UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from -- to -- .
Commission file number 0-12638
F&M BANCORP
(Exact name of registrant as specified in its charter)
Maryland 52-1316473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Thomas Johnson Drive
Frederick, Maryland 21702
(Address of principal executive offices) (zip code)
301-694-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $5 par value, 5,694,888 shares outstanding as of May 7, 1997.
Exhibit index located on page 21.
<PAGE>
F&M BANCORP
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets (Unaudited),
March 31, 1997 and 1996 and December 31, 1996 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1997 and 1996 6
Consolidated Statements of Changes in Shareholders'
Equity (Unaudited), Three Months Ended March 31, 1997
and Twelve Months Ended December 31, 1996 8
Notes to Consolidated Financial Statements (Unaudited) 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
F&M Bancorp and Subsidiaries
<CAPTION>
(Dollars in thousands, March 31 March 31 December 31
except per share amounts) 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 33,204 $ 28,974 $ 33,762
Federal funds sold 4,000 21,830 --
Interest-bearing deposits with banks 3,886 4,132 4,943
---------- -------- ----------
Total cash and cash equivalents 41,090 54,936 38,705
---------- -------- ----------
Loans held for sale 144 1,709 309
---------- -------- ----------
Investment securities
Held-to-maturity, fair value
$99,116, $105,858, and $100,201,
respectively 99,436 105,880 99,503
Available-for-sale, at fair value 130,420 131,528 146,308
---------- -------- ----------
Total investment securities 229,856 237,408 245,811
---------- -------- ----------
Loans, net of unearned income 678,404 617,909 670,269
Less: Allowance for credit losses (9,434) (9,686) (9,639)
---------- -------- ----------
Net loans 668,970 608,223 660,630
---------- -------- ----------
Bank premises and equipment, net 25,376 21,086 25,231
Other real estate owned 6,577 7,774 7,457
Interest receivable 7,081 6,547 6,701
Intangible assets 3,895 4,582 3,945
Other assets 17,963 13,539 17,062
---------- -------- ----------
Total assets $1,000,952 $955,804 $1,005,851
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 111,022 $105,942 $ 108,101
Interest-bearing 690,290 689,005 686,649
---------- -------- ----------
Total deposits 801,312 794,947 794,750
Federal funds purchased and
securities sold under agreements
to repurchase 34,801 32,127 41,876
Other short-term borrowings 52,683 16,377 57,411
Long term borrowings 6,685 12,272 6,686
Accrued interest and other liabilities 10,726 10,491 11,668
---------- -------- ----------
Total liabilities 906,207 866,214 912,391
---------- -------- ----------
Shareholders' equity
Common stock, par value $5 per share;
authorized 10,000,000 shares;
issued and outstanding 5,691,988
shares, 5,668,616 shares, and
5,678,564 shares, respectively 28,460 28,343 28,393
Surplus 29,363 28,968 29,148
Retained earnings 37,576 32,704 36,113
Net unrealized loss on
securities available for sale (654) (425) (194)
---------- -------- ----------
Total shareholders' equity 94,745 89,590 93,460
---------- -------- ----------
Total liabilities and shareholders'
equity $1,000,952 $955,804 $1,005,851
========== ======== ==========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
F&M BANCORP and Subsidiaries
<CAPTION>
Quarter ended
(Dollars in thousands, March 31
except per share amounts) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $14,470 $13,716
Interest and dividends on investment
securities
Taxable 2,658 2,357
Tax-exempt 870 928
Interest on deposits with banks 36 118
Interest on federal funds sold 14 218
------- -------
Total interest income 18,048 17,337
------- -------
Interest Expense
Interest on deposits 6,833 7,070
Interest on federal funds purchased and
securities sold under agreements to
repurchase 495 425
Interest on Federal Home Loan Bank borrowings 821 463
Interest on other short-term borrowings 20 19
------- -------
Total interest expense 8,169 7,977
------- -------
Net interest income 9,879 9,360
Provision for credit losses 450 300
------- -------
Net interest income after provision
for credit losses 9,429 9,060
------- -------
Noninterest Income
Trust income 611 427
Service charges on deposit accounts 1,226 1,084
Losses on sales of securities -- (28)
Gains (losses) on sales of property (5) 79
Gains on sales of loans 43 142
Other operating income 1,149 955
------- -------
Total noninterest income 3,024 2,659
------- -------
Noninterest Expenses
Salaries and employee benefits 4,605 4,270
Occupancy and equipment expense 1,465 1,288
Other operating expense 2,578 2,687
------- -------
Total noninterest expenses 8,648 8,245
------- -------
