<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-12638
F&M BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1316473
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 694-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($5 PAR VALUE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common Stock of 11,011,540 shares outstanding as of August 2, 2000.
--------------------------------------------------------------------------------
<PAGE>
F&M BANCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets,
June 30, 2000 and 1999 (Unaudited) and December 31, 1999.........................................................3
Consolidated Statements of Income and Comprehensive Income (Unaudited),
Three and Six Months Ended June 31, 2000 and 1999................................................................4
Consolidated Statements of Changes in Shareholders' Equity (Unaudited),
Six Months Ended June 30, 2000 and Twelve Months Ended December 31, 1999.........................................5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 2000 and 1999..........................................................................6
Notes to Consolidated Financial Statements (Unaudited)...........................................................7
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................12
Quantitative and Qualitative Disclosures about Market Risk......................................................20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................21
Signatures......................................................................................................22
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1999
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 61,227 $ 44,345 $ 60,888
Federal funds sold 3,967 39,795 11,304
Interest- bearing deposits with banks 9,392 6,706 14,128
------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 74,586 90,846 86,320
------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 4,882 17,834 15,497
Investment securities
Available for sale, at fair value 308,550 357,496 317,945
Held to maturity, fair value
$93,916, $104,440 and $97,357, respectively 95,432 104,680 99,416
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 403,982 462,176 417,361
------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 1,216,063 998,316 1,114,734
Less: Allowance for credit losses (13,209) (13,858) (13,068)
------------------------------------------------------------------------------------------------------------------------------
Net loans 1,202,854 984,458 1,101,666
------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 34,989 35,942 35,494
Other real estate owned, net 1,594 1,305 1,185
Interest receivable 11,140 10,613 10,080
Intangible assets 6,049 7,871 6,696
Other assets 29,630 26,164 45,035
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,769,706 $ 1,637,209 $ 1,719,334
==============================================================================================================================
LIABILITIES:
Deposits:
Noninterest-bearing $ 195,186 $ 177,595 $ 188,154
Interest-bearing 1,129,792 1,131,585 1,125,919
------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,324,978 1,309,180 1,314,073
------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 125,406 63,460 94,083
Other short-term borrowings 1,695 1,971 48,183
Long-term borrowings 149,634 98,764 100,578
Accrued taxes and other liabilities 17,218 16,504 18,597
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,618,931 1,489,879 1,575,514
------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized 50,000,000 shares; issued
and outstanding 11,009,000 shares,
10,988,621 shares, and 10,999,621 shares, respectively 55,043 43,793 54,998
Surplus 78,423 75,077 78,248
Retained earnings 25,064 33,525 18,951
Accumulated other comprehensive loss (7,755) (5,065) (8,377)
------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 150,775 147,330 143,820
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,769,706 $ 1,637,209 $ 1,719,334
==============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 25,051 $ 20,992 $ 48,782 $ 42,177
Interest on deposits with banks 129 336 275 665
Interest and dividends on investment securities
Taxable 4,594 4,806 9,239 9,314
Tax-exempt 1,467 1,468 2,953 2,942
Interest on federal funds sold - 355 114 659
-------------------------------------------------------------------------------------------------------------------------------
Total interest income 31,241 27,957 61,363 55,757
-------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 11,094 10,785 21,940 21,458
Interest on federal funds purchased and
securities
sold under agreements to repurchase 1,624 631 2,906 1,218
Interest on Federal Home Loan Bank Borrowings 2,199 1,329 3,913 2,693
Interest on other short-term borrowings 17 11 39 29
-------------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,934 12,756 28,798 25,398
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 16,307 15,201 32,565 30,359
Provision for credit losses 630 325 1,296 850
-------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 15,676 14,876 31,268 29,509
-------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposit accounts 2,224 1,776 3,906 3,396
Insurance income 1,968 1,772 4,236 3,539
Gains on sales of loans 597 627 1,044 1,414
Gains (losses) on sales of property (67) - (49) 190
Trust & stock brokerage income 943 747 2,005 1,510
Other operating income 1,552 1,243 3,037 2,567
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,217 6,165 14,179 12,616
-------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and employee benefits 8,646 8,348 17,134 16,546
Merger-related expense 17 - 228 -
Occupancy and equipment expense 2,341 2,318 4,941 4,629
Other operating expense 4,745 5,000 9,424 9,293
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 15,748 15,666 31,726 30,468
