their bottom lines through increasing
their noninterest income. At F&M, the story was quite different.
As part of our strategic planning initiative, we identified lines of business
that presented opportunities for increasing noninterest revenue. During the
past several years, these areas have been the focus of our thinking and,
through the investment of resources, have produced gratifying results.
Activity in our Trust and Investment Management Group remains strong and we
continue to direct efforts toward building this business. Total assets under
management have increased by more than $100 million during the past four years,
and we have expanded the investment area to accommodate this growth. As a
locally based bank offering trust services, we see additional opportunities to
grow, to further solidify customer relationships, and to strengthen our
position as the most responsive bank in our region.
New and potentially gainful opportunities for commercial lending are emerging
as F&M's presence extends further into Montgomery County. We have identified
significant customer demand in this geographic area for flexibility and
responsiveness, attributes that characterize F&M's community banking
philosophy. To meet our anticipated increased volume, we will add to lending
officer support in the coming year. Our plans to enhance existing cash
management products for commercial customers, such as software that allows for
remote, PC-based transactions, should provide a further boost.
Our new partner in the area of alternative investment products is Essex
Corporation, one of the nation's leading third-party providers. Their
experience and commitment to customer service coupled with our customers'
increasing demand for competitive products should generate additional revenue
for this line of business.
12 | 13
<PAGE> 13
[PHOTO]
WHEN BILL AND SHARON WARREN DECIDED IT WAS TIME TO SEEK PROFESSIONAL INVESTMENT
PLANNING SERVICES, THEY DIDN'T HAVE TO LOOK FAR. F&M CUSTOMERS SINCE THEY MOVED
TO THE AREA 25 YEARS AGO, THEY HAVE DEALT WITH THE BANK AS DEPOSITORS AND AS
COMMERCIAL AND PERSONAL LOAN CUSTOMERS. BUT CHOOSING F&M'S TRUST AND INVESTMENT
MANAGEMENT SERVICES WAS NOT A DECISION THE WARRENS TOOK LIGHTLY. "TO ME, BANK
TRUST DEPARTMENTS MEANT A STODGY APPROACH TO INVESTING. THERE'S NOTHING WRONG
WITH THAT, BUT F&M WAS DIFFERENT. THEY PRESENTED A PLAN TO US THAT PROVED THEY
WERE VERY UP ON THINGS. THEY HAVE A LOT OF TOP PEOPLE ON BOARD AND WE'VE BEEN
VERY SATISFIED WITH OUR RESULTS." F&M ASSOCIATES HAVE GUIDED THE WARRENS THOUGH
IMPORTANT INVESTMENT AND TAX DECISIONS AND HELPED THEM ESTABLISH A TRUST FOR
THEIR CHILDREN. "WE'VE WORKED HARD FOR A LOT OF YEARS AND WE'VE BEEN DRIVEN TO
SUCCEED," SAYS MR. WARREN. "WE'RE CONVINCED THAT WE'RE ON THE RIGHT TRACK WITH
F&M--AND THAT'S A NICE FEELING."
BILL WARREN
"WE'RE CONVINCED THAT WE'RE ON THE
RIGHT TRACK WITH F&M."
<PAGE> 14
TANGIBLE DIFFERENCES IN THE BANK'S REACH
Merger and acquisition activity was an important component of F&M's growth in
1995. Specifically, three developments led the way in our expansion plan and
helped push bank assets over the $700 million mark. Each is representative of
the long-term strategy of growth through mergers, acquisitions, and other
well-considered activities that will help build our franchise for the 21st
century.
Our purchase of the Bank of Brunswick represents F&M Bancorp's first full-bank
acquisition through merger. As such, it provided us with an opportunity to
integrate the systems of a smaller-sized institution with our own. After a
smooth transition, F&M continues to build a solid following in this historic
railroad hub. And former Bank of Brunswick depositors have learned that, as F&M
customers, banking continues on a very personalized basis but with a fuller
range of services.
In 1995, we continued to pursue banking opportunities in Montgomery County. The
purchase of two First Union Bank offices--one in Olney, the other in Frederick
County--gave us access to new depositors, a broader customer base, and provided
another valuable inroad to a contiguous market. We took a further step in
Montgomery County by proceeding with the construction of our new Germantown
Crossings community office at Routes 355 and 27. In early 1996, F&M will open
this highly visible office, which is strategically located near Route 270. Our
operations at the crossroads of suburban Washington, D.C., and central and
western Maryland give us an important presence in a rapidly growing and
competitive market.
14 | 15
<PAGE> 15
[MAP]
[PHOTO]
OVER THE YEARS, MARGARET BROWN HAS SEEN HER FAIR SHARE OF BANKS COME AND GO. SO
WHEN SHE PRODUCES WHAT SHE CALLS "MY BOOK," A 1962 FARMERS AND MECHANICS
NATIONAL BANK SAVINGS PASSBOOK--YOU KNOW SHE APPRECIATES CONTINUITY. SHE'S BEEN
A DEPOSITOR WITH F&M AND--UNTIL IT WAS RECENTLY ACQUIRED BY F&M--THE BANK OF
BRUNSWICK "FOR AS LONG AS I CAN REMEMBER."
WHEN THE TWO INSTITUTIONS BECAME ONE, MRS. BROWN NEVER THOUGHT TWICE ABOUT THE
TRANSITION. "I LIKED THE BANK OF BRUNSWICK, AND I MISS IT," SHE RECALLS. "BUT
NOT SO MUCH AS I MIGHT HAVE BECAUSE, AT F&M, I SEE THE SAME FACES I ALWAYS DID.
IT'S NICE TO KNOW THAT THEY'RE THERE." AS A LONGTIME BUSINESSWOMAN--SHE'S OWNED
BROWN'S BEAUTY SHOP IN FREDERICK FOR 35 YEARS--MRS. BROWN HAS LEARNED WHAT IT
TAKES TO KEEP CUSTOMERS COMING BACK. JUDGING FROM HER BANKING PATTERNS, IT'S A
SUBJECT THAT F&M ASSOCIATES UNDERSTAND, TOO.
MARGARET BROWN
"AT F&M, I SEE THE SAME FACES I ALWAYS DID.
IT'S NICE TO KNOW THAT THEY'RE THERE."
<PAGE> 16
FINANCIAL REVIEW
<TABLE>
<CAPTION>
NET INCOME
(Dollars in millions) 5.021 7.268 7.763 8.151 8.199
<S> <C> <C> <C> <C> <C>
9
7
5
3
0 91 92 93 94 95
</TABLE>
<TABLE>
<CAPTION>
CASH DIVIDENDS PAID PER SHARE
(Dollars) 0.63 0.64 0.69 0.71 0.76
<S> <C> <C> <C> <C> <C>
.80
.70
.60
.50
0 91 92 93 94 95
</TABLE>
<TABLE>
<CAPTION>
TOTAL AVERAGE ASSETS
(Dollars in millions) 558.7 597.6 625.7 662.2 715.4
<S> <C> <C> <C> <C> <C>
800
600
400
200
0 91 92 93 94 95
</TABLE>
<TABLE>
<CAPTION>
TOTAL AVERAGE EQUITY
(Dollars in millions) 49.64 52.35 57.14 61.21 65.46
<S> <C> <C> <C> <C> <C>
70
60
50
40
0 91 92 93 94 95
</TABLE>
16 | 17
<PAGE> 17
FINANCIAL CONTENTS
18 SELECTED FINANCIAL INFORMATION
19 MANAGEMENT'S DISCUSSION AND ANALYSIS
31 CONSOLIDATED FINANCIAL STATEMENTS
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46 REPORT OF INDEPENDENT AUDITORS
47 DIRECTORS AND OFFICERS
<PAGE> 18
SELECTED FINANCIAL INFORMATION
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1995 1994(1) 1993(1) 1992(1) 1991(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS
Interest income $54,120 $47,105 $45,857 $48,004 $50,835
Interest expense 23,618 17,858 17,391 20,551 27,331
Net interest income 30,502 29,247 28,466 27,453 23,504
Provision for credit losses 2,000 910 1,530 2,662 1,895
Net interest income after
provision for credit losses 28,502 28,337 26,936 24,791 21,609
Net gains (losses) on sales of securities (256) -- 2 618 --
Other noninterest income 10,439 6,990 6,174 5,374 4,652
Noninterest expenses 27,553 24,185 22,146 20,698 18,100
Income before provision for
income taxes and cumulative effect
of change in accounting principle 11,132 11,142 10,966 10,085 8,161
Provision for income taxes 2,933 2,991 3,203 2,817 2,117
Income before cumulative effect of change in
accounting principle 8,199 8,151 7,763 7,268 6,044
Cumulative effect of accounting change -- -- -- -- 1,023
Net income 8,199 8,151 7,763 7,268 5,021
PER SHARE DATA(2)
Income before cumulative effect of change in
accounting principle $1.86 $1.86 $1.77 $1.66 $1.38
Net income 1.86 1.86 1.77 1.66 1.15
Cash dividends paid .76 .71 .69 .64 .63
DIVIDEND PAYOUT RATIO(3) 40.86% 38.17% 38.98% 38.55% 54.78%
AVERAGE RATIOS(4)
Return on assets
Income before cumulative effect of
change in accounting principle 1.15% 1.23% 1.24% 1.22% 1.08%
Net income 1.15% 1.23% 1.24% 1.22% 0.90%
Return on equity
Income before cumulative effect of
change in accounting principle 12.53% 13.32% 13.59% 13.88% 12.17%
Net income 12.53% 13.32% 13.59% 13.88% 10.11%
Shareholders' equity to total assets 9.15% 9.24% 9.13% 8.76% 8.89%
OTHER INFORMATION(4)
Total average assets $715,446 $662,190 $625,679 $597,593 $558,698
Total average equity 65,456 61,206 57,143 52,349 49,644
</TABLE>
(1) Restated to reflect the acquisition of the Bank of Brunswick
consummated on May 31, 1995, and accounted for as a pooling of
interests.
(2) Each year restated for the stock dividend declared in 1995.
(3) Reflects the per share percentage relationship of cash dividends paid
to net income.
(4) Calculations and amounts for 1995, 1994, and 1993 reflect the effects
of adopting Financial Accounting Standards Board Statement No.115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993.
18 | 19
<PAGE> 19
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 operations of F&M Bancorp and its subsidiary ("Bancorp"), for each
year from 1993 through 1995. This discussion is intended to assist readers in
their analysis of the accompanying consolidated financial statements and notes
thereto. During 1995, Bancorp completed its merger with the Bank of Brunswick,
Brunswick, Maryland, in a tax-free exchange of stock. At the date of
acquisition, the Bank of Brunswick had two branch offices, earning assets of
$26.7 million, including loans of $21.6 million, and deposits of $26.6 million.
The merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements and related financial data have been restated
to include the accounts of the Bank of Brunswick for all periods presented.
During 1995, Bancorp also consummated a purchase and assumption agreement with
First Union National Bank of Maryland, Rockville, Maryland, in which it
acquired certain assets and assumed $16.1 million in deposit liabilities of two
First Union offices located in Bancorp's principal market area. The transaction
was accounted for using the purchase method of accounting. Refer to Note 2 to
the consolidated financial statements for further information on Bancorp's
acquisition activities.
