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 September 30, 1998
[ ] 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 Identification No.)
incorporation or organization)
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, 6,401,264 shares outstanding as of November 9, 1998
Exhibit index located on page 30
F&M BANCORP
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets,
September 30, 1998 and 1997 (Unaudited) and December 31, 1997 3
Consolidated Statements of Income (Unaudited),
Three and Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Comprehensive Income (Unaudited),
Three and Nine Months Ended September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1998 and 1997 8
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited), Nine Months Ended September 30, 1998 and Twelve
Months Ended December 31, 1997 10
Notes to Consolidated Financial Statements (Unaudited) 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Quantitative and Qualitative Disclosures about Market Risk 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 30
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
September 30, September 30, December 31,
(Dollars in thousands, 1998 1997 1997
except per share amounts) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 34,447 $ 30,206 $ 30,200
Federal fund sold -- -- 1,700
Interest-bearing deposits
with banks 18,064 6,209 9,073
- - ------------------------------------------------------------------------------
Total cash and cash equivalents 52,511 36,415 40,973
- - ------------------------------------------------------------------------------
Loans held for sale 466 54 283
- - ------------------------------------------------------------------------------
Investment securities
Available-for-sale, at fair
value 195,016 141,073 136,065
Held-to-maturity, fair value
$102,687, $104,143, and
$96,650, respectively 100,351 102,796 94,940
- - ------------------------------------------------------------------------------
Total investment securities 295,367 243,869 231,005
- - ------------------------------------------------------------------------------
Loans, net of unearned income 714,373 714,190 724,295
Less: Allowance for credit
losses (9,865) (9,837) (9,530)
- - ------------------------------------------------------------------------------
Net loans 704,508 704,353 714,765
- - ------------------------------------------------------------------------------
Bank premises and equipment,
net 23,595 25,404 24,956
Other real estate owned, net 1,522 6,388 5,055
Interest receivable 7,022 7,644 7,393
Intangible assets 3,488 3,636 3,664
Other assets 18,092 18,721 17,500
- - ------------------------------------------------------------------------------
Total assets $1,106,571 $1,046,484 $1,045,594
- - ------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiaries (cont.)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
(Dollars in thousands, 1998 1997 1997
except per share amounts) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Deposits
Noninterest-bearing $ 109,674 $ 108,704 $ 113,215
Interest-bearing 739,511 701,530 708,752
- - ------------------------------------------------------------------------------
Total deposits 849,185 810,234 821,967
- - ------------------------------------------------------------------------------
Federal funds purchased
and securities sold under
agreements to repurchase 56,820 44,732 45,051
Other short-term borrowings 1,866 56,599 41,342
Long term borrowings 82,150 23,819 24,114
Accrued interest and other
liabilities 10,415 11,714 11,653
- - ------------------------------------------------------------------------------
Total liabilities 1,000,436 947,098 944,127
- - ------------------------------------------------------------------------------
Shareholders' equity
Common stock, par value $5 per
share; authorized 50,000,000
shares; issued and outstanding
6,398,497 shares(1), 6,041,581
shares, and 6,056,586 shares,
respectively 31,993 30,208 30,283
Surplus 48,648 36,409 36,739
Retained earnings 24,973 32,613 34,154
Accumulated other comprehensive
income 521 156 291
- - ------------------------------------------------------------------------------
Total shareholders' equity 106,135 99,386 101,467
- - ------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,106,571 $1,046,484 $1,045,594
- - ------------------------------------------------------------------------------
(1) Restated to reflect 5% stock dividend paid July 29, 1998.
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
F&M BANCORP and Subsidiaries
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands,
except per share amounts) 1998 1997 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $15,516 $15,517 $46,565 $45,007
Interest and dividends on
investment securities
Taxable 2,698 2,979 7,975 8,263
Tax-exempt 942 828 2,609 2,555
Interest on deposits with banks 231 95 482 193
Interest on federal funds sold 109 13 343 37
- - ------------------------------------------------------------------------------
Total interest income 19,496 19,432 57,974 56,055
- - ------------------------------------------------------------------------------
Interest Expense
Interest on deposits 7,490 7,091 21,904 20,819
Interest on federal funds
purchased and securities sold
under agreements to repurchase 625 582 1,723 1,656
Interest on Federal Home Loan Bank
borrowings 793 1,128 2,528 2,784
Interest on other short-term
borrowings 23 38 110 112
- - ------------------------------------------------------------------------------
Total interest expense 8,931 8,839 26,265 25,371
- - ------------------------------------------------------------------------------
Net interest income 10,565 10,593 31,709 30,684
Provision for credit losses 525 450 1,575 1,350
- - ------------------------------------------------------------------------------
Net interest income after
provision for credit losses 10,040 10,143 30,134 29,334
- - ------------------------------------------------------------------------------
Noninterest Income
Trust income 678 654 1,999 1,834
Service charges on deposit
accounts 1,251 1,330 3,938 3,890
Gains on sales of securities 40 3 75 5
Gains on sales of loans 117 81 570 185
Gains (losses) on sales of property 27 3 422 18
Other operating income 1,654 2,425 4,903 5,874
- - ------------------------------------------------------------------------------
Total noninterest income 3,767 4,496 11,907 11,806
- - ------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
F&M BANCORP and Subsidiaries (cont.)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands,
except per share amounts) 1998 1997 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expenses
Salaries and employee benefits 5,040 5,188 15,414 15,044
Occupancy and equipment expense 1,569 1,645 4,794 4,695
Other operating expense 2,349 2,788 8,109 8,403
- - ------------------------------------------------------------------------------
Total noninterest expenses 8,958 9,621 28,317 28,142
- - ------------------------------------------------------------------------------
Income before provision for income
taxes 4,849 5,018 13,724 12,998
Provision for income taxes 1,446 1,588 4,033 3,959
- - ------------------------------------------------------------------------------
Net Income $ 3,403 $ 3,430 $ 9,691 $ 9,039
- - ------------------------------------------------------------------------------
Earnings per Common Share - Basic
based on weighted average shares
outstanding of 6,383,489 for 1998,
6,332,750 for 1997 (1) $ 0.53 $ 0.54 $ 1.52 $ 1.43
Earnings per Common Share - Diluted
based on weighted average shares
outstanding of 6,458,834 for 1998,
6,381,899 for 1997 (1) $ 0.53 $ 0.54 $ 1.50 $ 1.42
- - ------------------------------------------------------------------------------
Dividends per Share (1) $ 0.25 $ 0.21 $ 0.97 $ 0.60
- - ------------------------------------------------------------------------------
(1) Restated to reflect 5% stock dividend paid July 29, 1998.