-------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,145 5,374 13,721 11,657
Provision for income taxes 2,277 1,331 4,138 3,137
===============================================================================================================================
Net Income $ 4,869 $ 4,043 $ 9,584 $ 8,520
===============================================================================================================================
Other Comprehensive Income (Loss), Net of Tax:
Unrealized losses on securities $ (743) $ (4,023) $ (1,040) $ (5,341)
Reclassification adjustment for gains (losses)
included in net income - - - -
-------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (743) (4,023) (1,040) (5,341)
-------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 4,126 $ 20 $ 8,544 $ 3,179
===============================================================================================================================
Earnings per Common Share - Basic
Based on weighted average shares outstanding
11,008,605 in 2000, and 10,986,893 in 1999 $ 0.44 $ 0.37 $ 0.87 $ 0.78
-------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted
Based on weighted average shares outstanding
11,023,552 in 2000, and 11,052,635 in 1999 $ 0.44 $ 0.37 $ 0.87 $ 0.77
===============================================================================================================================
Dividends per Share $ 0.27 $ 0.25 $ 0.54 $ 0.50
===============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 52,196 $ 65,020 $ 30,694 $ 277 $ 148,187
Net income - - 13,063 - 13,063
Dividend reinvestment plan 55 171 (138) - 88
Cash dividends paid
($.97 per share) - - (10,646) - (10,646)
Stock consideration for
options exercised (58) (50) (81) - (189)
Stock options exercised 527 1,444 - - 1,971
Stock dividend 2,278 11,663 (13,941) - -
Other comprehensive income - - - (8,654) (8,654)
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 54,998 $ 78,248 $ 18,951 $(8,377) $ 143,820
Net income - - 9,584 - 9,584
Dividend reinvestment plan (15) 14 (54) - (55)
Cash dividends paid
($.27 per share) - - (3,413) - (3,413)
Stock consideration for
options exercised (3) (5) (4) - (12)
Stock options exercised 63 166 - - 229
Stock dividend - - - - -
Other comprehensive income - - - 622 622
--------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 55,043 $ 78,423 $ 25,064 $(7,755) $ 150,775
==========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended June 30,
(DOLLARS IN THOUSANDS) 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 9,584 $ 8,520
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for credit losses 1,296 850
Depreciation and amortization 1,906 2,009
Amortization of intangibles 586 528
Net premium amortization on investment securities 173 453
Increase in interest receivable (1,024) (431)
Increase in interest payable 658 1,490
Deferred income tax benefits (229) (67)
Amortization (accretion) of net loan origination costs (fees) 187 (125)
Gain on sales of property - (3)
Decrease in loans held for sale 10,615 10,695
Decrease in other assets 18,596 336
Decrease in other liabilities (2,037) (1,694)
Other 413 31
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,724 22,592
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held to maturity - (12,494)
Purchases of investment securities available for sale (13,252) (136,321)
Proceeds from sales/calls of securities available for sale - 1,109
Proceeds from maturing securities available for sale 23,540 106,076
Proceeds from maturing securities held to maturity 3,882 5,865
Net increase in loans (106,363) (8,763)
Purchases of premises and equipment (1,401) (1,698)
Proceeds from sales of property - 400
Other investing activities (409) (1,223)
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (94,003) (47,049)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, interest-bearing checking,
savings and money market accounts 18,168 20,019
Net (decrease)/increase in certificates of deposit (7,263) 3,900
Net increase in federal funds purchased and securities sold under agreements to
repurchase 31,323 2,033
Net decrease in other short-term borrowings (46,488) (12,805)
Net increase in long-term borrowings 49,056 4,518
Cash dividends paid (3,413) (5,247)
Dividend reinvestment plan (55) 139
Proceeds from issuance of common stock 217 1,232
----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 41,545 13,789
Net decrease in cash and cash equivalents (11,734) (10,667)
Cash and cash equivalents at beginning of year 86,320 101,513
Cash and cash equivalents at end of period 74,586 90,846
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest 28,140 25,398
Cash payments for income tax 474 1,225
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available for sale,
net of income taxes 622 (5,342)
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The foregoing financial statements are unaudited; however, in the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of F&M Bancorp and subsidiaries' ("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,
1999.
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. ACQUISITIONS
On December 30, 1999, Bancorp consummated a merger with Patapsco Valley
Bancshares, Inc. ("PVB") and its commercial banking subsidiary, Commercial &
Farmers Bank ("C&F"), Ellicott City, MD, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Under the terms of the merger
agreement, C&F was merged with and into the Bank at closing, increasing the
Bank's assets by approximately $173 million, loans by approximately $118
million, and deposits by approximately $150 million.
On July 15, 1999, Bancorp consummated a merger with Potomac Basin Group
Associates, Inc. (Potomac Basin), in a tax-free exchange of shares accounted for
as a pooling-of-interests. Potomac Basin is a Beltsville, MD-based, full-line
independent insurance agency specializing in corporate employee benefit plans.
