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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/X/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2001

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-12638

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F&M BANCORP(Exact name of registrant as specified in its charter)

MARYLAND(State or other jurisdiction of
incorporation or organization)

52-1316473(I.R.S. Employer
Identification No.)110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND(Address of principal executive offices)

21702(Zip Code)


(888) 694-4170(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)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/    No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

At
February 8, 2002, the aggregate market value of 10,853,300 shares of Common Stock outstanding and held by non-affiliates of Registrant was $297,706,019.

DOCUMENTS
INCORPORATED BY REFERENCE: Portions of F&M Bancorp's 2001 Annual Report to Shareholders are incorporated herein by reference into Part II. Portions of the Proxy
Statement dated March 15, 2002 relating to the 2002 Annual Meeting of Stockholders of the Registrant are incorporated herein by reference into Part III.

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TABLE OF CONTENTS

|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|PART 1   |  |                                                                                      
|Item 1   |  | Business                                                                              |  | 3 
|         |  | The Companies                                                                         |  | 3 
|         |  | Farmers & Mechanics Bank                                                              |  | 4 
|         |  | Bank Deposits and Lending Activities                                                  |  | 4 
|         |  | Banking Products and Services                                                         |  | 4 
|         |  | Environmental Liabilities                                                             |  | 4 
|         |  | Seasonal Aspects                                                                      |  | 4 
|         |  | Employees                                                                             |  | 4 
|         |  | Competition                                                                           |  | 4 
|         |  | Supervision and Regulation                                                            |  | 5 
|         |  | Bank Holding Company Regulation                                                       |  | 5 
|         |  | Bank Regulations                                                                      |  | 5 
|         |  | Support of Subsidiary Banks                                                           |  | 6 
|         |  | Payment of Dividends and Other Restrictions                                           |  | 6 
|         |  | Capital Requirements                                                                  |  | 6 
|         |  | Monetary Policy                                                                       |  | 7 
|         |  | Legislation                                                                           |  | 7 
|Item 2   |  | Properties                                                                            |  | 8 
|Item 3   |  | Legal Proceedings                                                                     |  | 8 
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                   |  | 9 
|PART II  |  |                                                                                      
|Item 5   |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 9 
|Item 6   |  | Selected Financial Data                                                               |  | 10
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 11
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27
|Item 8   |  | Financial Statements and Supplementary Data                                           |  | 28
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 55
|PART III |  |                                                                                      
|Item 10  |  | Directors and Executive Officers of the Registrant                                    |  | 56
|Item 11  |  | Executive Compensation                                                                |  | 56
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 56
|Item 13  |  | Certain Relationships and Related Transactions                                        |  | 57
|PART IV  |  |                                                                                      
|Item 14  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 58
|         |  | Signatures                                                                            |  | 60

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PART I

ITEM 1.    BUSINESS

The Companies:

GENERAL:    F&M
Bancorp ("Bancorp") is a bank holding company headquartered in Frederick, Maryland that is organized under the laws of the State of Maryland and registered
under the Bank Holding Company Act of 1956. Bancorp derives substantially all of its income from operation of its wholly-owned subsidiary, Farmers & Mechanics Bank ("the Bank").

On
December 31, 2001, Bancorp had consolidated assets of $1.881 billion, total loans of $1.162 billion, total deposits of $1.516 billion, and total
shareholders' equity of $167 million. The principal executive offices of Bancorp are located at 110 Thomas Johnson Drive, Frederick, Maryland 21702 and its telephone number is
(888) 694-4170.

On
November 20, 2001, Bancorp through Farmers & Mechanics Bank, sold assets and liabilities associated with the Fairfield and Gettysburg, Pennsylvania branch offices to
Adams County National Bank. Under the terms of the agreement, Adams County National Bank assumed responsibility for services related to checking, savings, and certificates of deposit products totaling
$24.3 million, purchased the branch office and real estate located at 20 East Main Street, Fairfield, PA, and assumed the lease for the Middle St. office in Gettysburg.

On
July 16, 2001, Bancorp dissolved Home Appraisals, Inc. and Founders Mortgage Co. Both businesses were acquired in previous acquisitions. Farmers & Mechanics Bank
has assumed the services rendered by these companies.

On
June 1, 2001, Bancorp completed the consolidation of its two banking subsidiaries into one state banking charter. Home Federal Savings Bank began operating as a division of
Farmers & Mechanics Bank. The consolidation of F&M Bancorp's two banking subsidiaries into a single state-chartered institution will provide enhanced operating efficiencies for the company.

