** **

**SECURITIESAND EXCHANGE COMMISSION**

## **WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**ý****       ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2001**

** **

**OR**

 

**o**        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**Commission file number 0-12638**

 

**F&MBANCORP**

*(Exact name ofregistrant as specified in its charter)*

 

| **Maryland**                                                      |   | **52-1316473**                         |
|-------------------------------------------------------------------|--------|----------------------------------------|
| *(State or other jurisdiction of  incorporation or organization)* |   | *(I.R.S. Employer 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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý  No o

 

Common Stock of 10,864,581shares outstanding as of November 2, 2001.

 

 

F&MBANCORP

TABLE OF CONTENTS

 
| PART I  | FINANCIAL  INFORMATION                                                                                                              |
|---------|-------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                |
|    | Consolidated Balance Sheets,

September 30, 2001 (Unaudited) and December 31, 2000                                                  |
|    |                                                                                                                                |
|    | Consolidated Statements of Income and  Comprehensive Income (Unaudited), 

Three and Nine Months Ended September 30,  2001 and 2000 |
|    |                                                                                                                                |
|    | Consolidated Statements of Changes in  Shareholders' Equity (Unaudited), 

Nine Months Ended September 30, 2001 and  2000           |
|    |                                                                                                                                |
|    | Consolidated Statements of Cash Flows  (Unaudited), 

Nine Months Ended September 30, 2001 and 2000                                 |
|    |                                                                                                                                |
|    | Notes to Consolidated Financial Statements  (Unaudited)                                                                             |
|    |                                                                                                                                |
|    | Management's Discussion and Analysis of  Financial Condition and Results of Operations                                              |
|    |                                                                                                                                |
|    | Quantitative and Qualitative Disclosures  about Market Risk                                                                         |
|    |                                                                                                                                |
| PART II | OTHER INFORMATION                                                                                                                   |
|    |                                                                                                                                |
|    | Item 6.   Exhibits and Reports on Form 8-K                                                                                     |
|    |                                                                                                                                |
|    | Signatures                                                                                                                          |

 

 
| **CONSOLIDATED BALANCE SHEETS****(Unaudited)**                                                                                      |   |               |      |              |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------|--------|
| **F&M  BANCORP and Subsidiaries**                                                                                               |   |               |      |              |   |
|                                                                                                                                |   | **September  30,** |      | **December  31,** |   |
|                                                                                                                                |   | **2001**           |      | **2000**          |   |
| **(Dollars in thousands, except per share data)**                                                                                   |   | **(Unaudited)**    |      |              |   |
|                                                                                                                                |   |               |      |              |   |
| **Assets**                                                                                                                          |   |               |      |              |   |
| Cash  and due from banks                                                                                                            |   | $                  | 58,580    |              | $      | 55,490 |   |
| Federal  funds sold                                                                                                                 |   | 23,095             |      | 3,052             |   |
| Interest-bearing  deposits with banks                                                                                               |   | 2,484              |      | 6,625             |   |
| Total  cash and cash equivalents                                                                                                    |   | 84,159             |      | 65,167            |   |
| Loans  held for sale                                                                                                                |   | 17,086             |      | 5,994             |   |
| Investment  securities:                                                                                                             |   |               |      |              |   |
| Available  for sale, at fair value                                                                                                  |   | 501,735            |      | 337,837           |   |
| Held  to maturity, fair value of $0 and $88,584, respectively                                                                       |   | -                  |      | 89,405            |   |
| Total  investment securities                                                                                                        |   | 501,735            |      | 427,242           |   |
| Loans,  net of unearned income                                                                                                      |   | 1,178,950          |      | 1,220,130         |   |
| Less:  Allowance for credit losses                                                                                                  |   | (14,219            | )         | (13,232           | )      |
| Net  loans                                                                                                                          |   | 1,164,731          |      | 1,206,898         |   |
| Bank  premise and equipment, net                                                                                                    |   | 36,334             |      | 35,647            |   |
| Other  real estate owned, net                                                                                                       |   | 667                |      | 1,056             |   |
| Interest  receivable                                                                                                                |   | 10,322             |      | 11,172            |   |
| Intangible  assets                                                                                                                  |   | 4,721              |      | 5,566             |   |
| Other  assets                                                                                                                       |   | 32,219             |      | 36,502            |   |
| Total  assets                                                                                                                       |   | $                  | 1,851,974 |              | $      | 1,795,244 |   |
|                                                                                                                                |   |               |      |              |   |
| **Liabilities:**                                                                                                                    |   |               |      |              |   |
| Deposits:                                                                                                                           |   |               |      |              |   |
| Noninterest-bearing                                                                                                                 |   | $                  | 214,933   |              | $      | 207,872 |   |
| Interest-bearing                                                                                                                    |   | 1,274,659          |      | 1,156,160         |   |
| Total  deposits                                                                                                                     |   | 1,489,592          |      | 1,364,032         |   |
| Short-term  borrowings:                                                                                                             |   |               |      |              |   |
| Federal  funds purchased and securities sold under agreements to repurchase                                                         |   | 108,744            |      | 127,395           |   |
| Other  short-term borrowings                                                                                                        |   | 1,772              |      | 110,676           |   |
| Long-term  borrowings                                                                                                               |   | 65,003             |      | 15,790            |   |
| Accrued  taxes and other liabilities                                                                                                |   | 17,908             |      | 19,315            |   |
| Total  liabilities                                                                                                                  |   | 1,683,019          |      | 1,637,208         |   |
| **Shareholders'  equity**                                                                                                           |   |               |      |              |   |
| Common  stock, par value $5 per share; authorized 50,000,000 shares; issued  11,037,840 shares, and 11,014,529 shares, respectively |   | 55,189             |      | 55,073            |   |
| Surplus                                                                                                                             |   | 78,841             |      | 78,488            |   |
| Retained  earnings                                                                                                                  |   | 32,461             |      | 25,857            |   |
| Accumulated  other comprehensive (loss) income                                                                                      |   | 6,153              |      | (1,382            | )      |
| Treasury  shares                                                                                                                    |   | (3,689             | )         | -                 |   |
| Total  shareholders' equity                                                                                                         |   | 168,955            |      | 158,036           |   |
| Total  liabilities and shareholders' equity                                                                                         |   | $                  | 1,851,974 |              | $      | 1,795,244 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 
| **CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME**(Unaudited)                     |   |
|----------------------------------------------------------------------------------------------|--------|
| **F&M  BANCORP and Subsidiaries**                                                        |   |
| **(Dollars in thousands, except per share data)**                                            |   | **Three Months Ended** |   | **Nine  Months Ended** |   |
|                                                                                         |   | **September  30,** |   | **September  30,** |   |
|                                                                                         |   | **2001** |   | **2000** |   | **2001** |   | **2000** |   |
| Interest  Income:                                                                            |   |   |   |   |   |   |   |   |   |
| Interest  and fees on loans                                                                  |   | $ | 23,873 |   | $ | 25,915 |   | $ | 73,227 |   | $ | 74,626 |   |
| Interest  on deposits with banks                                                             |   | 87 |   | 104 |   | 299 |   | 379 |   |
| Interest  and dividends on investment securities:                                            |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                      |   | 5,002 |   | 4,624 |   | 14,778 |   | 13,863 |   |
| Tax-exempt                                                                                   |   | 1,377 |   | 1,432 |   | 4,242 |   | 4,385 |   |
| Interest  on federal funds sold                                                              |   | 130 |   | 64 |   | 568 |   | 178 |   |
| Total  interest income                                                                       |   | 30,469 |   | 32,139 |   | 93,114 |   | 93,430 |   |
| Interest  Expense                                                                            |   |   |   |   |   |   |   |   |   |
| Interest  on deposits                                                                        |   | 12,045 |   | 11,680 |   | 36,952 |   | 33,618 |   |
| Interest  on federal funds purchased and securities sold under agreements to repurchase      |   | 769 |   | 1,760 |   | 2,938 |   | 4,668 |   |
| Interest  on long-term borrowings                                                            |   | 595 |   | 2,422 |   | 1,423 |   | 6,335 |   |
| Interest  on other short-term borrowings                                                     |   | 16 |   | 28 |   | 1,376 |   | 75 |   |
| Total  interest expense                                                                      |   | 13,425 |   | 15,891 |   | 42,689 |   | 44,696 |   |
| Net  interest income                                                                         |   | 17,044 |   | 16,248 |   | 50,425 |   | 48,734 |   |
| Provision  for credit losses                                                                 |   | 430 |   | 1,215 |   | 3,060 |   | 2,511 |   |
| Net  interest income after provision for credit losses                                       |   | 16,614 |   | 15,033 |   | 47,365 |   | 46,223 |   |
| Noninterest  Income                                                                          |   |   |   |   |   |   |   |   |   |
| Service  charges on deposit accounts                                                         |   | 2,062 |   | 2,071 |   | 6,133 |   | 5,901 |   |
| Insurance  income                                                                            |   | 2,134 |   | 1,910 |   | 6,928 |   | 6,146 |   |
| Gains  on sales of loans                                                                     |   | 2,136 |   | 1,479 |   | 3,256 |   | 2,523 |   |
| Gains  on sales of securities                                                                |   | 19 |   | 633 |   | 52 |   | 633 |   |
| Gains  on sales of property                                                                  |   | 130 |   | 92 |   | 238 |   | 43 |   |
| Alternative  investment & stock brokerage income                                         |   | 872 |   | 971 |   | 2,719 |   | 2,976 |   |
| Other  operating income                                                                      |   | 1,558 |   | 1,511 |   | 5,088 |   | 4,635 |   |
| Total  noninterest income                                                                    |   | 8,911 |   | 8,667 |   | 24,415 |   | 22,855 |   |
| Noninterest  Expenses                                                                        |   |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits                                                              |   | 10,717 |   | 9,507 |   | 28,618 |   | 26,641 |   |
| Merger-related  expenses                                                                     |   | - |   | 7 |   | - |   | 318 |   |
| Occupancy  and equipment expense                                                             |   | 2,417 |   | 2,228 |   | 7,376 |   | 7,146 |   |
| Other  operating expense                                                                     |   | 4,609 |   | 4,758 |   | 13,848 |   | 14,217 |   |
| Total  noninterest expenses                                                                  |   | 17,743 |   | 16,500 |   | 49,842 |   | 48,321 |   |
| Income  before provision for income taxes                                                    |   | 7,782 |   | 7,200 |   | 21,938 |   | 20,757 |   |
| Provision  for income taxes                                                                  |   | 2,269 |   | 2,230 |   | 6,235 |   | 6,280 |   |
| Net  Income                                                                                  |   | $ | 5,513 |   | $ | 4,970 |   | $ | 15,703 |   | $ | 14,477 |   |
| Other  Comprehensive Income (Loss), Net of Tax:                                              |   |   |   |   |   |   |   |   |   |
| Unrealized  gains on securities                                                              |   | $ | 3,243 |   | $ | 1,946 |   | $ | 7,502 |   | $ | 2,150 |   |
| Reclassification  adjustment for gains included in net income                                |   | 12 |   | - |   | 33 |   | 418 |   |
| Other  comprehensive income                                                                  |   | 3,255 |   | 1,946 |   | 7,535 |   | 2,568 |   |
| Comprehensive  income                                                                        |   | $ | 8,768 |   | $ | 6,916 |   | $ | 23,238 |   | $ | 17,045 |   |
| Earnings  per Common Share - Basic                                                           |   |   |   |   |   |   |   |   |   |
| Based  on weighted average shares outstanding of 11,002,801 in 2001, and 11,009,477  in 2000 |   | $ | 0.50 |   | $ | 0.44 |   | $ | 1.43 |   | $ | 1.31 |   |
| Earnings  per Common Share - Diluted                                                         |   |   |   |   |   |   |   |   |   |
| Based  on weighted average shares outstanding of 11,049,532 in 2001, and 11,076,718  in 2000 |   | $ | 0.50 |   | $ | 0.44 |   | $ | 1.42 |   | $ | 1.31 |   |
| Dividends  per Share                                                                         |   | $ | 0.27 |   | $ | 0.27 |   | $ | 0.81 |   | $ | 0.81 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 
| **CONSOLIDATED  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY **(Unaudited) |   |
|----------------------------------------------------------------------------------|--------|
| **F&M BANCORP and  Subsidiaries**                                            |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **(Dollars in thousands, except per share  data)**                     |   |   |   |   |   |   |   |
|                                                                             |   | **Common Stock** |       | **Surplus** |       | **Retained Earnings** |     | **Accumulated Other  Comprehensive Income (Loss)** |       | **Treasury Shares** |       | **Total** |         |
|                                                                             |
|                                                                             |
|                                                                             |
| 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 ($.27 per  share)                                            |   | - |   | - |   | (9,359 | ) | - |   | - |   | (9,359 | ) |
| Stock consideration for options  exercised                                       |   | (3 | ) | (5 | ) | (4 | ) | - |   | - |   | (12 | ) |
| Stock options exercised                                                          |   | 83 |   | 214 |   | - |   | - |   | - |   | 297 |   |
| Other comprehensive income                                                       |   | - |   | - |   | - |   | 2,568 |   | - |   | 2,568 |   |
| Balance at September 30, 2000                                                    |   | $ | 55,063 |   | $ | 78,470 |   | $ | 23,997 |   | $ | (5,809 | ) | $ | - |   | 151,721 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2000                                                     |   | $ | 55,073 |   | $ | 78,488 |   | $ | 25,857 |   | $ | (1,382 | ) | $ | - |   | $ | 158,036 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                       |   | - |   | - |   | 15,703 |   | - |   | - |   | 15,703 |   |
| Dividend reinvestment plan                                                       |   | - |   | - |   | (164 | ) | - |   | - |   | (164 | ) |
| Cash dividends paid ($.27 per  share)                                            |   | - |   | - |   | (8,928 | ) | - |   | - |   | (8,928 | ) |
| Stock consideration for options  exercised                                       |   | (3 | ) | (4 | ) | (7 | ) | - |   | - |   | (14 | ) |
| Stock options exercised                                                          |   | 119 |   | 357 |   | - |   | - |   | - |   | 476 |   |
| Treasury shares                                                                  |   | - |   | - |   | - |   | - |   | (3,689 | ) | (3,689 | ) |
| Other comprehensive income                                                       |   | - |   | - |   | - |   | 7,535 |   | - |   | 7,535 |   |
| Balance at September 30, 2001                                                    |   | $ | 55,189 |   | $ | 78,841 |   | $ | 32,461 |   | $ | 6,153 |   | $ | (3,689 | ) | 168,955 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