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
F&M BANCORP and Subsidiaries
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands,
except per share amounts) 1998 1997 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 3,403 $ 3,430 $ 9,691 $ 9,039
Other comprehensive income,
net of tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 472 298 169 345
Less: reclassification adjustment
for gains included in net income (40) (3) (61) (5)
- - ------------------------------------------------------------------------------
Comprehensive income $3,915 $3,731 $9,921 $9,389
- - ------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
F&M BANCORP and Subsidiaries
<TABLE>
<CAPTION>
Nine months ended
September 30
(Dollars in thousands) 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,691 $ 9,039
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 1,575 1,350
Depreciation and amortization 2,056 2,064
Amortization of intangibles 388 386
Net premium amortization on investment
securities (23) 364
Decrease (increase) in interest receivable 372 (943)
Increase in interest payable 296 239
Deferred income tax benefit (7) 62
Amortization (accretion) of net loan
origination cost (fees) (182) 6
Gain on sales of property (422) (18)
(Gain)on sales/calls of securities (75) (5)
(Increase) decrease in loans held for sale (183) 255
Increase in other assets (1,342) (1,072)
Decrease in other liabilities (811) (729)
- - ------------------------------------------------------------------------------
Net cash provided by operating activities 11,333 10,998
- - ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be
held to maturity (18,613) (6,251)
Purchases of investment securities
available for sale (184,656) (90,921)
Proceeds from sales/calls of securities
held to maturity 10,541 250
Proceeds from sales/calls of securities
available for sale 23,539 11,879
Proceeds from maturing securities available
for sale 102,835 84,600
Proceeds from maturing securities held
to maturity 2,459 2,590
Net decrease (increase) in loans 8,854 (44,909)
Purchases of premises and equipment (1,036) (2,134)
Proceeds from sales of property 4,101 774
Other investing activities 121 345
- - ------------------------------------------------------------------------------
Net cash used in investing activities (51,855) (43,777)
- - ------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
F&M BANCORP and Subsidiaries (cont.)
<TABLE>
<CAPTION>
Nine months ended
September 30
(Dollars in thousands) 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing
deposits, interest-bearing checking,
savings and money market accounts 7,945 4,210
Net increase in certificates of deposit 19,273 11,274
Net increase in securities sold under
agreements to repurchase 11,768 2,856
Net decrease in long-term borrowings (37,398) (1,732)
Net increase in other short-term borrowings 55,932 17,133
Cash dividends paid (6,208) (3,819)
Dividend reinvestment plan (96) (72)
Proceeds from issuance of common stock 844 554
- - ------------------------------------------------------------------------------
Net cash provided by financing activities 52,060 30,404
- - ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 11,538 (2,375)
Cash and cash equivalents at beginning of period 40,973 38,790
- - ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $52,511 $36,415
- - ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $25,925 $25,087
Cash payments for income tax 3,396 3,754
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available
for sale, net of deferred income taxes (benefits)
payable 230 350
- - ------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
F&M BANCORP and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Other
(Dollars in thousands Common Retained Comprehensive
except per share amounts) Stock Surplus Earnings Income Total
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $28,654 $28,925 $35,914 $ (194) $93,299
Comprehensive net income -- -- 12,108 485 12,593
Dividend reinvestment plan -- -- (80) -- (80)
5% Stock dividend (283,322
shares) 1,416 7,013 (8,429) -- --
Stock options exercised
(52,097 shares) 260 861 -- -- 1,121
Cash dividends paid
($.86 per share) -- -- (5,138) -- (5,138)
Stock consideration for options
exercised (9,514 shares) (47) (60) (221) -- (328)
- - ------------------------------------------------------------------------------
Balance at December 31, 1997 $30,283 $36,739 $34,154 $ 291 $101,467
Comprehensive net income -- -- 9,691 230 9,921
Dividend reinvestment plan -- -- (96) -- (96)
5% Stock dividend (302,819
shares) (1) 1,514 10,977 (12,491) -- --
Cash dividends paid
($.97 per share) -- -- (6,208) -- (6,208)
Stock options exercised
(41,812 shares) 209 949 -- -- 1,158
Stock consideration for options
exercised (2,720 shares) (13) (17) (77) -- (107)
- - ------------------------------------------------------------------------------
Balance at September 30, 1998 $31,993 $48,648 $24,973 $ 521 $106,135
- - ------------------------------------------------------------------------------
(1)5% Stock Dividend paid July 29, 1998.
</TABLE>
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 its
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
Note 2. Pending Acquisition
On September 4, 1998, Bancorp announced it had reached a definitive agreement
to acquire all of the outstanding capital stock of Monocacy Bancshares, Inc.,
Taneytown , Maryland, in a tax free transaction. Under the terms of the
agreement, Monocacy Bancshares will merge with and into Bancorp. On the
effective date of the merger, each share of Monocacy Bancshares common stock
will be converted into a number of shares of Bancorp's common stock. The
number of shares of Bancorp common stock to be exchanged for each share of
Monocacy Bancshares common stock will be determined by dividing 2,219,753 by
the number of shares of Monocacy Bancshares common stock outstanding
immediately prior to consummation of the merger subject to adjustment in
certain circumstances. The aggregate number of shares of Bancorp common stock
to be delivered may be increased or decreased by up to 62,000 shares,
depending on the average closing price of Bancorp common stock prior to
merger. The transaction is subject to the approval of federal regulatory
authorities, Monocacy Bancshares stockholders, and Bancorp stockholders and is
expected to be consummated during the fourth quarter of 1998.
Monocacy Bancshares had total assets at September 30, 1998 of approximately
$303.2 million. Taneytown Bank & Trust Company, the primary subsidiary of
Monocacy Bancshares, currently operates eleven banking offices in central
Maryland primarily Carroll County, and also in Columbia, Maryland and in south
central Pennsylvania.
Note 3. Acquisition
On May 29, 1998, Bancorp consummated a merger with Keller-Stonebraker
Insurance, Inc. ("KSI"), a Hagerstown, MD-based, full-line independent
insurance agency with offices in Hagerstown and Cumberland, MD and Keyser, WV.
The merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements have been restated to include the accounts
of KSI for all periods presented.