On
May 10, 2001, Bancorp consolidated two insurance affiliates into Keller Stonebraker Insurance, Inc. ("KS"), Hagerstown, MD, Charles S. Gardner Insurance
Agency, Inc. and JRH Insurance, Inc. KS operates as an independent, wholly-owned subsidiary of the Bank and provides a full line of consumer and commercial business insurance
products through offices in Hagerstown, Cumberland, MD and Keyser, WV. Consumer insurance products include annuities, homeowners, automobile, life and personal umbrellas. Commercial business products
include property and casualty packages, workers' compensation, bonds, professional liability, umbrella, and 401(k) and other benefit plans.

On
May 10, 2001, Bancorp consolidated C&F Insurance Agency into Potomac Basin Group Associates, Inc. ("PB"), Beltsville, MD, PB operates as an independent, wholly-owned
subsidiary of the Bank and is an independent insurance agency specializing in corporate employee benefit plans and property and casualty packages through its offices in Beltsville and Ellicott City,
MD.

On
April 26, 2001, Bancorp dissolved TBT Title VIII, Inc., Central Maryland Service Corp., CLC Associates, Inc., Family Home Insurance Agency, Inc. and
Keystone General Partnership. These businesses were inactive companies that were acquired in previous acquisitions. Farmers & Mechanics Bank and its affiliates have assumed any services
rendered by these companies.

On
December 30, 1999, Bancorp completed the acquisition of Patapsco Valley Bancshares, Inc. ("PVB") and its commercial banking subsidiary, Commercial & Farmers Bank
("C&F"), Ellicott City, MD, in a tax-free exchange of shares accounted for as a pooling-of-interests. Under the terms of the merger agreement, C&F was merged with
and into the Bank at closing, increasing the Bank's assets by

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approximately $173 million, loans by approximately $118 million, and deposits by approximately $150 million.

On
July 15, 1999, Bancorp consummated a merger with Potomac Basin Group Associates, Inc. ("PB"), in a tax-free exchange of shares accounted for as a
pooling-of-interests. PB is a Beltsville, MD-based, full-line independent insurance agency specializing in corporate employee benefit plans.

Farmers & Mechanics Bank:Farmers & Mechanics Bank was incorporated in 1865 as a national banking association
under the laws of the United States, and is the successor to Maryland State chartered banking institution dating from 1817. In 1915, the Bank acquired trust powers. Effective April 1, 2001,
Farmers & Mechanics Bank commenced operations as a Maryland state-chartered bank. Effective June 1, 2001, Home Federal Savings Bank began operating as a division of Farmers &
Mechanics Bank. The Bank, the deposits of which are insured by the Federal Deposit Insurance Corporation, conducts general banking and trust company business through 50 full-service
offices and 81 automated teller machines located in Frederick, Carroll, Montgomery, Baltimore, Howard, Washington and Allegany Counties, in Maryland. The Bank also operates the East Coast's first
full-service mobile unit, Express Bank, and delivers electronic services throughout its market with personal and business PC internet banking access and with its 24-hour
telephone banking service, ExpressLine.

Bank Deposit and Lending Activities:As of December 31, 2001, the Bank had deposits of $1.516 billion. No
material portion of the bank's deposits has been obtained from any single depositor or group of related depositors, including federal, state and local governments and agencies. As of
December 31, 2001, the Bank had $1.162 billion in loans representing approximately 62% of its total assets of $1.881 billion. No material portion of the Bank's loans are
concentrated within a single industry or group of related industries. The Bank is not dependent upon any single borrower or a few principal borrowers. The loss of any individual or of a few principal
borrowers would not have a material adverse effect on the operations or earnings of the Bank.

Banking Products and Services:Bancorp, through its wholly-owned subsidiaries, provides banking and bank-related
financial services to middle market and small business organizations, local governmental units, and retail customers in central Maryland and surrounding areas. Bancorp, through its subsidiaries, also
provides broad-based commercial and retail banking services, brokerage, personal trust, investment management, and financial planning services; and a wide variety of related financial products and
services to individuals, businesses and governmental units. In addition, Bancorp provides a full line of consumer and commercial business insurance products through offices in Beltsville, Ellicott
City, Hagerstown, and Cumberland, Maryland and Keyser, West Virginia.

Environmental Liabilities:Management of Bancorp is not aware of any environmental liabilities that would have a material
adverse effect on the operations or earnings of Bancorp.

Seasonal Aspects:Management does not believe that the deposits or the business of the Bank or its subsidiaries in general
are seasonal in nature. The deposits may, however, vary with local and national economic conditions but should not have a material effect on planning and policy making.

Employees:As of December 31, 2001, Bancorp had no full-time equivalent employees. As of that date, the
Bank and its subsidiaries had 740 full-time equivalent employees.

Competition:The market for banking and bank-related services is highly competitive and is growing more
competitive every year. Traditional banks are developing capabilities in nontraditional lines of business such as insurance, brokerage, mutual funds, investment banking, securities underwriting and
asset management. Commercial enterprises such as insurance companies, investment banking firms and
retailers are gaining regulatory approvals to offer traditional banking products and services either alone or through affiliations.