 
| **CONSOLIDATED  STATEMENTS OF CASH FLOWS**                                                                   |   |                   |   |     |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|----------|--------|
| **F&M  Bancorp and Subsidiaries**                                                                        |   |                   |   |     |   |
|                                                                                                         |   | **Nine  Months Ended** |   |
|                                                                                                         |   | **September  30,**     |   |
| ***(Dollars in thousands)***                                                                                 |   | **2001**               |   | **2000** |   |
| **Cash Flows  from Operating Activities**                                                                    |   |                   |   |     |   |
| Net  Income                                                                                                  |   | $                      | 15,703 |     | $      | 14,477 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities                            |   |                   |   |     |   |
| Provision  for credit losses                                                                                 |   | 3,060                  |   | 2,511    |   |
| Depreciation  and amortization                                                                               |   | 2,655                  |   | 3,242    |   |
| Amortization  of intangibles                                                                                 |   | 845                    |   | 853      |   |
| Net  premium amortization on investment securities                                                           |   | 523                    |   | 246      |   |
| Decrease/(increase)  in interest receivable                                                                  |   | 850                    |   | (1,185   | )      |
| (Decrease)/increase  in interest payable                                                                     |   | (970                   | )      | 795      |   |
| Deferred  income tax benefits                                                                                |   | 1,527                  |   | 626      |   |
| Amortization  of net loan origination costs (fees)                                                           |   | 54                     |   | 199      |   |
| Gain  on sales of property                                                                                   |   | (238                   | )      | (43      | )      |
| Gain  on sales/calls of securities                                                                           |   | (52                    | )      | (633     | )      |
| (Increase)/decrease  in loans held for sale                                                                  |   | (11,092                | )      | 9,771    |   |
| Decrease  in other assets                                                                                    |   | 2,755                  |   | 16,337   |   |
| Decrease  in other liabilities                                                                               |   | (437                   | )      | (568     | )      |
| Other                                                                                                        |   | (216                   | )      | (1,301   | )      |
| Net  cash provided by operating activities                                                                   |   | 14,967                 |   | 45,327   |   |
| **Cash Flows  from Investing Activities**                                                                    |   |                   |   |     |   |
| Purchases  of investment securities held to maturity                                                         |   |                   |   | (490     | )      |
| Purchases  of investment securities available for sale                                                       |   | (253,456               | )      | (39,037  | )      |
| Proceeds  from sales of securities available for sale                                                        |   | 15,038                 |   | 1,429    |   |
| Proceeds  from maturing securities available for sale                                                        |   | 171,679                |   | 42,672   |   |
| Proceeds  from maturing securities held to maturity                                                          |   | -                      |   | 8,643    |   |
| Net  decrease/(increase) in loans                                                                            |   | 39,056                 |   | (110,186 | )      |
| Purchases  of premises and equipment                                                                         |   | (3,580                 | )      | (3,665   | )      |
| Proceeds  from sales of property                                                                             |   | 389                    |   | -        |   |
| Other  investing activities                                                                                  |   | -                      |   | (85      | )      |
| Net  cash used in investing activities                                                                       |   | (30,874                | )      | (100,719 | )      |
| **Cash Flows  from Financing Activities**                                                                    |   |                   |   |     |   |
| Net  increase in noninterest-bearing deposits, interest-bearing checking, savings  and money market accounts |   | 27,321                 |   | 3,274    |   |
| Net  increase in certificates of deposit                                                                     |   | 98,239                 |   | 8,439    |   |
| Net  (decrease)/increase in federal funds purchased and securities sold under  agreements to repurchase      |   | (18,651                | )      | 21,988   |   |
| Net  (decrease) in other short-term borrowings                                                               |   | (108,904               | )      | (46,190  | )      |
| Net  increase in long-term borrowings                                                                        |   | 49,213                 |   | 48,968   |   |
| Cash  dividends paid                                                                                         |   | (8,928                 | )      | (9,359   | )      |
| Dividend  reinvestment plan                                                                                  |   | (164                   | )      | (70      | )      |
| Proceeds  from issuance of common stock                                                                      |   | 462                    |   | 285      |   |
| Net  increase in treasury shares                                                                             |   | (3,689                 | )      | -        |   |
| Net  cash provided by financing activities                                                                   |   | 34,899                 |   | 27,335   |   |
| Net  increase/(decrease) in cash and cash equivalents                                                        |   | 18,992                 |   | (28,057  | )      |
| Cash  and cash equivalents at beginning of year                                                              |   | 65,167                 |   | 86,320   |   |
| Cash  and cash equivalents at end of period                                                                  |   | 84,159                 |   | 58,263   |   |
| **Supplemental  Disclosures of Cash Flow Information**                                                       |   |                   |   |     |   |
| Cash  payments for interest                                                                                  |   | 30,235                 |   | 43,901   |   |
| Cash  payments for income tax                                                                                |   | 3,693                  |   | 4,644    |   |
| **Non-Cash  Investing and Financing Activities**                                                             |   |                   |   |     |   |
| Fair  value adjustment for securities available for sale, net of income taxes                                |   | 7,535                  |   | 2,568    |   |
|                                                                                                              |        |                        |        |          |        |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