Income before provision for income taxes 3,805 3,474
Provision for income taxes 1,081 1,000
------- -------
Net Income $ 2,724 $ 2,474
======= =======
Earnings per Common Share
Based on weighted average shares
outstanding of 5,685,895 for
1997, 5,666,468 for 1996 $ .48 $ .44
======= =======
Dividends per Share $ .22 $ .17
======= =======
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
F&M BANCORP and Subsidiaries
<CAPTION>
Three Months Ended
March 31 March 31
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,724 $ 2,474
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for credit losses 450 300
Depreciation and amortization 637 486
Amortization of intangibles 127 156
Net premium amortization on investment securities 135 188
Increase in interest receivable (380) (18)
Decrease in interest payable (10) (36)
Deferred income tax benefit 133 34
Accretion of net loan origination fees 33 64
Loss (gain) on sales of property 5 (79)
Gain on sales/calls of securities -- 28
Decrease in loans held for sale 165 244
Decrease in other assets (835) (31)
Increase (decrease) in other liabilities (933) 635
-------- --------
Net cash provided by operating activities 2,251 4,445
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be
held to maturity (1,110) (17,212)
Purchases of investment securities available
for sale (6,707) (20,156)
Proceeds from maturities and sales/calls of
securities available for sale 21,764 23,464
Proceeds from maturities and calls of
securities to be held to maturity 1,139 1,066
Net decrease (increase) in loans (8,823) 6,796
Purchases of premises and equipment (793) (1,166)
Proceeds from sales of property 6 --
Other investing activities 879 1,274
-------- --------
Net cash provided by (used in) investing activities 6,355 (5,934)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits,
interest-bearing checking, savings and
money market accounts 9,843 6,279
Net increase (decrease) in certificates of deposit (3,281) 4,043
Net decrease in securities sold under
agreements to repurchase (7,075) (8,031)
Net decrease in long-term borrowings (1) (500)
Net decrease in other short-term borrowings (4,728) (2,243)
Cash dividends paid (1,250) (985)
Dividend reinvestment plan (6) --
Proceeds from issuance of common stock 277 106
-------- --------
Net cash used in financing activities (6,221) (1,331)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,385 (2,820)
Cash and cash equivalents at beginning of period 38,705 57,756
-------- --------
Cash and cash equivalents at end of period $ 41,090 $ 54,936
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 8,180 $ 8,028
Cash payments for income tax 483 930
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available
for sale, net of deferred income taxes payable
(benefits) (460) (406)
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
F&M BANCORP and Subsidiaries
<CAPTION>
Net
Unrealized
Gain
(Loss) on
Securities
(Dollars in thousands Common Retained Available
except per share amounts) Stock Surplus Earnings for Sale Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $28,304 $28,811 $31,304 $ (18) $88,401
Net income -- -- 8,611 -- 8,611
Dividend reinvestment plan -- -- (25) -- (25)
Stock options exercised
(25,113 shares) 126 377 -- -- 503
Cash dividends paid
($.64 per share) -- -- (3,640) -- (3,640)
Stock repurchased (7,448 shares) (37) (40) (137) -- (214)
Fair value adjustment for
securities available
for sale, net -- -- -- (176) (176)
------- ------- ------- ------- -------
Balance at December 31, 1996 $28,393 $29,148 $36,113 $ (194) $93,460
Net income -- -- 2,724 -- 2,724
Dividend reinvestment plan -- -- (6) -- (6)
Cash dividends paid
($.22 per share) -- -- (1,250) -- (1,250)
Stock options exercised
(13,734 shares) 69 217 -- -- 286
Stock repurchased (310 shares) (2) (2) (5) -- (9)
Fair value adjustment for
securities available
for sale, net -- -- -- (460) (460)
------- ------- ------- ------- -------
Balance at March 31, 1997 $28,460 $29,363 $37,576 $ (654) $94,745
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
The foregoing financial statements are unaudited; however, in the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of F&M Bancorp's ("Bancorp's") significant accounting
policies is set forth in Note 1 to the consolidated financial statements in
it's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
On November 15, 1996, Bancorp acquired all of the outstanding capital stock of
Home Federal Corporation, Hagerstown, Maryland, in a tax-free transaction. Home
Federal Corporation merged with and into Bancorp. This transaction was
accounted for as a "pooling of interests." Accordingly, the consolidated
financial statements for the quarter ended March 31, 1996 have been restated to
include the accounts of Home Federal Corporation and its subsidiaries.
