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 June 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 (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, 6,395,629 shares outstanding as of August 10, 1998
Exhibit index located on page 27.
F&M BANCORP
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets,
June 30, 1998 and 1997 (Unaudited) and December 31, 1997 3
Consolidated Statements of Income (Unaudited),
Three and Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Comprehensive Income (Unaudited),
Three and Six Months Ended June 30, 1998 and 1997 7
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1998 and 1997 8
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited), Six Months Ended June 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 16
Quantitative and Qualitative Disclosures about Market Risk 25
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 27
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
June 30, June 30, December 31,
(Dollars in thousands, 1998 1997 1997
except per share amounts) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSSETS
Cash and due from banks $ 35,930 $ 33,934 $ 30,200
Federal fund sold 9,011 -- 1,700
Interest-bearing deposits with
banks 6,987 4,410 9,073
- -----------------------------------------------------------------------------
Total cash and cash equivalents 51,928 38,344 40,973
- -----------------------------------------------------------------------------
Loans held for sale 552 212 283
- -----------------------------------------------------------------------------
Investment securities
Held-to-maturity, fair value
$91,361, $99,318, and $96,650,
respectively 89,876 98,526 94,940
Available-for-sale, at fair
value 164,620 155,342 136,065
- ----------------------------------------------------------------------------
Total investment securities 254,496 253,868 231,005
- ----------------------------------------------------------------------------
Loans, net of unearned income 716,518 692,053 724,295
Less: Allowance for credit
losses (9,797) (9,731) (9,530)
- ----------------------------------------------------------------------------
Net loans 706,721 682,322 714,765
- ----------------------------------------------------------------------------
Bank premises and equipment, net 23,955 25,363 24,956
Other real estate owned 1,456 6,389 5,055
Interest receivable 7,461 6,944 7,393
Intangible assets 3,570 3,692 3,664
Other assets 18,331 18,023 17,500
- ----------------------------------------------------------------------------
Total assets $1,068,470 $1,035,157 $1,045,594
- ----------------------------------------------------------------------------
</TABLE>
CONSOLIDATED BALANCE SHEETS
F&M Bancorp and Subsidiaries (cont.)
<TABLE>
<CAPTION>
June 30, June 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 $ 110,303 $ 112,608 $ 113,215
Interest-bearing 734,915 697,849 708,752
- ----------------------------------------------------------------------------
Total deposits 845,218 810,457 821,967
- ----------------------------------------------------------------------------
Federal funds purchased
and securities sold under
agreements to repurchase 50,599 59,095 45,051
Other short-term borrowings 8,903 51,637 41,342
Long term borrowings 50,173 6,320 24,114
Accrued interest and other
liabilities 9,925 10,838 11,653
- ----------------------------------------------------------------------------
Total liabilities 964,818 938,347 944,127
- ----------------------------------------------------------------------------
Shareholders' equity
Common stock, par value $5 per share;
authorized 50,000 shares;
issued and outstanding 6,387,349
shares (1), 5,980,786 shares, and
6,004,469 shares, respectively 31,937 30,165 30,283
Surplus 48,747 36,560 37,028
Retained earnings 22,958 30,230 33,865
Accumulated other comprehensive
income 10 (145) 291
- ----------------------------------------------------------------------------
Total shareholders' equity 103,652 96,810 101,467
- ----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,068,470 $1,035,157 $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 Six months ended
(Dollars in thousands, June 30 June 30
except per share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $15,426 $15,022 $31,049 $29,490
Interest and dividends on
investment securities
Taxable 2,668 2,626 5,277 5,284
Tax-exempt 832 857 1,667 1,727
Interest on deposits with banks 160 62 251 98
Interest on federal funds sold 148 10 234 24
- ----------------------------------------------------------------------------
Total interest income 19,234 18,577 38,478 36,623
- ----------------------------------------------------------------------------
Interest Expense
Interest on deposits 7,295 6,895 14,414 13,728
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 549 579 1,098 1,074
Interest on Federal Home Loan
bank borrowings 832 835 1,735 1,656
Interest on other short-term
borrowings 53 41 87 74
- -----------------------------------------------------------------------------
Total interest expense 8,729 8,350 17,334 16,532
- -----------------------------------------------------------------------------
Net interest income 10,505 10,227 21,144 20,091
Provision for credit losses 525 450 1,050 900
- -----------------------------------------------------------------------------
Net interest income after
provision for credit losses 9,980 9,777 20,094 19,191
- -----------------------------------------------------------------------------
Noninterest Income
Trust income 663 569 1,321 1,180
Service charges on deposit accounts 1,369 1,334 2,687 2,560
Gains on sales of securities 21 2 35 2
Gains on sales of loans 306 61 453 104
Gains (losses) on sales of property 395 20 395 15
Other operating income 1,712 1,792 3,249 3,450
- -----------------------------------------------------------------------------
Total noninterest income 4,466 3,778 8,140 7,311
- ----------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
F&M BANCORP and Subsidiaries (cont.)
