<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 March 31, 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 11,008,527 shares outstanding as of April 30, 2000.
- ------------------------------------------------------------------------------
<PAGE>
F&M BANCORP
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets,
March 31, 2000 and 1999 (Unaudited) and December 31, 1999...............3
Consolidated Statements of Income and Comprehensive Income
(Unaudited), Three Months Ended March 31, 2000 and 1999.................4
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited),Three Months Ended March 31, 2000 and Twelve Months
Ended December 31, 1999.................................................5
Consolidated Statements of Cash Flows (Unaudited), Three Months
Ended March 31, 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.............19
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders ............20
Item 6. Exhibits and Reports on Form 8-K..............................20
Signatures.............................................................21
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31, March 31, December 31
2000 1999 1999
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 66,806 $ 49,967 $ 60,888
Federal funds sold 3,967 31,576 11,304
Interest- bearing deposits with banks 8,953 41,995 14,128
----------- ----------- -----------
Total cash and cash equivalents 79,726 123,538 86,320
----------- ----------- -----------
Loans held for sale 3,709 17,565 15,497
Investment securities
Available for sale, at fair value 312,511 328,353 317,945
Held to maturity, fair value
$96,149, $104,588 and $97,357, respectively 98,201 102,713 99,416
----------- ----------- -----------
Total investment securities 410,712 431,066 417,361
----------- ----------- -----------
Loans, net of unearned income 1,171,866 985,532 1,114,734
Less: Allowance for credit losses (12,948) (14,326) (13,068)
----------- ----------- -----------
Net loans 1,158,918 971,206 1,101,666
----------- ----------- -----------
Bank premise and equipment, net 34,457 35,867 35,494
Other real estate owned, net 1,760 1,306 1,185
Interest receivable 10,592 11,157 10,080
Intangible assets 6,287 7,441 6,696
Other assets 29,903 26,582 45,035
----------- ----------- -----------
Total assets $ 1,736,064 $ 1,625,728 $ 1,719,334
=========== =========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing $ 193,121 $ 182,440 $ 188,154
Interest-bearing 1,142,845 1,108,767 1,125,919
----------- ----------- -----------
Total deposits 1,335,966 1,291,207 1,314,073
----------- ----------- -----------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 100,755 63,497 94,083
Other short-term borrowings 916 1,667 48,183
Long-term borrowings 131,933 99,182 100,578
Accrued taxes and other liabilities 21,472 20,612 18,597
----------- ----------- -----------
Total liabilities 1,591,042 1,476,165 1,575,514
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized
50,000,000 shares; issued and outstanding 11,011,422
shares, 10,974,368 shares, and 10,999,621 shares,
respectively 55,057 43,721 54,998
Surplus 78,407 75,056 78,248
Retained earnings 20,232 31,827 18,951
Accumulated other comprehensive (loss) income (8,674) (1,041) (8,377)
----------- ----------- -----------
Total shareholders' equity 145,022 149,563 143,820
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,736,064 $ 1,625,728 $ 1,719,334
=========== =========== ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
Quarter ended March 31,
---------------------------
(Dollars in thousands, except per share amounts) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 23,731 $ 21,185
Interest on deposits with banks 147 330
Interest and dividends on investment securities
Taxable 4,644 4,515
Tax-exempt 1,487 1,467
Interest on federal funds sold 114 304
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 30,123 27,801
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 10,847 10,673
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,282 587
Interest on Federal Home Loan Bank Borrowings 1,714 1,364
Interest on other short-term borrowings 22 18
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,865 12,642
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 16,258 15,159
Provision for credit losses 666 525
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 15,592 14,634
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Trust income 598 763
Service charges on deposit accounts 1,682 1,620
Insurance income 2,268 1,768
Gains on sales of loans 447 787
Gains (losses) on sales of property 18 3
Alternative investment & stock brokerage income 464 190
Other operating income 1,485 1,324
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,962 6,455
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and employee benefits 8,488 8,199
Merger-related expense 211 --
Occupancy and equipment expense 2,601 2,311
Other operating expense 4,678 4,293
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 15,978 14,803
- ---------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 6,576 6,286
Provision for income taxes 1,861 1,806
=================================================================================================================================
Net Income $ 4,715 $ 4,480
=================================================================================================================================
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on securities $ (297) $ (1,318)
Reclassification adjustment for gains (losses) included
in net income -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive (Loss) Income (297) (1,318)
=================================================================================================================================
Comprehensive income
$ 4,418 $ 3,162
=================================================================================================================================
Earnings per Common Share - Basic
Based on weighted average shares outstanding of
11,008,331 in 2000, and 10,947,919 in 1999 $ 0.43 $ 0.41
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted
Based on weighted average shares outstanding of
11,028,172 in 2000, and 11,027,808 in 1999 $ 0.43 $ 0.41
=================================================================================================================================