Note 2. Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
March 31, 1997
- -------------------------------------------------------------------------------
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 $ 57,833 $ 31 $ 328 $ 57,536
Obligations of states and
political subdivisions 7,377 72 1 7,448
Mortgage-backed securities 59,643 70 776 58,937
- -------------------------------------------------------------------------------
Total-debt securities 124,853 173 1,105 123,921
Equity securities 6,499 -- -- 6,499
- -------------------------------------------------------------------------------
Total available-for-sale: 131,352 173 1,105 130,420
- -------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 11,950 28 181 11,797
Obligations of states and
political subdivisions 62,976 713 353 63,336
Mortgage-backed securities 24,510 33 560 23,983
- -------------------------------------------------------------------------------
Total held-to-maturity 99,436 774 1,094 99,116
- -------------------------------------------------------------------------------
Total investment securities $230,788 $ 947 $2,199 $229,536
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
March 31, 1996
- -------------------------------------------------------------------------------
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 $ 59,372 $ 97 $ 271 $ 59,198
Obligations of states and
political subdivisions 14,547 322 1 14,868
Mortgage-backed securities 45,931 92 601 45,422
- -------------------------------------------------------------------------------
Total-debt securities 119,850 511 873 119,488
Equity securities 12,040 -- -- 12,040
- -------------------------------------------------------------------------------
Total available-for-sale: 131,890 511 873 131,528
- -------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 5,944 58 24 5,978
Obligations of states and
political subdivisions 57,355 887 447 57,795
Mortgage-backed securities 42,581 51 547 42,085
- -------------------------------------------------------------------------------
Total held-to-maturity 105,880 996 1,018 105,858
- -------------------------------------------------------------------------------
Total investment securities $237,770 $1,507 $1,891 $237,386
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------
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 $ 69,883 $ 112 $ 146 $ 69,849
Obligations of states and
political subdivisions 8,545 116 -- 8,661
Mortgage-backed securities 62,042 155 435 61,762
- -------------------------------------------------------------------------------
Total-debt securities 140,470 383 581 140,272
Equity securities 6,036 -- -- 6,036
- -------------------------------------------------------------------------------
Total available-for-sale: 146,506 383 581 146,308
- -------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 11,949 58 13 11,994
Obligations of states and
political subdivisions 62,336 1,038 214 63,160
Mortgage-backed securities 25,218 71 242 25,047
- -------------------------------------------------------------------------------
Total held-to-maturity 99,503 1,167 469 100,201
- -------------------------------------------------------------------------------
Total investment securities $246,009 $1,550 $1,050 $246,509
===============================================================================
</TABLE>
Bancorp classifies its investments in debt and equity securities into two
categories: held-to-maturity and available-for-sale. Securities classified as
held-to-maturity are those debt securities that Bancorp has both the positive
intent and ability to hold to maturity. These securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income using the interest method.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that Bancorp intends to hold
for an indefinite period of time but not necessarily to maturity. These
securities may be sold as part of its asset/liability management strategy, or
in response to significant movements in interest rates, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value, with any unrealized gains and losses reported as a
separate component of shareholders' equity, net of the related deferred tax
effect.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
included in interest income in the consolidated statements of income. Realized
gains and losses, if any, determined based on the adjusted cost of the specific
securities sold, are reported as a separate line item in noninterest income in
the consolidated statements of income.
The amortized cost and estimated fair values of investments at March 31, 1997
by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
(in thousands) Cost Value
- -------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $ 36,666 $ 36,684
After 1 but within 5 years 20,541 20,416
After 5 years but within 10 years 8,003 7,884
Mortgage-backed securities 59,643 58,937
Equity securities 6,499 6,499
- -------------------------------------------------------------------------
Total available-for-sale 131,352 130,420
- -------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 523 530
After 1 but within 5 years 36,604 37,017
After 5 years but within 10 years 37,693 37,478
After 10 years 107 107
Mortgage-backed securities 24,509 23,984
- -------------------------------------------------------------------------
Total held-to-maturity 99,436 99,116
- -------------------------------------------------------------------------
Total investment securities $230,788 $229,536
=========================================================================
</TABLE>
The amortized cost of investment securities pledged to secure public deposits,
securities sold under repurchase agreements, Federal Home Loan Bank advances,
and for other purposes as required and permitted by law, totaled $118,316,000
at March 31, 1997.