<TABLE>
<CAPTION>
Three months ended Six months ended
(Dollars in thousands, June 30 June 30
except per share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expenses
Salaries and employee benefits $ 5,316 $ 4,924 $10,374 $ 9,857
Occupancy and equipment expense 1,616 1,506 3,225 3,050
Other operating expense 3,121 2,901 5,760 5,615
- ----------------------------------------------------------------------------
Total noninterest expenses 10,053 9,331 19,359 18,522
- ----------------------------------------------------------------------------
Income before provision for income
taxes 4,393 4,224 8,875 7,980
Provision for income taxes 1,260 1,309 2,587 2,371
- ----------------------------------------------------------------------------
Net Income $ 3,133 $ 2,915 $ 6,288 $ 5,609
- ----------------------------------------------------------------------------
Earnings per Common Share - Basic
based on weighted average shares
outstanding of 6,377,345 for 1998,
6,329,008 for 1997(1) $ 0.49 $ 0.46 $ 0.99 $ 0.89
Earnings per Common Share - Diluted
based on weighted average shares
outstanding of 6,450,080 for 1998,
6,370,437 for 1997 (1) $0.48 $ 0.46 $ 0.97 $ 0.88
- ----------------------------------------------------------------------------
Dividends per Share (1) $0.49 $ 0.21 $ 0.72 $ 0.42
- ----------------------------------------------------------------------------
(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 Six months ended
(Dollars in thousands, June 30 June 30
except per share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $3,133 $2,915 $6,288 $5,609
Other comprehensive income,
net of tax:
Unrealized (losses) gains
on securities:
Unrealized holding (losses) gains
arising during period (144) 509 (301) 49
Less: reclassification adjustment
for gains included in net income (12) -- (20) --
- ----------------------------------------------------------------------------
Comprehensive income $3,001 $3,424 $6,007 $5,658
- ----------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
F&M BANCORP and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,288 $ 5,609
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 1,050 900
Provision for other real estate owned 2 --
Depreciation and amortization 933 1,303
Amortization of intangibles 259 262
Net premium amortization on investment securities 121 247
Increase in interest receivable (68) (243)
Increase (decrease) in interest payable 23 (67)
Deferred income tax benefit (59) (15)
Amortization (accretion) of net loan origination
cost (fees) (94) 85
Gain on sales of property (155) (15)
(Gain) loss on sales/calls of securities (35) 2
(Increase) decrease in loans held for sale (269) 97
Increase in other assets (1,417) (10)
Decrease in other liabilities (1,034) (1,289)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 5,545 6,866
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held
to maturity (6,303) (1,110)
Purchases of investment securities available
for sale (95,092) (56,883)
Proceeds from sales/calls of securities held
to maturity 8,924 --
Proceeds from sales/calls of securities
available for sale 17,844 --
Proceeds from maturing securities available
for sale 48,290 47,765
Proceeds from maturing securities held to maturity 2,309 2,008
Net decrease (increase) in loans 7,139 (22,507)
Purchases of premises and equipment (200) (1,377)
Proceeds from sales of property 3,851 107
Other investing activities 199 1,003
- ----------------------------------------------------------------------------
Net cash used in investing activities (13,039) (30,994)
- ----------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
F&M BANCORP and Subsidiaries (cont.)