Dividends per Share $ 0.27 $ 0.24
=================================================================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGED IN SHAREHOLDERS' EQUITY (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
(Dollars in thousands, except per share amounts) 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 -- -- 4,715 -- 4,715
Dividend reinvestment plan -- -- (15) -- (15)
Cash dividends paid ($.27 per share) -- -- (3,415) -- (3,415)
Stock consideration for options exercised (3) (5) (4) -- (12)
Stock options exercised 62 164 -- -- 226
Stock Dividend -- -- -- -- --
Other comprehensive income -- -- -- (297) (297)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $ 55,057 $ 78,407 $ 20,232 $ (8,674) $ 145,022
=================================================================================================================================
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31,
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,715 $ 4,480
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 666 525
Depreciation and amortization 315 987
Amortization of intangibles 281 267
Net premium amortization on investment securities 97 253
(Increase) in interest receivable (512) (995)
Increase in interest payable 733 1,158
Deferred income tax benefits 312 -
Amortization (accretion) of net loan origination costs (fees) 118 (64)
Gain on sales of property - (3)
Decrease in loans held for sale 11,788 10,964
Decrease/(increase) in other assets 15,132 (3,383)
(Decrease)/increase in other liabilities (9,637) 2,861
Other 5 81
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,013 17,131
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held to maturity - (7,582)
Purchases of investment securities available for sale (7,022) (24,985)
Proceeds from sales/calls of securities available for sale - 1,109
Proceeds from maturing securities available for sale 11,928 30,543
Proceeds from maturing securities held to maturity 1,159 3,001
Net increase in loans (58,036) 5,397
Purchases of premises and equipment 722 (636)
Proceeds from sales of property - 399
Other investing activities (575) (351)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities (51,823) 6,895
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, interest-bearing checking,
savings and money market accounts 18,164 6,164
Net increase in certificates of deposit 3,729 (217)
Net increase in federal funds purchased and securities sold under agreements to repurchase 6,672 2,070
Net increase/(decrease) in other short-term borrowings (35,488) (13,109)
Net increase/(decrease) in long-term borrowings 31,355 4,936
Cash dividends paid (3,415) (2,698)
Dividend reinvestment plan (15) 70
Proceeds from issuance of common stock 214 930
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 21,216 (1,854)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,594) 22,172
Cash and cash equivalents at beginning of year 86,320 101,366
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 79,726 $ 123,538
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 12,132 $ 10,483
Cash payments for income tax 18 1
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available for sale,
net of income taxes (297) (1,310)
</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 of 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>
March 31, 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 $ 134,294 $ 2 $ 4,942 $ 129,354
Obligations of state and political subdivisions 44,950 19 2,036 42,933
Mortgage-backed securities 132,824 - 6,743 126,081
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 312,068 21 13,721 298,368
Equity securities 14,411 - 268 14,143
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 326,479 21 13,989 312,511
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of state and political subdivisions 88,354 193 2,094 86,453
Mortgage-backed securities 9,847 12 163 9,696
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 98,201 205 2,257 96,149
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 424,680 $ 226 $ 16,246 $ 408,660
==================================================================================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
March 31, 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 $ 133,916 $ 240 $ 772 $ 133,384
Obligations of state and political subdivisions 38,834 740 368 39,206
Other Debt Securities 11,047 15 79 10,983
Mortgage-backed securities 126,474 119 1,442 125,152
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 310,271 1,114 2,661 308,725
Equity securities 19,832 63 267 19,628
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 330,103 1,177 2,928 328,353
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies - - - -
Obligations of state and political subdivisions 89,847 1,872 223 91,496
Mortgage-backed securities 12,866 226 - 13,092
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 102,713 2,098 223 104,588
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 432,816 $ 3,275 $ 3,151 $ 432,940
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 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 March 31, 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>
March 31, 2000
Amortized Fair
(Dollars in thousands) Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $ 9,551 $ 9,528
After 1 but within 5 years 80,622 78,436
After 5 but within 10 years 74,711 70,987
After 10 years 14,360 13,336
Mortgage-backed securities 132,824 126,081
Equity securities 14,411 14,143
- -----------------------------------------------------------------------------------------------------
Total available for sale 326,479 312,511
- -----------------------------------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 7,193 7,208
After 1 but within 5 years 32,857 32,892
After 5 but within 10 years 20,249 19,713
After 10 years 28,055 26,640
Mortgage-backed securities 9,847 9,696
- -----------------------------------------------------------------------------------------------------
Total to be held to maturity 98,201 96,149
- -----------------------------------------------------------------------------------------------------
Total investment securities $ 424,680 $ 408,660
=====================================================================================================
</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 $148.8 million
at March 31, 2000.