Note 3. Loans
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
March 31, December 31,
- -------------------------------------------------------------------------------
(In thousands) 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans
Construction and land development $ 30,163 $ 30,297 $ 29,571
Secured by farmland 6,645 6,156 6,864
Residential mortgage 185,538 176,649 183,566
Other mortgage 128,196 120,806 128,777
Agricultural 808 1,296 977
Commercial and industrial loans 67,278 51,628 62,288
Consumer 255,113 226,388 253,454
Other loans 4,663 4,689 4,772
- -------------------------------------------------------------------------------
Totals $678,404 $617,909 $670,269
===============================================================================
</TABLE>
Loans to states, political subdivisions, and industrial revenue bonds are
included in all other loans in the schedule above and in total loans in the
statement of condition.
The allowance for credit losses is maintained at a level which, in management's
opinion, is considered adequate to provide for possible loan losses on loans
currently held in the loan portfolio.
Note 4. Bank Premises and Equipment
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
March 31, December 31,
- -------------------------------------------------------------------------------
(In thousands) 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $ 22,407 $ 20,190 $ 22,786
Furniture and equipment 17,850 17,140 17,280
Leasehold improvements 1,760 1,134 1,696
- -------------------------------------------------------------------------------
42,017 38,464 41,762
Less accumulated depreciation
and amortization (16,641) (17,378) (16,531)
- -------------------------------------------------------------------------------
Net premises and equipment $ 25,376 $ 21,086 $ 25,231
===============================================================================
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
F&M Bancorp's net income for the first quarter of 1997 was $2,724,000 or 48
cents per share compared with $2,474,000 or 44 cents per share for the same
period last year. Return on average assets and return on average equity was
1.11 percent and 11.91 percent, respectively, in the first quarter of 1997
compared with 1.05 percent and 11.14 percent, respectively, in the same period
last year. Increases in net interest income and noninterest income were the
principal factors in the 10.1 percent increase in earnings.
Results of Operations
Net Interest Income
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,
is the principal source of Bancorp's earnings. Net interest income is impacted
by changes in the volume and mix of earning assets and funding sources, market
interest rates, monetary policy of the Federal Reserve Board and other factors.
Average balances and rates for major categories of interest-earning assets and
interest-bearing liabilities for the first quarter are presented on a year-to-
year comparative basis in Table 1. Net interest income on a taxable-equivalent
basis increased $486,000 or 4.9 percent compared with the first quarter of last
year. The primary reason for the increase was the increase in the volume of
loans from one period to the other. Loans increased $54,787,000 or 8.8 percent
compared with the first quarter of 1996. Overall, interest rates declined on
both earning assets and interest-bearing liabilities. The decline was most
significant on the liability side, however, which contributed to the increase
in net interest income.
Average earning assets increased $43,673,000 or 5.0 percent during the first
quarter of 1997 compared with the first quarter last year. Loans lead the
increase, as stated above. Investment securities increased $5,579,000 on
average overall, with a shift in the portfolio mix from tax-exempt municipals
to a higher percentage of taxable securities. Asset growth was funded through
additional borrowings, an increase in deposits, and a reduction in the amount
of federal funds sold.
Interest-bearing deposits increased $7,531,000 or 1.1 percent. Growth in
interest checking was offset by a decline in savings deposits. Average time
deposits grew at a rate of 2.0 percent compared with the first quarter of last
year. Federal Home Loan Bank (FHLB) advances and federal funds provided the
additional funding necessitated by the substantial loan demand.
Interest rates earned and paid both declined, but the greatest declines
occurred with funding sources. The average rate earned on average assets
declined three basis points to 8.19 percent compared with the first quarter of
last year. Loan rates declined 21 basis points while the rates on investment
securities were mixed, with tax-exempt rates declining 27 basis points and
taxable rates increasing 45 basis points.
The average rate paid on interest-bearing liabilities declined ten basis
points to 4.20 percent compared with the same quarter last year. Deposit rates
declined 15 basis points overall, lead by time deposit rates, which declined 25
basis points. As time deposit rates declined, customers shifted their savings
balances into these accounts to lock in rates before they declined even
further. Therefore, the growth in time deposits came primarily at the expense
of savings deposits. Interest checking posted strong growth, increasing 7.1
percent compared with the first quarter of last year. The average rate paid on
borrowed funds declined 29 basis points. This decrease served to offset the
impact of the increased borrowings.