**Notes to Consolidated Financial Statements**  (Unaudited)

 

**Note 1.  Summary of Significant Accounting Policies**

 

The foregoing financialstatements are unaudited; however, in the opinion of management, alladjustments (comprising only normal recurring accruals) necessary for a fairpresentation of the financial statements have been included. A summary ofF&M Bancorp and subsidiaries’ (“Bancorp’s”) significant accounting policiesis set forth in Note 1 to the consolidated financial statements in its AnnualReport on Form 10-K for the year ended December 31, 2000.

 

# **Note 2. Investment Securities**

 

Investment securities aresummarized as follows:

 
|                                                                                    |   | **September 30,  2001** |    |
|-----------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                    |   |                    |    | **Gross** |   | **Gross** |   | **Estimated** |   |
|                                                                                    |   | **Amortized**           |    | **Unrealized** |   | **Unrealized** |   | **Fair** |   |
| **(Dollars in thousands)**                                                              |   | **Cost**                |    | **Gains** |   | **Losses** |   | **Value** |   |
| Available-for-sale:                                                                     |   |                    |    |   |   |   |   |   |   |
| U.S.  Treasury securities and obligations of U.S. government corporations and  agencies |   | $                       | 57,002  |   | $ | 1,019 |   | $ | - |   | $ | 58,021 |   |
| Obligations  of state and political subdivisions                                        |   | 122,089                 |    | 3,155 |   | 39 |   | 125,204 |   |
| Mortgage-backed  securities                                                             |   | 304,118                 |    | 4,269 |   | 46 |   | 308,342 |   |
| Total  debt securities                                                                  |   | 483,208                 |    | 8,443 |   | 85 |   | 491,566 |   |
| Equity  securities                                                                      |   | 10,302                  |    | - |   | 133 |   | 10,169 |   |
| Total  securities available for sale                                                    |   | 493,510                 |    | 8,443 |   | 218 |   | 501,735 |   |
| Held-to-maturity:                                                                       |   |                    |    |   |   |   |   |   |   |
| Obligations  of state and political subdivisions                                        |   | -                       |    | - |   | - |   | - |   |
| Mortgage-backed  securities                                                             |   | -                       |    | - |   | - |   | - |   |
| Total  securities to be held to maturity                                                |   | -                       |    | - |   | - |   | - |   |
| Total  investment securities                                                            |   | $                       | 493,510 |   | $ | 8,443 |   | $ | 218 |   | $ | 501,735 |   |

 
|                                                                                    |   | **December 31,  2000** |    |
|-----------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                    |   |                   |    | **Gross** |   | **Gross** |   | **Estimated** |   |
|                                                                                    |   | **Amortized**          |    | **Unrealized** |   | **Unrealized** |   | **Fair** |   |
| **(Dollars in thousands)**                                                              |   | **Cost**               |    | **Gains** |   | **Losses** |   | **Value** |   |
| Available-for-sale:                                                                     |   |                   |    |   |   |   |   |   |   |
| U.S.  Treasury securities and obligations of U.S. government corporations and  agencies |   | $                      | 171,234 |   | $ | 142 |   | $ | 1,202 |   | $ | 170,174 |   |
| Obligations  of state and political subdivisions                                        |   | 44,818                 |    | 266 |   | 525 |   | 44,559 |   |
| Mortgage-backed  securities                                                             |   | 119,185                |    | 73 |   | 1,980 |   | 117,278 |   |
| Total  debt securities                                                                  |   | 335,237                |    | 481 |   | 3,707 |   | 332,011 |   |
| Equity  securities                                                                      |   | 5,984                  |    | - |   | 158 |   | 5,826 |   |
| Total  securities available for sale                                                    |   | 341,221                |    | 481 |   | 3,865 |   | 337,837 |   |
| Held-to-maturity:                                                                       |   |                   |    |   |   |   |   |   |   |
| Obligations  of state and political subdivisions                                        |   | 81,034                 |    | 587 |   | 493 |   | 81,128 |   |
| Mortgage-backed  securities                                                             |   | 8,371                  |    | 86 |   | 2 |   | 8,455 |   |
| Total  securities to be held to maturity                                                |   | 89,405                 |    | 673 |   | 495 |   | 89,583 |   |
| Total  investment securities                                                            |   | $                      | 430,626 |   | $ | 1,154 |   | $ | 4,360 |   | $ | 427,420 |   |

 

Bancorp classifies its investments in debt and equity securities in twocategories: held-to-maturity and available-for-sale. Securitiesclassified as held-to-maturity are those debt securities that Bancorp has boththe positive intent and ability to hold to maturity. These securities arecarried at cost, adjusted for amortization of premiums and accretion ofdiscounts, which are recognized as adjustments to interest income using theeffective interest method. Currently, Bancorp does not have anyheld-to-maturity securities in its portfolio.

 

Securities classified asavailable-for-sale are equity securities with readily determinable fair valuesand those debt securities that Bancorp intends to hold for an indefinite periodof time, but not necessarily to maturity. These securities may be sold as partof its asset/liability management strategy, or in response to significant movementsin interest rates, liquidity needs, regulatory capital considerations, andother similar factors. These securities are carried at fair value, with anyunrealized gains and losses reported as a separate component of shareholders’equity, net of the related deferred tax effect.

