<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 September 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 11,012,679 shares outstanding as of October 25, 2000.
--------------------------------------------------------------------------------
<PAGE>
F&M BANCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets,
September 30, 2000 and 1999 (Unaudited) and December 31, 1999....................................................3
Consolidated Statements of Income (Unaudited),
Three and Nine Months Ended September 30, 2000 and 1999..........................................................4
Consolidated Statements of Comprehensive Income (Unaudited),
Three and Nine Months Ended September 30, 2000 and 1999..........................................................5
Consolidated Statements of Changes in Shareholders' Equity (Unaudited),
Nine Months Ended September 30, 2000 and Twelve Months Ended December 31, 1999...................................6
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 2000 and 1999....................................................................7
Notes to Consolidated Financial Statements (Unaudited)...........................................................8
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................13
Quantitative and Qualitative Disclosures about Market Risk......................................................21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................22
Signatures......................................................................................................23
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30, September 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 $ 49,377 $ 55,036 $ 60,888
Federal funds sold 4,251 14,397 11,304
Interest- bearing deposits with banks 4,635 4,965 14,128
-------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 58,263 74,398 86,320
-------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 5,726 14,717 15,497
Investment securities
Available for sale, at fair value 317,360 343,519 317,945
Held to maturity, fair value
$88,097, $106,131 and $97,357, respectively 91,113 107,355 99,416
-------------------------------------------------------------------------------------------------------------------------------
Total investment securities 408,473 450,874 417,361
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 1,222,453 1,041,837 1,114,734
Less: Allowance for credit losses (13,310) (13,790) (13,068)
-------------------------------------------------------------------------------------------------------------------------------
Net loans 1,209,143 1,028,047 1,101,666
-------------------------------------------------------------------------------------------------------------------------------
Bank premise and equipment, net 35,916 35,652 35,494
Other real estate owned, net 1,270 1,147 1,185
Interest receivable 11,265 11,433 10,080
Intangible assets 5,843 7,589 6,696
Other assets 28,042 25,871 45,035
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,763,941 $ 1,649,728 $ 1,719,334
===============================================================================================================================
LIABILITIES:
Deposits:
Noninterest-bearing $ 198,352 $ 172,840 $ 188,154
Interest-bearing 1,127,434 1,114,236 1,125,919
-------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,325,786 1,287,076 1,314,073
-------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and Securities sold
under agreements to repurchase 116,071 93,717 94,083
Other short-term borrowings 1,993 1,746 48,183
Long-term borrowings 149,546 103,746 100,578
Accrued taxes and other liabilities 18,824 16,723 18,597
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,612,220 1,503,008 1,575,514
-------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized
50,000,000 shares; issued and outstanding 11,012,672 shares,
10,996,728 shares, and 10,999,621 shares, respectively 55,063 46,818 54,998
Surplus 78,470 86,071 78,248
Retained earnings 23,997 21,115 18,951
Accumulated other comprehensive (loss) (5,809) (7,284) (8,377)
-------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 151,721 146,720 143,820
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,763,941 $ 1,649,728 $ 1,719,334
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 25,915 $ 21,503 $ 74,626 $ 63,680
Interest on deposits with banks 104 281 379 946
Interest and dividends on investment securities
Taxable 4,624 5,079 13,863 14,393
Tax-exempt 1,432 1,497 4,385 4,439
Interest on federal funds sold 64 161 178 820
--------------------------------------------------------------------------------------------------------------------------
Total interest income 32,139 28,521 93,430 84,278
--------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 11,680 10,740 33,618 32,198
Interest on federal funds purchased and securities
sold under agreements to repurchase 1,760 818 4,668 2,036
Interest on Federal Home Loan Bank Borrowings 2,422 1,339 6,335 4,032
Interest on other short-term borrowings 28 25 75 54
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 15,891 12,922 44,696 38,320
--------------------------------------------------------------------------------------------------------------------------
Net interest income 16,248 15,599 48,735 45,958
Provision for credit losses 1,215 100 2,511 950
--------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 15,033 15,499 46,224 45,008