The net interest margin, the ratio of taxable-equivalent net interest income to
earning assets increased three basis points for the first quarter of 1997
compared with the same period last year. The increase resulted from the
increase in the volume of loans, which changed the mix of earning assets, and
the decline in liability interest rates which out paced the decline in earning
asset rates.
Table 1. Consolidated Average Balances, Interest and Average Rates
(Taxable Equivalent Basis)
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
YTD YTD
Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold
- overnight $ 210 $ 14 5.31% $ 15,812 $ 218 5.55%
- -------------------------------------------------------------------------------
Short-term interest
bearing deposits 4,841 36 3.02 5,932 118 8.00
- -------------------------------------------------------------------------------
Total investment
securities -
Tax-exempt(1) 70,645 1,318 7.46 72,801 1,406 7.73
- -------------------------------------------------------------------------------
Total investment
securities - Taxable 166,672 2,658 6.38 158,937 2,357 5.93
- -------------------------------------------------------------------------------
Total loans 675,094 14,507 8.71 620,307 13,756 8.92
- -------------------------------------------------------------------------------
Total interest-
earning assets 917,462 18,533 8.19 873,789 17,855 8.22
- -------------------------------------------------------------------------------
Total noninterest-
earning assets 77,885 71,598
- -------------------------------------------------------------------------------
TOTAL ASSETS $995,347 $945,387
===============================================================================
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Basic savings, time $114,159 $ 717 2.55% $120,429 $ 804 2.69%
open & clubs
Interest checking 101,748 508 2.02 94,993 499 2.11
Money market
savings 113,642 851 3.04 113,607 843 2.98
Total time deposits 358,918 4,757 5.38 351,907 4,924 5.63
- -------------------------------------------------------------------------------
Total interest-bearing
deposits 688,467 6,833 4.03 680,936 7,070 4.18
- -------------------------------------------------------------------------------
Borrowed funds
Federal funds
purchased and
repurchase accounts 41,458 495 4.84 34,213 425 5.00
Other short-term
borrowings 52,874 742 5.69 17,849 287 6.47
- -------------------------------------------------------------------------------
Total short-term
borrowings 94,332 1,237 5.32 52,062 712 5.55
- -------------------------------------------------------------------------------
Long-term borrowings 6,685 99 6.01 12,546 195 6.25
- -------------------------------------------------------------------------------
Total borrowed funds 101,017 1,336 5.36 64,608 907 5.65
- -------------------------------------------------------------------------------
Total interest-bearing
liabilities 789,484 8,169 4.20 745,544 7,977 4.30
- -------------------------------------------------------------------------------
Non-interest bearing
liabilities
Demand deposits 101,802 100,368
Other liabilities 11,341 10,157
Shareholders' equity 92,720 89,318
- -------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $995,347 $945,387
===============================================================================
NET INTEREST INCOME * $10,364 $ 9,878
===============================================================================
NET INTEREST SPREAD 3.99% 3.92%
===============================================================================
NET INTEREST MARGIN AS A
PERCENT OF EARNING ASSETS 4.58% 4.55%
===============================================================================
</TABLE>
* Based on an effective federal tax rate of 34% for 1997 and 1996.
(1) Based on amortized cost (i.e. excludes mark-to-market adjustments).
Management continually monitors Bancorp's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility
using the concept of natural hedges, 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 currently utilized. As market rates change,
corresponding changes in asset mix, funding sources and pricing are considered
to avoid a negative impact on net interest income.
Bancorp attempts to measure the interest rate sensitivity of its assets and
liabilities on the basis of when they will reprice as opposed to when they can
reprice. Since it is difficult to predict the movement of interest rates,
management's objective is to maintain a relatively balanced sensitivity
position, while not foregoing any opportunity to benefit from current rate
conditions. As indicated in Table 2, Bancorp had a cumulative net liability
sensitive position of $93,030,000 within the one year horizon at March 31, 1997.
This position would indicate that Bancorp has the potential for decreased
earnings if market interest rates rise in the next twelve months.
Due to inherent limitations in this traditional gap analysis technique for
measuring interest rate 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. The effects of changes in interest rates on the
market value of assets, liabilities, and off-balance-sheet contracts is also
measured. At March 31, 1997, the changes in net interest income and/or market
value calculated under these alternative methods were within limits established
by the Board of Directors.