<TABLE>
<CAPTION>
Six Months Ended
June 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 11,888 15,900
Net increase (decrease) in certificates
of deposit 11,363 (193)
Net increase in securities sold under
agreements to repurchase 5,548 17,219
Net increase (decrease) in long-term borrowings 26,059 (366)
Net decrease in other short-term borrowings (32,440) (6,694)
Cash dividends paid (4,609) (2,503)
Dividend reinvestment plan (18) (63)
Proceeds from issuance of common stock 658 382
- ----------------------------------------------------------------------------
Net cash provided by financing activities 18,449 23,682
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
Equivalents 10,955 (446)
Cash and cash equivalents at beginning of period 40,973 38,790
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $51,928 $38,344
- ----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $17,306 $16,569
Cash payments for income tax 2,496 2,856
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available
for sale, net of deferred income taxes (benefits)
payable (281) 49
- ----------------------------------------------------------------------------
</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 $29,214 $35,625 $ (194) $93,299
Comprehensive net income -- -- 12,108 485 12,593
Dividend reinvestment plan -- -- (80) -- (80)
5% Stock dividend
(283,322 shares) 1,416 7,013 (8,429) -- --
Stock options exercised
(52,097 shares) 260 861 -- -- 1,121
Cash dividends paid
($.81 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 $37,028 $33,865 $ 291 $101,467
Comprehensive net income -- -- 6,288 (281) 6,007
Dividend reinvestment plan -- -- (18) -- (18)
5% Stock dividend (302,819
shares)(1) 1,514 10,977 (12,491) -- --
Cash dividends paid
($.72 per share) -- -- (4,609) -- (4,609)
Stock options exercised
(30,664 shares) 153 759 -- -- 912
Stock consideration for options
exercised (2,720 shares) (13) (17) (77) -- (107)
- ------------------------------------------------------------------------------
Balance at June 30, 1998 $31,937 $48,747 $22,958 $ 10 $103,652
- ------------------------------------------------------------------------------
(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. Acquisition
On May 29, 1998, Bancorp consummated a merger with Keller-Stonebraker
Insurance, Inc. ("KSI"), a Hagerstown, Maryland 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 3. Investment Securities
<TABLE>
<CAPTION>
Investment securities are summarized as follows:
June 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 $ 98,476 $ 327 $ 118 $ 98,685
Obligations of states and
political subdivisions 636 1 3 634
Mortgage-backed securities 8,492 -- 107 8,385
Other debit securities 31,139 158 57 31,240
- ------------------------------------------------------------------------------
Total debt securities 138,743 486 285 138,944
Equity securities 25,801 -- 125 25,676
- ------------------------------------------------------------------------------
Total securities available for
sale: 164,544 486 410 164,620
- ------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 985 15 -- 1,000
Obligations of states and political
subdivisions 70,956 1,327 30 72,253
Mortgage-backed securities 17,935 173 -- 18,108
- ------------------------------------------------------------------------------
Total securities to be held to
maturity 89,876 1,515 30 91,361
- ------------------------------------------------------------------------------
Total investment securities $254,420 $2,001 $440 $255,981
- ------------------------------------------------------------------------------
June 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 $62,888 $ 94 $ 138 $ 62,844
Obligations of states and
political subdivisions 6,216 37 -- 6,253
Other securities 24,960 -- -- 24,960
Mortgage-backed securities 53,882 213 320 53,775
- ------------------------------------------------------------------------------
Total debt securities 147,946 344 458 147,832
Equity securities 7,510 -- -- 7,510
- ------------------------------------------------------------------------------
Total securities available
for sale: 155,456 344 458 155,342
- ------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 11,951 33 75 11,909
Obligations of states and
political subdivisions 62,696 1,027 95 63,628
Mortgage-backed securities 23,879 88 186 23,781
- ------------------------------------------------------------------------------
Total securities to be held
to maturity 98,526 1,148 356 99,318
- ------------------------------------------------------------------------------
Total investment securities $253,982 $1,492 $ 814 $254,660
- ------------------------------------------------------------------------------
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 June 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 $27,826 $27,728
After 1 but within 5 years 51,608 51,573
After 5 years but within 10 years 28,170 28,403
Mortgage-backed securities 31,139 31,240
Equity securities 25,801 25,676
- ------------------------------------------------------------------------------
Total securities available for sale 164,544 164,620
- ------------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 5,915 5,970
After 1 but within 5 years 31,029 31,655
After 5 years but within 10 years 32,012 32,641
After 10 years 2,985 2,987
Mortgage-backed securities 17,935 18,108
- ------------------------------------------------------------------------------
Total securities to be held to maturity 89,876 91,361
- ------------------------------------------------------------------------------
Total investment securities $254,420 $255,981
- ------------------------------------------------------------------------------
</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 $119.3
million at June 30, 1998.
Note 4. Loans
<TABLE>
<CAPTION>
Loans, net of unearned income, consist of the following:
June 30, December 31,
- ------------------------------------------------------------------------------
(In thousands) 1998 1997 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans:
Construction and land development $25,266 $ 30,416 $ 30,621
Secured by farmland 5,712 6,693 5,970
Residential mortgage 182,030 187,562 185,798
Other mortgage 157,579 127,012 146,197
Agricultural 557 920 795
Commercial and industrial loans 85,259 73,369 79,984
Consumer 256,568 261,461 271,882
Other loans 3,547 4,620 3,048
- ------------------------------------------------------------------------------
Totals $716,518 $692,053 $724,295
- ------------------------------------------------------------------------------
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds are
included in all other loans in the schedule above and in total loans in the
statement of condition.