OVERVIEW
Net income for 1995 set a new record for the fourth straight year, reaching
$8,199,000, an increase of $48,000 over 1994's net income of $8,151,000. In
1993 net income was $7,763,000. Per share earnings were $1.86 in both 1995 and
1994 and $1.77 in 1993. Per share earnings for 1994 and 1993 have been restated
for the merger with the Bank of Brunswick and a stock dividend distributed to
shareholders on May 22, 1995.
Return on average total assets was 1.15 percent for 1995, 1.23 percent
for 1994, and 1.24 percent for 1993. Return on average equity was 12.53 percent
for 1995, 13.32 percent for 1994, and 13.59 percent for 1993.
Although earnings performance reflected only a modest increase
compared with the prior year, future earnings potential has been enhanced by
strategic decisions which have resulted in a stronger balance sheet. Key
factors in Bancorp's earnings performance were:
- - The sale of the cardholder credit card business resulting in a $2,890,000
gain.
- - A special provision for credit losses of $600,000 to recognize the potential
impact of unfavorable nationwide trends in consumer delinquencies.
- - A one-time charge of $803,000 resulting from a reevaluation of the core
deposit intangible associated with the Standard Federal acquisition
consummated in 1994.
- - Acquisition expenses of $320,000 related to the Bank of Brunswick merger.
- - A 4.0 percent increase in tax-equivalent net interest income.
- - A 20.2 percent increase in noninterest income from recurring sources.
- - A 9.3 percent increase in noninterest expense, exclusive of one-time
charges, reflective of the increased overhead associated with the expansion
of Bancorp's retail delivery system through acquisition and de novo
activities.
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 investment 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 for 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 $32,523,000 in
1995 compared with $31,275,000 in 1994, an increase of $1,248,000 or 4.0
percent. Total average earning assets increased 7.1 percent during 1995
compared with 1994. Earnings power was enhanced in 1995 as the percentage of
average loans to average earning assets was 74.0 percent in 1995 compared with
70.7 percent in 1994. Other components of average earning assets declined as
proceeds from maturing investment securities and a reduction in federal funds
sold were utilized to partially fund this loan demand. Total average
interest-bearing liability balances were 7.8 percent higher in 1995 compared
with 1994, while average noninterest-bearing deposit balances were 9.7 percent
higher. Total average deposits increased 6.7 percent in 1995 compared with 1994
indicating that a portion of the 7.1 percent growth in average earning assets
was funded in part by alternative funding sources.
The average rate paid on interest-bearing liabilities increased more
than the average yield on earning assets during 1995.
The average yield on earning assets increased 53 basis points in 1995
while the average rate paid on interest-bearing liabilities increased 79 basis
points. Reversing a trend of the last several years, customers shifted their
deposits to higher yielding certificates of deposit from savings and money
market accounts to lock in higher yields. In addition, intense competition
between financial service providers to acquire and retain deposits acted to
drive liability rates higher. As a result, the net interest spread (the
difference between the average taxable-equivalent yield on earning assets and
the average rate paid on interest-bearing liabilities) declined 26 basis points
to 4.20 percent.
The net interest margin (the ratio of taxable-equivalent net interest
income to earning assets) declined 15 basis points as the rate of growth in
earning assets (7.1 percent) exceeded the rate of growth in net interest income
(4.0 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
<PAGE> 20
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 1995 due to volume related increases totaling
$1,994,000, offset in part by rate related declines totaling $746,000.
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 1996, 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.
In 1995, competitive pressures and the recognition of the customer benefits
associated with establishing an agent bank relationship with a third party
provider specializing in the issuance and servicing of credit card portfolios
led to the decision to sell our cardholder credit card business. The sale
resulted in a gain of $2,890,000. Noninterest income, exclusive of securities
losses, property gains, and the credit card sale transaction, increased
$1,264,000 or 20.2 percent in 1995 compared with 1994. This increase reflects
management's continued 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. Significant increases were realized
in several components of noninterest income: Trust income increased $416,000 or
36.3 percent; service charges on deposit
TABLE 1. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- --------------------------- ----------------------------------
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 $ 4,839 $ 286 5.91% $ 7,209 $ 290 4.02% $ 12,633 $ 386 3.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits
with banks 26 1 3.85 464 20 4.31 666 28 4.20
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities(1)
Taxable 99,029 5,697 5.75 105,698 5,513 5.22 99,164 5,542 5.59
Tax-exempt(2) 68,836 5,408 7.86 68,317 5,459 7.99 60,069 5,030 8.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
securities(2) 167,865 11,105 6.62 174,015 10,972 6.31 159,233 10,572 6.64
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans
held for sale(2) 491,919 44,749 9.10 438,840 37,851 8.63 414,485 36,755 8.87
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
and average yield(2) 664,649 56,141 8.45 620,528 49,133 7.92 587,017 47,741 8.13
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning Assets
Cash and due from banks 21,350 20,868 19,364
Interest receivable 4,520 3,931 3,923
Bank premises
and equipment, net 15,251 12,911 12,238
Other assets 15,497 9,756 9,164
Less: Allowance for
credit losses (5,821) (5,804) (6,027)
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning
assets 50,797 41,662 38,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $715,446 $662,190 $625,679
====================================================================================================================================
</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.
20 | 21
<PAGE> 21
accounts increased $667,000 or 29.3 percent; and other operating income
increased $110,000 or 3.9 percent. The 1995 increases reflect a full year's
impact of revised fee schedules and new products introduced during 1994, the
full integration of three Standard Federal offices acquired in late 1994, a
larger customer base due to the further expansion of our retail delivery system
in 1995, and a 23.0 percent increase in assets under management by the Trust
Group. Gains from sales of property decreased $705,000 in 1995 compared with
1994 due primarily to one-time gains realized in 1994 from the sale of three
former branch locations which were closed as part of Bancorp's branch
reconfiguration plan. Securities losses of $256,000 were realized in 1995 while
no investment security sales took place in 1994.
Noninterest Expenses.
Noninterest expense consists primarily of costs associated with personnel, bank
premises and equipment, and regulatory fees. Bancorp's noninterest expense
increased $3,368,000 or 13.9 percent in 1995 compared with 1994. This increase
was driven primarily by one-time charges and higher overhead associated with
acquisition and de novo activities. A total of five offices and seven ATMs were
added to our retail delivery system in 1995. In addition, 1995 expenses reflect
a full year's impact of the acquisition of three Standard Federal offices which
were acquired in late 1994. Salaries and employee benefits, the largest
component of noninterest expense, increased $982,000 or 8.0 percent compared
with the prior year. This increase is due in a large measure to higher staffing
levels and to a lesser degree,
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ----------------------------- -------------------------------
Average Interest Average Average Interest Average Average Interest Average
(Dollars in thousands) Balances Expense Rate Balances Expense Rate Balances Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing Liabilities
Interest-bearing deposits
Checking $ 67,535 $ 1,479 2.19% $ 66,357 $ 1,526 2.30% $ 59,947 $ 1,550 2.59%
Savings 111,704 3,187 2.85 117,101 3,260 2.78 109,727 3,249 2.96
Money market accounts 87,234 2,941 3.37 92,877 2,743 2.95 86,148 2,602 3.02
Certificates of deposit
under $100,000 218,477 11,957 5.47 181,920 7,926 4.36 179,946 8,110 4.51
Certificates of deposit
$100,000 and over 29,197 1,654 5.66 25,877 1,113 4.30 23,850 978 4.10
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 514,147 21,218 4.13 484,132 16,568 3.42 459,618 16,489 3.59
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased
and securities
sold under agreements
to repurchase 38,500 2,215 5.75 29,539 1,208 4.09 28,902 854 2.95
Other short-term
borrowings 3,063 185 6.04 1,931 82 4.25 1,679 48 2.86
- ------------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings 41,563 2,400 5.77 31,470 1,290 4.10 30,581 902 2.95
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities and average
rate incurred 555,710 23,618 4.25 515,602 17,858 3.46 490,199 17,391 3.55
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing Liabilities
Demand deposits 87,604 79,829 73,068
Other liabilities 6,676 5,553 5,269
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 94,280 85,382 78,337
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 649,990 600,984 568,536
Shareholders' equity 65,456 61,206 57,143
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $715,446 $662,190 $625,679
- ------------------------------------------------------------------------------------------------------------------------------
Net interest earnings $32,523 $31,275 $30,350
==============================================================================================================================
Net interest spread(3) 4.20% 4.46% 4.58%
==============================================================================================================================
Net interest margin(4) 4.89% 5.04% 5.17%
==============================================================================================================================
</TABLE>
<PAGE> 22
normal promotional and merit increases. The average number of full-time
equivalent employees increased 5.8 percent in 1995. A portion of the intangible
asset associated with the Standard Federal acquisition was written down
$803,000 based on a periodic analysis of deposit retention which reflected
deposit runoff in excess of original projections. Exclusive of this write-down,
other operating expenses increased $1,005,000 or 10.9 percent in 1995 compared
with 1994.
Other operating expenses include $320,000 in non-recurring charges
associated with the Bank of Brunswick merger. Insurance expense declined
$482,000 in 1995 compared with 1994 primarily due to reduced FDIC premium
assessments which took effect in mid-year for Bank Insurance Fund ("BIF")
deposits when the BIF reached its designated reserve ratio of 1.25 percent. The
assessment rate on BIF deposits was decreased from 0.23 percent to 0.04
percent. This trend should continue in 1996 when the assessment rate for BIF
deposits will be further reduced from 0.04 percent to zero. Bancorp has "Oakar
deposits" of approximately $29.0 million insured by the Savings Association
Insurance Fund ("SAIF") for which the assessment rate remains at 0.23 percent.
There is legislation pending which will increase BIF assessments for 1996 from
zero to 0.024 percent and impose a one-time assessment of approximately 0.80
percent on SAIF insured deposits. After the one-time assessment, the BIF and
SAIF assessment rates would be equivalent. There can be no assurance that the
legislation will pass in its present form or that alternative legislation
affecting assessments will be enacted.
Noninterest expenses are expected to continue to increase as the full
effects of the delivery system expansion in 1995 are realized and a de novo
office is opened in January 1996. Significant investments in technology,
equipment, and training is also anticipated in 1996 as Bancorp moves forward
with a process reengineering initiative.
During 1995, Bancorp began construction on a 45,000-square-foot
addition to its corporate headquarters facility, with completion targeted for
late 1996. Accordingly, no significant impact on Bancorp's noninterest expenses
are anticipated to result from this building expansion in 1996.
Income Taxes.