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Bancorp
operates in a highly competitive marketplace that has intensified in the past several years largely as a result of interstate banking and the acquisition of in-state
financial institutions by larger, out-of-state banks. The full range of competition includes other bank holding companies, other commercial banks, other savings and loan
associations, credit unions, money market funds, brokerage houses, investment managers, mortgage companies, consumer finance companies, leasing companies, insurance carriers, other insurance agencies,
automobile manufacturers and their financing units and commercial loan syndicates.

Bancorp
competes successfully in its marketplace by effectively focusing its business energy and resources on meeting the specific needs of its customers with a level of sales, service
and support intended to foster long-term relationships. Additionally, Bancorp has been able to expand its presence throughout the Maryland market to better serve clients who demand a
statewide presence. Bancorp's growth strategy may include the use of strategic acquisitions and it regularly evaluates opportunities and conducts due diligence activities in connection with possible
transactions. As a result, discussions and, in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur.

Supervision and Regulation

Bancorp and its bank subsidiary are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of customers and
depositors. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. In addition, Bancorp and its
subsidiaries are subject to general U.S. federal laws and regulations and to the laws and regulations of the states in which they conduct their businesses. Described below are material elements of
selected laws and regulations applicable to the Corporation and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of
the statutes and regulations described.

Bank Holding Company Regulation:F&M Bancorp is registered with the Federal Reserve Board (the "FRB") as a bank holding
company and is subject to reporting requirements, supervision and examination by the FRB under the Bank Holding Company Act of 1956 (the "Act"), as amended. The Act restricts the business activities
and acquisitions that may be engaged in or made by Bancorp. Bancorp is generally prohibited from acquiring direct or indirect ownership or control of more than 5% of any class of the voting shares of
any company which is not a bank or bank holding company and from engaging in any business other than that of banking or of managing or controlling banks, or of furnishing services to, or performing
services for, its affiliated banks. The Act and regulations thereunder require prior approval of the FRB of the acquisition by Bancorp of more than 5% of any
class of the voting shares of any additional bank. After prior approval or notice, Bancorp may acquire other banks and bank holding companies and engage directly or indirectly in certain activities
closely related to banking. Bancorp must give prior notice of certain purchases or redemptions of its outstanding equity securities. Bancorp and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease, sale of property, or furnishing of services.

The
FRB may issue cease and desist orders against bank holding companies and nonbank subsidiaries to stop actions believed to present a serious threat to the Bank. The FRB also regulates
certain debt obligations of bank holding companies.

Bank Regulations:The Bank is subject to supervision and regulation by the State of Maryland, the FRB, and the Federal
Deposit Insurance Corporation ("FDIC") as of December 31, 2001. On December 14, 2000 the Bank made application with the Maryland State Commissioner of Financial Regulation to become a
state-chartered Bank. Approval from the Commissioner occurred and was effective April 1, 2001. This made the Bank subject to supervision by the State of Maryland with the

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FRB serving as the primary regulator. Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of branches, mergers and
consolidations, changes in control, electronic funds transfers, responsiveness to community needs, management practices, compensation policies and other aspects of operations are subject to regulation
by the appropriate Federal supervisory authorities and the applicable banking laws of the State of Maryland. The Bank may establish branch banking offices and engage in certain corporate activities
without geographic limitation in the state of Maryland without prior approval. Mergers of the Bank with any other bank would require approval of, and involve review by, various governmental agencies.

Some
of the aspects of the lending and deposit business of the Bank which are subject to regulation by the FRB or the FDIC include disclosure requirements in connection with personal or
mortgage loans, interest on deposits and reserve requirements. In addition, the Bank is subject to numerous federal, state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit (including to insiders), credit practices, disclosure of credit terms and discrimination in credit transactions.

The
Bank is subject to restrictions under federal law which limit the transfer of funds by the Bank to Bancorp and its nonbanking subsidiaries, whether in the form of loans, extensions
of credit, investments, asset purchases, or otherwise. Such transfers by the Bank to Bancorp or any of Bancorp's nonbanking subsidiaries are limited in amount to 10% of the Bank's capital and surplus
and, with respect to Bancorp and all such nonbanking subsidiaries, to an aggregate of 20% of the Bank's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured
in specified amounts.

Support of Subsidiary Banks:Under FRB policy, Bancorp is expected to act as a source of financial strength and to commit
resources to support its banking subsidiary. This support may be required at times when, absent of such FRB policy, Bancorp may not be inclined to provide it. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority in payment.

A
depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly
controlled FDIC insured depository institution or any assistance provided by the FDIC to any commonly controlled FDIC insured depository institution "in danger of default." Default is defined
generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the
absence of regulatory assistance. Liability for the losses of commonly controlled depository institutions can lead to the failure of some or all depository institutions in a holding company structure,
if the remaining institutions are unable to pay the liability assessed by the FDIC. Any obligation or liability owed by a subsidiary bank to its parent company is subordinate to the subsidiary bank's
cross-guarantee liability for losses of commonly controlled depository institutions.