The allowance for credit losses is maintained at a level which, in
management's opinion, is considered adequate to provide for possible loan
losses on loans currently held in the loan portfolio.
Note 5. Bank Premises and Equipment
<TABLE>
<CAPTION>
Investments in bank premises and equipment are as follows
June 30, December 31,
- ------------------------------------------------------------------------------
(In thousands) 1998 1997 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $22,252 $22,691 $22,531
Furniture and equipment 18,800 18,541 18,358
Leasehold improvements 1,806 1,803 1,784
- ------------------------------------------------------------------------------
42,858 43,035 42,673
Less accumulated depreciation
and amortization (18,903) (17,672) (17,717)
- ------------------------------------------------------------------------------
Net premises and equipment $23,955 $25,363 $24,956
- ------------------------------------------------------------------------------
</TABLE>
Note 6. 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 June 30, 1998 interim reporting date, unrealized gains (losses) on
securities is the only item included in other comprehensive income.
Note 7. 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>
- ------------------------------------------------------------------------------
June 30,
(in thousands except per share amounts) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net income available to common stockholders $6,288 $5,609
Average shares outstanding 6,377 6,329
Basic EPS $ 0.99 $ 0.89
Diluted EPS:
Net income available to common stockholders $ 6,288 $5,609
Average shares outstanding 6,377 6,329
Effect of dilutive securities (options) 73 41
Average shares outstanding-diluted 6,450 6,370
Diluted EPS $ 0.97 $ 0.88
- ------------------------------------------------------------------------------
</TABLE>
Note 8. 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 net income for the second quarter of 1998, including special
items, was $3.1 million, or $0.49 basic earnings per share, an increase of 8%
compared with net income of $2.9 million, or $0.46 basic earnings per share,
for the second 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. Before special items,
earnings for the second quarter of 1998 increased 10% to $3.2 million, or
$0.50 basic earnings per share. Special items reduced current-period earnings
by $67,000 after tax, or $0.01 per share. Returns on average assets and
average equity were 1.19% and 12.16%, respectively, for the second quarter of
1998 compared with 1.16% and 12.33%, respectively, for the second quarter of
1997.
For the six months ended June 30, 1998 compare with June 30, 1997, net income
including special items increased 12% to $6.3 million, or $0.99 basic earnings
per share, from $5.6 million, or $0.89 basic earnings per share. Returns on
average assets and average equity were 1.21% and 12.37%, respectively, for the
first half of 1998 compared with 1.13% and 12.08%, respectively, for the first
six months of 1997.
Earnings growth for the current quarter and six-month period was largely
attributed to loan growth, strong fee income and continued expense control.
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 72%
of Bancorp's gross revenue through the first half 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 second quarter and year-to-date
periods are presented in Table 1. Net interest income on a taxable-equivalent
basis increased by 2% to $11.0 million for the second quarter of 1998, and
increased by 5% to $22.0 million for the first half of 1998 compared with
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 change in
the mix of earning assets favoring short-term investments, which provided
added liquidity to satisfy anticipated loan demand. Average loan growth
slowed to 5% in the second quarter of 1998 compared with 6% growth between the
comparable six-month periods.
Average interest-bearing deposits increased by 5% for the comparable quarter
and six-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
13% and 19% 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)
June 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 $ 19,512 $ 485 4.97% $ 6,030 $ 124 4.11%
- ------------------------------------------------------------------------------
Total investment securities
- Tax-exempt(1) 70,613 2,526 7.15 70,221 2,617 7.45
- ------------------------------------------------------------------------------
Total investment securities
- Taxable 169,866 5,277 6.21 165,377 5,284 6.39
- ------------------------------------------------------------------------------
Total investment
securities 240,479 7,803 6.49 235,598 7,901 6.71
- ------------------------------------------------------------------------------
Total loans 719,879 31,094 8.71 681,389 29,560 8.75
- ------------------------------------------------------------------------------
Total interest-earning
assets 979,870 39,382 8.10 923,017 37,585 8.21
- ------------------------------------------------------------------------------
Total noninterest-earning
assets 72,277 78,927
- ------------------------------------------------------------------------------
TOTAL ASSETS $1,052,147 $1,001,944
- ------------------------------------------------------------------------------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 110,568 $ 1,344 2.45% $ 115,496 $1,455 2.54%
Interest checking 113,109 1,085 1.93 103,040 1,027 2.01