 

Regardless of theclassification, dividend and interest income, including amortization ofpremiums and accretion of discounts arising at acquisition, are included ininterest income in the consolidated statements of income and comprehensiveincome. Realized gains and losses, if any, determined based on the adjustedcost of the specific securities sold, are reported as a separate line item innoninterest income in the consolidated statements of income and comprehensiveincome.

 

The amortized cost andestimated fair values of investments at September 30, 2001 by contractualmaturity are shown below. Expected maturities may differ from contractualmaturities because borrowers have the right to call or prepay obligations withor without call or prepayment penalties.

 
|                              |   | **September 30,  2001** |    |
|-----------------------------------|--------|-------------------------|---------|
|                              |   | **Amortized**           |    | **Fair** |   |
| **(Dollars in thousands)**        |   | **Cost**                |    | **Value** |   |
| Available-for-sale:               |   |                    |    |   |   |
| Within  1 year                    |   | $                       | 32,880  |   | $ | 33,165 |   |
| After  1 but within 5 years       |   | 55,750                  |    | 57,611 |   |
| After  5 but within 10 years      |   | 59,727                  |    | 61,101 |   |
| After  10 years                   |   | 30,734                  |    | 31,347 |   |
| Mortgage-backed  securities       |   | 304,118                 |    | 308,342 |   |
| Equity  securities                |   | 10,302                  |    | 10,169 |   |
| Total  investment securities |   | $                       | 493,510 |   | $ | 501,735 |   |

 

The carryingvalue of investment securities pledged to secure public deposits, securitiessold under repurchase agreements, Federal Home Loan Bank advances, and forother purposes as required and permitted by law, totaled $205.3 million atSeptember 30, 2001.

 

Interest earned on obligationsof state and political subdivisions is exempt from federal income taxes.  However, the federal interest expensededuction is limited for interest deemed to be incurred to purchase or carrytax-exempt obligations.  Such tax-exemptsecurities comprised 25.0% and 29.4% of the total carrying value of theinvestment portfolio at the nine months ended September 30, 2001 and the yearended December 31, 2000 respectively.

 

 

**Note 3. Loans**

 

Loans, net of unearned income,consist of the following:

 
|                               |   | **Period  Ended**  |      |
|------------------------------------|--------|--------------------|-----------|
|                               |   | **September  30,** |      | **December  31,** |   |
| **(Dollars in thousands)**         |   | **2001**           |      | **2000** |   |
| Real  Estate Loans:                |   |               |      |   |   |
| Construction  and land development |   | $                  | 91,959    |   | $ | 80,632 |   |
| Secured  by farmland               |   | 5,750              |      | 6,508 |   |
| Residential  mortgage              |   | 311,145            |      | 347,440 |   |
| Other  mortgage                    |   | 316,157            |      | 292,661 |   |
| Agricultural                       |   | 431                |      | 550 |   |
| Commercial  and industrial loans   |   | 164,105            |      | 182,020 |   |
| Consumer                           |   | 287,974            |      | 308,818 |   |
| Other  loans                       |   | 1,429              |      | 1,501 |   |
| Totals                             |   | $                  | 1,178,950 |   | $ | 1,220,130 |   |

 

Doesnot include loans held for sale

 

Loans to states and politicalsubdivisions and industrial revenue bonds are included in other loans in theschedule above and in total loans in the consolidated balance sheets.

 

The allowance for credit lossesis maintained at a level which, in management’s opinion, is considered adequateto absorb losses inherent in the loan portfolio.

 

 

**Note 4. Bank Premisesand Equipment**

 

Investments in bank premisesand equipment are as follows:

 
|                                             |   | **Period Ended**  |   |
|--------------------------------------------------|--------|-------------------|--------|
|                                             |   | **September 30,** |   | **December 31,** |   |
| **(Dollars in thousands)**                       |   | **2001**          |   | **2000** |   |
| Bank  premises and land                          |   | $                 | 34,242 |   | $ | 32,024 |   |
| Furniture  and equipment                         |   | 31,290            |   | 32,557 |   |
| Leasehold  improvements                          |   | 5,612             |   | 3,482 |   |
|                                             |   | 71,144            |   | 68,063 |   |
| Less:  accumulated depreciation and amortization |   | 34,810            |   | 32,416 |   |
| Net  premises and equipment                      |   | $                 | 36,334 |   | $ | 35,647 |   |

 

**Note 5.  Comprehensive Income**

 

Bancorp adopted FinancialAccounting Standards Board  (“FASB”)Statement No. 130, “Reporting Comprehensive Income,” effective January 1, 1998.Other comprehensive income consists entirely of unrealized gains (losses) onavailable-for-sale securities. Income taxes allocated to other comprehensiveincome amounted to a provision of $2.0 million and $1.2 million for the threemonths ended September 30, 2001 and 2000, respectively. Income taxes allocatedto other comprehensive income amounted to a provision of $4.7 million and $1.6million for the nine months ended September 30, 2001 and 2000, respectively.

 

**Note 6.  Earnings Per Share**

 

Earnings per share (“EPS”) datais computed and presented in accordance with FASB Statement No. 128, “EarningsPer Share.” As prescribed by the Statement, the presentation of primary EPS hasbeen replaced with the dual presentation of basic and diluted EPS.  Basic EPS excludes dilution and is computedby dividing net income available to common shareholders (“numerator”) by theweighted-average number of common shares outstanding for the period aftergiving retroactive effect to stock dividends and stock splits (“denominator”).Diluted EPS reflects the potential dilution that could occur if outstandingstock options or other contracts to issue common stock, if any, were exercisedor converted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of Bancorp. Diluted EPS is equal to the numeratordivided by the denominator plus the dilutive effect of outstanding stockoptions.

 
| **(Dollars  in thousands except per share data)** |   |                                 |   |                                |   |       |   |
|---------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|------------|--------|
|                                              |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|                                              |   | **2001**                             |   | **2000**                            |   | **2001**   |   | **2000** |   |
| Net  income                                       |   | $                                    | 5,513  |                                | $      | 4,970      |   | $ | 15,703 |   | $ | 14,477 |   |
| Basic  EPS, net of treasury shares                |   |                                 |   |                                |   |       |   |   |   |
| Shares                                            |   | 10,967,281                           |   | 11,011,474                          |   | 11,002,801 |   | 11,009,477 |   |
| EPS                                               |   | $                                    | 0.50   |                                | $      | 0.44       |   | $ | 1.43 |   | $ | 1.31 |   |
| Dilutive  shares                                  |   |                                 |   |                                |   |       |   |   |   |
| Stock  options                                    |   | 59,097                               |   | 57,969                              |   | 46,731     |   | 67,241 |   |
| EPS                                               |   | $                                    | 0.00   |                                | $      | 0.00       |   | $ | 0.01 |   | $ | 0.00 |   |
| Diluted  EPS, net of treasury shares              |   |                                 |   |                                |   |       |   |   |   |
| Shares  including options                         |   | 11,026,378                           |   | 11,069,443                          |   | 11,049,532 |   | 11,076,718 |   |
| EPS                                               |   | $                                    | 0.50   |                                | $      | 0.44       |   | $ | 1.42 |   | $ | 1.31 |   |

 

**Note 7.  Future Changes in Accounting Principles**

 

In June, 1999, the FASB issuedSFAS No. 133, “Accounting for Derivative Instruments and for HedgingActivities”, which calls for derivatives to be recognized on the consolidatedbalance sheet at fair value and for subsequent changes in fair value to berecognized in the consolidated statement of income and comprehensiveincome.  However, because non-derivativeand non-financial transactions are still measured using a mix of historical andcurrent prices, the Statement retains special accounting for gains and losseswhen derivatives are used in qualifying hedges of assets, liabilities, andfuture transactions.  The Statementunifies qualifying criteria for hedges involving all types of derivatives,requiring that a company document, designate, and assess the effectiveness ofits hedges. For hedges that meet the Statement’s criteria, the derivative’sgains and losses will be allowed to offset gains and losses on, or forecastedcash flows of, the hedged item

 

Among a number of otherprovisions, the Statement will also allow entities to reclassifyheld-to-maturity securities without calling into question management’s intentfor the remainder of its securities portfolios. On January 1, 2001 the Bancorpadopted this Statement and elected to reclassify its entire held-to-maturityportfolio into the available-for-sale portfolio.

 

For calendar-year companiessuch as Bancorp, the Statement, as amended by SFAS No. 137, took effect onJanuary 1, 2001.  The adoption of thisstatement on January 1, 2001 had no effect on Bancorp's earnings, as theBancorp did not carry any derivative instruments on its books during the periodfrom January 1, 2001 to September 30, 2001.