TABLE 2. INTEREST RATE SENSITIVITY ANALYSIS AT MARCH 31, 1997 (1)
<TABLE>
<CAPTION>
1-90 91-180 181-365 1-3 3-5 Beyond
(In thousands) days days days years years 5 years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning Assets:
Interest-
bearing
deposits
with banks $ 3,886 $ -- $ -- $ -- $ -- $ -- $ 3,886
Federal funds
Sold 4,000 -- -- -- -- -- 4,000
Investment
securities (2) 17,949 22,195 30,306 78,138 37,977 38,345 224,910
Loans, net 133,003 69,552 108,993 200,828 103,597 46,586 662,559
-------- -------- -------- -------- -------- -------- --------
Total $158,838 $ 91,747 $139,299 $278,966 $141,574 $ 84,931 $895,355
======== ======== ======== ======== ======== ======== ========
Interest-
bearing
Liabilities:
Deposits $165,319 $ 81,896 $145,759 $135,367 $ 31,591 $130,358 $690,290
Short-term
borrowings 72,120 -- 15,364 -- -- -- 87,484
Long-term
borrowings -- -- 2,456 -- -- 4,229 6,685
-------- -------- -------- -------- -------- -------- --------
Total $237,439 $ 81,896 $163,579 $135,367 $ 31,591 $134,587 $784,459
======== ======== ======== ======== ======== ======== ========
Interest
Sensitivity
Gap:
Period $(78,601)$ 9,851 $(24,280)$143,599 $109,983 $(49,656)$ --
Cumulative (78,601) (68,750) (93,030) 50,569 160,552 110,896 $110,896
</TABLE>
(1) Excludes nonaccrual loans and other nonrate-sensitive assets.
(2) Reflects fair value adjustments for securities available for sale.
Noninterest Income.
Noninterest income increased $365,000 or 13.7 percent for the first quarter of
1997 compared with the first quarter of 1996. All significant sources of
noninterest income increased as management's strategic emphasis on new sources
of revenue continue to develop revenue enhancing opportunities. Significant
increases include deposit services, up $142,000 or 13.1 percent, and Trust
income, up $184,000 or 43.1 percent.
Noninterest Expenses.
Noninterest expenses increased $403,000 or 4.9 percent compared with the first
quarter of last year. Salaries and benefits increased $335,000 or 7.8 percent
and include personnel expenses related to a full quarter of operations of a de
novo branch office which opened in March, 1996. Occupancy and equipment
expense increased $177,000 or 13.7 percent, reflecting the completion of the
addition to the corporate headquarters building in the fourth quarter of 1996
and investments in technology which enhance customer service. Other operating
expenses declined $109,000 or 4.1 percent primarily as a result of a reduction
in deposit insurance premiums.
Income Taxes.
The provision for income taxes increased $81,000 or 8.1 percent compared with
the first quarter of last year. Tax expense varies from one period to the next
with changes in the level of income before taxes, changes in the amount of tax-
exempt income, and the relationship of these changes to each other. Bancorp's
effective tax rate for the first quarter of 1997 and 1996 was 28.4 percent and
28.8 percent, respectively. 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.
NONPERFORMING ASSETS
Table 3 summarizes Bancorp's nonperforming assets and contractually past due
loans. Total nonperforming assets at March 31, 1997 have declined $354,000
compared with year earlier levels and have declined $1,129,000 since year-end.
Loans past due 90 or more days as to interest or principal reflected a $527,000
increase compared with prior year levels but have decreased $437,000 since
year-end. Although there is no direct correlation between nonperforming loans
and ultimate loan losses, an analysis of the nonperforming loans may provide
some indication of the quality of the loan portfolio. Management believes that
the amounts of its nonperforming loans and past due loans are modest in
relation to the loan portfolio.
POTENTIAL PROBLEM LOANS
At March 31, 1997, Bancorp had performing loans amounting to $12,828,000 that
were identified as potential problem loans because the borrowers were currently
experiencing financial difficulties such that management had concerns that such
loans might, in the future, become classified as nonaccrual or delinquent. At
December 31, 1996, potential problem loans totaled $20,579,000. The decrease in
the amount of these loans during 1997 is a reflection of an improvement in
credit quality. As of March 31, 1997, management does not believe that these
loans present any significant risk of loss.
Bancorp had loans amounting to approximately $5,752,000 and $5,000,000 at March
31, 1997 and March 31, 1996, respectively, that were specifically classified as
impaired and included in non-accrual loans in Table 3. The average balance of
impaired loans amounted to $6,036,000 and $5,315,000 for the first quarter of
1997 and 1996, respectively. Cash receipts for these same periods were $162,000
and $37,000. All cash receipts were applied to reduce the principal balance of
those impaired loans and no interest income was recognized. The specific
allowance for credit losses related to these impaired loans was $344,000 and
$477,000, at March 31, 1997 and March 31, 1996, respectively.