Payment of Dividends and Other Restrictions:Bancorp is a legal entity separate and distinct from its subsidiaries. There are
various legal and regulatory limitations on the extent to which Bancorp's subsidiaries, including its bank subsidiary, can finance or otherwise supply funds to the Bancorp. See Note 14,
Regulatory Restrictions, Notes to Consolidated Financial Statements, for additional information regarding certain regulatory restrictions on inter-company transfers of funds and on the payment of
dividends by the Bank to Bancorp.

Capital Requirements:Under regulatory capital adequacy guidelines discussed below, Bancorp and the Bank were "well
capitalized" at December 31, 2001 and 2000.

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The
Federal Reserve Bank maintains capital adequacy guidelines applicable to Bancorp and the Bank, respectively, which set forth minimum levels of capital relative to assets and
risk-adjusted assets. The guidelines require Bancorp and the Bank to maintain a minimum tangible (leverage) capital ratio of 3% Tier 1 capital (primarily shareholders' equity) to total
regulatory assets, plus, for all but the most highly rated institutions, an additional cushion of 100 to 200 basis points. Tier 1 capital for bank holding companies includes common equity, minority
interest in equity accounts of consolidated subsidiaries, and qualifying perpetual preferred stock. Tier 1 capital excludes goodwill and other disallowed intangibles, certain deferred tax assets and
any net unrealized loss on marketable equity securities. At December 31, 2001, Bancorp's tangible capital ratio was 8.71%.

Bancorp
and the Bank must also meet a minimum core "Tier 1" capital to risk-weighted assets ratio of 4%. Each must also meet a minimum core and supplemental "Total" capital
to risk-weighted assets ratio of 8%, measuring the amount of defined capital as a percentage of the amount and nature of assets, as well as commitments currently at risk. The
risk-weighted capital rules specify four categories of asset or commitment risk with each category being assigned a weight ranging from 0% to 100% depending upon the defined risk of each
category. At least 50% of Bancorp's total capital must be made up of Tier 1 capital elements including common equity, retained earnings, guaranteed preferred beneficial interest in junior subordinated
debentures, and a limited amount of perpetual preferred stock after subtracting goodwill and certain other adjustments. The remainder may consist of perpetual debt, mandatory convertible debt
securities, a limited amount of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. At December 31, 2001, Bancorp's Tier 1 and Total risk-weighted
capital ratios were 12.24% and 13.30%, respectively.

The
FDIC requires "prompt corrective action" when an insured institution's capital falls to certain levels. This rule restricts or prohibits certain activities and requires an insured
institution to submit a capital restoration plan when it becomes undercapitalized. The restrictions and prohibitions become more severe as an institution's capital level declines.

Capital
adequacy guidelines also provide for consideration of interest rate risk in the overall determination of a bank's minimum capital requirement. The guidelines explicitly provide
that a bank's exposure to declines in the economic value of its capital due to changes in interest rates is a factor to be considered in evaluating capital adequacy.

For
additional information pertaining to capital adequacy and interest rate risk management, see Management's Discussion and Analysis of Financial Condition and Results of Operations,

Monetary Policy:The earnings and growth of Bancorp and the Bank are affected by general economic conditions as well as by
monetary policies of regulatory authorities including the FRB, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to
the FRB are engaging in open market transactions in U.S. Government securities, changing the discount rate on bank borrowings and changing reserve requirements against bank deposits. These techniques
are used in varying combinations to influence the overall growth and distribution of bank loans, investments and deposits. Their use may also affect interest rates charged on loans or paid on
deposits. The effect of governmental monetary policies on the earnings of Bancorp cannot be predicted.

Legislation:The enactment of the Gramm-Leach-Bliley Act in 1999 significantly changed the business of banking. Also known as
the "Financial Services Modernization Act" the Act became effective March 12, 2000. This act, among other things, repealed the sections of the Glass-Steagall Act, which have prohibited the
affiliation of banks with securities firms. This allows a bank holding company to affiliate with any financial company, for example insurance or securities, and to cross sell an affiliate's products
thus allowing any financial company to offer to its customers any financial product or service.

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The
act further expands the number of permissible bank holding company activities to include a long list of financial activities. It includes any activity which in the future is deemed
by the FRB and the Treasury Department to be "financial in nature or incidental to financial activities" and any activity that the FRB determines is complimentary to a financial activity, which does
not pose a substantial safety and soundness risk.

The
new standard is much broader than the previous permissible activities standard. The broader standard allows bank holding companies to expand their product mix and to adapt to
changing market conditions. State laws prohibiting such affiliations are expressly pre-empted. Significantly, the act removes the ability of commercial businesses to acquire or establish a
thrift holding company or receive a thrift charter and requires existing unitary thrift holding companies to be sold only to financial companies in the future.