Money market savings 129,544 2,127 3.31 114,290 1,719 3.03
Total time deposits 368,413 9,858 5.40 357,246 9,527 5.38
- ------------------------------------------------------------------------------
Total interest-bearing
deposits 721,634 14,414 4.03 690,072 13,728 4.01
- ------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased
and securities sold
under agreements to
repurchase 43,758 1,098 5.06 42,766 1,074 5.06
Other short-term
borrowings 24,185 705 5.88 54,091 1,533 5.72
- ------------------------------------------------------------------------------
Total short-term
borrowings 67,943 1,803 5.35 96,857 2,607 5.43
- ------------------------------------------------------------------------------
Long-term borrowings 40,160 1,117 5.61 5,994 197 6.63
- ------------------------------------------------------------------------------
Total borrowed funds 108,103 2,920 5.45 102,851 2,804 5.50
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities 829,737 17,334 4.21 792,923 16,532 4.20
- ------------------------------------------------------------------------------
Noninterest-bearing
liabilities
Demand deposits 108,441 103,253
Other liabilities 11,427 12,121
Shareholders' equity 102,542 93,647
- ------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $1,052,147 $1,001,944
- ------------------------------------------------------------------------------
NET INTEREST INCOME * $22,048 $21,053
- ------------------------------------------------------------------------------
NET INTEREST SPREAD 3.89% 4.01%
- ------------------------------------------------------------------------------
NET INTEREST MARGIN AS A
PEPRCENT OF EARNING ASSETS 4.54% 4.60%
- ------------------------------------------------------------------------------
June 30,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Dollars in QTD Average Average QTD Average Average
thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term interest
bearing deposits $ 23,223 $ 308 5.31% $ 6,849 $ 75 4.38%
- ------------------------------------------------------------------------------
Total investment
securities
- Tax-exempt(1) 71,021 1,260 7.10 69,802 1,300 7.45
- ------------------------------------------------------------------------------
Total investment
securities
- Taxable 174,329 2,668 6.12 164,104 2,626 6.40
- ------------------------------------------------------------------------------
Total investment
securities 245,350 3,928 6.40 233,906 3,926 6.71
- ------------------------------------------------------------------------------
Total loans 718,433 15,450 8.63 687,397 15,054 8.78
- ------------------------------------------------------------------------------
Total interest
- earning assets 987,006 19,686 8.00 928,152 19,055 8.23
- ------------------------------------------------------------------------------
Total noninterest
- earning assets 70,483 79,122
- ------------------------------------------------------------------------------
TOTAL ASSETS $1,057,489 $1,007,274
- ------------------------------------------------------------------------------
LIABILITIES
Interest-bearing
liabilities
Interest-bearing
deposits
Basic savings, time
open & clubs $111,362 $ 677 2.44% $ 116,861 $ 738 2.53%
Interest checking 114,013 550 1.93 104,427 520 2.00
Money market
savings 133,238 1,115 3.36 115,474 867 3.01
Total time deposits 369,635 4,953 5.37 355,098 4,770 5.39
- ------------------------------------------------------------------------------
Total interest-bearing
Deposits 728,248 7,295 4.02 691,860 6,895 4.00
- ------------------------------------------------------------------------------
Borrowed funds
Federal funds
purchased and
repurchase accounts 43,696 549 5.04 44,059 578 5.26
Other short-term
borrowings 17,822 263 5.90 54,952 777 5.67
- ------------------------------------------------------------------------------
Total short-term
borrowings 61,518 812 5.29 99,011 1,355 5.49
- ------------------------------------------------------------------------------
Long-term
borrowings 44,360 622 5.62 5,195 98 7.57
- ------------------------------------------------------------------------------
Total borrowed funds 105,878 1,434 5.43 104,206 1,453 5.59
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities 834,126 8,729 4.20 796,066 8,348 4.21
- ------------------------------------------------------------------------------
Non-interest bearing
liabilities
Demand deposits 110,244 103,937
Other liabilities 9,767 12,445
Shareholders'
equity 103,352 94,826
- ------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $1,057,489 $1,007,274
- ------------------------------------------------------------------------------
NET INTEREST
INCOME * $10,957 $10,707
- ------------------------------------------------------------------------------
NET INTEREST SPREAD 3.80% 4.02%
- ------------------------------------------------------------------------------
NET INTEREST MARGIN AS A
PERCENT OF EARNING ASSETS 4.45% 4.63%
- ------------------------------------------------------------------------------
* Based on an effective federal tax rate of 34% for 1998 and 1997.
(1) Based on amortized cost (i.e. excludes mark-to-market adjustments).
</TABLE>
Despite the relative stability of 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 18 basis points to 4.45% for the second
quarter of 1998 compared with 4.63% the second quarter of last year. For the
year-to-date periods, the net interest margin declined to 4.54% for 1998 from
4.60% for 1997.
Provision for Credit Losses.