Income tax expense amounted to $2,933,000 in 1995 compared with $2,991,000 in
1994. 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 1995 was 26 percent compared with 27
percent in 1994. The decline in the effective tax rate in 1995 was assisted by
the realization of tax benefits from
Table 2. Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------
1995 over 1994 1994 over 1993
------------------------------- --------------------------------
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) $6,898 $4,574 $2,324 $1,096 $2,083 $ (987)
Interest and dividends on
investment securities
Taxable 184 (361) 545 (29) 350 (379)
Tax-exempt(4) (51) 38 (89) 429 665 (236)
Interest on federal funds sold (4) (114) 110 (96) (195) 99
Interest-bearing deposits with banks (19) (17) (2) (8) (9) 1
- -------------------------------------------------------------------------------------------------------
Total 7,008 4,120 2,888 1,392 2,894 (1,502)
- -------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 4,650 1,635 3,015 79 746 (667)
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 1,007 432 575 354 18 336
Interest on other short-term
borrowings 103 59 44 34 8 26
- -------------------------------------------------------------------------------------------------------
Total 5,760 2,126 3,634 467 772 (305)
- -------------------------------------------------------------------------------------------------------
Net interest income $1,248 $1,994 $ (746) $ 925 $2,122 $(1,197)
=======================================================================================================
</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 $131,000 for the year ended December 31, 1995 over 1994 and
decreased fees on loans of $2,000 for the year ended December 31,
1994, compared with 1993.
(3) Tax-equivalent adjustments of $183,000 for 1995, $172,000 for 1994,
and $174,000 for 1993 are included in the calculation of rate changes
for interest and fees on loans.
(4) Tax-equivalent adjustments of $1,838,000 for 1995, $1,856,000 for
1994, and $1,710,000 for 1993 are included in the calculation of rate
changes for tax-exempt investment securities.
22 | 23
<PAGE> 23
tax planning strategies implemented in the second quarter of 1994. 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.
Beginning January 1, 1996, the Maryland state financial institution
franchise tax will be phased out over a two-year period to result in Maryland
banks being taxed like all other non-bank corporations. The changes effect
principally how investment income is taxed. Given the existing composition of
the investment portfolio and its distribution between taxing jurisdictions, the
effect on state income tax expense will not be material.
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 $44,121,000 or 7.1 percent in 1995 compared with a $33,511,000 or 5.7
percent increase in 1994.
Investments.
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 increased by 4.6 percent compared with last year-end
primarily due to increased liquidity resulting from the December sale of the
cardholder credit card portfolio. The percentage of the investment portfolio
allocated to the held-to-maturity and available-for-sale categories was 34.0
percent and 66.0 percent, respectively at December 31, 1995, compared with 54.1
percent and 45.9 percent, respectively at year-end 1994. To provide increased
liquidity and portfolio management flexibility, Bancorp elected on December 26,
1995, to transfer held-to-maturity securities having an amortized cost of
$32,711,000 and a fair value of $32,765,000 to the available-for-sale category.
On this same date, Bancorp also transferred investment securities
available-for-sale having an amortized cost of $7,405,000 and a fair value of
$7,426,000 to the held-to-maturity category.
Table 4 presents the amortized cost of the investment portfolio at
December 31, 1995. 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 declined 3.5 percent in 1995 compared with 1994 averages.
Averages declined as maturing investment securities were utilized to partially
fund loan demand. Average investment yield increased 31 basis points to 6.62
percent reflecting the increase in market rates. Investment purchases in 1995
TABLE 3. SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- ---------------------------- -------
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 $ 4,839 $(2,370) (32.9)% $ 7,209 $(5,424) (42.9)% $ 12,633
Interest-bearing deposits with banks 26 (438) (94.4) 464 (202) (30.3) 666
Taxable investment securities 99,029 (6,669) (6.3) 105,698 6,534 6.6 99,164
Tax-exempt investment securities 68,836 519 0.8 68,317 8,248 13.7 60,069
Loans, net 491,919 53,079 12.1 438,840 24,355 5.9 414,485
- ------------------------------------------------------------------------------------------------------------------------------
Total uses $664,649 $44,121 7.1% $620,528 $33,511 5.7% $587,017
==============================================================================================================================
FUNDING SOURCES
Interest-bearing checking $ 67,535 $ 1,178 1.8% $ 66,357 $ 6,410 10.7% $ 59,947
Savings 111,704 (5,397) (4.6) 117,101 7,374 6.7 109,727
Money market accounts 87,234 (5,643) (6.1) 92,877 6,729 7.8 86,148
Certificates of deposit
Under $100,000 218,477 36,557 20.1 181,920 1,974 1.1 179,946
$100,000 and over 29,197 3,320 12.8 25,877 2,027 8.5 23,850
Short-term borrowings 41,563 10,093 32.1 31,470 889 2.9 30,581
Noninterest-bearing funds (net)(1) 108,939 4,013 3.8 104,926 8,108 8.4 96,818
- ------------------------------------------------------------------------------------------------------------------------------
Total sources $664,649 $44,121 7.1% $620,528 $33,511 5.7% $587,017
==============================================================================================================================
</TABLE>
(1) Noninterest-bearing liabilities and shareholders' equity less
noninterest-earning assets.
<PAGE> 24
were primarily 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, 1995. The average maturity of the portfolio
lengthened slightly from 3.4 years in 1994 to 3.8 years in 1995. During 1995,
several security sales were executed resulting in a pre-tax loss of $256,000.
This loss will be offset in subsequent years with the higher yielding
replacement securities. It is management's opinion that none of the obligations
in the investment portfolio present any material risk characteristics which
should be disclosed. All of the obligations of states and political
subdivisions are rated A or higher by either Moody's Investors Service, Inc. or
Standard and Poor's Corporation and approximately 77.1 percent are rated AAA.
The aggregate book value of obligations issued in the states of Maryland and
New Jersey were $7,163,000 and $7,417,000, respectively, which exceeds 10
percent of shareholders' equity at December 31, 1995. The related fair values
of these issues were $7,217,000 and $7,606,000, respectively.
Loans.
Average loans were 12.1 percent higher in 1995 compared with 1994. The growth
was primarily concentrated in commercial and industrial loans and consumer
loans. As reflected in Table 6, year-end total gross loans increased $4.2
million or 0.9 percent compared with the prior year, reflecting the effect of
the sale of the cardholder credit card portfolio in December 1995. Adjusting
for this $10.7 million sale, the 1995 increase is a more significant $14.9
million or 3.1 percent. The strong loan growth that was achieved in the fourth
quarter of 1994 was not sustained
TABLE 4. INVESTMENT PORTFOLIO DISTRIBUTION--BOOK VALUE (AMORTIZED COST)(1)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 64,836 $ 61,866 $ 59,604
Obligations of states and
political subdivisions 72,185 70,975 65,877
Mortgage-backed securities 34,041 37,347 43,997
Other securities 5,712 2,426 2,676
- ----------------------------------------------------------------------------
Total $176,774 $172,614 $172,154
============================================================================
</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.
throughout the year in 1995 as evidenced by the smaller increase in year-end
balances relative to the average loan balance increase. Bancorp strives to
maintain its loan portfolio in accordance with what management believes are
conservative underwriting guidelines. Although most of Bancorp's loans are made
within a limited geographic area, the loan portfolio is reasonably well
diversified. The overall composition of the portfolio remained fairly stable in
1995. 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, 1995.
TABLE 5. INVESTMENT PORTFOLIO ANALYSIS
December 31, 1995
<TABLE>
<CAPTION>
Maturing in:
---------------------------------------------------------------------------------------------
One year After one After five
or less through five years through ten years After ten years Total
---------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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 $31,228 5.39% $22,673 5.41% $ 5,995 6.75% $ -- --% $ 59,896 5.53%
Obligations of states and
political subdivisions(2) 8,296 8.86 8,683 8.82 -- -- -- -- 16,979 8.84
Mortgage-backed securities(3) 2,883 6.48 23,644 6.05 2,567 6.58 4,947 6.39 34,041 6.17
Equity securities -- -- -- -- -- -- -- -- 5,712 6.52
- -----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 42,407 6.14 55,000 6.22 8,562 6.70 4,947 6.39 116,628 6.25
- -----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies -- -- 4,940 6.49 -- -- -- -- 4,940 6.49
Obligations of states and
political subdivisions(3) -- -- 21,948 7.59 33,148 7.16 110 6.50 55,206 7.33
- -----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity -- -- 26,888 7.39 33,148 7.16 110 6.50 60,146 7.26
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $42,407 6.14% $81,888 6.61% $41,710 7.06% $5,057 6.40% $176,774 6.59%
===================================================================================================================================
</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 1995 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.
24 | 25
<PAGE> 25
TABLE 6. LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(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 $ 19,326 4.0% $ 21,193 4.4% $ 22,110 5.3% $ 18,288 4.5% $ 21,361 5.3%
Secured by farmland 6,212 1.3 6,132 1.3 5,832 1.4 5,773 1.4 4,398 1.1
Residential mortgage 111,109 22.9 115,873 24.1 112,668 27.1 123,758 30.4 136,174 33.6
Other mortgage 87,706 18.1 86,430 18.0 75,779 18.2 82,131 20.2 108,764 26.9
Loans to farmers 1,493 0.3 1,815 0.4 1,810 0.4 1,124 0.3 1,821 0.4
Commercial and industrial 55,622 11.5 44,584 9.3 32,657 7.9 31,390 7.7 23,762 5.9
Consumer 198,523 40.9 198,815 41.3 159,489 38.4 138,314 34.0 102,235 25.3
Other loans 4,821 1.0 5,738 1.2 5,545 1.3 6,121 1.5 6,074 1.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $484,812 100.0% $480,580 100.0% $415,890 100.0% $406,899 100.0% $404,589 100.0%
===================================================================================================================================
</TABLE>
Loans are classified according to security, borrower, or purpose.
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY(1)
December 31, 1995
<TABLE>
<CAPTION>
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 $14,385 $ 4,863 $ 78 $19,326
Secured by farmland 1,625 4,253 334 6,212
Loans to farmers 579 900 14 1,493
Commercial and industrial 36,316 17,908 1,398 55,622
Other loans 628 998 3,195 4,821
- ---------------------------------------------------------------------------
Total $53,533 $28,922 $5,019 $87,474
===========================================================================
Rate Sensitivity
Predetermined rate $12,268 $1,740
Floating rate 16,654 3,279
- ---------------------------------------------------------------------------
Total $28,922 $5,019
===========================================================================
</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 8. AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------------------------------
Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 87,604 --% $ 79,829 --% $ 73,068 --%
- ----------------------------------------------------------------------------------------------------------------
Interest-bearing deposits
Demand 67,535 2.19 66,357 2.30 59,947 2.59
Money market 87,234 3.37 92,877 2.95 86,148 3.02
Savings 111,704 2.85 117,101 2.78 109,727 2.96
Time 247,674 5.50 207,797 4.35 203,796 4.46
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 514,147 4.13 484,132 3.42 459,618 3.59
- ----------------------------------------------------------------------------------------------------------------
Total average deposits $601,751 3.53% $563,961 2.94% $532,686 3.10%
================================================================================================================
</TABLE>
TABLE 9. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31,
--------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Maturing in
3 months or less $ 7,387 $10,464 $ 7,230
Over 3 months
through 6 months 8,236 7,403 6,264
Over 6 months
through 12 months 9,461 5,995 7,105
Over 12 months 4,932 5,110 5,653
- -------------------------------------------------------------------
Total $30,016 $28,972 $26,252
===================================================================
</TABLE>
TABLE 10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
End of period outstanding $40,158 $31,959 $30,377
Highest month-end balance 46,478 33,984 31,791
Average balance 38,500 29,539 28,902
Average rate of interest
At end of year 5.20% 5.28% 2.99%
During year 5.75% 4.09% 2.95%
</TABLE>
<PAGE> 26
Deposits.