Note 4. Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
- - ------------------------------------------------------------------------------
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 $ 116,487 $ 851 $ 36 $ 117,302
Obligations of states and
political subdivisions 410 -- -- 410
Mortgage-backed securities 63,113 242 42 63,313
- - ------------------------------------------------------------------------------
Total debt securities 180,010 1,093 78 181,025
Equity securities 14,115 -- 124 13,991
- - ------------------------------------------------------------------------------
Total securities available for sale: 194,125 1,093 202 195,016
- - ------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 991 9 -- 1,000
Obligations of states and political
subdivisions 83,080 2,082 25 85,137
Mortgage-backed securities 16,280 270 -- 16,550
- - ------------------------------------------------------------------------------
Total securities to be held
to maturity 100,351 2,361 25 102,687
- - ------------------------------------------------------------------------------
Total investment securities $294,476 $3,454 $227 $297,703
- - ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 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 $76,890 $ 244 $ 52 $ 77,082
Obligations of states and
political subdivisions 2,563 14 -- 2,577
Mortgage-backed securities 51,751 268 112 51,907
- - ------------------------------------------------------------------------------
Total debt securities 131,204 526 164 131,566
Equity securities 9,507 -- -- 9,507
- - ------------------------------------------------------------------------------
Total securities available
for sale: 140,711 526 164 141,073
- - ------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 11,958 36 24 11,970
Obligations of states and
political subdivisions 67,804 1,220 43 68,981
Mortgage-backed securities 23,034 179 21 23,192
- - ------------------------------------------------------------------------------
Total securities to be held
to maturity 102,796 1,435 88 104,143
- - ------------------------------------------------------------------------------
Total investment securities $243,507 $1,961 $ 252 $245,216
- - ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 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 $ 79,940 $ 419 $ 39 $ 80,320
Obligations of states and
political subdivisions 1,021 6 -- 1,027
Mortgage-backed securities 41,841 255 76 42,020
- - ------------------------------------------------------------------------------
Total-debt securities 122,802 680 115 123,367
Equity securities 12,698 -- -- 12,698
- - ------------------------------------------------------------------------------
Total securities available
for sale: 135,500 680 115 136,065
- - ------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 4,967 33 -- 5,000
Obligations of states and
political subdivisions 68,079 1,444 10 69,513
Mortgage-backed securities 21,894 243 -- 22,137
- - ------------------------------------------------------------------------------
Total securities to be held
to maturity 94,940 1,720 10 96,650
- - ------------------------------------------------------------------------------
Total investment securities $230,440 $2,400 $ 125 $232,715
- - ------------------------------------------------------------------------------
</TABLE>
Bancorp classifies its investments in debt and equity securities in 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,
are 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 September 30,
1998 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 $ 49,058 $ 49,055
After 1 but within 5 years 36,893 37,298
After 5 years but within 10 years 30,946 31,358
Mortgage-backed securities 63,113 63,314
Equity securities 14,115 13,991
- - ------------------------------------------------------------------------------
Total securities available for sale 194,125 195,016
- - ------------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 9,006 9,086
After 1 but within 5 years 29,515 30,326
After 5 years but within 10 years 31,186 32,225
After 10 years 14,364 14,500
Mortgage-backed securities 16,280 16,550
- - ------------------------------------------------------------------------------
Total securities to be held
to maturity $100,351 $102,687
- - ------------------------------------------------------------------------------
Total investment securities $294,476 $297,703
- - ------------------------------------------------------------------------------
</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 $109.0
million at September 30, 1998.
Note 5. Loans
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
- - ------------------------------------------------------------------------------
(In thousands) 1998 1997 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans:
Construction and land development $ 21,540 $ 30,537 $ 30,621
Secured by farmland 5,648 6,468 5,970
Residential mortgage 187,112 186,040 185,798
Other mortgage 159,334 138,310 146,197
Agricultural 533 677 795
Commercial and industrial loans 80,529 77,081 79,984
Consumer 257,391 270,868 271,882
Other loans 2,286 4,209 3,048
- - ------------------------------------------------------------------------------
Totals $714,373 $714,190 $724,295
- - ------------------------------------------------------------------------------
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds are
included in 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 6. Bank Premises and Equipment
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
- - ------------------------------------------------------------------------------
(In thousands) 1998 1997 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $22,255 $22,814 $22,531
Furniture and equipment 18,885 18,536 18,358
Leasehold improvements 1,806 1,805 1,784
- - ------------------------------------------------------------------------------
42,946 43,155 42,673
Less accumulated depreciation
and amortization (19,351) (17,751) (17,717)
- - ------------------------------------------------------------------------------
Net premises and equipment $23,595 $25,404 $24,956
- - ------------------------------------------------------------------------------
</TABLE>
Note 7. Comprehensive Income
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No.
130, "Reporting Comprehensive Income," effective January 1, 1998. In
accordance with the requirements of this Statement, comprehensive income and
its components, as recognized under the accounting standards, are displayed in
a financial statement with the same prominence as other financial statements.
As of the September 30, 1998 interim reporting date, unrealized gains (losses)
on securities is the only item included in other comprehensive income.
Note 8. Earnings Per Share
Earnings per share ("EPS") data is computed and presented in accordance with
FASB Statement No. 128, "Earnings Per Share." As prescribed by the Statement,
the presentation of primary EPS has been replaced with the dual presentation
of basic and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common shareholders ("numerator") by the
weighted-average number of common shares outstanding for the period after
giving retroactive effect to stock dividends and stock splits ("denominator").
Diluted EPS reflects the potential dilution that could occur if stock options
or other contracts to issue common stock or resulted in the issuance of common
stock that then shared in the earnings of Bancorp. Diluted EPS is equal to the
numerator divided by the denominator plus the dilutive effect of outstanding
stock options.
The calculations of earnings per share below are based on weighted average
number of shares outstanding, adjusted for the 5% stock dividend paid July 29,
1998.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
September30,
(In thousands except per share amounts) 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net income available to common stockholders $9,691 $9,039
Average shares outstanding 6,383 6,333
Basic EPS: $ 1.52 $ 1.43
Diluted EPS:
Net income available to common stockholders $9,691 $9,039
Average shares outstanding 6,383 6,333
Effect of dilutive securities (options) 76 49
Average shares outstanding-diluted 6,459 6,382
Diluted EPS $ 1.50 $ 1.42
- - ------------------------------------------------------------------------------
</TABLE>
Note 9. Future Changes in Accounting Principles
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information".