The
act also confirms state regulation of insurance, subject, however, to a standard that no state may discriminate against affiliates of a bank, thus attempting to provide for equal
treatment of both bank affiliated insurance agencies and non-bank affiliated insurance agencies. The act also allows banks to engage in new and existing financial activities through
subsidiaries without regard to geographic limitation and streamlines bank holding company supervision and clarifies the roles of various regulators. Regulations are currently being promulgated to
implement the provisions of the act.

The
act also contains rules requiring Bancorp and its subsidiaries to safeguard the confidentiality of any "nonpublic personal information" that it has about a customer. These provisions
generally restrict the ability of Bancorp to transfer information about consumers to nonaffiliated third parties and require Bancorp to provide certain privacy-related notices to consumers.

Proposals
to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the states' legislatures, and before the various bank regulatory
agencies. Some of these proposals could have significant effects on the way in which Bancorp and its subsidiaries, and financial institutions in general, conduct their business, and could have
significant effects on Bancorp's operating results. Bancorp cannot, however, accurately predict what those effects would be.

ITEM 2.    PROPERTIES

The following describes the location and general character of the principal offices and other materially important physical properties of Bancorp and its
subsidiaries.

The
Bank owns a fee simple interest in its principal executive offices and main banking facility, totaling approximately 115,000 square feet, located at 110 Thomas Johnson Drive,
Frederick, MD. The Bank also owns a fee simple interest in the principal executive office and main banking facility of its division Home Federal, with approximately 39,000 square feet, located at
122-128 West Washington Street, Hagerstown, MD. Keller Stonebraker leases approximately 8,000 square feet for its headquarters office located at 1120 Professional Court, Hagerstown, MD,
from a partnership in which Keller Stonebraker's executive officers hold a 30% limited partnership interest. Bancorp acquired in its merger with Monocacy Bancshares, Inc., a fee simple interest
in the 43,500 square foot headquarters building of Taneytown Bank & Trust Company located at 222 East Baltimore Street, Taneytown, MD. Out of a total of 50 full-service branch
offices of the Bank at December 31, 2001, 28 were owned and 22 were leased. Information concerning Bancorp's lease commitments is included in Note 12, Commitments and Contingencies,
Notes to Consolidated Financial Statements.

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ITEM 3.    LEGAL PROCEEDINGS

Bancorp and its subsidiaries become involved, from time to time, in various legal proceedings incidental to their respective businesses. As disclosed in
Note 12, Commitments and Contingencies, Notes to Consolidated Financial Statements, in the opinion of the management, there were no legal matters pending as of December 31, 2001, which
would have a material effect on the consolidated financial statements.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders since the 2001 Annual Shareholder meeting.

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The principal market on which F&M Bancorp Common Stock is traded is The NASDAQ Stock Market. Stock price and dividend information is provided below.

Shareholders
received quarterly cash dividends totaling $11,977,000 in 2001 and $12,332,000 in 2000. Since 1996, dividends per share have risen at a compound annual growth rate of 19.4%.

The
ratio of dividends per share to basic earnings per share was 56.6% in 2001 compared to 61.7% for 2000. The Board of Directors establishes the dividend amount each quarter. In making
its decision on dividends, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.

Bancorp
has a stock repurchase program that permits the purchase of up to 500,000 shares of its outstanding common stock. Repurchases are made in connection with shares expected to be
issued under Bancorp's dividend reinvestment, stock option, and benefit plans, as well as for other corporate purposes. Shares repurchased under this program totaled 178,400 in 2001.

Stock Price and Dividends

|            |  | 2001 |       | 2000
|----------- |  | ---- | ----- | ----
|
|1st quarter |  | $    | 27.06 |     
|2nd quarter |  |      | 29.99 |     
|3rd quarter |  |      | 29.59 |     
|4th quarter |  |      | 28.00 |     

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ITEM 6.    SELECTED FINANCIAL DATA