--------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposit accounts 2,071 1,812 5,901 5,208
Insurance income 1,910 1,643 6,146 5,177
Gains on sales of loans 450 529 1,494 1,752
Gains on sales of securities 633 15 633 14
Gains (losses) on sales of property 92 - 43 190
Alternative investment & stock brokerage income 971 683 2,976 2,193
Other operating income 1,511 1,471 4,634 4,047
--------------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,639 6,153 21,826 18,581
--------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and employee benefits 8,478 9,116 25,612 25,662
Merger-related expense 7 117 318 117
Occupancy and equipment expense 2,228 2,278 7,146 6,907
Other operating expense 4,758 4,451 14,217 13,554
--------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 15,470 15,962 47,292 46,240
--------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,201 5,690 20,757 17,349
Provision for income taxes 2,230 1,570 6,280 4,707
==========================================================================================================================
Net Income $ 4,970 $ 4,120 $ 14,477 $ 12,642
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 4,970 $ 4,120 $ 14,477 $ 12,642
=============================================================================================================================
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains (losses) on securities $ 1,946 $ (2,219) $ 2,568 $ (7,560)
Reclassification adjustment for gains (losses)
included in net income - - - -
-----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 1,946 (2,219) 2,568 (7,560)
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income 6,916 1,901 17,045 5,082
=============================================================================================================================
Earnings per Common Share - Basic
Based on weighted average shares outstanding
11,009,477 in 2000, and 10,975,633 in 1999 $ 0.44 $ 0.38 $ 1.31 $ 1.15
-----------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted
Based on weighted average shares outstanding
11,028,794 in 2000, and 11,041,808 in 1999 $ 0.44 $ 0.37 $ 1.31 $ 1.14
=============================================================================================================================
Dividends per Share $ 0.27 $ 0.26 $ 0.81 $ 0.76
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGED IN SHAREHOLDERS' EQUITY (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
(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 - - (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 - - 14,477 - 14,477
Dividend reinvestment plan (15) 13 (68) - (70)
Cash dividends paid - - (9,359) - (9,359)
Stock consideration for
options exercised (3) (5) (4) - (12)
Stock options exercised 83 214 - - 297
Stock Dividend - - - - -
Other comprehensive income - - - 2,568 2,568
-------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 55,063 $ 78,470 $ 23,997 $ (5,809) $ 151,721
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
F&M Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 14,477 $ 12,642
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for credit losses 2,511 950
Depreciation and amortization 3,242 2,942
Amortization of intangibles 853 807
Net premium amortization on investment securities 246 613
Increase in interest receivable (1,185) (1,250)
Increase in interest payable 795 1,795
Deferred income tax benefits 626 (16)
Amortization (accretion) of net loan origination costs (fees) 199 (127)
(Loss) Gain on sales of property (85) 12
Loss on sales/calls of securities - (14)
Decrease in loans held for sale 9,771 13,812
Decrease/(increase) in other assets 16,312 (712)
Decrease in other liabilities (568) (1,627)
Other (1,977) (27)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 45,327 29,800
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held to maturity (490) (19,477)
Purchases of investment securities available for sale (39,037) (164,496)
Proceeds from sales/calls of securities available for sale 1,429 39,178
Proceeds from maturing securities available for sale 42,672 108,182
Proceeds from maturing securities held to maturity 8,643 9,881
Net (increase) in loans (110,186) (51,356)
Purchases of premises and equipment (3,665) (2,305)
Proceeds from sales of property - 558
Other investing activities (85) (1,106)
------------------------------------------------------------------------------------------------------------------------
Net cash (used) in investing activities (100,719) (80,941)
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, interest-bearing checking,
savings and money market accounts 3,274 17,550
Net increase/(decrease) in certificates of deposit 8,439 (15,734)
Net increase in federal funds purchased and securities sold under 21,988 32,290
agreements to repurchase
Net (decrease)/increase in other short-term borrowings (46,190) 9,500
Net increase/(decrease) in long-term borrowings 48,968 (13,030)
Cash dividends paid (9,359) (8,118)
Dividend reinvestment plan (70) 155
Proceeds from issuance of common stock 285 1,413
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,335 24,026
Net (decrease) in cash and cash equivalents (28,057) (27,115)
Cash and cash equivalents at beginning of year 86,320 101,513
Cash and cash equivalents at end of period 58,263 74,398
========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest 43,901 38,321