9
<PAGE>
NOTE 4. LOANS
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------- December 31,
(In thousand of Dollars) 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans:
Construction and land development $ 71,699 $ 68,186 $ 67,452
Secured by farmland 7,854 6,111 7,884
Residential mortgage 334,546 287,846 305,834
Other mortgage 288,341 237,556 276,414
Agricultural 515 766 656
Commercial and industrial loans 180,050 119,911 170,379
Consumer 285,201 255,216 283,000
Other loans 3,660 9,940 3,115
- ----------------------------------------------------------------------------------------------------------------
Totals $ 1,171,866 $ 985,532 $ 1,114,734
================================================================================================================
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds are
included in other loans in the schedule above and in total loans in the 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>
March 31,
------------------------- December 31,
2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $33,158 $33,367 $33,688
Furniture and equipment 28,759 27,488 28,594
Leasehold improvements 3,524 3,419 3,537
- ----------------------------------------------------------------------------------------------------------------
65,441 64,274 65,819
Less: accumulated depreciation
and amortization 30,984 28,407 30,325
- ----------------------------------------------------------------------------------------------------------------
Net premises and equipment $34,457 $35,867 $35,494
================================================================================================================
</TABLE>
NOTE 6. COMPREHENSIVE INCOME
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. 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 $187 thousand and $829 thousand for the first quarter of 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.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------------
(Dollars in thousands except per share amounts) 2000 1999
------------ -----------
<S> <C> <C>
Net income $ 4,715 $ 4,480
============ ===========
Basic EPS
Shares 11,008,331 10,947,919
EPS $0.43 $0.41
Dilutive shares
Stock options 19,841 79,889
EPS $0.00 $0.00
Diluted EPS
Shares including options 11,028,172 11,027,808
EPS $0.43 $0.41
</TABLE>
NOTE 8. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, 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 first quarter of 2000 was $4.715 million, or
$0.43 basic earnings per share, an increase of 5% compared with earnings of
$4.480 million, or $0.41 basic earnings per share, for the first 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.
Returns on average assets and average equity were 1.12% and 13.22%,
respectively, for the first quarter of 2000 compared with 1.13% and 12.17%,
respectively for the first quarter 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.
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 three 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 first quarter are presented on a
year-to-year comparative basis in the table below. Net interest income on a
taxable-equivalent basis increased by $1.1 million, compared with the first
quarter of last year. Average earning assets increased $99.4 million, or 7%,
for the first quarter of 2000 compared with the first quarter of 1999. Loan
demand grew, resulting in an increase in the average loan portfolio balance
of $132.8 million, or 13%. The average balance in the investment portfolio
decreased $2.0 million as Bancorp utilized these funds to meet the increase
in loan demand. The yield on earning assets across all sectors increased five
basis points to 7.81% compared with the first quarter of last year.
Average interest-bearing deposits increased $32.6 million or 3%. Growth occurred
in interest bearing checking and money market accounts. The introduction of new
deposit products and pricing methods will continue to stimulate growth in
deposits. Additional funding was provided principally by short term borrowing,
consisting of overnight federal funds purchased and securities under agreement
to repurchase, which increased $44.3 million or 78%, compared with the first
quarter of 1999.
12
<PAGE>
With the increase in market interest rates between comparable periods,
and growth in loans, the net interest margin, which is the ratio of
taxable-equivalent net interest income to average earning assets,
decreased 3 basis points to 4.30% compared with the first quarter of
last year.