This statement requires that public business enterprises report certain
information about operating segments in complete sets of financial statements
of the enterprise and in condensed financial statements of interim periods
issued to shareholders. It also requires that public business enterprises
report certain information about their products and services, the geographic
areas in which they operate, their major customers, and the nature of
differences between reportable segment measurements and those used for the
consolidated entity. This statement is effective for all periods ending after
December 15, 1997. Adoption in interim financial statements is not required
until the year following initial adoption. Once adopted, however, comparative
prior period information is required. Adoption of this Statement is not
expected to have a material impact on Bancorp.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
F&M Bancorp's earnings for the third quarter of 1998, before special items,
were $3.403 million, or $0.53 basic earnings per share, an increase of 13%
compared with earnings before special items of $3.019 million, or $0.47 basic
earnings per share, for the third quarter of 1997. Per share and dollar
amounts reported previously have been restated to give effect to a 5% stock
dividend declared in June 1998 and the acquisition of Keller-Stonebraker, Inc.
completed in May 1998 and accounted for as a pooling of interests. Including
special items, net income for the third quarter of 1998 decreased by 1% to
$3.403 million, or $0.53 basic earnings per share, from $3.430 million for the
third quarter of 1997. Special items increased prior-period earnings by $411
thousand after tax, or $0.07 per share. Returns on average assets and average
equity were 1.27% and 12.90%, respectively, for the third quarter of 1998
compared with 1.31% and 13.98%, respectively, for the third quarter of 1997
based upon net income including special items.
For the nine months ended September 30, 1998 and 1997, net income including
special items increased 7% to $9.691 million for the most recent period, or
$1.52 basic earnings per share, from $9.039 million, or $1.43 basic earnings
per share, one year earlier. Returns on average assets and average equity
were 1.23% and 12.56%, respectively, for the first nine months of 1998
compared with 1.19% and 12.74%, respectively, for the first nine months of
1997.
Earnings growth for the current quarter and nine-month period was largely
attributed to loan growth, strong fee income and lower expenses.
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, representing approximately 73%
of gross revenue through the first nine months of 1998. Net interest income
is influenced by a number of external economic and competitive factors such as
Federal Reserve Board monetary policy and its influence on market interest
rates; loan demand and competition from nonbank lenders; and competition with
investment managers, brokerage firms and investment bankers for consumer and
commercial business assets that might otherwise be deposited in banks.
Internal factors impacting levels and changes in net interest income are
attributed to Bancorp's interest rate risk management policies, which address
a variety of issues including loan and deposit pricing strategies, funding
alternatives, and maturity schedules. Bancorp has not made use of
derivatives, interest rate hedges, or similar instruments or transactions to
manage interest rate risk.
Average balances and rates for each major category of interest-earning assets
and interest-bearing liabilities for the third quarter and year-to-date
periods are presented in Table 1. Net interest income on a taxable-equivalent
basis increased by 0.2% to $11.074 million for the third quarter of 1998, and
increased by 3% to $33.119 million for the first nine months of 1998 compared
with the corresponding periods for 1997. The increases were primarily
attributed to higher volumes of loans and investment securities, partly offset
by declines in average interest rates earned thereon. Growth in net interest
income for the quarter and year-to-date periods was suppressed, however, by a
continuing change in the mix of earning assets favoring short-term
investments, which provided added liquidity intended to satisfy anticipated
loan demand. Average loan growth slowed to 2% in the third quarter of 1998
compared with 4% growth between the comparable nine-month periods.
Average interest-bearing deposits increased by 5% for the comparable quarter
and nine-month periods, at average interest rates only slightly higher in
1998. While savings deposits continue to decline in line with industry
trends, growth was achieved in all other major deposit categories assisted by
the introduction of new deposit products and pricing changes. Deposits have
been supplemented largely by Federal Home Loan Bank advances, which
[increased] by 30.6% and 30.7% for the quarter and year-to-date periods,
respectively. FHLB borrowings have been a dependable source of relatively
low-cost funds to support growth in loans and investment securities.
<TABLE>
<CAPTION>
Table 1. Consolidated Average Balances, Interest and Average Rates
(Taxable Equivalent Basis)
September 30,
- - ------------------------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------
YTD Average Average YTD Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Short-term funds $ 21,150 $ 825 5.20% $ 6,994 $ 230 4.38%
- - ------------------------------------------------------------------------------
Total investment securities
- Tax-exempt (1) 73,701 3,953 7.15 69,532 3,871 7.42
- - ------------------------------------------------------------------------------
Total investment securities
- Taxable 172,933 7,975 6.15 171,016 8,263 6.44
- - ------------------------------------------------------------------------------
Total investment
securities 246,634 11,928 6.45 240,548 12,134 6.73
- - ------------------------------------------------------------------------------
Total loans 716,956 46,631 8.70 687,884 45,108 8.77
- - ------------------------------------------------------------------------------
Total interest-earning
assets 984,740 59,384 8.06 935,426 57,472 8.21
- - ------------------------------------------------------------------------------
Total noninterest-earning
assets 71,760 78,578
- - ------------------------------------------------------------------------------
TOTAL ASSETS $1,056,500 $1,014,004
- - ------------------------------------------------------------------------------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 109,528 $ 2,000 2.44% $115,260 $2,176 2.52%
Interest checking 112,835 1,617 1.92 104,448 1,550 1.98
Money market savings 132,780 3,315 3.34 113,755 2,576 3.03
Total time deposits 371,407 14,972 5.39 359,853 14,517 5.39
- - ------------------------------------------------------------------------------
Total interest-bearing
deposits 726,550 21,904 4.03 693,316 20,819 4.01
- - ------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased
and securities sold
under agreements to
repurchase 45,665 1,723 5.04 43,246 1,656 5.12
Other short-term
borrowings 30,472 1,253 5.50 54,927 2,394 5.83
- - ------------------------------------------------------------------------------
Total short-term
borrowings 76,137 2,976 5.23 98,173 4,050 5.52
- - ------------------------------------------------------------------------------
Long-term borrowings 32,071 1,385 5.78 11,520 502 5.83
- - ------------------------------------------------------------------------------
Total borrowed funds 108,208 4,361 5.39 109,693 4,552 5.55
- - ------------------------------------------------------------------------------
Total interest-bearing
liabilities 834,758 26,265 4.21 803,009 25,371 4.22
- - ------------------------------------------------------------------------------
Noninterest-bearing
liabilities
Demand deposits 107,773 104,227
Other liabilities 10,809 11,872
Shareholders' equity 103,160 94,896
- - ------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $1,056,500 $1,014,004
- - ------------------------------------------------------------------------------
NET INTEREST INCOME* $33,119 $32,101