Cash payments for income tax 4,644 1,225
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available for sale,
net of income taxes 2,568 (7,284)
</TABLE>
7
<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>
Nine Months Ended
September 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 143,859 17 3,774 140,102
Obligations of state and political subdivisions 44,914 57 1,272 43,699
Mortgage-backed securities 124,293 1 4,925 119,369
----------------------------------------------------------------------------------------------------------------------------
Total debt securities 313,066 75 9,971 303,170
Equity securities 13,672 518 - 14,190
----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 326,738 593 9,971 317,360
----------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of state and political subdivisions 82,355 346 1,095 81,606
Mortgage-backed securities 8,758 12 58 8,712
----------------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 91,113 358 1,153 90,318
============================================================================================================================
Total investment securities 417,851 951 11,124 407,678
============================================================================================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 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 157,278 73 3,513 153,838
Obligations of state and political subdivisions 38,434 414 1,732 37,116
Other Debt Securities - - - -
Mortgage-backed securities 140,184 13 5,454 134,743
----------------------------------------------------------------------------------------------------------------------------
Total debt securities 335,896 500 10,699 325,697
Equity securities 18,051 38 267 17,822
----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 353,947 538 10,966 343,519
----------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies - - - -
Obligations of state and political subdivisions 96,579 570 1,775 95,374
Mortgage-backed securities 10,776 37 56 10,757
----------------------------------------------------------------------------------------------------------------------------
Total securities to be held to maturity 107,355 607 1,831 106,131
----------------------------------------------------------------------------------------------------------------------------
Total investment securities 461,302 1,145 12,797 449,650
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended
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.
9
<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 September 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>
Nine Months Ended
September 30, 2000
Amortized Fair
(Dollars in thousands) Cost Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $ 19,240 $ 19,212
After 1 but within 5 years 80,924 79,492
After 5 but within 10 years 73,767 70,948
After 10 years 13,820 13,126
Mortgage-backed securities 125,315 120,392
Equity securities 13,672 14,190
--------------------------------------------------------------------------------------------------------------------
Total available for sale 326,738 317,360
--------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 3,244 3,247
After 1 but within 5 years 33,536 33,781
After 5 but within 10 years 19,456 19,292
After 10 years 26,126 25,294
Mortgage-backed securities 8,751 8,704
--------------------------------------------------------------------------------------------------------------------
Total to be held to maturity 91,113 90,318
--------------------------------------------------------------------------------------------------------------------
Total investment securities $ 417,851 $ 407,678
====================================================================================================================
</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
$161.3 million at September 30, 2000.
10
<PAGE>
NOTE 4. LOANS
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousand of Dollars) 2000 1999 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans:
Construction and land development $ 84,073 $ 62,521 $ 67,452
Secured by farmland 6,311 8,360 7,884
Residential mortgage 342,753 301,336 305,834
Other mortgage 301,771 256,989 276,414
Agricultural 489 982 656
Commercial and industrial loans 181,808 135,539 170,379
Consumer 303,974 272,723 283,000
Other loans 1,274 3,387 3,115
--------------------------------------------------------------------------------------------------------------------
Totals $ 1,222,453 $ 1,041,837 $ 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>
September 30, December 31,
2000 1999 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $ 33,172 $ 33,637 $ 33,688
Furniture and equipment 31,383 28,627 28,594
Leasehold improvements 3,694 3,483 3,537
--------------------------------------------------------------------------------------------------------------------
68,249 65,747 65,819
Less: accumulated depreciation
and amortization 32,333 30,095 30,325
--------------------------------------------------------------------------------------------------------------------
Net premises and equipment $ 35,916 $ 35,652 $ 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 tax (benefit) of $1.9 million and ($1.3) million for the
third quarter of 2000 and 1999, respectively and tax (benefit) of $1.6
million and ($4.8) million for the nine months ended September 30, 2000 and
1999, respectively.