Deposits represent Bancorp's largest and most important funding source. Average
deposits in 1995 increased 6.7 percent compared with 1994 averages. Average
deposit growth was assisted by the late 1994 acquisition of three Standard
Federal offices, the June 1995 acquisition of two First Union offices, and the
further expansion of our network of ATMs providing added convenience for our
customers. The growth in deposits can be also be attributed to appropriate
pricing strategies coupled with Bancorp's strong reputation for safety and
soundness. Bancorp will continue 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, 1995,
totaled $3,514,000 or 0.72 percent of the total of year-end loans and other
real estate owned ("OREO"). The year-earlier total was $5,645,000 or 1.17
percent. Nonperforming loans were $1,163,000 or 0.24 percent of year-end loans
versus $2,086,000 or 0.43 percent at December 31, 1994. Non-residential real
estate loans were the single largest segment of total nonaccrual loans,
totaling $845,000 and $1,830,000 at December 31, 1995 and 1994, respectively.
The amount of loans past due 90 days or more that were not classified as
nonperforming loans totaled $744,000 at December 31, 1995, compared with
$213,000 at December 31, 1994. 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.
OREO comprises the single largest segment of nonperforming assets. At
December 31, 1995, OREO, net of the valuation allowance, was $2,351,000 or 0.48
percent of the total of year-end loans and OREO compared with $3,559,000 or
0.74 percent a year earlier. The decline in OREO of $1,208,000 compared with
the prior year was attributable in a large measure to Bancorp's successful
efforts in disposing of several OREO properties. The balance at December 31,
1995, consists principally of the real estate held in a limited partnership and
includes minority interests totaling $727,000.
Potential Problem Loans.
At December 31, 1995, Bancorp had $21,003,000 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 95.5 percent of these loans and 71.6
percent was fully secured by real estate. Potential problem loans totaled
$25,641,000 at December 31, 1994. The decrease of
TABLE 11. NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual loans(1) $1,163 $2,086 $1,579 $2,073 $1,025
Restructured loans(2) -- -- -- -- --
Other real estate owned
net of valuation allowance(3) 2,351 3,559 3,081 3,383 2,340
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,514 $5,645 $4,660 $5,456 $3,365
=========================================================================================================
Loans past due 90 or more days
as to interest or principal(4) $744 $213 $645 $738 $1,502
=========================================================================================================
Nonperforming loans to
year-end loans 0.24% 0.43% 0.38% 0.51% 0.25%
Nonperforming assets to year-end loans
and other real estate owned 0.72% 1.17% 1.11% 1.33% 0.83%
Year-end allowance for credit
losses times nonperforming loans 5.30x 2.78x 3.61x 2.82x 4.24x
Year-end allowance for credit
losses times nonperforming assets 1.75x 1.03x 1.22x 1.07x 1.29x
</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 and real estate acquired by foreclosure (in partial
or complete satisfaction of debt) or otherwise surrendered by the
borrower to Bancorp's possession. Other real estate owned is recorded
at the lower of cost or fair value on the date of acquisition or
transfer from loans. Write-downs to fair value at the date of
acquisition are charged to the allowance for credit losses. Subsequent
to transfer, these assets are adjusted through a valuation allowance
to the lower of the net carrying value or the fair value (net of
estimated selling expenses) based on periodic appraisals.
(4) Nonaccrual loans are not included.
26 | 27
<PAGE> 27
$4,638,000 in the amount of these loans in 1995 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.
Effective January 1, 1995, Bancorp adopted Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." It requires that impaired loans
within its scope be measured based on the present value of expected cash flows
discounted at the loan's observable market price or the fair value of the
collateral for a collateral dependent loan. The effects of adoption were not
material to the consolidated financial statements.
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. 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 $2,000,000 in 1995, exceeding net
charge-offs by $371,000. The provision was $1,090,000 higher than last year's
provision. Included in the 1995 provision is a special provision of $600,000 to
recognize unfavorable nationwide trends in consumer delinquencies. Net
charge-offs for 1995 were $1,629,000 or 0.33 percent of average loans compared
with $822,000 or 0.19 percent, in 1994. The increase in net charge-offs was
primarily concentrated in the commercial real estate and consumer portfolios.
Management believes its allowance for credit losses is adequate to cover
anticipated credit losses at December 31, 1995. Management's estimate of credit
losses inherent in the credit extension process and the related allowance may
change in the near term due to uncertainties inherent in the estimation
process.
At December 31, 1995, Bancorp had loans amounting to approximately
$890,000 that were specifically classified as impaired and included in
non-accrual loans in Table 11. At December 31, 1995, no specific allowance for
credit losses related to impaired loans was required.
TABLE 12. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding
less average unearned income(1) $491,513 $436,552 $410,780 $406,878 $391,224
=========================================================================================================
Allowance for credit losses
at beginning of year $5,793 $5,705 $5,851 $4,349 $4,181
- ---------------------------------------------------------------------------------------------------------
Charge-offs
Real estate 427 27 754 484 51
Commercial and industrial 70 35 162 408 1,330
Consumer 2,758 1,980 1,645 846 886
- ---------------------------------------------------------------------------------------------------------
Total loans charged-off 3,255 2,042 2,561 1,738 2,267
- ---------------------------------------------------------------------------------------------------------
Recoveries
Real estate 21 68 18 107 3
Commercial and industrial 22 18 10 50 106
Consumer 1,583 1,134 857 421 431
- ---------------------------------------------------------------------------------------------------------
Total recoveries 1,626 1,220 885 578 540
- ---------------------------------------------------------------------------------------------------------
Net charge-offs 1,629 822 1,676 1,160 1,727
- ---------------------------------------------------------------------------------------------------------
Additions charged to
operating expense 2,000 910 1,530 2,662 1,895
- ---------------------------------------------------------------------------------------------------------
Allowance for credit
losses at end of year $6,164 $5,793 $5,705 $5,851 $4,349
=========================================================================================================
Ratio of net charge-offs to
average loans outstanding 0.33% 0.19% 0.41% 0.29% 0.44%
=========================================================================================================
</TABLE>
(1) Excludes loans held for sale.
<PAGE> 28
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 ("ALCO") 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 90.5 percent of average funding sources and 92.5
percent of average interest-bearing liabilities in 1995 compared with 90.9
percent and 93.9 percent, respectively in 1994. 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 5.7 percent of total average interest-bearing
deposits during 1995 compared with 5.3 percent in 1994. Although the loan to
deposit ratio averaged 81.7 percent in 1995 compared with 77.8 percent in the
prior year, the ratio was within the ALCO guideline target. Table 5 reflects
the maturity distribution of the investment portfolio at December 31, 1995, of
which 24.0 percent will mature within one year and an additional 46.3 percent
between one and five years. 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 growth of net interest income
through periods of changing interest rates. Bancorp uses the concept of natural
hedges to manage its interest rate risk: a process of adjusting balance sheet
positions having individual interest rate risks to control the net interest
rate risk as a whole. Derivative financial instruments, such as futures,
forwards, swaps, option 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.
TABLE 13. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------
% 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 $ 694 4.0% $ 998 4.4% $2,207 5.3% $1,833 4.5% $ 622 5.3%
Residential mortgage 69 22.9 187 24.1 120 27.1 489 30.4 35 33.6
Other mortgage 969 18.1 753 18.0 680 18.2 306 20.2 207 26.9
Commercial and industrial 954 11.5 1,289 9.3 701 7.9 1,533 7.7 2,062 5.9
Consumer 1,946 40.9 1,941 41.3 1,275 38.4 924 34.0 506 25.3
Unallocated 1,532 2.6 625 2.9 722 3.1 766 3.2 917 3.0
- -----------------------------------------------------------------------------------------------------------------------------
Total allowance
for credit losses $6,164 100.0% $5,793 100.0% $5,705 100.0% $5,851 100.0% $4,349 100.0%
=============================================================================================================================
</TABLE>
(1) Reflects the percentage of loans in each category to total loans.
28 | 29
<PAGE> 29
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, 1995. 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 liability sensitive position of
$25,218,000 within the one year time frame. This position would indicate that
Bancorp has the potential for decreased earnings if market interest rates were
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. At December 31, 1995, the changes in net interest
income and/or market value calculated under these alternative methods were
within limits established by the Board of Directors.
CAPITAL RESOURCES
The Federal Reserve Board and the Comptroller have adopted capital adequacy
guidelines requiring Bancorp 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. At December 31, 1995, Bancorp's ratio of total
capital to risk-weighted assets was 13.81 percent as compared to the regulatory
guideline for 1995 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.
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 an 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 con-
TABLE 14. INTEREST RATE SENSITIVITY ANALYSIS(1)
at December 31, 1995
<TABLE>
<CAPTION>
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 $ 18,500 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 18,500
Investment securities(2) 5,887 5,916 11,505 13,031 10,932 57,870 24,215 42,066 171,422
Loans, net 85,599 23,811 41,717 31,534 35,503 168,150 75,032 15,897 477,243
- ------------------------------------------------------------------------------------------------------------------------------------
Total $109,986 $ 29,727 $ 53,222 $ 44,565 $ 46,435 $226,020 $99,247 $ 57,963 $667,165
====================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits $ 46,166 $ 43,537 $ 64,634 $ 60,459 $ 52,807 $164,475 $73,378 $ 19,335 $524,791
Short-term borrowings 41,550 -- -- -- -- -- -- -- 41,550
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 87,716 $ 43,537 $ 64,634 $ 60,459 $ 52,807 $164,475 $73,378 $ 19,335 $566,341
====================================================================================================================================
INTEREST SENSITIVITY GAP
Period $ 22,270 $(13,810) $(11,412) $(15,894) $ (6,372) $ 61,545 $25,869 $ 38,628 $100,824
Cumulative 22,270 8,460 (2,952) (18,846) (25,218) 36,327 62,196 100,824 100,824
</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 $66,095 9.14%
Tangible capital requirements 3.00
- --------------------------------------------------------------------
Excess 6.14%
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Percent of
Risk-Weighted
(Dollars in thousands) Amount Assets
- --------------------------------------------------------------------
<S> <C> <C>
Core capital (Tier 1) $66,095 12.63%
Risk-based capital requirements 4.00
- --------------------------------------------------------------------
Excess 8.63%
====================================================================
Core and supplementary capital (Total) $72,259 13.81%
Risk-based capital requirements 8.00
- --------------------------------------------------------------------
Excess 5.81%
====================================================================
</TABLE>
stantly searching for ways to increase the efficiency of Bancorp's operation to
minimize inflation's impact. In the future, as was the case in 1995, 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, 1994
COMPARED WITH 1993
Bancorp earned $8,151,000 or $1.86 per share in 1994 compared with $7,763,000
or $1.77 per share in 1993. Per share earnings have been restated for the stock
dividend distributed in 1995. Return on average total assets was 1.23 percent
for 1994 and 1.24 percent for 1993. Return on average equity was 13.32 percent
in 1994 and 13.59 percent in 1993. Record earnings were achieved during a
period of improved economic conditions and with the restructuring of our branch
delivery system.