Bancorp increased the provision for credit losses by 17% for the three- and
six-month periods, to $525,000 and $1.1 million, respectively, for 1998
compared with $450,000 and $900,000, respectively, for 1997. The increase was
largely attributed to a 6% increase in year-to-date average total loans
inasmuch as net loan losses declined 3% and 18%, respectively, between the
comparable three- and six-month periods.
Noninterest Income.
Total noninterest income increased 18% to $4.5 million for the second quarter
of 1998 compared with $3.8 million for the second quarter of 1997. Excluding,
for purposes of comparison, income from credit card merchant servicing for the
second quarter of 1997, noninterest income increased by 31% between the
comparable quarters. The merchant processing line of business was sold at a
substantial gain in the third quarter of 1997. Several categories of
noninterest income increased related to management's strategic emphasis on new
sources of revenue and innovative marketing and distribution. Trust and
investment management income increased 17% to $663,000 for the second quarter
of 1998 from $569,000 for the second quarter of 1997. Trust assets under
management reached $428 million at June 30, 1998, a 12% increase from $383
million at June 30, 1997. Service charges on deposit accounts increased 3% to
$1.4 million attributed largely to increased transaction volume. Gains on
sales of loans, largely residential mortgages, increased to $306,000 for the
second quarter of 1998 compared to $61,000 for the same quarter last year
attributed to the favorable interest rate environment and high refinance
activity. Other operating income for the quarter ended June 30, 1998 included
a $467,000 nonrecurring gain on the sale of real property.
For the comparable six-month periods, total noninterest income advanced by 11%
to $8.1 million for 1998 from $7.3 million for 1997. Excluding merchant
servicing income described above, the comparable increase in total noninterest
income amounted to 24%. Trust and investment management income increased by
12% related to growth in managed assets, service charges on deposit accounts
rose 5%, and other operating income included the aforementioned $467,000 gain
on the sale of real property, and gains on the sale of loans amounted to
$453,000 compared with $104,000 for the first half of 1997.
Noninterest Expense
Total noninterest expense increased by 8% to $10.1 million for the second
quarter of 1998 compared with $9.3 million for the second quarter of last
year. Excluding expenses associated with credit card merchant servicing for
the second quarter of 1997, total noninterest expense increased by 11% between
the comparable quarters. Salaries and benefits increased by 8% largely due to
merit-based compensation increases. Occupancy and equipment expense increased
by 7%. Other operating expense, excluding the credit card merchant servicing
expense recorded last year, increased 18% to $3.1 million. Other operating
expense for the second quarter of 1998 included $388,000 of merger-related
expense. 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 61.8% for the second quarter of 1998 from
63.1% for the second quarter of 1997 evidencing improved control of operating
expenses relative to higher revenue.
For the comparable six-month periods, total noninterest expense increased 5%
to $19.4 million, or by 8% after excluding merchant servicing income for the
first half of 1997. Salaries and benefits increased by 5%, occupancy and
equipment expense rose by 6%, and other operating expense, reflecting $388,000
in merger-related expense, increased by 14% excluding, for comparative
purposes, the previously described merchant servicing income for 1997. For
the year-to-date periods, the efficiency ratio declined to 61.8% for 1998
compared with 64.0% for 1997.
Income Taxes.
The provision for income taxes declined 4% to $1.2 million for the second
quarter of 1998, from $1.3 million for the second 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. Bancorp's effective tax rate for the second
quarter of 1998 was 29% compared with 31% for the second quarter of 1997. The
previously described gain on the sale of real property in the second quarter
of 1998, at capital gains tax rates, contributed to the decline in the
effective rate between the comparable quarters. 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.
For the six months ended June 30, 1998, the effective tax rate was 29%
compared with 30% for the first half of 1997.
NONPERFORMING ASSETS
Table 3 summarizes Bancorp's nonperforming assets and contractually past-due
loans. Total nonperforming assets at June 30, 1998 declined $5.9 million
compared with year earlier levels and declined $2.8 million since year-end
1997. Loans past due 90 days or more as to interest or principal decreased
$39,000 compared with prior year levels and increased $278,000 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 June 30, 1998, Bancorp had $9.7 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 June 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>
June 30, December 31,
- ------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans (1) $ 6,235 $ 7,162 $ 5,396
Other real estate owned net of
valuation allowance(2) 1,456 6,389 5,055
- ------------------------------------------------------------------------------
Total nonperforming assets $ 7,691 $13,551 $10,451
- ------------------------------------------------------------------------------
Loans past due 90 or more days
as to interest or principal(3) $ 945 $ 855 $ 538
- ------------------------------------------------------------------------------
Nonperforming loans to total loans 0.87% 1.03% 0.75%
Nonperforming assets to total loans
and other real estate owned 1.07% 1.94% 1.43%
Nonperforming assets to total assets 0.72% 1.31% 1.00%
Allowance for credit losses times
nonperforming loans 1.57x 1.36x 1.77x
Allowance for credit losses times
nonperforming assets 1.27x 0.72x 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.