|                                                      |  | Year Ended December 31, |          
|----------------------------------------------------- |  | ----------------------- | ---------
|
|
|Operating Income                                      |  |                         |          
|Interest income                                       |  | $                       | 122,460  
|Interest expense                                      |  |                         | 54,346   
|                                                      |  |                         |          
|Net interest income                                   |  |                         | 68,114   
|Provision for credit losses                           |  |                         | 3,681    
|                                                      |  |                         |          
|Net interest income after provision for credit losses |  |                         | 64,433   
|Noninterest income                                    |  |                         | 30,854   
|Noninterest expense                                   |  |                         | 65,182   
|                                                      |  |                         |          
|Income before provision for income taxes              |  |                         | 30,105   
|Provision for income taxes                            |  |                         | 8,984    
|                                                      |  |                         |          
|Net income                                            |  | $                       | 21,121   
|                                                      |  |                         |          
|Per Share Data                                        |  |                         |          
|Net income  basic                                    |  | $                       | 1.93     
|Net income  diluted                                  |  |                         | 1.92     
|Cash dividend paid                                    |  |                         | 1.09     
|Book value                                            |  |                         | 15.41    
|Key Ratios                                            |  |                         |          
|Return on average assets                              |  |                         | 1.18     
|Return on average shareholders' equity                |  |                         | 12.65    
|Average shareholders' equity to total average assets  |  |                         | 9.29     
|Dividend payout ratio (1)                             |  |                         | 56.6     
|Select Average Balances                               |  |                         |          
|Assets                                                |  | $                       | 1,796,258
|Deposits                                              |  |                         | 1,445,571
|Loans and leases                                      |  |                         | 1,191,721
|Investment securities                                 |  |                         | 473,117  
|Shareholders' equity                                  |  |                         | 166,951  
|At Period End                                         |  |                         |          
|Assets                                                |  | $                       | 1,881,434
|Deposits                                              |  |                         | 1,516,068
|Loans and leases                                      |  |                         | 1,162,225
|Investment securities                                 |  |                         | 546,522  
|Shareholders' equity                                  |  |                         | 167,425  
|Asset Quality                                         |  |                         |          
|Nonperforming assets                                  |  | $                       | 1,917    
|Nonperforming assets to total assets                  |  |                         | 0.10     
|Net charge-offs to average loans outstanding          |  |                         | 0.25     
|Allowance for credit losses to total loans            |  |                         | 1.20     

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides an overview of the financial condition and results of operations of F&M Bancorp and Subsidiaries ("Bancorp") for the three years
in the period ended December 31, 2001, and is intended to assist readers in their analysis and understanding of the accompanying consolidated financial statements and notes thereto.

Bancorp's
acquisition of Potomac Basin Group Associates, Inc. ("PB"), completed in July 1999, and Patapsco Valley Bancshares, Inc. ("PVB") and its wholly-owned
subsidiary, Commercial & Farmers Bank ("C&F"), completed in December 1999, are accounted for as pooling-of-interests transactions. Accordingly, the consolidated
financial statements, notes, and historical financial data contained herein were restated for all prior periods presented to include the financial condition and results of operations for PB and PVB.
Refer to Note 2, Notes to Consolidated Financial Statements, for further information regarding acquisition activity within the periods reported.

All
per share amounts in this report have been restated to give effect to subsequent stock dividends and shares issued in pooling-of-interests transactions.

Forward-Looking Statements

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

OVERVIEW

Bancorp achieved favorable growth in deposits and noninterest income in the year 2001 while continuing to maintain strong net income growth and asset quality.
During the year there was a growing concern over the recessionary environment that prompted the Federal Reserve Bank to cut rates, pushing the federal funds rate to a four-decade low of
1.75%. As a result of the declining rate environment, the Federal Reserve hoped to increase consumer confidence and spending to reduce the effects of the recession that began in March. Against this
background, economic conditions within the Bancorp's operating area in Maryland remained generally strong and credit quality has remained at traditionally strong levels.

Bancorp's
net income for 2001 totaled $21.1 million or $1.92 per diluted share compared with $19.3 million or $1.75 per diluted share in 2000, a 9% increase. Return on
average equity declined slightly to 12.65% in 2001 from 12.98% due to an increase in equity attributable to the improved market performance of the investment portfolio. Return on average assets
increased to 1.18% in 2001 from the 1.11% achieved in 2000.

In
2001 average deposits increased $123.3 million or 9.3%. This increase was driven from growth in demand deposits, money market accounts, and certificates of deposit. In
November 2001, the Bancorp sold two Pennsylvania branches that totaled $24.3 million in deposits that were acquired, through a previous acquisition.

Our
principal revenue category, net interest income, grew by 5% in 2001 compared to 2000. This increase was due to a 4% increase in average earning assets and the net interest margin
increasing to 4.22% from 4.20% in the prior year. The stability of the net interest margin during a year when

11

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interest rates declined by 4.75% attests to the effectiveness of Bancorp's interest rate risk management practices.

Noninterest
income grew $2.1 million to $30.9 million in 2001 versus $28.8 million in 2000, a 7% increase. This increase resulted primarily from a significant
increase in the mortgage banking business, strong insurance sales and increases in deposit services utilized. Bancorp has made it a strategic priority to grow and diversify its sources of noninterest
income. In the past five years, Bancorp has diversified its revenue so that noninterest revenues now comprise over 30% of total revenue, up from 27% in 1997.

In
2001 Bancorp's efficiency ratio at 63.88%, which is a measure of operating cost management, was improved from 64.73% achieved in 2000. Total noninterest expense increased 4% over 2000
and has been contained to a 3% five-year compound growth rate.