Net interest income on a taxable-equivalent basis was $31,275,000 in
1994 compared with $30,350,000 in 1993, an increase of $925,000 or 3.0 percent.
This increase resulted from increases totaling $2,122,000 due to changes in
volume which were offset by decreases totaling $1,197,000 caused by changes in
rates.
Total average earning assets increased $33,511,000 or 5.7 percent from
1993 to 1994. Average 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 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 average yield on
earning assets declined 21 basis points while average rates paid on funding
sources declined 9 basis points from 1993 to 1994. Therefore, the net interest
spread declined 12 basis points to 4.46 percent in 1994. The net interest
margin declined 13 basis points to 5.04 percent as the rate of growth in
earning assets exceeded the rate of growth in net interest income.
Noninterest income, exclusive of nonrecurring securities and property
gains, increased $183,000 or 3.0 percent in 1994 compared with 1993.
Significant increases were noted in several components of noninterest income.
Deposit and other service fees increased $340,000 or 17.6 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
$162,000 or 19.3 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.
Gains from sales of property increased $633,000 due principally to the sale of
three former branch locations which were closed as part of Bancorp's branch
reconfiguration plan.
Noninterest expenses increased $2,039,000 or 9.2 percent in 1994
compared with 1993. Salaries and benefits increased $1,053,000 or 9.4 percent.
Other operating expense increased $908,000 or 10.9 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, the
result of higher transaction volumes, and professional services which increased
$268,000 or 39.5 percent, the result of the implementation of strategic
initiatives designed to improve profitability and growth. Other real estate
owned expenses declined $178,000 in 1994 compared with 1993 due to decreases in
provisions for decline in value and selling expenses.
Income tax expense totaled $2,991,000 in 1994 compared with $3,203,000
in 1993. 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 of 1994. The effective tax rates also reflect the benefit of
tax-exempt loans and investment securities.
Bancorp had total assets of $703,859,000 as of December 31, 1994, up
$57,255,000 or 8.9 percent over a year earlier. Above average growth was
achieved through the acquisition of three branch offices from the former
Standard Federal Savings Association. During 1994, total average assets
increased 5.8 percent and average earning assets increased 5.7 percent. The
composition of average earning assets remained relatively stable in 1994 when
compared with 1993. Average loans increased 5.9 percent in 1994 compared with
1993. In 1994, loan demand was generally strong in all sectors reflecting the
improved economic conditions in Bancorp's market area. The average balance of
investment securities increased 9.3 percent in 1994 compared with 1993.
Total average interest-bearing deposits were 5.3 percent higher in
1994 compared with 1993, with increases in all deposit categories. In 1994, as
in 1993, customers continued to show a preference for the more liquid savings
and demand accounts. Average short-term borrowings increased 2.9 percent to
comprise 6.1 percent of average interest-bearing liabilities during 1994
compared with 6.2 percent of average interest-bearing liabilities during 1993.
Average noninterest-bearing deposits in 1994 increased 9.3 percent compared
with 1993 averages.
Total shareholders' equity was $61,882,000 at December 31, 1994, a 1.2
percent increase over the 1993 year-end total of $61,130,000. Shareholders'
equity was negatively affected by an increase in unrealized losses, net of
taxes, on the available-for-sale investment portfolio due to the rising
interest rate environment in 1994.
30 | 31
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
December 31,
------------------------
(Dollars in thousands, except per share amounts) 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,811 $ 23,326
Federal funds sold 18,500 2,100
- --------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 45,311 25,426
- --------------------------------------------------------------------------------------------------------
Interest-bearing deposits with banks -- 100
- --------------------------------------------------------------------------------------------------------
Loans held for sale 841 149
- --------------------------------------------------------------------------------------------------------
Investment securities
Held-to-maturity, fair value of $61,299 in 1995 and
$89,588 in 1994 60,146 91,654
Available-for-sale, at fair value 116,988 77,649
- --------------------------------------------------------------------------------------------------------
Total investment securities 177,134 169,303
- --------------------------------------------------------------------------------------------------------
Loans, net of unearned income of $118 in 1995 and $181 in 1994 484,694 480,399
Less: Allowance for credit losses (6,164) (5,793)
- --------------------------------------------------------------------------------------------------------
Net loans 478,530 474,606
- --------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 16,391 13,714
Other real estate owned 2,351 3,559
Interest receivable 5,357 4,757
Intangible assets 4,451 4,501
Other assets 9,488 7,744
- --------------------------------------------------------------------------------------------------------
38,038 34,275
- --------------------------------------------------------------------------------------------------------
Total assets $739,854 $703,859
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 96,266 $ 90,575
Interest-bearing 524,791 511,604
- --------------------------------------------------------------------------------------------------------
Total deposits 621,057 602,179
Short-term borrowings
Federal funds purchased and
securities sold under agreements to repurchase 40,158 31,959
Other short-term borrowings 1,392 1,933
Accrued interest and other liabilities 7,228 5,906
- --------------------------------------------------------------------------------------------------------
Total liabilities 669,835 641,977
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 13)
- --------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock, par value $5 per share; authorized 10,000,000 shares;
issued and outstanding 4,413,600 in 1995 and 4,204,626 in 1994 22,068 21,023
Surplus 24,625 20,126
Retained earnings 23,169 23,706
Net unrealized gain (loss) on securities available for sale 157 (2,973)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 70,019 61,882
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $739,854 $703,859
========================================================================================================
</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) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $44,566 $37,679 $36,581
Interest and dividends on investment securities
Taxable 5,697 5,513 5,542
Tax-exempt 3,570 3,603 3,320
Interest on deposits with banks 1 20 28
Interest on federal funds sold 286 290 386
- ------------------------------------------------------------------------------------------
Total interest income 54,120 47,105 45,857
- ------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits
Checking 1,479 1,526 1,550
Savings 3,187 3,260 3,249
Money market accounts 2,941 2,743 2,602
Certificates of deposit under $100,000 11,957 7,926 8,110
Certificates of deposit $100,000 and over 1,654 1,113 978
Interest on federal funds purchased and securities sold
under agreements to repurchase 2,215 1,208 854
Interest on other short-term borrowings 185 82 48
- ------------------------------------------------------------------------------------------
Total interest expense 23,618 17,858 17,391
- ------------------------------------------------------------------------------------------
Net interest income 30,502 29,247 28,466
Provision for credit losses 2,000 910 1,530
- ------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 28,502 28,337 26,936
- ------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 1,560 1,144 1,091
Service charges on deposit accounts 2,943 2,276 1,936
Gain on sales of loans 3,013 52 633
Net gains (losses) on sales of securities (256) -- 2
Net gains on sales of property 20 725 92
Other operating income 2,903 2,793 2,422
- ------------------------------------------------------------------------------------------
Total noninterest income 10,183 6,990 6,176
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries 10,913 9,997 9,289
Pension and other employee benefits 2,328 2,262 1,917
Occupancy expense 1,847 1,527 1,495
Equipment expense 1,440 1,182 1,136
Other operating expense 11,025 9,217 8,309
- ------------------------------------------------------------------------------------------
Total noninterest expenses 27,553 24,185 22,146
- ------------------------------------------------------------------------------------------
Income before provision for income taxes 11,132 11,142 10,966
Provision for income taxes 2,933 2,991 3,203
- ------------------------------------------------------------------------------------------
NET INCOME $ 8,199 $ 8,151 $ 7,763
==========================================================================================
EARNINGS PER COMMON SHARE
Based on weighted average shares outstanding of 4,409,089
in 1995, 4,393,312 in 1994, and 4,378,445 in 1993 $1.86 $1.86 $1.77
==========================================================================================
</TABLE>
See notes to consolidated financial statements.
32 | 33
<PAGE> 33
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
F&M Bancorp and Subsidiary
<TABLE>
<CAPTION>
Three years ended December 31, 1995
-------------------------------------------------------------------
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, 1992 $18,664 $15,560 $18,121 $ -- $52,345
Effect of pooling 1,288 512 583 -- 2,383
Net income -- -- 7,763 -- 7,763
Dividend reinvestment plan -- -- (21) -- (21)
Cash dividends paid ($.69 per share) -- -- (3,004) -- (3,004)
Stock consideration for options exercised (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 20,016 16,323 23,280 1,511 61,130
Net income -- -- 8,151 -- 8,151
Dividend reinvestment plan -- -- (46) -- (46)
Cash dividends paid ($.71 per share) -- -- (3,132) -- (3,132)
Stock consideration for options exercised (7,688 shares) (39) (38) (141) -- (218)
Stock options exercised (22,521 shares) 113 368 -- -- 481
Stock dividend (186,500 shares) 933 3,473 (4,406) -- --
Fair value adjustment for securities
available for sale, net -- -- -- (4,484) (4,484)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 21,023 20,126 23,706 (2,973) 61,882
Net income -- -- 8,199 -- 8,199
Dividend reinvestment plan -- -- (46) -- (46)
Cash dividends paid ($.76 per share) -- -- (3,368) -- (3,368)
Stock consideration for options exercised (4,108 shares) (21) (20) (81) -- (122)
Stock options exercised (16,217 shares) 82 262 -- -- 344
Stock dividend (196,865 shares) 984 4,257 (5,241) -- --
Fair value adjustment for securities
available for sale, net -- -- -- 3,130 3,130
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $22,068 $24,625 $23,169 $ 157 $70,019
==============================================================================================================================
</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) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,199 $ 8,151 $ 7,763
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for credit losses 2,000 910 1,530
Provision for other real estate owned 426 270 462
Depreciation and amortization 1,327 1,101 1,076
Amortization of intangibles 1,346 134 38
Net premium amortization on investment securities 158 512 932
Increase in interest receivable (600) (521) (66)
Increase (decrease) in interest payable 198 433 (147)
Deferred income tax benefits (588) (159) (384)
Accretion of net loan origination fees (42) (249) (174)
Gain on sales of property (20) (725) (92)
Loss (gain) on sales of securities 256 -- (2)
Decrease (increase) in loans held for sale (692) 8,547 (4,152)
Decrease (increase) in other assets (3,010) 82 (326)
Increase (decrease) in other liabilities 1,124 254 (296)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,082 18,740 6,162
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment secutities -- -- (84,482)
Purchases of investment securities to be held to maturity (9,715) (13,010) --
Purchases of investment securities available for sale (54,832) (31,835) --
Proceeds from sales/calls of investment securities -- -- 11,517
Proceeds from calls of investment securities to be held to maturity 2,655 -- --
Proceeds from maturing investment securities to be held to maturity 9,298 2,715 --
Proceeds from sales/calls of investment securities available for sale 22,704 2,230 --
Proceeds from maturing investment securities available for sale 26,729 37,602 --
Proceeds from maturing investment securities -- -- 42,984
Net increase in loans (5,882) (65,340) (11,453)
Purchases of premises and equipment (4,289) (2,249) (1,982)
Proceeds from sales of property 1,215 949 1,024
Intangible assets (1,296) (4,002) (671)
Other investing activities (128) (252) (70)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,541) (73,192) (43,133)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits, interest-bearing
checking, savings, and money market accounts (16,906) 37,200 16,743
Net increase in certificates of deposit 35,784 16,431 6,024
Net increase in federal funds purchased and
securities sold under agreements to repurchase 8,199 1,582 4,162
Net increase (decrease) in other short-term borrowings (541) (81) 135
Cash dividends paid (3,368) (3,132) (3,004)
Dividend reinvestment plan (46) (46) (21)
Proceeds from issuance of common stock 222 263 153
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,344 52,217 24,192
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 19,885 (2,235) (12,779)
Cash and cash equivalents at beginning of year 25,426 27,661 40,440
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $45,311 $25,426 $27,661
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $23,420 $17,425 $17,530
Cash payments for income tax 2,567 3,150 4,213
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
Fair value adjustment for securities available for sale,
net of deferred income taxes payable (benefits) 3,130 (4,484) 1,511
</TABLE>
See notes to consolidated financial statements.