(3) Nonaccrual loans are not included.
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level, which in
management's judgment, 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 June 30, 1998, the estimate of
losses and related allowance are subject to change due to economic and other
uncertainties inherent in the estimation process.
As reflected in Table 4, the allowance for credit losses as a percentage of
total loans decreased, principally attributed to improved credit quality as
evidenced by the decline in both nonperforming loans, as referenced above, and
net chargeoffs.
Bancorp had loans amounting to approximately $5.1 million and $5.8 million at
June 30, 1998 and June 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 six and three months ended June 30,
1998 and 1997 amounted to $4.7 million and $5.4 million, and $6.0 million, and
$5.9 million, respectively. Cash receipts for these same periods were $213,000
and $35,000, for 1998 and $1.1 million and $971,000 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 $957,000 and $576,000, at June 30,
1998 and June 30, 1997, respectively.
TABLE 4. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Period ended
- ------------------------------------------------------------------------------
June 30, December 31,
- ------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding less
average unearned income (1) $718,778 $681,222 $695,070
- ------------------------------------------------------------------------------
Allowance for credit losses at
beginning of year $ 9,530 $ 9,639 $ 9,639
- ------------------------------------------------------------------------------
Charge-offs:
Real estate 325 132 371
Commercial and industrial -- 24 24
Consumer 1,926 2,053 4,345
- ------------------------------------------------------------------------------
Total loans charged-off 2,251 2,209 4,740
- ------------------------------------------------------------------------------
Recoveries
Real estate 220 82 416
Commercial and industrial 7 -- 7
Consumer 1,241 1,319 2,408
- ------------------------------------------------------------------------------
Total recoveries 1,468 1,401 2,831
- ------------------------------------------------------------------------------
Net charge-offs 783 808 1,909
- ------------------------------------------------------------------------------
Provision for credit losses 1,050 900 1,800
- ------------------------------------------------------------------------------
Allowance for credit losses at end
of period $9,797 $ 9,731 $ 9,530
- ------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding 0.11% 0.12% 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>
June 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 $1,516 3.5% $2,009 4.4% $1,479 4.2%
Residential mortgage 435 25.4 593 27.1 600 25.7
Other mortgage 2,405 22.0 1,489 18.4 1,795 20.2
Commercial and industrial 906 11.9 621 10.6 714 11.0
Consumer 3,472 35.8 3,281 37.7 4,084 37.6
Unallocated 1,063 1.4 1,738 1.8 858 1.3
- ------------------------------------------------------------------------------
Total allowance for
credit losses $9,797 100.0% $9,731 100.0% $9,530 100.0%
- ------------------------------------------------------------------------------
(1) Excludes loans held for sale.
</TABLE>
YEAR 2000 COMPUTER READINESS
In July 1997, management initiated an enterprise-wide Assurance Plan ("Plan")
to prepare Bancorp's computer systems and applications for the Year 2000.
Approved and monitored by Bancorp's Board of Directors and overseen by senior
management, the Plan is administered by a task team representing every
relevant area of the company and sets forth a detailed time line that is
intended to address all critical issues in a timely and prudent manner.
At June 30, 1998 Bancorp's Plan was on schedule and calls for testing of
internal and external systems to be substantially complete by December 31,
1998. We have received Year 2000 compliance communications from 97% of our
mission critical vendors, and we are continuing on schedule with Year 2000
testing. During the past quarter, Bancorp hosted three local seminars to
address the Year 2000 challenge for businesses and to educate our customers on
the issues surrounding the century change.
The assessment and resolution of internal and external Year 2000 issues under
the Plan, and within the control of Bancorp, is not expected to have a
material adverse impact on Bancorp or on its ability to conduct business.
There can be no assurance, however, that there would be no adverse impact on
Bancorp if vendors, service providers, major borrowers, or others with whom
Bancorp conducts business, fail to achieve full Year 2000 compliance.
CAPITAL RESOURCES
Shareholders' equity totaled $103.7 million at June 30, 1998, an increase of
2.1% compared with the 1997 year-end level of $101.5 million, and an increase
of 7.1% from the year-earlier level of $96.8 million. The fair value of the
available-for-sale portfolio declined $281,000 (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 June 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 12.89% 14.00% 9.51%
Minimum 4.00% 8.00% 3.00%
- ------------------------------------------------------------------------------
Excess 8.89% 6.00% 6.51%
- ------------------------------------------------------------------------------
</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 $66.8 million
within the one-year timeframe at June 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 June
30, 1998.