TABLE 3. NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
<TABLE>
<CAPTION>
March 31, December 31
(Dollars in thousands) 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans(1) $ 7,032 $ 6,189 $ 7,281
Other real estate owned net of
valuation allowance(2)(4) 6,577 7,774 7,457
- -------------------------------------------------------------------------------
Total nonperforming assets $13,609 $13,963 $14,738
- -------------------------------------------------------------------------------
Loans past due 90 or more days
as to interest or principal(3) $ 1,783 $ 1,256 $ 2,220
- -------------------------------------------------------------------------------
Nonperforming loans to period-end loans 1.04% 1.00% 1.09%
Nonperforming assets to period-end
loans and other real estate owned 1.99% 2.23% 2.17%
Period-end allowance for credit
losses times nonperforming loans 1.34x 1.57x 1.32x
Period-end allowance for credit
losses times nonperforming assets 0.69x 0.69x 0.65x
</TABLE>
(1) Loans are placed on nonaccrual status when, in the opinion of
management, reasonable doubt exists as to the full, timely collection of
interest or principal or a specific loan meets the criteria for nonaccrual
status established by regulatory authorities. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. No interest is taken into
income on nonaccrual loans unless received in cash or until such time the
borrower demonstrates sustained performance over a period of time in
accordance with contractual terms.
(2) Other real estate owned includes: banking premises no longer used
for business purposes 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.
(3) Nonaccrual loans are not included.
(4) Consists principally of the real estate held in a limited partnership
and includes minority interests totaling $904,000, $730,000, and $838,000 at
March 31, 1997, March 31, 1996 and December 31, 1996, respectively.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses was $9,434,000 or 1.4 percent of loans
outstanding as of March 31, 1997 compared with $9,639,000 or 1.4 percent of
loans outstanding as of December 31, 1996 and $9,686,000 or 1.6 percent of
loans outstanding as of March 31, 1996. The provision for credit losses was
$450,000 for the first quarter of 1997 and $300,000 for the first quarter of
1996. Net charge-offs for the first quarter were $655,000 compared with
$410,000 for the first quarter of last year. As reflected in Table 4, net
charge-offs as a percent of total loans were 0.10 percent this quarter
compared with 0.07 percent for the same period last year.
TABLE 4. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Period ended
- -------------------------------------------------------------------------------
March 31, March 31, December 31,
(Dollars in thousands) 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding
less average unearned income(1) $674,570 $619,221 $640,148
===============================================================================
Allowance for credit losses
at beginning of year $ 9,639 $ 9,796 $ 9,796
- -------------------------------------------------------------------------------
Charge-offs
Real estate 122 11 303
Commercial and industrial -- -- 10
Consumer 1,260 1,077 3,609
- -------------------------------------------------------------------------------
Total loans charged-off 1,382 1,088 3,922
- -------------------------------------------------------------------------------
Recoveries
Real estate 74 59 247
Commercial and industrial -- 3 2
Consumer 653 616 1,994
- -------------------------------------------------------------------------------
Total recoveries 727 678 2,243
- -------------------------------------------------------------------------------
Net charge-offs 655 410 1,679
- -------------------------------------------------------------------------------
Additions charged to operating expense 450 300 1,522
- -------------------------------------------------------------------------------
Allowance for credit losses
at end of period $ 9,434 $ 9,686 $ 9,639
===============================================================================
Ratio of net charge-offs to
average loans outstanding 0.10% 0.07% 0.26%
===============================================================================
</TABLE>
(1) Exclusive of loans held for sale.
Based upon management's analysis and review of the loan portfolio, past loss
experience, and current economic conditions, the amount in the allowance for
credit losses at March 31, 1997 is considered adequate. 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.
TABLE 5. ALLOCATION OF ALLOWANCES FOR CREDIT LOSSES
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1996
- -------------------------------------------------------------------------------
% Gross % Gross % Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1) Amount Loans(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Construction and
land development $2,153 4.4% $1,850 4.9% $1,821 4.4%
Residential mortgage 561 27.3 432 28.6 510 27.4
Other mortgage 1,283 18.9 1,532 19.5 1,765 19.2
Commercial and industrial 593 9.9 889 8.4 830 9.3
Consumer 3,291 37.7 2,346 36.6 2,757 37.8
Unallocated 1,553 1.8 2,637 2.0 1,956 1.9
- -------------------------------------------------------------------------------
Total allowance for
credit losses $9,434 100.0% $9,686 100.0% $9,639 100.0%
===============================================================================
</TABLE>
(1) Excludes loans held for sale.