NOTE 3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars 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 133,591 - 5,386 128,205
Obligations of state and political subdivisions 45,565 37 1,608 43,994
Mortgage-backed securities 127,291 3 6,467 120,827
----------------------------------------------------------------------------------------------------------------------
Total debt securities 306,447 40 13,461 293,026
Equity securities 14,622 902 - 15,524
----------------------------------------------------------------------------------------------------------------------
Total securities available for sale 321,069 942 13,461 308,550
----------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of state and political subdivisions 86,294 181 1,588 84,887
Mortgage-backed securities 9,138 7 116 9,029
----------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 95,432 188 1,704 93,916
----------------------------------------------------------------------------------------------------------------------
Total investment securities 416,501 1,130 15,165 402,466
======================================================================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars 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 146,882 53 2,843 144,092
Obligations of state and political subdivisions 38,829 452 1,385 37,896
12,636 34 - 12,670
Mortgage-backed securities 147,527 20 4,419 143,128
----------------------------------------------------------------------------------------------------------------------
Total debt securities 345,874 559 8,647 337,786
Equity securities 19,914 63 267 19,710
----------------------------------------------------------------------------------------------------------------------
Total securities available for sale 365,788 622 8,914 357,496
----------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies - - - -
Obligations of state and political subdivisions 93,062 777 1,084 92,755
Mortgage-backed securities 11,618 99 32 11,685
----------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 104,680 876 1,116 104,440
----------------------------------------------------------------------------------------------------------------------
Total investment securities 470,468 1,498 10,030 461,936
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 30, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars 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 137,554 9 4,737 132,826
Obligations of state and political subdivisions 42,493 11 2,149 40,355
Other Debt Securities - - - -
Mortgage-backed securities 136,506 9 6,358 130,157
--------------------------------------------------------------------------------------------------------------------
Total debt securities 316,553 29 13,244 303,338
Equity securities 14,875 - 268 14,607
--------------------------------------------------------------------------------------------------------------------
Total securities available for sale 331,428 29 13,512 317,945
--------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies - - - -
Obligations of state and political subdivisions 89,218 303 2,255 87,266
Mortgage-backed securities 10,198 16 123 10,091
--------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 99,416 319 2,378 97,357
--------------------------------------------------------------------------------------------------------------------
Total investment securities 430,844 348 15,890 415,302
====================================================================================================================
</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.
8
<PAGE>
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 and
comprehensive 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 and
comprehensive income.
The amortized cost and estimated fair values of investments at June 30, 2000 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>
Six Months Ended
June 30, 2000
Amortized Fair
(Dollars in thousands) Cost Value
-----------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $ 6,342 $ 6,330
After 1 but within 5 years 80,403 78,133
After 5 but within 10 years 74,141 70,263
After 10 years 18,271 17,473
Mortgage-backed securities 127,291 120,827
Equity securities 14,622 15,524
-----------------------------------------------------------------
Total available for sale 321,069 308,550
-----------------------------------------------------------------
Held-to-maturity:
Within 1 year 5,462 5,465
After 1 but within 5 years 33,638 33,700
After 5 but within 10 years 19,808 19,430
After 10 years 27,385 26,292
Mortgage-backed securities 9,138 9,028
-----------------------------------------------------------------
Total to be held to maturity 95,432 93,915
-----------------------------------------------------------------
Total investment securities $416,501 $402,466
=================================================================
</TABLE>
The carrying value 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 $136.3 million
at June 30, 2000.
9
<PAGE>
NOTE 4. LOANS
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousand of Dollars) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans:
Construction and land development $ 75,330 $ 61,350 $ 67,452
Secured by farmland 6,393 6,307 7,884
Residential mortgage 344,929 298,614 305,834
Other mortgage 297,500 234,084 276,414
Agricultural 480 732 656
Commercial and industrial loans 187,694 127,600 170,379
Consumer 300,568 260,178 283,000
Other loans 3,169 9,493 3,115
-----------------------------------------------------------------------------------------------------------------
Totals $ 1,216,063 $ 998,316 $ 1,114,734
=================================================================================================================
</TABLE>
Does not include loans held for sale
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
balance sheet.
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
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $33,168 $33,543 $33,688
Furniture and equipment 30,152 28,192 28,594
Leasehold improvements 3,530 3,483 3,537
---------------------------------------------------------------------------------
66,850 65,218 65,819
Less: accumulated depreciation
and amortization 31,861 29,276 30,325
---------------------------------------------------------------------------------
Net premises and equipment $34,989 $35,942 $35,494
=================================================================================
</TABLE>
NOTE 6. COMPREHENSIVE INCOME
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income," effective January 1, 1999. Other comprehensive
income consists entirely of unrealized gains (losses) on available-for-sale
securities. Income taxes allocated to other comprehensive income amounted to
benefits of $467 thousand and $2.5 million for the second quarter of 2000 and
1999, respectively and benefits of $654 thousand and $3.4 million for the six
months ended June 30, 2000 and 1999, respectively.