11
<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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Net income $ 4,970 $ 4,120 $ 14,477 $ 12,642
============ ============ ============ ===========
Basic EPS
Shares 11,011,474 10,991,609 11,009,477 10,975,633
EPS $0.44 $0.38 $1.31 $1.15
Dilutive shares
Stock options 57,969 57,969 67,241 66,175
EPS $0.00 $0.00 $0.01 $0.01
Diluted EPS
Shares including options 11,069,443 11,049,578 11,076,718 11,041,808
EPS $0.44 $0.37 $1.31 $1.14
</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.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
F&M Bancorp's net income for the third quarter of 2000 was $4.971 million, or
$0.44 basic earnings per share, an increase of 21% compared with earnings of
$4.120 million, or $0.37 basic earnings per share, for the third 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.
Third quarter 2000 earnings were favorably impacted by a 24% increase in
noninterest income as well as reducing noninterest expense by 3% compared to
the third quarter of last year. Return on average assets was 1.13% for the
third quarter of 2000, compared to 1.00% for the third quarter of 1999.
Return on average equity in the third quarter of 2000 was 13.11%, compared to
11.18% for the same period of 1999.
For the nine months ended September 30, 2000 compared with the nine months
ended September 30, 1999, net income increased 15% to $14.477 million, or
$1.31 basic earnings per share, from $12.642 million, or $1.15 basic earnings
per share. Returns on average assets and average equity were 1.12% and
13.07%, respectively, for the first three quarters of 2000 compared with
1.04% and 11.43%, respectively, for the same period 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.
13
<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 69%
of gross revenue through the first nine 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 third quarter and year-to-date
periods are presented on a comparative basis in the tables below. Average
balances for the third quarter 2000, compared with the third quarter 1999
were as follows. Net interest income on a taxable-equivalent basis increased
by 5%, or $753 thousand. Average earning assets increased 8%, or $125.6
million. Average loans continued to grow at a strong pace of 19%, or $192
million. The average balance in the investment portfolio decreased 10%, or
$48.3 million. This is partially due to the increase in loan demand. The
yield on earning assets increased 34 basis points to 7.92%. Average
interest-bearing deposits decreased $361 thousand or less than 1%. Additional
long-term and short-term funding was provided principally by Federal Home
Loan Bank advances, which increased $50 million, or 49%.
Average balances for the nine months ended September 30, 2000, compared with
the nine months ended September 30, 1999 were as follow. Net interest income
on a taxable-equivalent basis increased by 6%, or $2.9 million. Average
earning assets increased 7%, or $113.2 million. Average loans grew 17%, or
$174.8 million. The average balance in the investment portfolio decreased 6%,
or $28.9 million. As loan demand has increased, investment securities have
been utilized to fund this growth. The yield on earning assets across all
sectors increased 23 basis points to 7.88%. Average interest-bearing deposits
increased $12.0 million, or 1%. The majority of this growth is in money
market accounts that grew 23% in this period. Additional short-term and
long-term funding was provided principally by Federal Home Loan Bank
advances, which increased $38.2 million, or 38%.