TABLE 7. Effects of Changes in Interest Rates on MVE at June 30, 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------
Percent Change
- ------------------------------------------------------------------------------
Hypothetical
Market Value Change Hypothetical
Change in of Portfolio Increase Increase Board
Interest Rates Equity (Decrease) (Decrease) Limit(1)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 bp rise $ 96,558 $ (18,593) (16.1)% (30.0)%
200 bp rise 103,122 (12,029) (10.4) (20.0)
100 bp rise 109,019 (6,132) (5.3) (10.0)
Base scenario 115,151 -- -- --
100 bp decline 120,297 5,146 4.5 (10.0)
200 bp decline 125,718 10,567 9.2 (20.0)
300 bp decline 132,235 17,084 14.8 (30.0)
- ------------------------------------------------------------------------------
(1) Established by Bancorp's Board of Directors
</TABLE>
PART II - Other Information
Item 4 Submission of Matters to Vote of Security Holders
(a) The annual meeting of stockholders of F&M Bancorp was held April 21,
1998.
(b) Proxies for the annual meeting were solicited pursuant to Regulation 14A
under the Securities and Exchange Act of 1934. There was no solicitation in
opposition to management's nominees as listed in the proxy statement, and all
such nominees were re-elected.
(c) (1) Election of Directors
Elected to serve as directors until the 2001 annual meeting of stockholders:
<TABLE>
<CAPTION>
Name For Withheld Against
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Howard B. Bowen 4,856,593 53,322 --
Martha E. Church 4,672,343 237,572 --
Albert H. Cohen 4,828,582 81,333 --
Charles W. Hoff, III 4,853,367 56,548 --
</TABLE>
Item 6 Exhibits and Reports on Form 8-K Page
(a) Exhibits
11 Statement Re: Computation of per share earnings 28
27 Financial Data Schedule 29
(b) No reports on Form 8-K were filed by the Corporation during the
quarter ended June 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)
August 14, 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>
Six Month Period Ended Quarter Ended June 30,
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 6,288 $ 5,609 $ 3,133 $ 2,915
- ------------------------------------------------------------------------------
Basic EPS
Shares 6,377,345 6,329,008 6,383,042 6,333,810
EPS $ 0.99 $ 0.89 $ 0.49 $ 0.46
Dilutive shares
Stock options 72,735 41,425 75,042 40,448
EPS $ 0.02 $ 0.01 $ 0.01 --
Diluted EPS
Shares including options 6,450,080 6,370,433 6,458,084 6,374,258
EPS $ 0.97 $ 0.88 $ 0.48 $ 0.46
</TABLE>
Exhibit 27
Article 9 Financial Data Schedule for the Second Quarter
[MULTIPLIER] 1000
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] June-30-1998
[CASH] 35,930
[INT-BEARING-DEPOSITS] 15,998
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 164,620
[INVESTMENTS-CARRYING] 89,876
[INVESTMENTS-MARKET] 91,361
[LOANS] 716,518
[ALLOWANCE] 9,797
[TOTAL-ASSETS] 1,068,470
[DEPOSITS] 845,218
[SHORT-TERM] 59,502
[LIABILITIES-OTHER] 9,925
[LONG-TERM] 50,173
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 31,937
[OTHER-SE] 71,715
[TOTAL-LIABILITIES-AND-EQUITY] 1,068,470
[INTEREST-LOAN] 31,049
[INTEREST-INVEST] 6,944
[INTEREST-OTHER] 485
[INTEREST-TOTAL] 38,478
[INTEREST-DEPOSIT] 14,414
[INTEREST-EXPENSE] 17,334
[INTEREST-INCOME-NET] 21,144
[SECURITIES-GAINS] 35
[LOAN-LOSSES] 1,050
[EXPENSE-OTHER] 19,359
[INCOME-PRETAX] 8,875
[INCOME-PRE-EXTRAORDINARY] 6,288
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 6,288
[EPS-PRIMARY] 0.99
[EPS-DILUTED] 0.97
[YIELD-ACTUAL] 4.45
[LOANS-NON] 6,235
[LOANS-PAST] 816
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 9,661
[ALLOWANCE-OPEN] 9,530
[CHARGE-OFFS] 2,251
[RECOVERIES] 1,468
[ALLOWANCE-CLOSE] 9,797
[ALLOWANCE-DOMESTIC] 8,734
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 1,063