 

In June2001, the Financial Accounting Standards Board issued SFAS No.141,"Business Combinations" (effective July 1, 2001) and SFAS No.142,"Goodwill and Other Intangible Assets" (effective for the Companyon January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting foracquisitions. SFAS No. 142 specifies that goodwill and some intangible assetswill no longer be amortized but instead will be subject to periodic impairmenttesting. The Company has adoption of SFAS No. 142 as of June 30, 2001.

 

# **Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

The U.S. economy continued itsslow pace during the third quarter of 2001, even as the Federal Reserve Bankmaintained its easy money policy by lowering short-term interest rates anadditional 0.75%. Competition among financial institutions for new loansintensified as prepayments of existing loans accelerated and capital spendingby corporate customers was delayed. With a bearish stock market, many investorschose to move their money into more risk-free bank deposits. F&M Bancorp’sresults have been impacted by these economic conditions as reflected in ourslower loan growth, rapid deposit growth and an improvement in the net interestmargin, as the deposits replaced higher cost wholesale funds.

 

Net income for the quarterended September 30, 2001 increased to a record $5.51 million or $.50 per share,a 10.9% increase over the $4.97 million or $.44 per share for the third quarterof 2000. For the nine months ended September 30, 2001, net income increased8.5% to $15.7 million or $1.43 per share from the $14.48 million or $1.31 pershare for the nine months ended September 30, 2000.

 

F&M Bancorp’s keyperformance ratios continue to be strong. Third quarter of 2001 resultsproduced a return on average assets of 1.21% and a return on average equity of13.01%. The earnings produced in the nine months ended September 30, 2001represent a return on average assets of 1.18% and a return on average equity of12.68%. These financial performance ratios are indicative of F&M Bancorp’searnings strength and effective balance sheet management.

 

During the quarter ended June30, 2001, the Bancorp initiated a charter consolidation plan as part of anongoing effort to improve long-term shareholder value. Under the program, ourcommunity bank affiliates were combined under a single state of Marylandoperating charter. This plan will result in improved efficiencies byeliminating operational redundancies.

 

Certain information included inthe following section of this report, other than historical information, maycontain certain forward–looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such forward–lookingstatements are identified by terminology such as "may","will", "believe", "expect","estimate", "anticipate", "likely","unlikely", "continue", or similar terms. Although Bancorpbelieves that the expectations reflected in such forward–lookingstatements are reasonable, actual results may differ from those projected inthe forward–looking statements.

 

# **Results of Operations**

 

**Net Interest Income**

 

F&M Bancorp’s principalsource of revenue is net interest income, the difference between interestincome on earnings assets and interest expense on deposits and borrowings.Interest income for purposes of analysis, is presented on a tax-equivalent basisto recognize associated tax benefits. The presentation provides a basis forcomparison of yields with taxable earning assets. The discussion on netinterest income should be read in conjunction with the following table –“Consolidated Average Balances, Interest and Average Rates.”

 

For the three months endedSeptember 30, 2001, the Bancorp’s taxable-equivalent net interest income of$17.8 million was 5.0% greater than the comparable quarter in the prior year.The lower interest rate environment favorably impacted the Bancorp’s borrowingcosts for both core deposits and wholesale funding in comparison to last yearand led to a net interest margin in the third quarter that increased to4.18%  -- an increase of 0.09% comparedto the same period last year.

 

The Bancorp’staxable-equivalent net interest income of $53.0 million in the nine monthsended September  2001 increased 3.1%compared to the prior year. This increase was driven by $26.5 million inadditional loans outstanding as well as a shift in funding from higher costborrowings into deposits which are typically a less expensive fundingalternative. Net interest margin in the nine months ended September 30, 2001was 4.24%, up slightly from 4.20% in the first nine months of 2000.

 

 
| **Consolidated  Average Balances, Interest and Average Rate (Unaudited)**   |   |
|-----------------------------------------------------------------------------|--------|
|                                                                        |   | **Three Months  Ended** |   |
|                                                                        |   | **September  30,** |   |
|                                                                        |   | **2001** |   | **2000** |   |
|                                                                        |   | **Average** |   |   |   | **Average** |   | **Average** |   |   |   | **Average** |   |
| **(Dollars in thousands)**                                                  |   | **Balance** |   | **Interest** |   | **Rate** |   | **Balance** |   | **Interest** |   | **Rate** |   |
| ASSETS                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  earning assets:                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  funds                                                           |   | $ | 23,472 |   | $ | 217 |   | 3.67 | % | $ | 8,903 |   | $ | 156 |   | 6.97 | % |
| Investment  securities                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                     |   | 352,855 |   | 5,002 |   | 5.62 | % | 289,167 |   | 4,624 |   | 6.36 | % |
| Tax-exempt  (1)                                                             |   | 124,124 |   | 2,086 |   | 6.67 | % | 130,282 |   | 2,169 |   | 6.62 | % |
| Total  investment securities                                                |   | 476,979 |   | 7,089 |   | 5.90 | % | 419,449 |   | 6,793 |   | 6.44 | % |
| Loans,  net, including loans held for sale(1)                               |   | 1,188,826 |   | 23,915 |   | 7.98 | % | 1,221,255 |   | 25,892 |   | 8.43 | % |
| Total  interest-earning assets                                              |   | 1,689,277 |   | 31,220 |   | 7.34 | % | 1,649,607 |   | 32,841 |   | 7.92 | % |
| Total  noninterest-earning assets                                           |   | 118,097 |   |   |   |   |   | 113,028 |   |   |   |   |   |
| Total  assets                                                               |   | $ | 1,807,374 |   |   |   |   |   | $ | 1,762,635 |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  bearing deposits                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                                                                     |   | $ | 123,623 |   | $ | 607 |   | 1.95 | % | $ | 151,448 |   | $ | 829 |   | 2.18 | % |
| Checking                                                                    |   | 235,442 |   | 506 |   | 0.85 | % | 187,242 |   | 902 |   | 1.92 | % |
| Money  market accounts                                                      |   | 266,580 |   | 2,068 |   | 3.08 | % | 263,797 |   | 2,790 |   | 4.21 | % |
| Certificates  of deposit                                                    |   | 631,557 |   | 8,865 |   | 5.57 | % | 523,067 |   | 7,157 |   | 5.44 | % |
| Total  interest bearing deposits                                            |   | 1,257,202 |   | 12,046 |   | 3.80 | % | 1,125,554 |   | 11,678 |   | 4.13 | % |
| Short-term  borrowings                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  funds purchased and securities sold under agreements to repurchase |   | 101,946 |   | 769 |   | 2.99 | % | 123,387 |   | 1,761 |   | 5.68 | % |
| Other  short term borrowings                                                |   | 1,881 |   | 16 |   | 3.37 | % | 114,603 |   | 1,956 |   | 6.79 | % |
| Total  Short Term Borrowings                                                |   | 103,827 |   | 785 |   | 3.00 | % | 237,990 |   | 3,717 |   | 6.21 | % |
| Long  term borrowings                                                       |   | 45,990 |   | 595 |   | 5.13 | % | 36,709 |   | 492 |   | 5.33 | % |
| Total  borrowed funds                                                       |   | 149,817 |   | 1,380 |   | 3.65 | % | 274,699 |   | 4,209 |   | 6.10 | % |
| Total  interest bearing liabilities                                         |   | 1,407,019 |   | 13,426 |   | 3.79 | % | 1,400,253 |   | 15,887 |   | 4.51 | % |
| Non-interest  bearing liabilities:                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                                            |   | 216,092 |   |   |   |   |   | 193,166 |   |   |   |   |   |
| Other  liabilities                                                          |   | 16,132 |   |   |   |   |   | 17,787 |   |   |   |   |   |
| Shareholders'  equity                                                       |   | 168,131 |   |   |   |   |   | 151,429 |   |   |   |   |   |
| Total  liabilities and shareholders' equity                                 |   | $ | 1,807,374 |   |   |   |   |   | $ | 1,762,635 |   |   |   |   |   |
| Net  interest income                                                        |   |   |   | 17,794 |   |   |   |   |   | 16,954 |   |   |   |
| Net  interest spread                                                        |   |   |   |   |   | 3.56 | % |   |   |   |   | 3.41 | % |
| Net  interest margin                                                        |   |   |   |   |   | 4.18 | % |   |   |   |   | 4.09 | % |

 

----

(1) Interest and yields onobligations of states and political subdivisions and tax-exempt loans arecomputed on a taxable equivalent basis using the U.S. statutory rate of 35percent. In addition, loan fee income is included in the interest incomecalculations, and nonaccrual loans are included in the average loan base uponwhich the interest rate earned on loans is calculated.