Asset
quality remained at Bancorp's traditionally strong levels. The ratio of net charge-offs to average loans outstanding was .25%. At year end the allowance for credit
losses represented 10.9 times the level of year-end nonperforming loans. The additional provision for credit losses of $445 thousand over 2000 reflects Bancorp's conservative
approach in factoring in the effects of a recessionary environment and the potential impact on its customers.

TABLE 1. CHANGES IN DILUTED NET INCOME PER COMMON SHARE

Table 1. Changes in Diluted Net Income per Share

|                                        |                             | 2001 to 2000 |      | 2000 to 1999 |  
|--------------------------------------- | --------------------------- | ------------ | ---- | ------------ | -
|Prior Year Diluted Net Income Per Share |                             | $            | 1.75 |              | $
|Change from difference in:              |                             |              |      |              |  
|                                        | Net interest income         |              |      | .28          |  
|                                        | Provision for credit losses |              |      | (.04         | )
|                                        | Noninterest income          |              |      | .19          |  
|                                        | Noninterest expense         |              |      | (.25         | )
|                                        | Merger-related expenses     |              |      | .03          |  
|                                        | Income taxes                |              |      | (.05         | )
|                                        | Shares outstanding          |              |      | .01          |  
|                                        |                             |              |      |              |  
|Total                                   |                             |              | .17  |              |  
|                                        |                             |              |      |              |  
|Diluted Net Income per Share            |                             | $            | 1.92 |              | $
|                                        |                             |              |      |              |  

RESULTS OF OPERATIONS

Bancorp's operating results for the year reflected strong revenue growth, with total revenues rising $5.2 million or 6% to $99 million. Increases
occurred in both net interest income and fee-generating business as Bancorp's strategies and growth initiatives continued to generate strong revenue momentum. Credit losses continued to be
modest while loan quality remained strong. Bancorp continues to initiate technology enhancements and capitalize on acquisition and consolidation synergies to moderate expense growth.

Net Interest Income

Net interest income for 2001 was $68.1 million, representing an increase of $3 million or 5% from 2000. A 5% increase was achieved in 2000 compared
to 1999, resulting in net interest income of $65.0 million. Bancorp's principal source of revenue is net interest income, the difference between interest income on earning assets and interest
expense on deposits and borrowings. Interest income for purposes of analysis is presented on a tax-equivalent basis to recognize associated tax benefits. The presentation provides a basis
for comparison of yields with taxable earning assets.

12

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TABLE 2. CONSOLIDATED AVERAGE BALANCES AND RATES

|                                                                           |                         | 2001 |           | 2000    |   | 1999    |       
|-------------------------------------------------------------------------- | ----------------------- | ---- | --------- | ------- | - | ------- | ------
|
|
|ASSETS                                                                     |                         |      |           |         |   |         |       
|Interest earning assets:                                                   |                         |      |           |         |   |         |       
|Short-term funds                                                           |                         | $    | 23,625    |         | $ | 1,222   |       
|                                                                           |                         |      |           |         |   |         |       
|Investment securities:                                                     |                         |      |           |         |   |         |       
|                                                                           | Taxable                 |      |           | 345,245 |   |         | 19,810
|                                                                           | Tax-exempt(1)           |      |           | 127,872 |   |         | 8,473 
|                                                                           |                         |      |           |         |   |         |       
|Total investment securities                                                |                         |      | 473,117   |         |   | 28,283  |       
|Loans, net, including loans held for sale(1)                               |                         |      | 1,191,721 |         |   | 96,031  |       
|                                                                           |                         |      |           |         |   |         |       
|Total interest-earning assets                                              |                         |      | 1,688,463 |         |   | 125,536 |       
|Total noninterest-earning assets                                           |                         |      | 107,795   |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|Total assets                                                               |                         | $    | 1,796,258 |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|LIABILITIES AND SHAREHOLDERS' EQUITY                                       |                         |      |           |         |   |         |       
|Interest bearing liabilities:                                              |                         |      |           |         |   |         |       
|Interest bearing deposits:                                                 |                         |      |           |         |   |         |       
|                                                                           | Checking                |      | $         | 186,999 |   | $       | 1,952 
|                                                                           | Savings                 |      |           | 149,726 |   |         | 2,675 
|                                                                           | Money market accounts   |      |           | 285,975 |   |         | 8,697 
|                                                                           | Certificates of deposit |      |           | 611,898 |   |         | 34,051
|                                                                           |                         |      |           |         |   |         |       
|Total interest bearing deposits                                            |                         |      | 1,234,598 |         |   | 47,375  |       
|                                                                           |                         |      |           |         |   |         |       
|Federal funds purchased and securities sold under agreements to repurchase |                         |      | 100,235   |         |   | 3,377   |       
|Other borrowed funds                                                       |                         |      | 67,089    |         |   | 3,594   |       
|                                                                           |                         |      |           |         |   |         |       
|Total borrowed funds                                                       |                         |      | 167,324   |         |   | 6,971   |       
|                                                                           |                         |      |           |         |   |         |       
|Total interest bearing liabilities                                         |                         |      | 1,401,922 |         |   | 54,346  |       
|Noninterest bearing liabilities:                                           |                         |      |           |         |   |         |       
|Demand deposits                                                            |                         |      | 210,973   |         |   |         |       
|Other liabilities                                                          |                         |      | 16,412    |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|Total noninterest-bearing liabilities                                      |                         |      | 227,385   |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|Total liabilities                                                          |                         |      | 1,629,307 |         |   |         |       
|Shareholders' equity                                                       |                         |      | 166,951   |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|Total liabilities and shareholders' equity                                 |                         | $    | 1,796,258 |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       
|Net interest income and spread                                             |                         |      |           |         | $ | 71,190  |       
|                                                                           |                         |      |           |         |   |         |       
|Net interest margin                                                        |                         |      |           |         |   |         |       
|                                                                           |                         |      |           |         |   |         |       