- - ------------------------------------------------------------------------------
NET INTEREST SPREAD 3.85% 3.99%
- - ------------------------------------------------------------------------------
NET INTEREST MARGIN AS A
PEPRCENT OF EARNING ASSETS 4.50% 4.59%
- - ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30,
- - ------------------------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------
QTD Average Average QTD Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term interest
bearing deposits $ 24,374 $ 340 5.53% $ 8,858 $ 108 4.84%
- - ------------------------------------------------------------------------------
Total investment
securities -
Tax-exempt (1) 79,776 1,428 7.16 68,176 1,255 7.36
- - ------------------------------------------------------------------------------
Total investment
securities - Taxable 178,964 2,698 6.03 182,111 2,979 6.54
- - ------------------------------------------------------------------------------
Total investment
securities 258,740 4,126 6.38 250,287 4,234 6.77
- - ------------------------------------------------------------------------------
Total loans 711,216 15,539 8.67 700,662 15,548 8.80
- - ------------------------------------------------------------------------------
Total interest- earning assets 994,330 20,005 7.98 959,807
19,890 8.22
Total noninterest-
earning assets 70,727 77,924
- - ------------------------------------------------------------------------------
TOTAL ASSETS $1,065,057 $1,037,731
- - ------------------------------------------------------------------------------
LIABILITIES
Interest-bearing
liabilities
Interest-bearing
deposits
Basic savings,
time open & clubs $ 107,484 $ 657 2.43% $114,798 $ 721 2.49%
Interest checking 112,297 530 1.87 107,215 523 1.94
Money market savings 139,144 1,188 3.39 112,701 859 3.02
Total time deposits 377,296 5,115 5.38 364,982 4,988 5.42
- - ------------------------------------------------------------------------------
Total interest-bearing
deposits 736,221 7,490 4.04 699,696 7,091 4.02
- - ------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased
and repurchase
accounts 49,417 625 5.02 44,189 582 5.23
Other short-term
borrowings 4,198 59 5.58 56,526 859 6.03
- - ------------------------------------------------------------------------------
Total short-term
borrowings 53,615 684 5.06 100,715 1,441 5.68
- - ------------------------------------------------------------------------------
Long-term borrowings 54,792 757 5.48 22,437 307 5.43
- - ------------------------------------------------------------------------------
Total borrowed funds 108,407 1,441 5.27 123,152 1,748 5.63
- - ------------------------------------------------------------------------------
Total interest-bearing
liabilities 844,628 8,931 4.20 822,848 8,839 4.26
- - ------------------------------------------------------------------------------
Non-interest bearing
liabilities
Demand deposits 106,460 106,144
Other liabilities 9,331 11,385
Shareholders' equity 104,638 97,354
- - ------------------------------------------------------------------------------
TOTAL LIABILITIES AND
EQUITY $1,065,057 $1,037,731
- - ------------------------------------------------------------------------------
NET INTEREST INCOME* $11,074 $11,051
- - ------------------------------------------------------------------------------
NET INTEREST SPREAD 3.78% 3.96%
- - ------------------------------------------------------------------------------
NET INTEREST MARGIN AS A
PERCENT OF EARNING ASSETS 4.42% 4.57%
- - ------------------------------------------------------------------------------
(1) Based on an effective federal tax rate of 34% for 1998 and 1997.
* Based on amortized cost (i.e. excludes mark-to-market adjustments).
</TABLE>
Lower market interest rates for the comparable periods, slowing loan growth
and added liquidity contributed to a decline in the net interest margin, which
is the ratio of taxable-equivalent net interest income to average earning
assets, by 15 basis points to 4.42% for the third quarter of 1998 compared
with 4.59% the third quarter of last year. For the year-to-date periods, the
net interest margin declined to 4.50% for 1998 from 4.59% for 1997.
Provision for Credit Losses.
The provision for credit losses was increased by 17% for the three- and nine-
month periods, to $525 thousand and $1.575 million, respectively, for 1998
compared with $450 thousand and $1.350 million, respectively, for 1997. The
increase was largely attributed to a 4% increase in year-to-date average total
loans.
Noninterest Income.
Excluding a $900 thousand gain on the sale of credit card merchant processing
recognized in the third quarter of 1997, total noninterest income increased 5%
to $3.765 million for the third quarter of 1998 compared with $3.596 million
for the third quarter of 1997. Trust and investment management income
increased 4% to $678 thousand for the third quarter of 1998 from $654 thousand
for the third quarter of 1997. Excluding an unusually large estate settlement
fee accrual of $72 thousand recognized in the third quarter of 1997, the
underlying rate of growth in trust fee income was 16%. Trust assets under
management reached $394 million at September 30, 1998, a 9% increase from $362
million at September 30, 1997. Service charges on deposit accounts decreased
6% to $1.251 million attributed largely to lower transaction volume. Gains on
sales of loans, largely residential mortgages, increased to $117 thousand for
the third quarter of 1998 compared with $81 thousand for the same quarter last
year attributed to the favorable interest rate environment and high refinance
activity. Other operating income for the quarter ended September 30, 1998,
excluding the $900 thousand nonrecurring gain described above, increased by 8%
to $1.654 million.
For the comparable nine-month periods, total noninterest income advanced by 1%
to $11.907 million for 1998 from $11.806 million for 1997. Excluding, for
purposes of comparison, merchant servicing income of $756 thousand and the
$900 thousand nonrecurring gain described above which were recognized in the
first nine months of 1997, and excluding a $467 thousand gain on the sale of
real property recognized in the first nine months of 1998, the comparable
increase in total noninterest income amounted to 13%. Trust and investment
management income increased by 9% related to growth in managed assets, but
increased by 24% after excluding an unusually large estate settlement fee
recognized in 1997; service charges on deposit accounts increased 1%; and
other operating income, excluding the aforementioned merchant servicing income
and nonrecurring gains, increased 24% compared with the first nine months of
1997.
Noninterest Expense
Total noninterest expense decreased by 7% to $8.958 million for the third
quarter of 1998 compared with $9.621 million for the third quarter of last
year. Excluding $231 thousand of expenses associated with the 1996 Home
Federal merger agreement recognized in the third quarter of 1997, total
noninterest expense declined by 5%. The reduction primarily reflects
stringent cost controls and significant efficiencies realized through the
recent integration of Home Federal's core processing systems and
administrative functions. The efficiency ratio (the ratio of adjusted
noninterest expense to the sum of net interest income on a tax equivalent
basis and recurring noninterest income) declined to 59.7% for the third
quarter of 1998 from 62.9% for the third quarter of 1997 acknowledging
improvement in the company's revenue related to its cost structure.
For the comparable nine-month periods, total noninterest expense increased 1%
to $28.317 million for 1998, from $28.142 million one year earlier. After
excluding, for comparative purposes, merchant servicing expense of $500
thousand recognized in the first nine months of 1997 and merger-related
expenses described above, the resulting rate of increase in total noninterest
expense was still just 1% attributed to ongoing cost controls and increased
operating efficiencies. For the year-to-date periods, the efficiency ratio
declined to 61.1% for 1998 compared with 63.6% for 1997.