 

 
| **Consolidated  Average Balances, Interest and Average Rate (Unaudited)**   |   |
|-----------------------------------------------------------------------------|--------|
|                                                                        |   | **Nine Months Ended** |   |
|                                                                        |   | **September 30,** |   |
|                                                                        |   | **2001** |   | **2000** |   |
|                                                                        |   | **Average** |   |   |   | **Average** |   | **Average** |   |   |   | **Average** |   |
| **(Dollars in  thousands)**                                                 |   | **Balance** |   | **Interest** |   | **Rate** |   | **Balance** |   | **Interest** |   | **Rate** |   |
| ASSETS                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning assets:                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term funds                                                            |   | $ | 22,604 |   | $ | 864 |   | 5.11 | % | $ | 13,585 |   | $ | 557 |   | 5.48 | % |
| Investment securities                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                     |   | 319,975 |   | 14,782 |   | 6.18 | % | 292,258 |   | 13,861 |   | 6.34 | % |
| Tax-exempt (1)                                                              |   | 125,610 |   | 6,426 |   | 6.84 | % | 131,256 |   | 6,645 |   | 6.76 | % |
| Total investment securities                                                 |   | 445,585 |   | 21,208 |   | 6.36 | % | 423,514 |   | 20,506 |   | 6.47 | % |
| Loans, net, including loans  held for sale(1)                               |   | 1,195,679 |   | 73,367 |   | 8.20 | % | 1,187,717 |   | 74,777 |   | 8.41 | % |
| Total interest-earning assets                                               |   | 1,663,868 |   | 95,439 |   | 7.67 | % | 1,624,816 |   | 95,840 |   | 7.88 | % |
| Total noninterest-earning  assets                                           |   | 113,218 |   |   |   |   |   | 104,199 |   |   |   |   |   |
| Total assets                                                                |   | $ | 1,777,086 |   |   |   |   |   | $ | 1,729,015 |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                                                                     |   | $ | 149,173 |   | $ | 2,668 |   | 2.39 | % | $ | 160,433 |   | $ | 2,624 |   | 2.18 | % |
| Checking                                                                    |   | 202,824 |   | 1,573 |   | 1.04 | % | 190,617 |   | 2,933 |   | 2.06 | % |
| Money market accounts                                                       |   | 266,345 |   | 6,878 |   | 3.45 | % | 251,086 |   | 7,418 |   | 3.95 | % |
| Certificates of deposit                                                     |   | 603,933 |   | 25,833 |   | 5.72 | % | 523,494 |   | 20,643 |   | 5.27 | % |
| Total interest bearing deposits                                             |   | 1,222,275 |   | 36,952 |   | 4.04 | % | 1,125,630 |   | 33,618 |   | 3.99 | % |
| Short-term borrowings                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds purchased and  securities sold under agreements to repurchase |   | 98,156 |   | 2,938 |   | 4.00 | % | 112,833 |   | 4,668 |   | 5.53 | % |
| Other short term borrowings                                                 |   | 28,232 |   | 1,376 |   | 6.52 | % | 88,414 |   | 4,359 |   | 6.59 | % |
| Total Short Term Borrowings                                                 |   | 126,388 |   | 4,314 |   | 4.56 | % | 201,247 |   | 9,027 |   | 5.99 | % |
| Long term borrowings                                                        |   | 39,022 |   | 1,423 |   | 4.88 | % | 50,896 |   | 2,051 |   | 5.38 | % |
| Total borrowed funds                                                        |   | 165,410 |   | 5,737 |   | 4.64 | % | 252,143 |   | 11,078 |   | 5.87 | % |
| Total interest bearing  liabilities                                         |   | 1,387,685 |   | 42,689 |   | 4.11 | % | 1,377,773 |   | 44,696 |   | 4.33 | % |
| Non-interest bearing  liabilities:                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                             |   | 207,130 |   |   |   |   |   | 186,647 |   |   |   |   |   |
| Other liabilities                                                           |   | 16,635 |   |   |   |   |   | 17,520 |   |   |   |   |   |
| Shareholders' equity                                                        |   | 165,636 |   |   |   |   |   | 147,075 |   |   |   |   |   |
| Total liabilities and  shareholders' equity                                 |   | $ | 1,777,086 |   |   |   |   |   | $ | 1,729,015 |   |   |   |   |   |
| Net interest income                                                         |   |   |   | 52,750 |   |   |   |   |   | 51,144 |   |   |   |
| Net interest spread                                                         |   |   |   |   |   | 3.56 | % |   |   |   |   | 3.55 | % |
| Net interest margin                                                         |   |   |   |   |   | 4.24 | % |   |   |   |   | 4.20 | % |

 

----

(1) Interest and yields onobligations of states and political subdivisions and tax-exempt loans arecomputed on a taxable equivalent basis using the U.S. statutory rate of 35percent. In addition, loan fee income is included in the interest incomecalculations, and nonaccrual loans are included in the average loan base upon whichthe interest rate earned on loans is calculated.

 

**Provision for CreditLosses**

 

The provision for credit lossesfor the third quarter of 2001 decreased by $785 thousand over the year-agoquarter. However, for the nine-month period ended September 30, 2001, theprovision increased to $3.0 million as compared to $2.5 million for the sameperiod last year. It is management’s belief that the continued slowdown in theeconomy warranted an increase in the risk factor associated with slowingeconomic conditions. While we still anticipate that the slower economicconditions may have an adverse impact, no deterioration in the quality of ourloan portfolio has been experienced.

 

**Noninterest Income**

 

For the first nine months of2001, noninterest income increased 6.8% from the comparable period of theprevious year. These increased revenues were the result of increased insurancesales and mortgage banking services during the period. Compared with the firstnine months of 2000, insurance revenue grew 12.7%, and income from mortgagebanking operations grew by 29.1%.

 

Noninterest income as apercentage of net revenues increased from 31.9% for the nine months of 2000 to32.6% for the current year.

 

Noninterest income was $8.9million compared to $8.6 million for the quarter ended September 30, 2000. Thisrepresents an increase of 2.8% increase for the same three month period in2000.

 

**Noninterest Expense**

 

Noninterest expense is made upof those expenses incurred to run and operate the Bancorp.  The Bancorp’s efficiency ratio (the ratio ofadjusted noninterest expense to the sum of net interest income on a taxequivalent basis and recurring noninterest income) for the third quarter of2001 was 66.4%, above the previous quarter and the year-ago comparable quarter.It is important to note that our business strategy includes the diversificationof our revenue stream through insurance sales. This line of business has adifferent cost structure than traditional banking and therefor drives ourefficiency ratio higher than some of our peers. The efficiency ratio for thethird quarter of 2001 excluding the insurance business was 65.1%.

 

The Bancorp continued to focuson expense control, total noninterest expense for the first nine months of 2001increased 3.1%, or $1.5 million over the prior year comparable period.  Salaries and employee benefits increased7.4%, occupancy and equipment rose just over 3% and other operating expensesdecreased almost 3%.

 

Noninterest expense for thequarter increased 7.5% from the year-ago quarter. When compared to the prioryear quarter, salaries and employee benefits increased 12.7%, occupancy andequipment expense increased 8.5%, and other operating expenses decreased alittle over 3%.

 

**Income Taxes.**

 

Tax expense varies from oneperiod to the next with changes in the level of income before taxes, changes inthe amount of tax-exempt income, and the relationship of these changes to eachother. The effective income tax expense rate differs from the amount computedat statutory rates primarily due to tax-exempt interest from certain loans andinvestment securities.

 

For the third quarter of 2001,provision for income taxes increased by 1.8% to $2.27 million from the previousyear quarter. The third quarter 2001 effective tax rate was 29% compared to 31%in the prior year. For the nine months ended September 30, 2001, the provisionfor income taxes decreased 1% to $6.24 million from the comparable 2000period.  The first nine months of 2001effective tax rate was 28% compared to 30% in the prior year.