14
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND AVERAGE RATE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 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: $ 8,903 $ 156 6.97% $ 26,994 $ 226 3.32%
Short-term funds
Investment securities (1)
Taxable 289,167 4,624 6.36% 334,227 5,064 6.01%
Tax-exempt (2) 130,282 2,169 6.62% 133,500 2,267 6.74%
----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 419,449 6,793 6.44% 467,727 7,331 6.22%
----------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 1,221,255 25,892 8.43% 1,029,302 21,567 8.31%
----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,649,607 32,841 7.92% 1,524,023 29,124 7.58%
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning assets 113,028 110,840
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,762,635 $ 1,634,863
================================================================================================================================
LIABILITIES
Interest bearing liabilities:
Interest bearing deposits
Savings $ 151,448 $ 829 2.18% $ 179,730 $ 1,019 2.25%
Checking 187,242 902 1.92% 182,313 999 2.17%
Money market accounts 263,797 2,790 4.21% 206,838 1,561 2.99%
Certificates of deposit 523,067 7,157 5.44% 557,034 7,161 5.10%
----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,125,554 11,678 4.13% 1,125,915 10,740 3.78%
----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 123,387 1,761 5.68% 71,028 819 4.57%
Other short term borrowings 114,603 1,956 6.79% 8,044 112 5.52%
----------------------------------------------------------------------------------------------------------------------------------
Total Short Term Borrowings 237,990 3,717 6.21% 79,072 931 4.67%
Long term borrowings 36,709 492 5.33% 93,217 1,252 5.33%
----------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 274,699 4,209 6.10% 172,289 2,183 5.03%
----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,400,253 15,887 4.51% 1,298,204 12,923 3.95%
Non-interest bearing liabilities:
Demand deposits 193,166 173,856
Other liabilities 17,787 15,421
Shareholders' equity 151,429 147,382
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,762,635 $ 1,634,863
================================================================================================================================
Net interest income 16,954 16,201
Net interest spread (3) 3.41% 3.63%
Net interest margin(4) 4.09% 4.22%
</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 ratio (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 ratio (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to earning assets.
15
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND AVERAGE RATE (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 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 $ 13,585 $ 557 5.48% $ 46,342 $ 1,567 4.52%
Investment securities (1)
Taxable 292,258 13,861 6.34% 322,003 14,360 5.96%
Tax-exempt (2) 131,256 6,645 6.76% 130,417 6,727 6.90%
--------------------------------------------------------------------------------------------------------------------------------
Total investment securities 423,514 20,506 6.47% 452,420 21,087 6.23%
--------------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 1,187,717 74,777 8.41% 1,012,874 63,886 8.43%
--------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,624,816 95,840 7.88% 1,511,636 86,540 7.65%
--------------------------------------------------------------------------------------------------------------------------------
Total noninterest-earning assets 104,199 109,986
--------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,729,015 $ 1,621,622
================================================================================================================================
LIABILITIES
Interest bearing liabilities:
Interest bearing deposits
Savings $ 160,433 $ 2,624 2.18% $ 169,612 $ 3,180 2.51%
Checking 190,617 2,933 2.06% 177,854 3,002 2.26%
Money market accounts 251,086 7,418 3.95% 203,976 4,135 2.71%
Certificates of deposit 523,494 20,643 5.27% 562,234 21,881 5.20%
--------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,125,630 33,618 3.99% 1,113,676 32,198 3.87%
--------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 112,833 4,668 5.53% 65,221 2,090 4.28%
Other short term borrowings 88,414 4,359 6.59% 5,891 255 5.79%
--------------------------------------------------------------------------------------------------------------------------------
Total Short Term Borrowings 201,247 9,027 5.99% 71,112 2,345 4.41%
Long term borrowings 50,896 2,051 5.38% 95,233 3,778 5.30%
--------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 252,143 11,078 5.87% 166,345 6,123 4.92%
--------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,377,773 44,696 4.33% 1,280,021 38,321 4.00%
Non-interest bearing liabilities:
Demand deposits 186,647 176,065
Other liabilities 17,520 16,824
Shareholders' equity 147,075 148,712
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,729,015 $ 1,621,622
================================================================================================================================
Net interest income 51,144 48,219
Net interest spread (3) 3.55% 3.65%
Net interest margin(4) 4.20% 4.26%
</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 ratio (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 ratio (expressed as
percentages) of taxable-equivalent interest income to earning assets and of
interest expense to earning assets.
16
<PAGE>
PROVISION FOR CREDIT LOSSES.
The provision for credit losses increased to $1.215 million for the third
quarter of 2000 compared with $100 thousand for the third quarter of 1999.
For the nine-month period ended September 30, 2000, the provision increased
$1.561 million or 164% as compared to the same period last year. This
increase is in part, a result of the 16% growth in the Bancorp's loan
portfolio as well as additional provision for a commercial loan in default.