<TABLE>
<CAPTION>
Consolidated Average Balances, Interest and Average Rates (Taxable Equivalent Basis)
March
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 $ 22,119 $ 261 4.75% $ 53,505 $ 634 4.97%
Investment securities (1)
Taxable 296,523 4,644 6.30% 302,999 4,515 6.00%
Tax-exempt (2) 132,351 2,253 6.85% 127,919 2,224 7.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 428,874 6,897 6.47% 430,918 6,739 6.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 1,142,896 23,767 8.35% 1,010,080 21,235 8.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,593,889 30,925 7.81% 1,494,503 28,608 7.76%
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning assets 98,313 108,648
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,692,202 $ 1,603,151
====================================================================================================================================
LIABILITIES
Interest bearing liabilities:
Interest bearing deposits
Savings $ 169,152 $ 941 2.24% $ 179,757 $ 1,068 2.41%
Checking 195,921 1,060 2.18% 170,441 941 2.24%
Money market accounts 230,157 2,079 3.63% 178,908 1,258 2.85%
Certificates of deposit 531,659 6,767 5.12% 565,198 7,405 5.31%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,126,889 10,847 3.87% 1,094,304 10,672 3.96%
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 101,367 1,282 5.09% 57,055 587 4.17%
Other short term borrowings 50,873 767 6.06% 13,606 184 5.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Short Term Borrowings 152,240 2,049 5.41% 70,661 771 4.43%
Long term borrowings 71,689 969 5.44% 93,458 1,198 5.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 223,929 3,018 5.42% 164,119 1,969 4.87%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,350,818 13,865 4.13% 1,258,423 12,641 4.07%
Non-interest bearing liabilities:
Demand deposits 181,178 177,689
Other liabilities 16,793 17,767
Shareholders' equity 143,413 149,272
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 1,692,202 1,603,151
====================================================================================================================================
Net interest income 17,060 15,967
Net interest spread (3) 3.68% 3.69%
Net interest margin(4) 4.30% 4.33%
</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.
13
<PAGE>
PROVISION FOR CREDIT LOSSES.
Bancorp increased the provision for credit losses by 27% to $666 thousand for
the first quarter of 2000 compared with $525 thousand for the first quarter of
1999. The increase is largely attributable to the underlying trends in loan
growth and loan mix as reflected in Note 4 coupled with a slight increase in the
ratio of net charge-offs to average loan outstanding.
NONINTEREST INCOME.
Noninterest income increased $507 thousand, or 8%, for the first quarter of 2000
compared with the first quarter of 1999. Increases in both insurance service
income of $500 thousand or 28%, and alternative investment income of $274
thousand or 144%, contributed to noninterest income growth in the first quarter
2000 compared with the same quarter 1999. This increase was partially offset by
a decrease in trust service income of $165 thousand or 22%.
NONINTEREST EXPENSE.
Noninterest expense increased $1,175 thousand, or 8%, for the first quarter of
2000 compared with the first quarter of last year. Salaries and benefits, which
represents 54% of total noninterest expense, increased $289 thousand, or 4%.
Occupancy and equipment expense increased $290 thousand, or 13%. Other operating
expense increased $380 thousand, or 9%. 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) increased from 66.0% for the
period ended March 31, 1999, to 66.5% for the period ended March 31, 2000.
INCOME TAXES.
The provision for income taxes increased to $1.861 million for the first quarter
of 2000, from $1.806 million for the first quarter of 1999. Tax expense varies
from one period to the next with changes in the level of income before taxes,
changes in the amount of tax-exempt income, and the relationship of these
changes to each other. Bancorp's effective tax rate for the first quarter of
2000 is 27% and for the same period in 1999 was 29%. Bancorp's income tax
expense differs from the amount computed at statutory rates primarily due to
tax-exempt interest from certain loans and investment securities.
NONPERFORMING ASSETS
The table below summarizes Bancorp's nonperforming assets and contractually
past-due loans. Through asset resolutions and sales, total nonperforming assets
at March 31, 2000 increased $273 thousand compared with year earlier levels and
declined $1.1 million since year-end 1999. Loans past due 90 days or more as to
interest or principal decreased $3.0 million compared with prior year levels and
decreased $804 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 March 31, 2000, Bancorp had $33.1 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 $26.7 million.