 

**Nonperforming Assets.**

 

The Bancorp’s asset qualitycontinues to be sound with nonperforming assets at only 0.13% of total assetsat the end of the third quarter. Total nonperforming assets at September 30,2001 were $2.3 million, a 45% decrease from the previous year. Although thereis no direct correlation between nonperforming loans and ultimate loan losses,an analysis of nonperforming loans may provide some indication of the qualityof the loan portfolio.

 

**Potential ProblemLoans.**

 

At September 30, 2001, Bancorphad $19.0 million in loans to borrowers who were currently experiencingfinancial difficulties such that management had reasonable concerns that suchloans might become contractually past due or be classified as a nonperformingasset. These loans are subject to the same close attention and regular creditreviews as extended to loans past due 90 days or more and nonperforming assets.

 
| Nonperforming Assets and  Contractually Past-Due Loans            |   |               |   |              |   |
|-------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                              |   | **Period  Ended**  |   |
|                                                              |   | **September  30,** |   | **December  31,** |   |
| **(Dollars in thousands)**                                        |   | **2001**           |   | **2000**          |   |
| Nonperforming  assets:                                            |   |               |   |              |   |
| Nonaccrual  loans (1)                                             |   | $                  | 1,639  |              | $      | 2,669 |   |
| Other  real estate owned net of valuation allowance (2)           |   | 667                |   | 1,057             |   |
| Total  nonperforming assets                                       |   | $                  | 2,306  |              | $      | 3,726 |   |
| Loans  past due 90 or more days as to interest or principal (3)   |   | $                  | 1,371  |              | $      | 1,230 |   |
| Nonperforming  loans to total loans                               |   | 0.14               | %      | 0.22              | %      |
| Nonperforming  assets to total loans plus other real estate owned |   | 0.19               | %      | 0.30              | %      |
| Nonperforming  assets to total assets                             |   | 0.13               | %      | 0.21              | %      |
| Allowance  for credit losses times nonperforming loans            |   | 8.68               |   | 4.96              |   |
| Allowance  for credit losses times nonperforming assets           |   | 6.17               |   | 3.55              |   |

 

----

(1)             Loans are placed on nonaccrualstatus when, in the opinion of management, reasonable doubt exists as to thefull, timely collection of interest or principal, or a specific loan meets thecriteria for nonaccrual status established by regulatory authorities. When aloan is placed on nonaccrual status, all interest previously accrued but notcollected is reversed against current period interest income. No interest istaken into income on nonaccrual loans unless received in cash, or until suchtime the borrower demonstrates sustained performance over a period of time inaccordance with contractual terms.

 

(2)             Other real estate owned includes:banking premises no longer used for business purposes and real estate acquiredby foreclosure (in partial or complete satisfaction of debt), or otherwisesurrendered by the borrower to Bancorp’s possession. Other real estate owned isrecorded at the lower of cost or fair value on the date of acquisition ortransfer from loans. Write-downs to fair value at the date of acquisition arecharged to the allowance for credit losses. Subsequent to transfer, theseassets are adjusted through a valuation allowance to the lower of the netcarrying value or the fair value (net of estimated selling expenses) based onperiodic appraisals.

 

(3)             Nonaccrual loans are not included.

 

**Allowance for Credit Losses.**

 

At September 30, 2001, theallowance for credit losses was $14.2 million or 1.20% of total loans with netcharge-offs of less than 0.18% of average loans outstanding during the firstnine months of 2001.

 

The allowance for credit lossesis maintained at a level, which in management's judgment is adequate to absorblosses inherent in the loan portfolio. The adequacy of the allowance for creditlosses is reviewed regularly by management. Additions to the allowance are madeby charges to the provision for credit losses. On a quarterly basis, acomprehensive review of the allowance is performed considering such factors asthe levels of loans outstanding, loss experience, delinquency levels, certainindividual loan reviews, and an evaluation of the regional and nationaleconomic environment. The methodology for assessing the appropriateness of theallowance consists of three primary elements:

 

•        TheFormula Allowance. The formula allowance is calculated by applying historicallydetermined loss factors to outstanding business loans based on credit riskratings and for pools of homogeneous loans. Individually risk rated loan lossfactors is determined using average annual net charge–off rates for themost recent two years. Pooled loans are loans that are homogeneous in naturesuch as consumer installment and residential mortgage loans. Pooled loan lossfactors are based on net charge–offs experienced over the past year. Thehistoric loss factors on the risk rated loans and the pooled loans are thenconsidered for either positive or negative adjustment in an attempt to reflectthe current dynamics of the portfolios. These adjustments in the loss factorsare 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–accrualassets; 2) changes in the nature and volume of the portfolio; 3) changes inlending policies, underwriting standards, or collection practices; 4) changesin the experience, ability, depth of lending management and staff; 5) portfolioconcentrations; and 6) changes in the national or local economy.

 

•        SpecificAllowances for Identified Problem Loans. The amount of specific reserves isdetermined through a loan–by–loan analysis of non–performingloans. The analysis considers expected future cash flows, the value of collateralor other factors that may impact the borrower's ability to repay.

 

•        TheUnallocated Allowance. The unallocated portion of the allowance is based onloss factors that cannot be associated with specific loans or loan categories.These factors include management's subjective evaluation of such conditions ascredit quality trends, collateral values, portfolio concentrations, specificindustry conditions in the regional economy, regulatory examination results,internal audit and loan review findings, recent loss experiences in particularportfolio segments, etc. The unallocated portion of the allowance for lossesreflects management's attempt to ensure that the overall reserve appropriatelyreflects a margin for the imprecision necessarily inherent in estimates ofcredit losses.

 

While management believes the allowance for credit losses was adequateat September 30, 2001, the estimate of losses and related allowance may changein the near term due to economic and other uncertainties inherent in theestimation process.

 
| Analysis of Allowance for Credit Losses                     |   |               |      |              |   |
|-------------------------------------------------------------|--------|--------------------|-----------|-------------------|--------|
|                                                        |   | **Period  Ended**  |      |
|                                                        |   | **September  30,** |      | **December  31,** |   |
| **(Dollars in thousands)**                                  |   | **2001**           |      | **2000**          |   |
| Average loans outstanding less average  unearned income (1) |   | $                  | 1,179,625 |              | $      | 1,197,648 |   |
| Allowance  for credit losses at beginning of period         |   | $                  | 13,232    |              | $      | 13,068 |   |
| Charge-offs:                                                |   |               |      |              |   |
| Real  estate                                                |   | 188                |      | 630               |   |
| Commercial  and industrial                                  |   | 243                |      | 1,009             |   |
| Consumer                                                    |   | 3,722              |      | 3,887             |   |
| Total  loans charged-off                                    |   | 4,153              |      | 5,526             |   |
| Recoveries:                                                 |   |               |      |              |   |
| Real  estate                                                |   | 4                  |      | 189               |   |
| Commercial  and industrial                                  |   | 131                |      | 80                |   |
| Consumer                                                    |   | 1,945              |      | 2,185             |   |
| Total  recoveries                                           |   | 2,080              |      | 2,454             |   |
| Net  charge-offs                                            |   | 2,073              |      | 3,072             |   |
| Additions  charged to operating expense                     |   | 3,060              |      | 3,236             |   |
| Allowance  for credit losses at end of period               |   | $                  | 14,219    |              | $      | 13,232 |   |
| Net  charge-offs to average loans outstanding               |   | 0.18               | %         | 0.26              | %      |

 

----

(1)Excludes loans held for sale

 

The following table presents anallocation of the allowance for credit losses to various loan categories. Thisallocation does not limit the amount of the allowance available to absorblosses from any type of loan and should not be viewed as an indicator of thespecific amount or specific loan categories in which future charge-offs mayultimately occur.

 
| **Allocation of  Allowance for Credit Losses** |   |               |   |              |   |       |   |            |   |
|------------------------------------------------|--------|--------------------|--------|-------------------|--------|------------|--------|-----------------|--------|
|                                           |   | **Period Ended**   |   |
|                                           |   | **September  30,** |   | **December  31,** |   |
|                                           |   | **2001**           |   | **2000**          |   |
|                                           |   |               |   | **%  of Total**   |   |       |   | **%  of Total** |   |
| **(Dollars in thousands)**                     |   | **Amount**         |   | **Allowance**     |   | **Amount** |   | **Allowance**   |   |
| Real  estate loans                             |   |               |   |              |   |       |   |            |   |
| Construction  and land development             |   | $                  | 1,704  |              | 12.0   | %          | $      | 1,866           |   | 14.1 | % |
| Residential  mortgage                          |   | 676                |   | 4.8               | %      | 690        |   | 5.2             | %      |
| Other  mortgage                                |   | 3,642              |   | 25.6              | %      | 3,651      |   | 27.6            | %      |
| Commercial  and industrial                     |   | 1,419              |   | 10.0              | %      | 2,073      |   | 15.7            | %      |
| Consumer                                       |   | 6,186              |   | 43.5              | %      | 3,940      |   | 29.8            | %      |
| Unallocated                                    |   | 592                |   | 4.2               | %      | 1,012      |   | 7.6             | %      |
| Totals                                         |   | $                  | 14,219 |              | 100.0  | %          | $      | 13,232          |   | 100.0 | % |

 

**Capital Resources**

 

It is Bancorp's policy tomaintain a level of capital sufficient to protect the company's depositors,creditors, and shareholders, and to support Bancorp's growth. The principalsource of capital is retained earnings.