Income Taxes.
The provision for income taxes declined 9% to $1.446 million for the third
quarter of 1998, from $1.588 million for the third quarter of 1997. 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. The effective tax rate for the third quarter
of 1998 was 30% compared with 32% for the third quarter of 1997. The decline
in the effective tax rate between the comparable quarters was related to a
higher proportion of tax-exempt securities income in the current period.
Income tax expense differs from the amount computed at statutory rates
primarily due to tax-exempt interest from certain loans and investment
securities.
For the nine months ended September 30, 1998, the effective tax rate was 29%
compared with 30% for the comparable 1997 period.
NONPERFORMING ASSETS
Table 3 summarizes Bancorp's nonperforming assets and contractually past-due
loans. Total nonperforming assets at September 30, 1998 declined $5.2 million
compared with year earlier levels and declined $3.3 million since year-end
1997. Loans past due 90 days or more as to interest or principal decreased
$185,000 compared with prior year levels and increased $192,000 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.
POTENTIAL PROBLEM LOANS
At September 30, 1998, Bancorp had $11.9 million in loans to borrowers who
were currently experiencing financial difficulties such that management had
reasonable concerns that such loans might become contractually past due or be
classified as a nonperforming asset. These loans are subject to the same close
attention and regular credit reviews as extended to loans past due 90 days or
more and nonperforming assets. As of September 30, 1998, management does not
believe that these loans present any significant risk of loss.
TABLE 3. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
<TABLE>
<CAPTION>
September 30, December 31,
- - ------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans (1) $ 5,632 $ 5,929 $ 5,396
Other real estate owned net of
valuation allowance (2) 1,522 6,388 5,055
- - ------------------------------------------------------------------------------
Total nonperforming assets $ 7,154 $12,317 $10,451
- - ------------------------------------------------------------------------------
Loans past due 90 or more days as
to interest or principal (3) $ 730 $ 915 $ 538
- - ------------------------------------------------------------------------------
Nonperforming loans to total loans 0.79% 0.83% 0.75%
Nonperforming assets to total loans
and other real estate owned 1.00% 1.71% 1.43%
Nonperforming assets to total assets 0.65% 1.18% 1.00%
Allowance for credit losses times
nonperforming loans 1.75x 1.66x 1.77x
Allowance for credit losses times
nonperforming assets 1.38x 0.80x 0.91x
(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.
(2) Nonaccrual loans are not included.
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level, which in
management's judgement, is adequate to absorb losses inherent in the loan
portfolio. The adequacy of the allowance for credit losses is reviewed
regularly by management. Additions to the allowance are made by charges to
the provision for credit losses. On a quarterly basis, a comprehensive review
of the 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. While management believes the
allowance for credit losses is adequate at September 30, 1998, the estimate of
losses and related allowance are subject to change due to economic and other
uncertainties inherent in the estimation process.
Bancorp had loans amounting to approximately $4.6 million and $4.3 million at
September 30, 1998 and September 30, 1997, respectively, that were
specifically classified as impaired and included in nonaccrual loans in Table
3. The average balance of impaired loans for the nine and three months ended
September 30, 1998 and 1997 amounted to $4.8 million and $5.0 million, and
$5.6 million and $5.0 million, respectively. Cash receipts for these same
periods were $318,000 and $105,000 for 1998 and $2.9 million and $1.7 for
1997. 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 $646,000 and $440,000 at
September 30, 1998 and September 30, 1997, respectively.
TABLE 4. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Period ended
- - ------------------------------------------------------------------------------
September 30, December 31,
- - ------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding less
average unearned income (1) $716,956 $687,717 $695,070
- - ------------------------------------------------------------------------------
Allowance for credit losses at
beginning of year $ 9,530 $ 9,639 $ 9,639
- - ------------------------------------------------------------------------------
Charge-offs:
Real estate 437 134 371
Commercial and industrial -- 24 24
Consumer 2,978 3,126 4,345
- - ------------------------------------------------------------------------------
Total loans charged-off 3,415 3,284 4,740
- - ------------------------------------------------------------------------------
Recoveries
Real estate 375 360 416
Commercial and industrial 9 1 7
Consumer 1,791 1,771 2,408
- - ------------------------------------------------------------------------------
Total recoveries 2,175 2,132 2,831
- - ------------------------------------------------------------------------------
Net charge-offs 1,240 1,152 1,909
- - ------------------------------------------------------------------------------
Provision for credit losses 1,575 1,350 1,800
- - ------------------------------------------------------------------------------
Allowance for credit losses at end of
Period $9,865 $ 9,837 $ 9,530
- - ------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding 0.17% 0.17% 0.27%
- - ------------------------------------------------------------------------------
(1) Exclusive of loans held for sale.
</TABLE>
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.
TABLE 5. ALLOCATION OF ALLOWANCES FOR CREDIT LOSSES
<TABLE>
<CAPTION>
September 30, December 31,
- - ------------------------------------------------------------------------------
1998 1997 1997
- - ------------------------------------------------------------------------------
% 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 $1,440 3.0% $1,679 4.3% $1,479 4.2%
Residential mortgage 481 26.2 595 26.0 600 25.7
Other mortgage 2,163 22.3 1,402 19.4 1,795 20.2
Commercial and
Industrial 881 11.3 588 10.8 714 11.0
Consumer 3,919 36.0 3,944 37.9 4,084 37.6
Unallocated 981 1.2 1,629 1.6 858 1.3
- - ------------------------------------------------------------------------------
Total allowance for
credit losses $9,865 100.0% $9,837 100.0% $9,530 100.0%
- - ------------------------------------------------------------------------------
(1) Excludes loans held for sale.
</TABLE>
YEAR 2000 COMPUTER READINESS
This disclosure is provided pursuant to the Securities and Exchange
Commission's Interpretation entitled "Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies
and Municipal Securities Issuers" effective August 4, 1998.
The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year
(such as "98" for the year 1998). F&M Bancorp and its subsidiaries have
undertaken to review their operating and information technology systems and
other mechanical equipment such as elevators to identify systems in which the
Year 2000 issue exists and to undertake the necessary renovation or
replacement of these systems so that the companies will continue to operate
unaffected by the Year 2000 issue after January 1, 2000.
In July 1997, F&M Bancorp established a Year 2000 issue task force comprised
of representatives across functional lines representing all of its
subsidiaries. The Year 2000 issue task team developed a Year 2000 issue
assurance plan to coordinate and direct its efforts. The plan was approved by
the board of directors on September 11, 1997. The task force provides
quarterly reports to the board outlining the status of its efforts and its
anticipated work in the coming quarter.