10
<PAGE>
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 outstanding stock
options or other contracts to issue common stock, if any, were exercised or
converted into 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.
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 4,869 $ 4,043 $ 9,584 $ 8,520
=========== =========== =========== ===========
Basic EPS
Shares 11,008,605 10,986,893 11,008,468 10,967,514
EPS $ 0.44 $ 0.37 $ 0.87 $ 0.78
Dilutive shares
Stock options 14,947 65,742 16,824 72,588
EPS $ 0.00 $ 0.00 $ 0.00 $ 0.01
Diluted EPS
Shares including options 11,023,552 11,052,635 11,025,292 11,040,102
EPS $ 0.44 $ 0.37 $ 0.87 $ 0.77
</TABLE>
NOTE 8. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June, 1999, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities", which calls for derivatives to be recognized in the
consolidated balance sheet at fair value and for subsequent changes in fair
value to be recognized in the consolidated statement of income and comprehensive
income. However, because non-derivative and non-financial transactions are still
measured using a mix of historical and current prices, the Statement retains
special accounting for gains and losses when derivatives are used in qualifying
hedges of assets, liabilities, and future transactions. The Statement unifies
qualifying criteria for hedges involving all types of derivatives, requiring
that a company document, designate, and assess the effectiveness of its hedges.
For hedges that meet the Statement's criteria, the derivative's gains and losses
will be allowed to offset gains and losses on, or forecasted cash flows of, the
hedged item.
Among a number of other provisions, the Statement will also allow entities to
reclassify available-for-sale and held-to-maturity securities without calling
into question management's intent for the remainder of its securities
portfolios.
For calendar-year companies such as Bancorp, the Statement will take effect
beginning January 1, 2001. Historically, Bancorp has not made use of hedges and
other financial derivatives and is unable to predict the impact, if any, that
the application of Statement No. 133 will have upon consolidated financial
statements issued after 2000.
11
<PAGE>
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 2000 was $4.869 million, or
$0.44 basic earnings per share, an increase of 20% compared with earnings of
$4.043 million, or $0.37 basic earnings per share, for the second quarter of
1999. Per share amounts reported previously have been restated for the
acquisitions of Patapsco Valley Bancshares, Inc., completed in December 1999,
and Potomac Basin Group Associates, Inc. completed in July 1999, both accounted
for as a pooling-of- interests.
Second quarter 2000 earnings were favorably impacted by a 17% increase in
noninterest income, as well as maintaining noninterest expense to less than a 1%
increase, compared to the second quarter of last year. Return on average assets
was 1.12% for the second quarter of 2000, compared to 1.00% for the second
quarter of 1999. Return on average equity in the second quarter of 2000 was
13.38%, compared to 10.85% for the same period of 1999.
For the six months ended June 30, 2000 compared with the six months ended June
30, 1999, net income increased 13% to $9.584 million, or $0.87 basic earnings
per share, from $8.520 million, or $0.78 basic earnings per share. Returns on
average assets and average equity were 1.12% and 13.30%, respectively, for the
first half of 2000 compared with 1.06% and 11.47%, respectively, for the first
six months of 1999.
Certain information included in the following section of this report, other than
historical information, may contain certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "likely", "unlikely", "continue",
or similar terms. Although Bancorp believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ from
those projected in the forward-looking statements.
12
<PAGE>
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 70% of gross
revenue through the first six months of 2000. 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 on a comparative basis in the tables below. Average balances for
the second quarter 2000, compared with the second quarter 1999 were as follow.
Net interest income on a taxable-equivalent basis increased by 7%, or $1.2
million. Average earning assets increased 8%, or $125.7 million. Average loans
continued to grow at a strong pace of 20%, or $199.7 million. The average
balance in the investment portfolio decreased 6%, or $27.4 million. This is
partially due to the increase in loan demand. The yield on earning assets across
all sectors increased 24 basis points to 7.89%. Average interest-bearing
deposits increased $6.7 million, or 1%. Additional long-term funding was
provided principally by Federal Home Loan Bank advances, which increased $49.2
million, or 53%.
Average balances for the six months ended June 30, 2000, compared with the six
month ended June 30, 1999 were as follow. Net interest income on a
taxable-equivalent basis increased by 7%, or $2.3 million. Average earning
assets increased 7%, or $1.0 million. Average loans grew 17%, or $166.7 million.