Table 5 presents an allocation of the allowance for credit losses 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.
CAPITAL RESOURCES
Shareholder's equity totaled $94,745,000 at March 31, 1997, an increase of 1.4
percent compared with the 1996 year end level of $93,460,000 and an increase of
5.8 percent from the year earlier level of $89,590,000. The fair value of the
available-for-sale portfolio has decreased $460,000 (net of deferred taxes)
since year end. Capital levels are considered sufficient to absorb anticipated
future price volatility in the available-for-sale portfolio.
Bancorp's risk-based capital and leverage capital ratios continue to exceed
regulatory guidelines as of March 31, 1997, as follows:
TABLE 6. CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
-------------------
Tier 1 Total Leverage
Capital Capital Ratio
------- ------- --------
<S> <C> <C> <C>
Actual 12.94% 14.19% 9.30%
Minimum 4.00% 8.00% 3.00%
------ ------ -----
Excess 8.94% 6.19% 6.30%
====== ====== =====
</TABLE>
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.
PART II - Other Information
Item 6 Exhibits and Reports on Form 8-K Page
(a) Exhibits
11 Statement Re: Computation of per share earnings. 21
27 Financial Data Schedule 22
(b) A report on Form 8-K Item 2. Acquisition or Disposition of Assets and
Item 7. Financial Statements and Exhibits was filed by the Corporation during
the quarter ended March 31, 1997 as an amendment to a Form 8-K filed on
November 21, 1996.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F&M BANCORP
-----------
(Registrant)
May 15, 1997 /s/David L. Spilman
- ------------------ ----------------------------
Date DAVID L. SPILMAN
TREASURER
<PAGE>
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Quarter Ending
March 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Earnings Per share:
Primary $ .48 $ .43
Fully diluted $ .48 $ .43
</TABLE>
Primary and fully diluted earnings per share are calculated using the following
number of adjusted weighted average shares outstanding:
<TABLE>
<CAPTION>
Quarter Ending
March 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Primary 5,724,501 5,724,363
Fully diluted 5,728,836 5,724,360
</TABLE>
The weighted average number of shares outstanding is adjusted to recognize the
dilutive effect, if any, of outstanding employee stock options on both a
primary and fully diluted basis.
The calculations of earnings per share above are based on the weighted average
number of shares outstanding including all common stock and common stock
equivalents in conformity with the instructions for Item 601 of Regulation
S-K. The calculation of earnings per share for financial reporting purposes is
based on the weighted average number of shares outstanding of 5,685,895 and
5,666,468 at March 31, 1997 and March 31, 1996, respectively, without giving
effect to the common stock equivalents resulting from the assumed exercise of
stock options, which do not dilute earnings per share by more than 3 percent,
in conformity with generally accepted accounting principles.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 33,204
<INT-BEARING-DEPOSITS> 3,886
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,420
<INVESTMENTS-CARRYING> 99,436
<INVESTMENTS-MARKET> 99,116
<LOANS> 678,404
<ALLOWANCE> 9,434
<TOTAL-ASSETS> 1,000,952
<DEPOSITS> 801,312
<SHORT-TERM> 52,683
<LIABILITIES-OTHER> 10,726
<LONG-TERM> 6,685
0
0
<COMMON> 28,460
<OTHER-SE> 66,285
<TOTAL-LIABILITIES-AND-EQUITY> 1,000,952
<INTEREST-LOAN> 14,470
<INTEREST-INVEST> 3,528
<INTEREST-OTHER> 50
<INTEREST-TOTAL> 18,048
<INTEREST-DEPOSIT> 6,833
<INTEREST-EXPENSE> 8,169
<INTEREST-INCOME-NET> 9,879
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,648
<INCOME-PRETAX> 3,805
<INCOME-PRE-EXTRAORDINARY> 3,805
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,724
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 4.58
<LOANS-NON> 7,032
<LOANS-PAST> 1,783
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12,828
<ALLOWANCE-OPEN> 9,639
<CHARGE-OFFS> 1,382
<RECOVERIES> 727
<ALLOWANCE-CLOSE> 9,434
<ALLOWANCE-DOMESTIC> 7,881
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,553
</TABLE>