The assurance plan is composed of five phases: 1) awareness; 2) assessment; 3)
renovation; 4) validation; and, 5) implementation, which mirror guidelines
developed by the Federal Financial Institutions Examination Council (FFIEC) to
deal with the Year 2000 issue. The assurance plan includes a timeline for
completion of all tasks identified. As of September 30, 1998, all tasks are
current to the timeline. Activities under each of the phases are ongoing as
new vendor and customer relationships are created.
The task team has undertaken the education of all associates regarding the
Year 2000 issue both for internal systems and as the problem may affect
customers. Education of customers has begun through periodic information in
the form of brochures and seminars. The task team has also received guidance
from various regulators including the Office of the Comptroller of the
Currency (OCC), Securities and Exchange Commission (SEC), Office of Thrift
Supervision (OTS), and FFIEC.
All vendors who supply hardware, software and/or services of any type have
been identified and contractual. A total of 522 products and services are
represented by this vendor listing and have been categorized as either mission
critical (those that directly impact daily operations), concern (those that
can be replaced with manual processes), or low priority (little or no impact
on daily operations). Vendors have been surveyed as to their Year 2000 issue
readiness. The task team has confirmed vendor responses by testing products
and services where possible to verify their readiness.
Of the 132 products and services identified as mission critical, 81 are deemed
Year 2000 issue ready. Seventy-eight of these products and services can be
tested internally and testing has been successfully completed on 34 of those
78 products and services (44%). Testing should be complete by December 31,
1998 and all systems under our control are expected to be Year 2000 issue
ready by March 31, 1999. Of the remaining 54 mission critical products and
services that cannot be internally tested, the progress of those service
providers' efforts addressing the Year 2000 issue are being closely monitored.
Examples of products and services that are not capable of internal testing
include utilities and communication services. At present, 49 of the 54 are
anticipated to be ready by January 1, 1999, three (3) have indicated plans to
be ready by December 31, 1999, and two (2) have been determined not to be
ready. Replacement products or services are being identified for these two
(2) and should be in place by March 31, 1999.
The company relies on Kirchman Corporation's Dimension 3000 software for
maintaining customer accounting records. Kirchman is a provider of accounting
systems for more than 1,000 banking clients worldwide. Kirchman's internal
methodologies addressing Year 2000 issues have been reviewed and have received
ITAA*2000 certification by the Information Technology Association of America,
an independent non-profit organization. Further, Kirchman systems have passed
all internal tests performed to date.
The task team has developed procedures for assessing Year 2000 issue risk for
its funds providers including, depositors, which are intended to manage and
limit potential risks associated with large or significant concentrations of
retail and commercial deposits. The Year 2000 issue readiness of providers of
lines of credit have been reviewed.
The task team has also established procedures for reviewing the Year 2000
issue readiness of borrowers to manage credit risk. Loan relationships with
balances exceeding $250,000 or which are particularly computer reliant have
been reviewed and three (3) have been risk rated "watch" and one (1) has been
risk rated "substandard" utilizing the standard risk classifications employed
to manage credit risk. The total value of these four (4) relationships is
$2,675,598.
The internal audit department is performing progress audits of the work of the
Year 2000 issue task force and reporting those results to the company's audit
committee quarterly.
During the last quarter, efforts have been made to enhance the company's
existing contingency plan for Year 2000 issues. The contingency planning
committee adopted the four phase model as recommended by the FFIEC and OCC
advisory letter 98-7. Phase1, organization and planning, and Phase 2,
business impact analysis, were complete at September 30, 1998 as required by
regulators. Phase 3, the contingency plan itself, and Phase 4, designing a
method of validation, are on track to be completed by December 31, 1998, also
as required by the regulators.
To date, the company has spent a total of $102,000 addressing Year 2000 issues
and anticipates additional out-of-pocket expenses of $142,000 to complete.
Work is done predominantly by existing associates as part of their normal work
responsibilities. The company has hired one additional associate whose
primary responsibility is testing. Costs for dealing with y2k issues are
being provided from operating revenues.
The Company believes its efforts, and those of its third-party providers will
effectively address Year 2000 issues before January 1, 2000. Because the
Company is so reliant on third-party providers (which products and services
cannot be effectively tested) for support, our normal business operations
could be disrupted in the event one or more third-party providers fail to
provide products and services as contracted. The most reasonably likely worst
case Year 2000 issue scenario identified to date involves our inability, for
short periods, to provide services to customers. The worst case scenario is
mitigated somewhat by our ability to manually process customer transactions,
by the geographic penetration of our branch network, and by our service
delivery methods which include both proprietary and network ATMs, PC banking,
telephone banking, and Express Bank, our full-service mobile branch. Power
and telecommunication services are critical but might be interrupted for only
a part of our branch network. The company has a generator to provide power to
operate computer systems and, by contract, has geographically-remote
facilities served by alternative sources of power to process work, if needed.
Longer periods of disruption could affect the company's ability to develop new
business and could increase costs of operation and decrease revenues.
CAPITAL RESOURCES
Shareholders' equity totaled $106.1 million at September 30, 1998, an increase
of 4.5% compared with the 1997 year-end level of $101.5 million, and an
increase of 6.7% from the year-earlier level of $99.4 million. The fair value
of the available-for-sale portfolio increase $230,000 (net of deferred taxes)
since year-end. Capital levels were 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 September 30, 1998, as follows:
TABLE 6. CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
- - ------------------------------------------------------------------------------
Tier 1 Total Leverage
Capital Capital Ratio
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual 13.00% 14.18% 9.64%
Minimum 4.00% 8.00% 3.00%
- - ------------------------------------------------------------------------------
Excess 9.00% 6.18% 6.64%
- - ------------------------------------------------------------------------------
</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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is defined as the future changes in market prices that increase or
decrease the value of financial instruments, i.e. cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
risks. Bancorp's primary source of market risk is interest rate risk. Market
risk sensitive financial instruments are entered into for purposes other than
trading.
Interest rate risk refers to the exposure of Bancorp's earnings and capital to
changes in interest rates. The magnitude of the effect of changes in market
rates depends on the extent and timing of such changes and on Bancorp's
ability to adjust. The ability to adjust is controlled by the time remaining
to maturity on fixed-rate obligations, the contractual ability to adjust rates
prior to maturity, competition, and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on Bancorp's earnings and
capital. Repricing risk arises largely from timing differences in the pricing
of assets and liabilities. Reinvestment risk refers to the reinvestment of
cash flows from interest payments and maturing assets at lower rates. Basis
risk exists when different yield curves or pricing indices do not change at
precisely the same time or in the same magnitude such that assets and
liabilities with the same maturity are not all affected equally. Yield curve
risk refers to unequal movements in interest rates across a full range of
maturities.