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/losses on the sales of portfolio items like,
loans, securities, or fixed assets are also included.
For the third quarter 2000, compared with the third quarter 1999 total
noninterest income increased 24%, or $1.5 million. Expanding into new markets
products such as stocks, mutual funds, and trust, 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 24% or, $555
thousand. Service charges on deposit accounts increased 14%, or $259
thousand. Gains on sales of securities increased to $633 thousand for the
third quarter 2000 from $15 thousand for the third quarter 1999.
The nine months ended September 30, 2000, compared to the nine months ended
September 30, 1999 yielded similar growth results. Total noninterest income
increased 17%, or $3.2 million. Alternative investments and insurance
activity increased noninterest income by 24%, or $1.8 million, while service
charges on deposit accounts produced a $694 thousand, or 13% 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
54% 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 noninterest expense to the sum
of net interest income on a tax equivalent basis and noninterest income)
increased from 63.65% for the period ended September 30, 1999, to 64.42% for
the period ended September 30, 2000.
The third quarter 2000, compared to the third quarter 1999 results were as
follows. Total noninterest expense decreased 3%, or $492 thousand. Salaries
and employee benefits decreased 7% or $638 thousand, occupancy and equipment
expense decreased 2%, or $50 thousand, while other operating expenses
including merger related expenses increased 4% or $197 thousand.
For the nine months ended September 30, 2000, compared to the nine month
ended September 30, 1999, total noninterest expense increased 2%, or $1.1
million. Salaries and employee benefits decreased less than 1%, or $51
thousand. Occupancy and equipment rose 4% or $239 thousand, and other
operating expenses including merger-related expense increased 6% or $864
thousand.
17
<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 42% to $2.230 million in the third
quarter, from $1.570 million in the same period last year. The effective tax
rate was 31% compared to 28% in this same period.
The nine months ended September 30, 2000, compared to the nine months ended
September 30, 1999 resulted in the provision for income taxes increasing 33%
to $6.280 million, from $4.707 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 September 30, 2000 decreased
$1.0 million compared with year-earlier levels and decreased $3.2 million
since year-end 1999. Loans past due 90 days or more as to interest or
principal decreased $566 thousand compared with prior year levels and
increased $396 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 September 30, 2000, Bancorp had $24.2 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>
September 30, December 31,
(Dollars in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans (1) $ 2,897 $ 4,001 $ 6,181
Other real estate owned net of valuation allowance (2) 1,270 1,147 1,185
-----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,167 $ 5,148 $ 7,366
-----------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days as to interest or principal (3) $ 1,910 $ 2,476 $ 1,514
Nonperforming loans to total loans 0.24% 0.38% 0.55%
Nonperforming assets to total loans plus
other real estate owned 0.34% 0.49% 0.65%
Nonperforming assets to total assets 0.24% 0.31% 0.43%
Allowance for credit losses times nonperforming loans 4.59 3.45 2.11
Allowance for credit losses times nonperforming assets 3.19 2.68 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
18
<PAGE>
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 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
September 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.