The average balance in the investment portfolio decreased 4%, or $18.9 million.
As loan demand has increased, investment securities have been utilized to fund
this growth. The yield on earning assets across all sectors increased 20 basis
points to 7.85%. Average interest-bearing deposits increased $19.0 million, or
2%. The majority of this growth is in money market account that grew 32% in this
period. Additional long-term funding was provided principally by Federal Home
Loan Bank advances, which increased $29.6 million, or 29%.
13
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND AVERAGE RATE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
----------------------------------- ----------------------------------------
Average verage Average Average
(Dollars in thousands) Balances Interest Rate Balances Interest Rate
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Short-term funds $ 10,689 $ 140 5.27% $ 57,273 $ 685 4.80%
Investment securities (1)
Taxable 289,979 4,593 6.37% 319,305 4,812 6.04%
Tax-exempt (2) 132,429 2,189 6.65% 130,518 2,227 6.84%
--------------------------------------------------------------------------------------------------------------------------------
Total investment securities 422,408 6,782 6.46% 449,823 7,039 6.28%
--------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 1,202,274 25,154 8.41% 1,002,623 21,084 8.43%
--------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,635,371 32,076 7.89% 1,509,719 28,808 7.65%
--------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning assets 111,051 115,108
--------------------------------------------------------------------------------------------------------------------------------
Total assets $1,746,422 $1,624,827
================================================================================================================================
LIABILITIES Interest bearing liabilities:
Interest bearing deposits
Savings $ 159,435 $ 854 2.15% $ 181,969 $ 1,093 2.41%
Checking 188,947 971 2.07% 180,141 1,062 2.36%
Money market accounts 259,440 2,549 3.95% 192,281 1,316 2.75%
Certificates of deposit 517,890 6,719 5.22% 564,660 7,315 5.20%
--------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,125,712 11,093 3.96% 1,119,051 10,786 3.87%
--------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and
securities
sold under agreements to repurchase 115,849 1,625 5.64% 60,960 725 4.77%
Other short term borrowings 8,519 108 5.10% 7,209 93 5.17%
--------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 124,368 1,733 5.60% 68,169 818 4.81%
Long-term borrowings 142,600 2,142 6.04% 93,351 1,247 5.36%
--------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 266,968 3,875 5.84% 161,520 2,065 5.13%
--------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,392,680 14,968 4.32% 1,280,571 12,851 4.03%
Non-interest bearing liabilities:
Demand deposits 189,970 178,662
Other liabilities 17,426 16,077
Shareholders' equity 146,346 149,517
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,746,422 $1,624,827
================================================================================================================================
Net interest income 17,108 15,957
Net interest spread (3) 3.57% 3.63%
Net interest margin(4) 4.21% 4.24%
</TABLE>
(1) Average balance and the related average rate are based on amortized cost.
(2) Interest and yield on obligations of state and political subdivisions and
tax-exempt loans are computed on a taxable Equivalent basis using U.S.
statutory tax rate of 35 percent. In addition, loan fee income is included
in the interest income Calculation, and nonaccrual loans are included in
the average loan base upon which the interest rate earned on loans is
calculated.
(3) Net interest spread is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to interest-bearing liabilities.
(4) Net interest margin is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to earning assets.
14
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND AVERAGE RATE (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
-------------------------------------------- ------------------------------------
Average Average Average Average
(Dollars in thousands) Balances Interest Rate Balances Interest Rate
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Short-term funds $ 16,404 $ 401 4.92% $ 63,146 $ 1,341 4.28%
Investment securities (1)
Taxable 293,180 9,237 6.34% 315,581 9,297 5.94%
Tax-exempt (2) 132,390 4,476 6.80% 128,849 4,459 6.98%
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 425,570 13,713 6.48% 444,430 13,756 6.24%
---------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 1,172,584 48,885 8.38% 1,005,894 42,319 8.48%
---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,614,558 62,999 7.85% 1,513,470 57,416 7.65%
---------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning assets 101,983 102,635
---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,716,541 $1,616,105
=================================================================================================================================
LIABILITIES Interest bearing liabilities:
Interest bearing deposits
Savings $ 164,228 $ 1,795 2.20% $ 181,784 $ 2,161 2.40%
Checking 192,455 2,031 2.12% 175,673 2,003 2.30%
Money market accounts 244,830 4,628 3.80% 185,207 2,574 2.80%
Certificates of deposit 524,774 13,486 5.17% 564,610 14,720 5.26%
---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,126,287 21,940 3.92% 1,107,274 21,458 3.91%
---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 108,670 2,910 5.39% 59,289 1,362 4.63%
Other short term borrowings 1,603 50 6.27% 1,658 29 3.53%
---------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 110,273 2,960 5.40% 60,947 1,391 4.60%
Long-term borrowings 131,781 3,912 5.97% 102,135 2,693 5.32%
---------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 242,054 6,872 5.71% 163,082 4,084 5.05%
---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,368,341 28,812 4.23% 1,270,356 25,542 4.05%
Non-interest bearing liabilities:
Demand deposits 185,656 178,397
Other liabilities 17,664 17,523
Shareholders' equity 144,880 149,829
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,716,541 $1,616,105
==================================================================================================================================
Net interest income 34,187 31,874
Net interest spread (3) 3.61% 3.60%
Net interest margin (4) 4.26% 4.25%
</TABLE>
(1) Average balance and the related average rate are based on amortized cost.