34 | 35
<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
Bank maintains correspondent banking relationships and executes daily federal
funds transactions on an unsecured basis with its correspondents.
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 intercompany 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.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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. However, the accrual of interest is discontinued when reasonable
doubt exists as to the full, timely collection of interest or principal. Loans
on which the accrual of interest has been discontinued, which includes impaired
loans, are designated as nonaccrual loans. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal
is probable. Interest accruals are resumed on such loans only when they are
brought current with respect to interest and principal and when, in 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.
Effective January 1, 1995, Bancorp adopted Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans within
its scope be measured based on the present value of expected cash flows
discounted at the loans original effective interest rate, or by reference to
the loans observable market price or the fair value of the collateral for a
collateral dependent loan. The effect of adoption was not material to the
consolidated financial statements.
The allowance for credit losses is maintained at a level which, in
management's judgement, is adequate to absorb losses inherent in the credit
extension process. The entire allowance is available to absorb losses related
to the loan portfolio.
<PAGE> 36
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 considering factors such as historical
relationships among loans outstanding, loss experience, delinquency levels,
individual loan reviews, and evaluation of the present and future local and
national economic environment. Management's estimate of credit losses in the
loan portfolio and the related allowance may change in the near term because of
uncertainties inherent in the estimation process.
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>
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 and real estate acquired by foreclosure (in partial or complete
satisfaction of debt) or otherwise surrendered by the borrower to Bancorp's
possession.
Other real estate owned is recorded at the lower of cost or fair value
on the date of acquisition. Write-downs to fair value at the date of
acquisition are charged to the allowance for credit losses. Subsequently, 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.
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 initially amortized using the straight-line method over
the estimated periods benefited of ten years. However, the amortization is
subject to periodic review and is accelerated when later events and
circumstances indicate revisions are necessary.
Income Taxes.
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." 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 pre-tax financial income and between the tax bases of assets and
liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Per Share Data.
Earnings per share 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.
36 | 37
<PAGE> 37
2. ACQUISITIONS
On May 31, 1995, Bancorp consummated its merger with the Bank of Brunswick,
Brunswick, Maryland, in a tax-free exchange of stock. Shareholders of the Bank
of Brunswick received 10.74 shares of Bancorp common stock for each common
share outstanding of the Bank of Brunswick. Approximately 258,000 shares of
Bancorp's common stock were issued in the transaction that was accounted for as
a pooling of interests. Accordingly, the consolidated financial statements
include the accounts of the Bank of Brunswick for all periods presented.
At the date of acquisition, the Bank of Brunswick had earning assets of $26.7
million, including loans of $21.6 million. Deposits totaled $26.6 million.
The combined and separate results of operations for the Bank of
Brunswick and Bancorp preceding the merger are as follows:
<TABLE>
<CAPTION>
Bank of F&M
(In thousands, except per share amounts) Brunswick Bancorp Combined
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1994
Total income $2,213 $51,882 $54,095
Net income 195 7,956 8,151
Net income per share 1.92 1.86
1993
Total income $2,244 $49,789 $52,033
Net income 160 7,603 7,763
Net income per share 1.85 1.77
======================================================================================
</TABLE>
Total income and net income of the Bank of Brunswick for the period
during 1995 prior to affiliation totaled $949,000 and $32,000, respectively.
On June 16, 1995, Bancorp consummated its purchase and assumption
agreement with First Union National Bank of Maryland, Rockville, Maryland, in
which it acquired certain assets and assumed $16.1 million in deposit
liabilities of two First Union offices located in Bancorp's principal market
area. The transaction was accounted for using the purchase method of
accounting.
On November 18, 1994, Bancorp consummated 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 the former Standard Federal Savings Association.
The transaction was accounted for using the purchase method of accounting.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments at December 31, 1995
and 1994, 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, 1995
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies
Within 1 year $ 31,228 $ 127 $ 48 $ 31,307
After 1 but
within 5 years 22,673 73 70 22,676
After 5 but
within 10 years 5,995 45 -- 6,040
- -----------------------------------------------------------------------------------------------
59,896 245 118 60,023
- -----------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions
Within 1 year 8,296 99 -- 8,395
After 1 but
within 5 years 8,683 286 1 8,968
- -----------------------------------------------------------------------------------------------
16,979 385 1 17,363
- -----------------------------------------------------------------------------------------------
Mortgage-backed
securities 34,041 63 214 33,890
- -----------------------------------------------------------------------------------------------
Total debt securities 110,916 693 333 111,276
Equity securities 5,712 -- -- 5,712
- -----------------------------------------------------------------------------------------------
Total securities
available for sale $116,628 $ 693 $333 $116,988
===============================================================================================
Held-to-maturity:
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies
After 1 but
within 5 years $ 4,940 $ 57 $ -- $ 4,997
- -----------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions
After 1 but
within 5 years 21,948 581 16 22,513
After 5 but
within 10 years 33,148 604 73 33,679
After 10 years 110 -- -- 110
- -----------------------------------------------------------------------------------------------
55,206 1,185 89 56,302
- -----------------------------------------------------------------------------------------------
Total securities to be
held to maturity $ 60,146 $1,242 $ 89 $ 61,299
===============================================================================================
</TABLE>
On December 26, 1995, pursuant to the Special Report issued by the
Financial Accounting Standards Board titled "A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities," Bancorp transferred investment securities to be held to maturity
having an amortized cost of $32,711,000 and a fair value of $32,765,000 to the
available-for-sale category. The unrealized holding gain at the date of transfer
is included in the separate component of shareholders' equity net of the related
tax effects.
<PAGE> 38
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Within 1 year $ 1,854 $ 3 $ 26 $ 1,831
After 1 but
within 5 years 9,208 -- 71 9,137
- -----------------------------------------------------------------------------------------------
11,062 3 97 10,968
- -----------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions
Within 1 year 7,262 -- -- 7,262
After 1 but
within 5 years 28,625 12 199 28,438
After 5 but
within 10 years 32,854 6 1,794 31,066
- -----------------------------------------------------------------------------------------------
68,741 18 1,993 66,766
- -----------------------------------------------------------------------------------------------
Other debt securities
Within 1 year 200 1 -- 201
- -----------------------------------------------------------------------------------------------
Mortgage-backed
securities 11,651 2 -- 11,653
- -----------------------------------------------------------------------------------------------
Total securities to be
held to maturity $91,654 $24 $2,090 $89,588
===============================================================================================
</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/calls of investment securities available for sale
during 1995 were $22,704,000. Gross gains of $21,000 and gross losses of
$287,000 were realized on those sales. Proceeds from calls of investment
securities held to maturity during 1995 were $2,655,000. Gross gains of
$10,000 were realized on those calls. 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. 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.
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 $83,478,000 at December 31, 1995, and
$79,310,000 at December 31, 1994.
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 41.0
percent and 41.9 percent of the total carrying value of the investment
portfolio at December 31, 1995 and 1994, respectively.
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Real estate loans
Construction and
land development $ 19,326 $ 21,193
Secured by farmland 6,212 6,132
Secured by 1 to 4 family
residential properties 111,109 115,873
Other mortgage 87,706 86,430
Loans to farmers 1,493 1,815
Commercial and industrial loans 55,622 44,584
Loans to individuals for
household, family, and
other personal expenditures 197,466 186,616
Credit card loans 1,057 12,199
All other loans 4,821 5,738
- -------------------------------------------------------------
Total loans $484,812 $480,580
=============================================================
</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.
38 | 39
<PAGE> 39
The fair value of the loan portfolio at December 31, 1995 and 1994 was
estimated to be $479,859,000 and $472,059,000, respectively, compared with the
net loan carrying amounts of $478,530,000 and $474,606,000, 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
$30,695,000 and $30,008,000 at December 31, 1995 and 1994, respectively. During
1995, $50,131,000 of new loans were made or became reportable, and repayments
and other decreases totaled $49,444,000.
Transactions in the allowance for credit losses are:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
- --------------------------------------------------------------------
Balance at beginning of year $5,793 $5,705 $5,851
Provision for credit losses 2,000 910 1,530
Recoveries of loans
previously charged-off 1,626 1,220 885
Loans charged-off (3,255) (2,042) (2,561)
- --------------------------------------------------------------------
Balance at end of year $6,164 $5,793 $5,705
====================================================================
</TABLE>
The loan portfolio includes loans that are not currently accruing
interest income. The total outstanding principal of these loans at December 31,
1995, 1994, and 1993, and the effect on income for the years then ended are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Principal balance $1,163 $2,086 $1,579
==================================================================
Gross amount of interest which would
have been recorded under original terms $195 $196 $202
==================================================================
Recorded interest income on these loans $6 $41 $135
==================================================================
</TABLE>
The net reduction in interest income on renegotiated loans was not
material in 1995, 1994, and 1993. At December 31, 1995, 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.
As of December 31, 1995, Bancorp had loans amounting to approximately
$890,000 that were specifically classified as impaired and included in the
nonaccrual loans referenced above. The average balance of impaired loans
amounted to $1,352,000 for the year ended December 31, 1995. During 1995, cash
receipts totaling $600,000 were applied to reduce the principal balance of
these impaired loans and no interest income was recognized. No specific
allowance for credit losses was required for these impaired loans in 1995.
5. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(In thousands) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Bank premises and land $15,961 $15,349
Furniture and equipment 10,968 9,733
Leasehold improvements 993 967
- -----------------------------------------------------------------
27,922 26,049
Less accumulated depreciation
and amortization (11,531) (12,335)
- -----------------------------------------------------------------
Bank premises and equipment, net $16,391 $13,714
=================================================================
</TABLE>
Depreciation and amortization in the consolidated statement of income
amounted to $1,327,000 in 1995, $1,101,000 in 1994, and $1,076,000 in 1993.
During 1995, construction of an addition to the corporate headquarters
facility was begun with completion targeted for late 1996. The total estimated
cost of the corporate expansion program and related furniture and equipment is
approximately $5,500,000, of which $4,200,000 was contractually committed as of
December 31, 1995. Expenditures in 1995 totaled $850,000. Construction period
interest capitalized as part of the building's cost during 1995 amounted to
$17,000.
<PAGE> 40
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. The Bank has included
the financial results of the partnership's operations within the accompanying
consolidated financial statements since the Bank controls the major operating
and financial policies of the partnership.