In determining the appropriate level of interest rate risk, Bancorp considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies, and other factors. To effectively measure and manage interest rate
risk, traditional cumulative gap and simulation analysis are used to determine
the impact on net interest income and the market value of portfolio equity
("MVE"). Bancorp attempts to manage interest rate sensitivity on the basis of
when assets and liabilities will reprice as opposed to when then can reprice.
Cumulative gap analysis presents the net amount of assets and liabilities that
will most likely reprice through specified periods if there are no changes in
balance sheet mix. Using that analysis, the effect of changes in market
interest rates, both rising and falling, on net interest income can be
calculated. Bancorp had a cumulative net liability position of $67.5 million
within the one-year timeframe at September 30, 1998. This position indicated
that Bancorp was exposed to the potential for decreased earnings if interest
rates were to rise in the next twelve months. In that case, the
Asset/Liability Management Committee ("ALCO") would consider actions to change
Bancorp's asset mix, funding sources, and interest rates to mitigate any
negative impact on net interest income.
Because of inherent limitations in traditional cumulative gap analysis, ALCO
also employs more sophisticated interest rate risk measurement techniques.
Simulation analysis is used to subject the current repricing positions to
rising and falling interest rates in increments and decrements of 100, 200,
and 300 basis points, and to determine how net interest income varies under
alternative interest rate and business activity scenarios. ALCO also measures
the effects of changes in interest rates on the MVE, i.e. the net present
value of all the future cash flows from Bancorp's financial instruments
expressed as the percentage change in portfolio value of equity for any given
change in prevailing interest rates. Table 7 presents Bancorp's MVE at
September 30, 1998.
TABLE 7. Effects of Changes in Interest Rates on MVE at September 30, 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
- - ------------------------------------------------------------------------------
Percent Change
- - ------------------------------------------------------------------------------
Hypothetical
Change in Market Value Change Hypothetical
Interest of Portfolio Increase Increase Board
Rates Equity (Decrease) (Decrease) Limit(1)
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 bp rise $102,444 $(19,018) (15.7)% (30.0)%
200 bp rise 109,180 (12,282) (10.1) (20.0)
100 bp rise 115,193 (6,269) (5.2) (10.0)
Base scenario 121,462 -- -- --
100 bp decline 126,658 5,196 4.3 (10.0)
200 bp decline 132,165 10,703 8.8 (20.0)
300 bp decline 138,893 17,431 14.4 (30.0)
(1) Established by Bancorp's Board of Directors
</TABLE>
PART II - Other Information
Item 6 Exhibits and Reports on Form 8-K Page
(a) Exhibits
11 Statement Re: Computation of per share earnings 31
27 Financial Data Schedule 32
(b) No reports on Form 8-K were filed by the Corporation during the
quarter ended September 30, 1998.
Items 1 through 5 have been omitted since the item is either inapplicable or
the answer is negative.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F&M BANCORP
--------------------------
(Registrant)
November 16, 1998 /s/ David L. Spilman
- - ------------------- ---------------------------
Date DAVID L. SPILMAN
TREASURER
Exhibit 11
Statement re: Computation of Per Share Earnings
Earnings per share ("EPS") is calculated on a Basic EPS and Diluted EPS basis.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders (the numerator) by the weighted-average number of common
shares outstanding (the denominator) during the period. Income available to
common shareholders is Net Income in the table below and as reported in
Bancorp's income statement. No adjustments were required to net income for any
EPS calculations.
Diluted EPS is calculated by adjusting the denominator for all dilutive
potential common shares that were outstanding during the period. Bancorp had
stock options outstanding during the periods presented below which had a
dilutive effect on EPS. Therefore, the number of additional common shares that
would have been outstanding if the options had been exercised is added to the
denominator to arrive at the dilutive number of shares.
The calculations of earnings per share below are based on the weighted average
number of shares outstanding, adjusted for the 5% stock dividend paid July 29,
1998, including all common stock and common stock equivalents in conformity
with the instructions for Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
Nine Month Period Ended Quarter Ended September 30,
(Dollar in thousands) 1998 1997 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 9,691 $ 9,039 $ 4,403 $ 3,430
- - ------------------------------------------------------------------------------
Basic EPS:
Shares 6,383,489 6,332,750 6,396,578 6,340,100
EPS $ 1.52 $ 1.43 $ 0.53 $ 0.54
Dilutive shares:
Stock options 75,345 49,149 75,036 65,547
EPS $ 0.02 $ 0.01 $ -- --
Diluted EPS:
Shares including
Options 6,458,834 6,381,899 6,471,614 6,405,657
EPS $ 1.50 $ 1.42 $ 0.53 $ 0.54
- - ------------------------------------------------------------------------------
</TABLE>
Exhibit 27
Article 9 Financial Data Schedule for the Third Quarter
[MULTIPLIER] 1000
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEPT-30-1998
[CASH] 34,447
[INT-BEARING-DEPOSITS] 18,064
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 195,016
[INVESTMENTS-CARRYING] 100,351
[INVESTMENTS-MARKET] 102,687
[LOANS] 714,373
[ALLOWANCE] 9,865
[TOTAL-ASSETS] 1,106,571
[DEPOSITS] 849,185
[SHORT-TERM] 58,686
[LIABILITIES-OTHER] 10,415
[LONG-TERM] 82,150
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 31,993
[OTHER-SE] 74,142
[TOTAL-LIABILITIES-AND-EQUITY] 1,106,571
[INTEREST-LOAN] 46,565
[INTEREST-INVEST] 10,584
[INTEREST-OTHER] 825
[INTEREST-TOTAL] 57,974
[INTEREST-DEPOSIT] 21,904
[INTEREST-EXPENSE] 26,265
[INTEREST-INCOME-NET] 31,709
[LOAN-LOSSES] 1,575
[SECURITIES-GAINS] 75
[EXPENSE-OTHER] 28,317
[INCOME-PRETAX] 13,724
[INCOME-PRE-EXTRAORDINARY] 9,691
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 9,691
[EPS-PRIMARY] 1.52
[EPS-DILUTED] 1.50
[YIELD-ACTUAL] 4.50
[LOANS-NON] 5,632
[LOANS-PAST] 730
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 11,847
[ALLOWANCE-OPEN] 9,530
[CHARGE-OFFS] 3,415
[RECOVERIES] 2,175
[ALLOWANCE-CLOSE] 9,865
[ALLOWANCE-DOMESTIC] 8,884
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 981