14
<PAGE>
<TABLE>
<CAPTION>
Nonperforming Assets and Contractually Past-Due Loans:
March 31,
---------------------- December 31,
(Dollars in thousands) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans (1) $ 4,551 $ 4,732 $ 6,181
Other real estate owned net of valuation allowance (2) 1,760 1,306 1,185
- -----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,311 $ 6,038 $ 7,366
- -----------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days as to interest or principal (3) $ 710 $ 3,736 $ 1,514
Nonperforming loans to total loans 0.39% 0.47% 0.55%
Nonperforming assets to total loans plus
other real estate owned 0.54% 0.60% 0.66%
Nonperforming assets to total assets 0.36% 0.37% 0.43%
Allowance for credit losses times nonperforming loans 2.85 3.03 2.11
Allowance for credit losses times nonperforming assets 2.05 2.37 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.
(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 are 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.
15
<PAGE>
- 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 March
31, 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.
Analysis of Allowance for Credit Losses:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding
less average unearned income (1) $ 1,140,064 $ 990,628 $ 1,116,658
- -----------------------------------------------------------------------------------------------------------------
Allowance for credit losses at beginning of year $ 13,068 $ 14,241 $ 14,241
Charge-offs:
Real estate 190 91 586
Commercial and industrial 279 2 388
Consumer 968 926 4,144
- -----------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,437 1,019 5,118
- -----------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate 6 2 310
Commercial and industrial 26 15 371
Consumer 619 562 1,969
- -----------------------------------------------------------------------------------------------------------------
Total recoveries 651 579 2,650
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs 786 440 2,468
- -----------------------------------------------------------------------------------------------------------------
Additions charged to operating expense 666 525 1,295
- -----------------------------------------------------------------------------------------------------------------
Allowance for credit losses at end of period $ 12,948 $ 14,326 $ 13,068
=================================================================================================================
Net charge-offs to average loans outstanding 0.07% 0.04% 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.
16
<PAGE>
Allocation of Allowance for Credit Losses;
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 1999
% of % of % of
Gross Gross Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1) Amount Loans(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Construction and land development $ 1,648 6.1% $ 1,630 6.9% $ 1,612 6.1%
Residential mortgage 597 28.5% 572 29.2% 653 27.4%
Other mortgage 4,225 24.6% 3,307 24.1% 3,960 24.8%
Commercial and industrial 2,616 15.4% 1,693 12.2% 2,388 15.3%
Consumer 3,270 24.3% 3,195 25.9% 3,073 25.4%
Unallocated 592 1.0% $3,929 1.7% 1,382 1.0%
- --------------------------------------------------------------------------------------------------------------------------------
Totals $ 12,948 100.0% $ 14,326 100.0% $ 13,068 100.0%
================================================================================================================================
</TABLE>
(1) Reflects the percentage of loans in each category to total loans
YEAR 2000 COMPUTER READINESS
This disclosure is provided pursuant to the Securities and Exchange Commission's
Interpretation entitled "Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisors, Investment Companies and Municipal
Securities Issuers" effective August 4, 1999.
The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year (such
as "99" for the year 1999).
Bancorp has experienced no significant problem, and business has continued as
usual, with no systems interruptions related to Year 2000 through April 21,
2000. Third party service providers whose systems could not be tested prior to
January 1, 2000 also have continued to provide uninterrupted service. No loan
relationships in excess of $250,000 have been identified which have experienced
payment or credit risk concerns as a result of Year 2000 issues. Any future
problems that may arise relating to year 2000 issues, the Bancorp's contingency
plan is designed to address.
Bancorp has spent a total of $461,000 addressing Year 2000 issues, and
anticipates no additional out-of-pocket expenses, out of a budget of $525,000.
Costs for dealing with Year 2000 issues have been provided from operating
revenues.
This will be the last disclosure of Year 2000 issues and consequences pursuant
to the referenced Securities and Exchange Commission Interpretation.
17
<PAGE>
CAPITAL RESOURCES
Shareholders' equity totaled $145.0 million at March 31, 2000, an increase of 1%
compared with the 1999 year-end level of $143.8 million, and an decrease of 3%
from the year earlier level of $149.6 million. The fair value of the
available-for-sale portfolio declined $5.4 million (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 March 31, 2000, as follows:
CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
March 31, 2000
-----------------------------------------------------
Tier 1 Total Leverage
Capital Capital Ratios
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual 12.38% 13.46% 8.79%
Regulatory Minimum 4.00% 8.00% 3.00%
- -------------------------------------------------------------------------------------------
Excess 8.38% 5.46% 5.79%
===========================================================================================
</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.