 

The Board and the regulatoryauthorities maintain capital adequacy guidelines applicable to Bancorp and theBank, respectively. Under each measure, Bancorp and its subsidiaries weresubstantially in excess of the minimum regulatory requirements and, bydefinition, were "well capitalized" at September 30, 2001 andDecember 31, 2000.

 

Shareholders’ equity totaled$169 million at September 30, 2001, or $15.52 per share compared to $152million, or $13.78 per share at September 30, 2000.

 

During the second quarter of2001, we announced a 500,000 share repurchase program to optimize the returnson our invested capital. Through September 30, 2001 we have repurchased 142,400shares at an average price of $25.91. We will continue to purchase shares fromtime to time in the future depending on market conditions

 

Bancorp's risk-based capitaland leverage capital ratios as of September 30, 2001, were as follows:

 

**Capital Ratios**

 
|                |   | **Risk-based  Capital** |   |
|---------------------|--------|-------------------------|--------|
|                |   | **Nine Months  Ended**  |   |
|                |   | **September 30,  2001** |   |
|                |   | **Tier  1**             |   | **Total** |   | **Leverage** |   |
|                |   | **Capital**             |   | **Capital** |   | **Ratios** |   |
| Actual              |   | 12.20                   | %      | 13.29 | % | 9.04 | % |
| Regulatory  Minimum |   | 4.00                    | %      | 8.00 | % | 3.00 | % |
| Excess              |   | 8.20                    | %      | 5.29 | % | 6.04 | % |

 

Fair value adjustments toshareholders’ equity for changes in the fair value of securities classified asavailable-for-sale are excluded from the calculation of these capital ratios inaccordance with regulatory guidelines.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk****.**

 

Market risk is defined as thefuture changes in market prices that increase or decrease the value offinancial instruments, i.e. cash, investments, loans, deposits and debt.  Included in market risk are interest raterisk, foreign currency exchange rate risk, commodity price risk, and otherrelevant market risks.  Bancorp’sprimary source of market risk is interest rate risk.  Market risk-sensitive financial instruments are entered into forpurposes other than trading.

 

Interest rate risk refers tothe exposure of Bancorp’s earnings and capital to changes in interest rates.This risk is driven by potential mismatches resulting in timing differences inthe repricing of assets, liabilities and the potential impact of explicit andembedded options. The goal of asset/liability management is to maintainhigh-quality and consistent growth of net interest income, while maintainingacceptable levels of risk to changes in interest rates, and acceptable levelsof capital and liquidity. This goal is achieved by influencing the maturity andrepricing of assets and liabilities and by managing discretionary portfolios.

 

There are several common sources of interest rate risk that must beeffectively managed if there is to be minimal impact on Bancorp’s earnings andcapital.  Re-pricing risk arises largelyfrom timing differences in the pricing of assets and liabilities.  Reinvestment risk refers to the reinvestmentof cash flows from interest payments and maturing assets at lower rates.  Basis risk exists when different yieldcurves or pricing indices do not change at precisely the same time or in thesame magnitude such that assets and liabilities with the same maturity are notall affected equally.  Yield curve riskrefers to unequal movements in interest rates across a full range of maturities.

 

In determining the appropriatelevel of interest rate risk, Bancorp considers the impact on earnings andcapital of the current outlook on interest rates, potential changes in interestrates, regional economies, liquidity, business strategies, and other factors.The Bancorp uses a number of tools to measure interest rate risk, includingsimulating net interest income, monitoring the sensitivity of the net presentvalue of the balance sheet, and monitoring the difference or gap betweenmaturing or rate-sensitive assets and liabilities over various time periods.

 

Management believes thatinterest rate risk is best measured by simulation modeling which calculatesexpected net interest income based on projected interest-earning assets andinterest-bearing liabilities.  The modelprojections can be varied depending upon historical trends and management'sexpectations of balance sheet growth patterns, spreads to market rates,historical market rate relationships, prepayment behavior, current and expectedproduct offerings and sales activities. Various sensitivity analyses areperformed on a regular basis to segregate interest rate risk into separatecomponents and understand the risk attributable to prepayments, caps andfloors, and other options. Assumption testing is performed to understand the degreeof impact from changing key assumptions such as the speed of prepayments, theinterest rate elasticity of core deposit rates and balance sheet growth.  The Bancorp's policy guideline limit for netinterest income simulation is a negative impact to net interest income of 15.0percent for the up or down 300 basis points scenarios when compared with theflat rate scenario.  Management hasgenerally maintained a risk position well within the policy guideline level.  The model indicated the impact of a 300 basispoint rise in rates over the next 12 months would cause approximately a 5.3%decrease in net interest income at September 30, 2001.  A 300 basis point decrease in rates over thenext 12 months would cause approximately a 3.3% increase in net interestincome.

 

Computations of prospectiveeffects of hypothetical interest rate changes are based on many assumptions,including relative levels of market interest rates, loan prepayments andchanges in deposit levels.  They are notintended to be a forecast and should not be relied upon as indicative of actualresults.  Further, the computations donot contemplate certain actions that management could take in response tochanges in interest rates.

 

Effects of Changing Prices:Inasmuch as virtually all of a financial institution's assets and liabilitiesare monetary in nature, changes in interest rates, or the price paid for money,may have a significant effect on earnings performance. Interest rates, thoughaffected by inflation, do not necessarily move in the same direction, or in thesame magnitude, as the prices of other goods and services. Movements ininterest rates are a result of the perceived changes in the rate of inflation,the effects of monetary and fiscal policies and the supply and demand for credit.Reference to Net Interest Income and Market Risk in this section will assistthe reader in understanding of how Bancorp is positioned to address changinginterest rates.

 

Several major categories ofnoninterest expense are more directly affected by inflationary factors such assalaries and employee benefits and other operating expenses. Managementendeavors to overcome, or mitigate, the effects of inflation by seekingopportunities to improve operating efficiency and productivity, and bydeveloping strategies for growth that will exceed the projected rate ofinflation.

 

# **PART II - OtherInformation**

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)           Exhibits

 

11.Computation of per share earnings. Filed as an exhibit hereto and incorporated herein by reference.

 

(b)           Reportson Form 8-K

 

1. Report onForm 8-K, Item 5. Other Event, was filed April 2, 2001. Announce itsapplication to become a state chartered bank, filed on December 14, 2000, wasapproved by the Maryland State Commissioner of Financial Regulation, and thatit has commenced operations at Farmers & Mechanics Bank, a state-charteredbank, effective April 1, 2001.

 

2. Report onForm 8-K, Item 5. Other Event, was filed June 22, 2001. Announced it hascompleted the consolidation of its two banking subsidiaries into one statebanking charter. Effective June1st, Home Federal Savings Bank began operatingas a division of Farmers &Mechanics Bank.

 

Signatures

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934 the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   |               |   |   | F&M  BANCORP     |   |
|--------|--------------------|--------|--------|----------------------|--------|
|   |               |   |   | (Registrant)         |   |
|   |               |   |   |                 |   |
|   | November 12,  2001 |   |   | /s/ Faye E.  Cannon  |   |
|   | Date               |   |   |                 |   |
|   |               |   |   | FAYE E.  CANNON      |   |
|   |               |   |   | PRESIDENT  AND CEO   |   |
|   |               |   |   |                 |   |
|   |               |   |   |                 |   |
|   | November 12,  2001 |   |   | /s/ Kaye A.  Simmons |   |
|   | Date               |   |   |                 |   |
|   |               |   |   | KAYE A.  SIMMONS     |   |
|   |               |   |   | CFO AND  TREASURER   |   |