(2) Interest and yield on obligations of state and political subdivisions and
tax-exempt loans are computed on a taxable equivalent basis using U.S.
statutory tax rate of 35 percent. In addition, loan fee income is included
in the interest income calculation, and nonaccrual loans are included in
the average loan base upon which the interest rate earned on loans is
calculated.
(3) Net interest spread is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to interest-bearing liabilities.
(4) Net interest margin is the difference between the ratios (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to earning assets.
15
<PAGE>
PROVISION FOR CREDIT LOSSES.
The provision for credit losses increased by 94% to $630 thousand for the second
quarter of 2000 compared with $325 thousand for the second quarter of 1999. For
the six-month period ended June 30, 2000, the provision increased $446 thousand
or 52% as compared to last year. This increase is in part, a result of the 20%
growth in the Bancorp's loan portfolio.
NONINTEREST INCOME.
Noninterest income is comprised of fees and commissions earned on traditional
banking products such as fees charged on deposit accounts, as well as from
commissions on other activities such as, insurance, trust and alternative
investment products. Gains on the sales of portfolio items like, loans,
securities, or fixed assets are also included.
For the second quarter 2000, compared with the second quarter 1999 total
noninterest income increased 17%, or $1.1 million. Expanding into stocks, mutual
funds, and trust markets, and continuing to offer a full range of insurance
services have aided in noninterest income growth. These types of business have
increased noninterest income by 16% or, $392 thousand. Service charges on
deposit accounts increased 25% or, $448 thousand.
The six months ended June 30, 2000; compared to the six months ended June 30,
1999 yielded the same growth results. Total noninterest income increased 12%, or
$1.6 million. Alternative investments and insurance activity increased
noninterest income by 24%, or $1.2 million, while service charges on deposit
accounts produced a $510 thousand or, 15% increase.
NONINTEREST EXPENSE.
Noninterest expense is made up of those expenses incurred to run and operate the
Bancorp. These expenses are divided into four general categories.
1. Salaries & employee benefits, which is the largest portion, representing
55% of total noninterest expense.
2. Merger-related expenses, which are nonrecurring and unusual items.
3. Occupancy and equipment expenses.
4. Other operating expenses.
The Bancorp's efficiency ratio (the ratio of adjusted noninterest expense to the
sum of net interest income on a tax equivalent basis and recurring noninterest
income) decreased from 69.52% for the period ended June 30, 1999, to 64.30% for
the period ended June 30, 2000.
The second quarter 2000, compared to the second quarter 1999 result were as
follows. Total noninterest expense increased less than 1%, or $82 thousand.
Salaries and employee benefits increased 4% or $298 thousand, occupancy and
equipment expense increased 1%, or $22 thousand, while other operating expenses
including merger related expenses decreased 5% or $238 thousand.
For the six months ended June 30, 2000, compared to the six month ended June 30,
1999, total noninterest expense increased 4%, or $1.3 million. Salaries and
employee benefits maintained a 4%, or $588 thousand increase. Occupancy and
equipment rose 7% or $312 thousand, and other operating expenses including
merger-related expense increased 4% or $359 thousand.
16
<PAGE>
INCOME TAXES.
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 income tax expense
rate differs from the amount computed at statutory rates primarily due to
tax-exempt interest from certain loans and investment securities. Provision for
income taxes increased 71% to $2.277 million in the second quarter, from $1.331
million in the same period last year. The effective tax rate is 32% compared to
25% in this same period.
The six months ended June 30, 2000, compared to the six months ended June 30,
1999 resulted in the provision for income taxes increasing 32% to $4.138
million, from $3.137 million. The effective tax rate was 30% compared to 27% in
the same period.
NONPERFORMING ASSETS.