7. DEPOSITS
The carrying amounts of deposits are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(In thousands) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing $ 96,266 $ 90,575
Interest-bearing
Checking 70,705 73,996
Savings 109,185 115,340
Money market accounts 84,177 97,328
Certificates of deposit
Under $100,000 230,708 195,968
$100,000 and over 30,016 28,972
- -----------------------------------------------------------------
Total deposits $621,057 $602,179
=================================================================
</TABLE>
The fair value of deposits at December 31, 1995 and 1994 was estimated
to be $623,213,000 and $601,939,000, 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
deposit, 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 which 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 unsecured
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.
Bancorp has unused lines of credit for short-term borrowings totaling
approximately $100,000,000 at December 31, 1995.
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) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Maximum balance at any
month end during the year $53,744 $36,542
Average balance for the year 41,563 31,470
Weighted average rate for the year 5.77% 4.10%
Weighted average rate
on borrowings at year end 5.20% 5.28%
Estimated fair value $41,550 $33,892
</TABLE>
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.
Due to the short maturities of these financial instruments, the
carrying amounts for both repurchase agreements and other short-term borrowings
were deemed to approximate fair values at December 31, 1995 and 1994.
9. INCOME TAXES
Effective January 1, 1993, Bancorp adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes." As permitted under
these rules, prior years financial statements have not been restated.
The cumulative effect on prior years of adopting Statement 109 as of
January 1, 1993, was not significant.
Significant components of Bancorp's deferred tax assets and liabilities
as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Provision for credit losses $2,347 $2,165
Unrealized losses on
securities available for sale -- 1,765
Deferred compensation 1,112 1,110
Provision for other
real estate owned 281 322
Amortization of intangibles 371 --
Other 289 251
- -----------------------------------------------------------------
Total deferred tax assets 4,400 5,613
Valuation allowance for
deferred tax assets -- --
- -----------------------------------------------------------------
Total deferred tax assets
after valuation allowance 4,400 5,613
- -----------------------------------------------------------------
Deferred tax liabilities
Unrealized gains on securities
available for sale 90 --
Depreciation and amortization 302 350
Other 68 56
- -----------------------------------------------------------------
Total deferred tax liabilities 460 406
- -----------------------------------------------------------------
Net deferred tax assets $3,940 $5,207
=================================================================
</TABLE>
40 | 41
<PAGE> 41
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,
-------------------------------------------
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax $11,132 $11,142 $10,966
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------------
Income tax at statutory rate 3,896 3,900 3,838
Increases (decreases)
in tax resulting from
Tax-exempt interest income (1,205) (1,242) (1,156)
State income taxes, net of
Federal income tax benefit 330 418 513
Other (88) (85) 8
- ------------------------------------------------------------------------------------------
Actual tax expense $ 2,933 $ 2,991 $ 3,203
==========================================================================================
Effective tax rate 26% 27% 29%
==========================================================================================
</TABLE>
Significant components of the provision for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable
Federal $2,916 $2,492 $2,728
State 605 658 859
- ------------------------------------------------------------------------------------------
Total currently payable 3,521 3,150 3,587
- ------------------------------------------------------------------------------------------
Deferred tax (benefits)
Federal (476) (142) (327)
State (112) (17) (57)
- ------------------------------------------------------------------------------------------
Total deferred tax (benefits) (588) (159) (384)
- ------------------------------------------------------------------------------------------
Provision for income taxes $2,933 $2,991 $3,203
==========================================================================================
</TABLE>
Within the provision for income taxes are the tax effects of investment
securities transactions. During 1995, a decrease in tax expense of $99,000
resulted from net security losses. In 1993, an increase in tax expense of $1,000
resulted from net security gains.
The components of the provision for deferred tax (benefits) are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $(182) $ (5) $(343)
Amortization of intangibles (371) -- --
Other (35) (154) (41)
- ------------------------------------------------------------------------------------------
Deferred tax (benefits) $(588) $(159) $(384)
==========================================================================================
</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 $330,000 for 1995, $384,000 for 1994, and
$343,000 for 1993. Effective for the 1993 Plan year, the Plan was amended to
provide for employer matching contributions of up to two percent of
compensation for eligible participants. Bancorp's additional matching
contribution totaled $154,000 in 1995 and $162,000 in 1994 and $100,000 in
1993. Effective for the 1996 Plan year, the Plan was amended to provide for
additional employer matching contributions of one-half of the next two percent
of compensation for eligible participants.
The Bank of Brunswick had a defined contribution profit sharing plan
which was terminated as of the close of business on May 31, 1995, at which time
all assets were distributed to the participants. No contributions to this plan
were made in 1995. Contributions to this plan were $10,000 in both 1994 and
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, 1995, 1994, and 1993 were $93,000, $274,000, and $227,000,
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 55,125 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.
<PAGE> 42
The following is a summary of transactions during the three years
ended December 31, 1995:
<TABLE>
<CAPTION>
Options issued
and outstanding Price
- ------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1992 166,032 $ 5.63 to $21.21
Exercised (26,593) 6.07 to 17.36
Granted 36,447 16.29
Terminated (6,294) 11.75 to 21.21
- ------------------------------------------------------------------------
Balance, December 31, 1993 169,592 5.63 to 21.21
Exercised (23,937) 5.63 to 21.21
Granted 38,508 21.31
Terminated (4,188) 6.07 to 21.31
- ------------------------------------------------------------------------
Balance, December 31, 1994 179,975 6.61 to 21.31
Exercised (16,692) 6.61 to 21.31
Granted 36,106 28.21
Terminated (6,599) 11.75 to 28.21
- ------------------------------------------------------------------------
Balance, December 31, 1995 192,790 $11.75 to $28.21
========================================================================
</TABLE>
At December 31, 1995 there were 113,320 options exercisable at prices
ranging from $11.75 to $28.21. Shares reserved for future grants totaled
165,085 at December 31, 1995.
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) 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Bank card income $1,828 $1,790 $1,581
Miscellaneous 1,075 1,003 841
- ----------------------------------------------------------------------
Total other operating income $2,903 $2,793 $2,422
======================================================================
</TABLE>
Other operating expense in the consolidated statements of income
include the following for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Insurance (including FDIC) $ 939 $1,421 $1,376
Stationery and supplies 859 805 755
Advertising 707 475 484
Professional services 1,170 947 679
Credit card processing 1,528 1,474 1,183
Postage 487 404 397
Directors fees 194 219 247
Telephone 405 292 239
Computer software and maintenance 454 415 362
Other real estate owned expenses 421 297 475
Amortization of intangibles 1,346 134 38
Miscellaneous 2,515 2,334 2,074
- -----------------------------------------------------------------------
Total other operating expense $11,025 $9,217 $8,309
=======================================================================
</TABLE>
Transactions in the allowances for other real estate owned are
summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $852 $582 $325
Provision for decline in
value and selling expenses 426 270 462
Losses charged to the allowances (552) -- (205)
- -----------------------------------------------------------------------
Ending balance $726 $852 $582
=======================================================================
</TABLE>
12. CONDENSED FINANCIAL INFORMATION OF
F&M BANCORP (PARENT COMPANY)
F&M BANCORP BALANCE SHEETS
(PARENT COMPANY)
<TABLE>
<CAPTION>
December 31,
-------------------------
(In thousands) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,864 $ 2,943
Investment in subsidiary 67,197 58,958
Other assets 2 --
- ------------------------------------------------------------------------------
Total assets $70,063 $61,901
==============================================================================
Liabilities and Shareholders' Equity
Total liabilities $ 44 $ 19
- ------------------------------------------------------------------------------
Common stock 22,068 21,023
Surplus 24,625 20,126
Retained earnings 23,169 23,706
Net unrealized gain (loss)
on securities available for sale 157 (2,973)
- ------------------------------------------------------------------------------
Total shareholders' equity 70,019 61,882
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $70,063 $61,901
==============================================================================
</TABLE>
F&M BANCORP STATEMENTS OF INCOME
(PARENT COMPANY)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $3,092 $3,070 $2,863
Other income 141 134 205
- -------------------------------------------------------------------------------------------------
Total income 3,233 3,204 3,068
Expenses 144 332 160
- -------------------------------------------------------------------------------------------------
Income before income tax expense
(benefits) and equity in
undistributed earnings of subsidiary 3,089 2,872 2,908
- -------------------------------------------------------------------------------------------------
Income tax expense (benefits) (1) (67) 17
Income before equity in undistributed
earnings of subsidiary 3,090 2,939 2,891
- -------------------------------------------------------------------------------------------------
Equity in undistributed earnings
of subsidiary 5,109 5,212 4,872
- -------------------------------------------------------------------------------------------------
Net income $8,199 $8,151 $7,763
=================================================================================================
</TABLE>
42 | 43
<PAGE> 43
F&M BANCORP STATEMENTS OF CASH FLOW
(PARENT COMPANY)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $8,199 $8,151 $7,763
Adjustments to reconcile net income
to net cash provided by operating
activities
Decrease (increase) in other assets (2) 5 8
Increase (decrease) in other
expenses payable 25 (30) 24
Equity in undistributed earnings
of subsidiary (5,109) (5,212) (4,872)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,113 2,914 2,923
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities
Cash dividends paid (3,368) (3,132) (3,004)
Stock transactions 176 217 132
- -------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,192) (2,915) (2,872)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (79) (1) 51
Cash and cash equivalents at
beginning of year 2,943 2,944 2,893
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,864 $2,943 $2,944
=================================================================================================
Non-cash investing and financing activities
Fair value adjustment for securities
available for sale, net of deferred
income taxes payable (benefits) $3,130 $(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 one to 25 years. Most of
the existing leases contain options which enable the Bank to renew the lease at
the fair rental value for periods of up 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.
Total rental expense was as follows for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Bank premises $581 $330 $330
Equipment 110 90 22
- ---------------------------------------------------------------
Total rental expense $691 $420 $352
===============================================================
</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, 1995 are:
<TABLE>
<CAPTION>
Year ending December 31, (In thousands)
- ---------------------------------------------
<S> <C>
1996 $ 648
1997 521
1998 480
1999 462
2000 462
Later years 2,305
- ---------------------------------------------
Total minimum payments required $4,878
=============================================
</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, 1995, 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) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contractual
amounts represent credit risk
Commitments to extend credit $90,275 $106,483
Standby letters of credit 11,828 13,285
</TABLE>
Carrying amounts for these off-balance sheet financial instruments
represent the deferred income arising from these unrecognized financial
instruments. The majority of commitments to extend credit and standby letters
of credit are at variable rates and/or have relatively short terms to maturity,
therefore the carrying amounts of these financial instruments is deemed to
closely approximate fair value. Carrying amounts for these off-balance sheet
financial instruments are immaterial.
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.
<PAGE> 44
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,
-------------------------------------------------
1995 1994
-------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amounts Value Amounts Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and
cash equivalents(1) $ 45,311 $ 45,311 $ 25,426 $ 25,426
Interest-bearing
deposits with banks(1) -- -- 100 100
Loans held for sale (Note 1) 841 841 149 149
Investment securities to be
held to maturity (Note 3) 60,146 61,299 91,654 89,588
Investment securities
available for sale (Note 3) 116,988 116,988 77,649 77,649
Net loans (Note 4) 478,530 479,859 474,606 472,059
Interest receivable(1) 5,357 5,357 4,757 4,757
Financial Liabilities
Deposits (Note 7) 621,057 623,213 602,179 601,939
Short-term borrowings
(Note 8) 41,550 41,550 33,892 33,892
Interest payable(1) 1,323 1,323 1,125 1,125
</TABLE>
(1) Due to the short-term nature of these financial instruments, carrying
amount was deemed to approximate fair value.