19
<PAGE>
Analysis of Allowance for Credit Losses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
(Dollars in thousands) 2000 1999 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding
less average unearned income (1) $ 1,182,955 $ 999,576 $ 1,116,658
--------------------------------------------------------------------------------------------------------------------
Allowance for credit losses at beginning of year $ 13,068 $ 14,241 $ 14,241
Charge-offs:
Real estate 412 533 586
Commericial and industrial 849 159 388
Consumer 2,966 2,750 4,144
--------------------------------------------------------------------------------------------------------------------
Total loans charged-off 4,227 3,442 5,118
--------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate 97 302 310
Commercial and industrial 34 312 371
Consumer 1,827 1,427 1,969
--------------------------------------------------------------------------------------------------------------------
Total recoveries 1,958 2,041 2,650
--------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,269 1,401 2,468
--------------------------------------------------------------------------------------------------------------------
Additions charged to operating expense 2,511 950 1,295
--------------------------------------------------------------------------------------------------------------------
Allowance for credit losses at end of period $ 13,310 $ 13,790 $ 13,068
====================================================================================================================
Net charge-offs to average loans outstanding 0.19% 0.14% 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>
Nine Month Ended
September 30, December 31,
2000 1999 1999
% of Total % of Total % of Total
(Dollars in thousands) Amount Allowance Amount Allowance Amount Allowance
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Construction and land development $ 1,845 13.9% $ 1,086 7.9% $ 1,612 12.3%
Residential mortgage 652 4.9% 501 3.6% 653 5.0%
Other mortgage 3,922 29.5% 4,168 30.2% 3,960 30.3%
Commercial and industrial 2,365 17.8% 2,195 15.9% 2,388 18.3%
Consumer 3,572 26.8% 3,008 21.8% 3,073 23.5%
Unallocated 954 7.2% 2,832 20.5% 1,382 10.6%
------------------------------------------------------------------------------------------------------------------------------
Totals $ 13,310 100.0% $ 13,790 100.0% $ 13,068 100.0%
==============================================================================================================================
</TABLE>
20
<PAGE>
CAPITAL RESOURCES
Shareholders' equity totaled $151.7 million at September 30, 2000; an
increase of 5% compared with the 1999 year-end level of $143.8 million, and
an increase of 3% from the year earlier level of $146.7 million. The fair
value of the available-for-sale portfolio increased $2.568 million (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 September 30, 2000, as follows:
CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
Nine Months Ended
September 30, 2000
-----------------------------------------------------
Tier 1 Total Leverage
Capital Capital Ratios
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual 11.75% 12.78% 8.64%
Regulatory Minimum 4.00% 8.00% 3.00%
-------------------------------------------------------------------------------------------
Excess 7.75% 4.78% 5.64%
===========================================================================================
</TABLE>
Fair value adjustments to shareholders' equity for changes in the fair value
of securities classified as available-for-sale are excluded from the
calculation of these capital ratios in accordance with regulatory guidelines.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is defined as the future changes in market prices that increase
or decrease the value of financial instruments, i.e. cash, investments,
loans, deposits and debt. Included in market risk are interest rate risk,
foreign currency exchange rate risk, commodity price risk, and other relevant
market risks. Bancorp's primary source of market risk is interest rate risk.
Market risk-sensitive financial instruments are entered into for purposes
other than trading.
Interest rate risk refers to the exposure of Bancorp's earnings and capital
to changes in interest rates. The magnitude of the effect of changes in
market rates depends on the extent and timing of such changes and on
Bancorp's ability to adjust. The ability to adjust is controlled by the time
remaining to maturity on fixed-rate obligations, the contractual ability to
adjust rates prior to maturity, competition, and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on Bancorp's earnings
and capital. 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,
21
<PAGE>
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.
Management believes that interest rate risk measured by simulation modeling
which calculates expected net interest income based on projected
interest-earning assets and interest-bearing liabilities. The model
projections are based upon historical trends and management's expectations of
balance sheet growth patterns, spreads to market rates, historical market
rate relationships, prepayment behavior, current and expected product
offerings and sales activities. The policy guideline limit for net interest
income simulation is a negative impact to net interest income of 15.0 percent
for the up or down 300 basis points ramp scenarios when compared with the
flat rate scenario. Management has generally maintained a risk position well
within the policy guideline level. The model indicated the impact of a 300
basis point rise in rates over the next 12 months would cause approximately a
1.1 percent decrease in net interest income at September 30, 2000. A 300
basis point decrease in rates over the next 12 months would cause
approximately a .8 percent increase in net interest income at September 30,
2000.
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.
22
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Material contracts. Filed as an exhibit hereto and incorporated
herein by reference
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)
October 25, 2000 /s/ Faye E. Cannon
------------------------- ----------------------
Date FAYE E. CANNON
PRESIDENT AND CEO
October 25, 2000 /s/ Kaye A. Simmons
------------------------- ----------------------
Date KAYE A. SIMMONS
CFO AND TREASURER
23