The table below summarizes Bancorp's nonperforming assets and contractually
past-due loans. Total nonperforming assets at June 30, 2000 increased $2.8
million compared with year-earlier levels and increased $173 thousand since
year-end 1999. Loans past due 90 days or more as to interest or principal
decreased $853 thousand compared with prior year levels and increased $169
thousand since year-end. Although there is no direct correlation between
nonperforming loans and ultimate loan losses, an analysis of nonperforming loans
may provide some indication of the quality of the loan portfolio.
POTENTIAL PROBLEM LOANS.
At June 30, 2000, Bancorp had $29.8 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. At
December 31, 1999, potential problem loans totaled $23.1 million.
Nonperforming Asset and Contractually Past-Due Loans:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans (1) $ 5,945 $ 3,422 $ 6,181
Other real estate owned net of valuation allowance (2) 1,594 1,305 1,185
-----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,539 $ 4,727 $ 7,366
-----------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days as to interest or principal (3) $ 1,683 $ 2,536 $ 1,514
Nonperforming loans to total loans 0.39% 0.34% 0.55%
Nonperforming assets to total loans plus
other real estate owned 0.54% 0.47% 0.66%
Nonperforming assets to total assets 0.34% 0.29% 0.43%
Allowance for credit losses times nonperforming loans 2.85 4.05 2.11
Allowance for credit losses times nonperforming assets 2.05 2.93 1.77
</TABLE>
(1) Loans are placed on nonaccrual status when, in the opinion of management,
reasonable doubt exists as to the full, timely collection of interest or
principal, or a specific loan meets the criteria for nonaccrual status
established by regulatory authorities. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed
against current period interest income. No interest is taken into income on
nonaccrual loans unless received in cash, or until such time the borrower
demonstrates sustained performance over a period of time in accordance with
contractual terms.
17
<PAGE>
(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.
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 allowance is
performed considering such factors as the levels of loans outstanding, loss
experience, delinquency levels, certain individual loan reviews, and an
evaluation of the regional and national economic environment. The methodology
for assessing the appropriateness of the allowance consists of three primary
elements:
- The Formula Allowance. The formula allowance is calculated by applying
historically determined loss factors to outstanding business loans based on
credit risk ratings and for pools of homogeneous loans. Individually risk rated
loan loss factors is determined using average annual net charge-off rates for
the most recent two years. Pooled loans are loans that are homogeneous in nature
such as consumer installment and residential mortgage loans. Pooled loan loss
factors are based on net charge-offs experienced over the past year. The
historic loss factors on the risk rated loans and the pooled loans are then
considered for either positive or negative adjustment in an attempt to reflect
the current dynamics of the portfolios. These adjustments in the loss factors
are tied to management's evaluation of a number of factors including: 1) changes
in the trend of the volume and severity of past due, classified and non-accrual
assets; 2) changes in the nature and volume of the portfolio; 3) changes in
lending policies, underwriting standards, or collection practices; 4) changes in
the experience, ability, depth of lending management and staff; 5) portfolio
concentrations; and 6) changes in the national or local economy.
- Specific Allowances for Identified Problem Loans. The amount of specific
reserves is determined through a loan-by-loan analysis of non-performing loans.
The analysis considers expected future cash flows, the value of collateral or
other factors that may impact the borrower's ability to repay.
- The Unallocated Allowance. The unallocated portion of the allowance is
based on loss factors that cannot be associated with specific loans or loan
categories. These factors include management's subjective evaluation of such
conditions as credit quality trends, collateral values, portfolio
concentrations, specific industry conditions in the regional economy, regulatory
examination results, internal audit and loan review findings, recent loss
experiences in particular portfolio segments, etc. The unallocated portion of
the allowance for losses reflects management's attempt to ensure that the
overall reserve appropriately reflects a margin for the imprecision necessarily
inherent in estimates of credit losses.
While management believes the allowance for credit losses was adequate at June
30, 2000, the estimate of losses and related allowance may change in the near
term due to economic and other uncertainties inherent in the estimation process.
18
<PAGE>
Analysis of Allowance for Credit Losses:
<TABLE>
<CAPTION>
Six Months Ended
June 30, December 31,
(Dollars in thousands) 2000 1999 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding
less average unearned income (1) $1,197,951 $988,044 $1,116,658
------------------------------------------------------------------------------------------------------------
Allowance for credit losses at beginning of year $ 13,068 $ 14,241 $ 14,241
Charge-offs:
Real estate 431 423 586
Commericial and industrial 313 131 388
Consumer 1,662 1,706 4,144
------------------------------------------------------------------------------------------------------------
Total loans charged-off 2,406 2,260 5,118
------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate 94 9 310
Commercial and industrial 36 36 371
Consumer 1,121 982 1,969
------------------------------------------------------------------------------------------------------------
Total recoveries 1,251 1,027 2,650
------------------------------------------------------------------------------------------------------------
Net charge-offs 1,155 1,233 2,468
------------------------------------------------------------------------------------------------------------
Additions charged to operating expense 1,296 850 1,295
------------------------------------------------------------------------------------------------------------
Allowance for credit losses at end of period $ 13,209 $ 13,858 $ 13,068
============================================================================================================
Net charge-offs to average loans outstanding 0.09% 0.12% 0.22%
</TABLE>
(1) Excludes loans held for sale
The following table 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.