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
18
<PAGE>
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. Table 7
presents Bancorp's MVE at March 31, 2000.
<TABLE>
<CAPTION>
Effects of Change in Interest rates on Market Value of Portfolio Equity:
at March 31, 2000
(Dollars in thousands) Percent Change
- ---------------------------------------------------------------------------------------------------------------
Market Value Hypothetical Hypothetical
Change in of Portfolio Increase Increase Board
Interest Rates Equity (Decrease) (Decrease) Limit(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 bp rise $ 112,339 $ (28,317) (20.1)% (30.00)%
200 bp rise 121,355 (19,301) (13.7) (20.0)
100 bp rise 130,783 (9,873) (7.0) (10.0)
Base scenario 140,656 -- -- --
100 bp decline 161,612 20,956 14.9 (10.0)
200 bp decline 173,083 32,427 23.1 (20.0)
300 bp decline 185,204 44,548 31.7 (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 March 31, 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.
19
<PAGE>
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 18, 2000.
(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 2003 annual meeting of stockholders:
<TABLE>
<CAPTION>
Name For Withheld Against
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Carl Benna 7,895,498 452,737 --
Beverly B. Byron 7,835,574 512,661 --
Maurice A. Gladhill 7,888,292 459,943 --
James K. Kluttz 7,883,478 464,757 --
Richard W. Phoebus, Sr. 7,870,745 477,490 --
Thomas R. Winkler 7,881,434 466,801 --
Elected to serve as directors until the 2001 annual meeting of stockholders:
Howard E. Harrison, III 7,876,862 471,373 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
23. Consent of experts and counsel. Filed as an exhibit hereto
and incorporated herein by reference.
27. Financial Data Schedule. Filed as an exhibit hereto and
incorporated herein by reference.
(b) Reports on Form 8-K
None reported
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F&M BANCORP
--------------------------
(Registrant)
May 9, 2000 /s/ Faye E. Cannon
------------------------- --------------------------
Date FAYE E. CANNON
PRESIDENT AND CEO
May 9, 2000 /s/ Kaye A. Simmons
------------------------- --------------------------
Date KAYE SIMMONS
CFO AND TREASURER
21
<PAGE>
Exhibit 23
Report of Independent Public Accounts
As independent public accountants, we hereby consent to the incorporation of
our Auditors Report included in F&M Bancorp's Form 10-K for the year ended
December 31, 1999, into F&M Bancorp's previously filed Registration
Statements on Form S-8 (File Nos. 33-39941, 002-88390, 333-93815, 333-16709,
333-68437, 333-02433, 333-76669) and Form S-3 (File No. 33-39940).
/s/ Arthur Andersen LLP
Vienna Virginia
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR UNION
NATIONAL BANCORP'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 66,806
<INT-BEARING-DEPOSITS> 8,953
<FED-FUNDS-SOLD> 3,967
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 312,511
<INVESTMENTS-CARRYING> 98,201
<INVESTMENTS-MARKET> 0
<LOANS> 1,175,575
<ALLOWANCE> 12,948
<TOTAL-ASSETS> 1,736,064
<DEPOSITS> 1,335,966
<SHORT-TERM> 101,671
<LIABILITIES-OTHER> 21,472
<LONG-TERM> 131,933
0
0
<COMMON> 55,057
<OTHER-SE> 89,965
<TOTAL-LIABILITIES-AND-EQUITY> 1,736,064
<INTEREST-LOAN> 23,731
<INTEREST-INVEST> 6,131
<INTEREST-OTHER> 261
<INTEREST-TOTAL> 30,123
<INTEREST-DEPOSIT> 10,847
<INTEREST-EXPENSE> 13,865
<INTEREST-INCOME-NET> 16,258
<LOAN-LOSSES> 666
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,978
<INCOME-PRETAX> 6,576
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,715
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 7.64
<LOANS-NON> 4,551
<LOANS-PAST> 710
<LOANS-TROUBLED> 1,760
<LOANS-PROBLEM> 33,100
<ALLOWANCE-OPEN> 13,068
<CHARGE-OFFS> 1,519
<RECOVERIES> 733
<ALLOWANCE-CLOSE> 12,948
<ALLOWANCE-DOMESTIC> 12,356
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 592
</TABLE>