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 1995 aggregated $18,283,000.
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 $7,320,000 available for loans or advances to the Parent Company
as of December 31, 1995. There were no loans or advances outstanding at
December 31, 1995.
Restrictions on Cash and Due from Banks.
The Bank was required to maintain average daily reserve balances with the
Federal Reserve Bank. The average amount of these required reserves during 1995
and 1994 was $10,000,000 and $9,668,000, respectively.
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,
1995, 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 12.63 percent and 13.81 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, 1995, was 9.14 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 55,125 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.
44 | 45
<PAGE> 45
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of Bancorp's unaudited quarterly results of
operations.
<TABLE>
<CAPTION>
1995 Three months ended
- ----------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $13,765 $13,706 $13,529 $13,120
Net interest income 7,719 7,657 7,510 7,616
Provision for credit losses 1,050 350 300 300
Gains (losses) on
sales of securities (264) 8 -- --
Income before
income taxes 3,414 2,785 2,341 2,592
Net income 2,444 2,048 1,767 1,940
Earnings per common share
Net income .55 .47 .40 .44(1)
</TABLE>
<TABLE>
<CAPTION>
1994 Three months ended
- ----------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $12,618 $11,881 $11,471 $11,135
Net interest income 7,696 7,451 7,188 6,912
Provision for credit losses 225 225 228 232
Gains (losses) on
sales of securities -- -- -- --
Income before
income taxes 2,997 3,031 2,579 2,535
Net income 2,198 2,210 1,891 1,852
Earnings per common share
Net income(1) .50 .51 .43 .42
</TABLE>
(1) Restated for the stock dividend declared in 1995.
(2) As discussed in Note 2 to the consolidated financial statements, on
May 31, 1995, Bancorp consummated its merger with the Bank of
Brunswick in a tax-free exchange of stock, accounted for as a pooling
of interests. Accordingly, the unaudited quarterly results of
operations for the first interim periods of 1995 and 1994 have been
restated to reflect the combined results of operations of Bancorp and
the pooled entity, Bank of Brunswick, as follows:
<TABLE>
<CAPTION>
Three months ended March 31, 1995
- -------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Bancorp Pooled Entity Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $12,579 $541 $13,120
Net interest income 7,255 361 7,616
Provision for credit losses 300 -- 300
Gains (losses) on
sales of securities -- -- --
Income before
income taxes 2,510 82 2,592
Net income 1,885 55 1,940
Earnings per common share .46 .44
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1994
- -------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) Bancorp Pooled Entity Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $10,617 $518 $11,135
Net interest income 6,572 340 6,912
Provision for credit losses 225 7 232
Gains (losses) on
sales of securities -- -- --
Income before
income taxes 2,471 64 2,535
Net income 1,807 45 1,852
Earnings per common share .44 .42
</TABLE>
Net income for the fourth quarter of 1995 was $3.4 million. The
principal factors affecting the fourth quarter's results included:
- The sale of the cardholder credit card business resulting in a $2,890,000
gain.
- A one-time charge of $803,000 resulting from a reevaluation of the core
deposit intangible associated with the Standard Federal acquisition.
- A special provision for credit losses of $600,000 to recognize the
potential impact of unfavorable nationwide trends in consumer
delinquencies.
- Securities losses of $264,000.
18. FUTURE CHANGES IN ACCOUNTING PRINCIPLE
In March 1995, The Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The assessment of
recoverability is based on estimates of future cash flows expected to result
from the use of the asset and its eventual disposition. In cases where the
expected future cash flows (undiscounted) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of the impairment loss
is based on the fair value of the asset. The Statement further requires that
these assets generally are to be reported at the lower of carrying amount or
fair value less cost to sell. Additionally, Statement No. 121 requires that
certain assets to be disposed of be recognized at the lower of their carrying
amounts or fair value less costs to sell.
Bancorp is required to adopt Statement No. 121 beginning January 1,
1996. Restatement of previously issued financial statements is not permitted.
Impairment losses resulting from the application of this Statement will be
reported in the period in which the recognition criteria are met. The initial
application of this Statement to any assets that are currently held for
disposal will be reported as the cumulative effect of a change in accounting
principle. Adoption of this Statement in 1996 is not expected to materially
affect Bancorp's consolidated financial statements.
In May 1995, the Financial Accounting Standards Board issued Statement
No. 122, "Accounting for Mortgage Servicing Rights," which eliminates the
accounting distinction between rights to service mortgage loans for others that
are acquired through loan origination activities and those acquired through
purchase transactions. Accordingly, a mortgage servicer will recognize as
assets all rights to service loans for others and will amortize these assets in
proportion to and over the period of estimated net servicing income. These
capitalized servicing rights must also be evaluated for impairment based on the
fair value of those rights.
<PAGE> 46
Bancorp is required to adopt Statement No. 122 prospectively,
effective January 1, 1996. Although earnings or losses from the sale of
mortgage loans when servicing is retained will increase or decrease,
respectively, in 1996 with the adoption of this Statement, the increases or
decreases are not expected to be material and will be mitigated by the
amortization of the mortgage servicing right intangible asset.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for an employee stock option or similar
equity instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The Statement
encourages all entities to adopt the fair value based method of accounting but
permits an entity to continue to measure compensation cost using the intrinsic
value based method currently prescribed by APB Opinion No. 25 provided the
entity makes pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied.
Bancorp will elect to continue to measure compensation cost using APB
Opinion No. 25. As a result, pro forma disclosures for awards granted after
January 1, 1995, in accordance with transition rules, are not included in the
1995 consolidated financial statements but will be presented subsequently
whenever 1995 financial statements are presented for comparative purposes with
financial statements for a later year. Adoption of this Statement in 1996 is
not expected to materially affect Bancorp's consolidated financial statements.
REPORT OF
INDEPENDENT AUDITORS
[KELLER BRUNER & COMPANY. L.L.C. LOGO]
Certified Public Accountants - Management Consultants
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, 1995 and 1994, 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, 1995, appearing on
pages 31 to 46 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1995, 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.
KELLER BRUNER & COMPANY. L.L.C.
Frederick, Maryland
January 24, 1996
46 | 47
<PAGE> 47
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 Corp
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 Emerita, Hood College
Senior Scholar at The Carnegie Foundation for the Advancement
of Teaching
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.
Robert K. Moler
President
Prescription Arts, 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
EXECUTIVE OFFICERS
- -------------------------------
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
ADVISORY COUNCIL
- -------------------------------
Joseph D. Baker, II
R. Holmes Baker
M. Roland Biser
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 T. Croghan
Millard E. Crum, Jr.
John M. Culler, M.D.
Russell E. Delauter
James A. Draper
Walter L. Engle
James E. Fitzgerald, Sr.
Joseph C. Free
Harry Y. George, Jr.
Bernard D. Gladhill
William U. Gladhill
Paul J. Green
William A. Hemp
Edward G. Higinbotham
Gary M. Himes
John S. Hollinger
Robert G. Hooper
Raymond R. Houck
William D. Jefferies
Charlotte W. Kerrigan
Glenwood D. King
Irving H. Kolker
Chester M. Leishear
James W. Linton, Jr.
Richard L. Martin
Forrest G. Moler, Jr.
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
Donald E. Rough
William E. Sauser
G. Donald Shafer
Ernest R. Shriver
William A. Simmons
John W. Stroh, M.D.
James E. Stoner, Jr., M.D.
Harry H. Swomley, Jr.
Charles H. Thornton
William E. Wagner, Jr.
Drainie B. Watson
Horace H. Waybright
Lila C. Wenner
Richard T. White
Floyd C. Wickham
Maurice L. Williams
Thomas R. Winebrener
J. Trego Zimmerman
(1) Advisory Council Member Emeritus
<PAGE> 48
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>
1995 1994
-------------------------- ------------------------------
Price Range Price Range
------------------ ----------------
Dividend Dividend
High Low Paid(1) High Low Paid(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 30 1/4 28 1/2 $.18 24 1/2 23 $.18
Second Quarter 27 1/2 25 3/4 .18 25 1/4 22 1/4 .17
Third Quarter 27 25 1/2 .20 30 1/4 24 1/4 .18
Fourth Quarter 30 25 1/2 .20 30 1/2 28 1/2 .18
- ----------------------------------------------------------------------------------------
</TABLE>
Bancorp stock is traded on the NASDAQ National Market.
Number of shareholders of record, December 31, 1995: 2,924
(1)Restated for the stock dividend declared in 1995.
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
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 24 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, 1995, the Bank had approximately 345
full-time and 26 part-time employees. The Bank is a member of the Federal
Deposit Insurance Corporation and is an Equal Opportunity Lender.
48
<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 24, 1996,
relating to the consolidated balance sheets of F&M Bancorp and its subsidiary
as of December 31, 1995 and 1994 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, 1995, which report appears on page
46 of the 1995 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 26, 1996
-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 10-K for the period ended December 31, 1995, 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 19, 1996
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Charles W. Hoff, III Chairman of the Board,
- ------------------------------- Chief Executive Officer
Charles W. Hoff, III and Director
(Principal Executive
Officer)
/s/ Kenneth M. Sabanosh Vice President and
- ------------------------------- Treasurer
Kenneth M. Sabanosh (Principal Financial
Officer and Principal
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, Ph.D. 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/ Robert K. Moler Director
- ------------------------------
Robert K. Moler
/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
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's Annual Report to Shareholders for the year ended December 31,
1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,811
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 116,988
<INVESTMENTS-CARRYING> 60,146
<INVESTMENTS-MARKET> 61,299
<LOANS> 484,694
<ALLOWANCE> 6,164
<TOTAL-ASSETS> 739,854
<DEPOSITS> 621,057
<SHORT-TERM> 41,550
<LIABILITIES-OTHER> 7,228
<LONG-TERM> 0
0
0
<COMMON> 22,068
<OTHER-SE> 47,951
<TOTAL-LIABILITIES-AND-EQUITY> 739,854
<INTEREST-LOAN> 44,566
<INTEREST-INVEST> 9,267
<INTEREST-OTHER> 287
<INTEREST-TOTAL> 54,120
<INTEREST-DEPOSIT> 21,218
<INTEREST-EXPENSE> 23,618
<INTEREST-INCOME-NET> 30,502
<LOAN-LOSSES> 2,000
<SECURITIES-GAINS> (256)
<EXPENSE-OTHER> 27,553
<INCOME-PRETAX> 11,132
<INCOME-PRE-EXTRAORDINARY> 11,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,199
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 8.45
<LOANS-NON> 1,163
<LOANS-PAST> 744
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 21,003
<ALLOWANCE-OPEN> 5,793
<CHARGE-OFFS> 3,255
<RECOVERIES> 1,626
<ALLOWANCE-CLOSE> 6,164
<ALLOWANCE-DOMESTIC> 4,632
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,532
</TABLE>