Allocation of Allowance for Credit Losses:
<TABLE>
<CAPTION>
Six Month Ended
June 30, December 31,
2000 1999 1999
---------------------------------------------------------------------------------------
(Dollars in thousands) Amount % of Gross Amount % of Gross Amount % of Gross
Loans Loans Loans
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Construction and land development $ 1,776 6.1% $1,287 6.9% $ 1,612 6.1%
Residential mortgage 751 28.5% 765 29.2% 653 27.4%
Other mortgage 4,096 24.6% 3,385 24.1% 3,960 24.8%
Commercial and industrial 3,166 15.4% 2,109 12.2% 2,388 15.3%
Consumer 3,052 24.3% 2,991 25.9% 3,073 25.4%
Unallocated 368 1.0% 3,321 1.7% 1,382 1.0%
----------------------------------------------------------------------------------------------------------------------------------
Totals $13,209 100.0% $ 13858 100.0% $13,068 100.0%
==================================================================================================================================
</TABLE>
19
<PAGE>
CAPITAL RESOURCES
Shareholders' equity totaled $150.8 million at June 30, 2000; an increase of 5%
compared with the 1999 year-end level of $143.8 million, and an increase of 2%
from the year earlier level of $147.3 million. The fair value of the
available-for-sale portfolio increased $622 thousand (net of deferred taxes)
since year-end, reflecting the positive impact of market interest rates. 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, 2000, as follows:
CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
Six Months Ended
June 30, 2000
-----------------------------------------------------
Tier 1 Total Leverage
Capital Capital Ratios
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual 11.79% 12.80% 8.77%
Regulatory Minimum 4.00% 8.00% 3.00%
-------------------------------------------------------------------------------------------
Excess 7.79% 4.80% 5.77%
===========================================================================================
</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.
Re-pricing 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.
20
<PAGE>
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 they 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.
Because of inherent limitations in traditional cumulative gap analysis, however,
Asset / Liability Management Committee ("ALCO") also employs more sophisticated
interest rate risk measurement techniques. Simulation analysis is used to
subject the current re-pricing conditions 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. The table
below presents Bancorp's MVE at June 30, 2000.
Effects of Change in Interest rates on Market Value of Portfolio Equity:
At June 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percent Change
Market Hypothetical ----------------------------------
Change in Value of Change Hypothetical
Interest Portfolio Increase Increase Board
Rates Equity (Decrease) (Decrease) Limit(1)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 bp rise $ 131,681 $ (24,746) -15.8% -30.0%
200 bp rise 139,722 (16,705) -10.7% -20.0%
100 bp rise 147,972 (8,455) -5.4% -10.0%
Base scenario 156,427 - - -
100 bp decline 178,224 21,797 13.9% -10.0%
200 bp decline 187,284 30,857 19.7% -20.0%
300 bp decline 196,510 40,083 25.6% -30.0%
</TABLE>
(1) Established by Bancorp's Board of Directors
Computations of prospective effects of hypothetical interest rate changes are
based on many assumptions, including relative levels of market interest rates,
loan prepayments and changes in deposit levels. They are not intended to be a
forecast and should not be relied upon as indicative of actual results. Further,
the computations do not contemplate certain actions that management could take
in response to changes in interest rates. At June 30, 2000 and 1999, the changes
in net interest income and or MVE calculated under these alternative methods
were within limits established by the Board of Directors and monitored by ALCO.
21
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of per share earnings. Filed as an exhibit hereto and
incorporated herein by reference.
27. Financial date schedule. Filed as an exhibit hereto and
incorporated herein by reference.
(b) Reports on Form 8-K
None
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 10, 2000 /s/ Faye E. Cannon
------------------------------------ -------------------------------
Date FAYE E. CANNON
PRESIDENT AND CEO
August 10, 2000 /s/ Kaye A. Simmons
------------------------------------ -------------------------------
Date KAYE A. SIMMONS
CFO AND TREASURER
22
<PAGE>
Exhibit 11:
Statement re: Computation of Per Share Earnings
Earnings per share ("EPS") are 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, including all common stock and common stock
equivalents in conformity with the instructions for Item 601 of Regulation S-K.
23