---

Consolidated Average Balances and Rates reveals a relatively stable net interest margin accomplished by significant increases in average earning
assets over the three year period ended December 31, 2001. As a result, Bancorp was able to achieve tax-equivalent net interest income of $71.2 million in 2001, representing
a 5% increase, preceded by $68.2 million in 2000.

13

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TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME

|                                                                                       |            | Year Ended December 31, |       
|-------------------------------------------------------------------------------------- | ---------- | ----------------------- | ------
|
|
|
|
|
|Interest Income                                                                        |            |                         |       
|Interest and fees on loans                                                             |            | $                       | (5,249
|Interest and dividends on investment securities:                                       |            |                         |       
|                                                                                       | Taxable    |                         |       
|                                                                                       | Tax-exempt |                         |       
|Short-term funds                                                                       |            |                         | 477   
|                                                                                       |            |                         |       
|Total                                                                                  |            |                         | (3,821
|Interest Expense                                                                       |            |                         |       
|Interest on deposits                                                                   |            |                         | 1,194 
|Interest on federal funds purchased and securities sold under agreements to repurchase |            |                         | (2,943
|Interest on other borrowings                                                           |            |                         | (5,049
|                                                                                       |            |                         |       
|Total                                                                                  |            |                         | (6,798
|                                                                                       |            |                         |       
|Net Interest Income                                                                    |            | $                       | 2,977 
|                                                                                       |            |                         |       

---

Analysis
of Changes in Net Interest Income reveals that the percentage increase in tax-equivalent net interest income for 2001 has declined slightly compared to 2000. This
was attributable to the impact of slower earning asset growth in 2001 offset by an improvement in the impact of changing rates. Competitive pricing pressures on loans and deposits have increased in
the recessionary environment and present a significant management challenge. This has heightened the emphasis to diversify revenue streams and requires greater sophistication in net interest margin
management.

Interest Income

Bancorp's tax-equivalent interest income decreased $3.8 million or 3% in 2001 compared to 2000. This decline was primarily the result of a 54
basis point decrease in the average yield on earning assets offset by a $65.7 million increase in those assets.

During
2001, average loans yielding 8.06% declined $5.9 million. This decrease was attributable to prepayments in residential mortgage loans, consumer automobile loans and
commercial loans. As a percentage of average earning assets, average loans were 71%, 74% and 68% in 2001, 2000 and 1999, respectively.

Average
total securities yielding 5.98% increased 15% to $473 million in 2001. They represented 28% of average earning assets in 2001 as compared to 25% in 2000. The growth in the
securities portfolio in 2001 resulted from the significant deposit growth achieved during the year.

Tax-equivalent
interest income increased 10% or $12.2 million in 2000 compared to 1999, due to significantly higher average earning assets and by a 27 basis point
improvement in the average yield earned on these funds.

14

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Interest Expense

Interest expense declined 11% or $6.8 million in 2001 compared to 2000. The change was attributable to a 54 basis point decline in the average total rate
paid on interest-bearing liabilities, offset by a 1% or $18.1 million increase in those liabilities.

Interest
bearing deposits increased 9% or $101.8 million in 2001 compared to 2000 primarily in money market accounts and certificates of deposit. Average total borrowings,
typically the most expensive funding source, declined 33% or $83.7 million. The average rate paid on interest-bearing deposits decreased by 24 basis points in 2001 compared to 2000,
representing a 6% decrease, while the average rate for borrowings decreased 179 basis points representing a 30% decrease.

Interest
expense increased 17% or $9.1 million in 2000 as compared to 1999, due to a 7% increase or $88.3 million higher average interest-bearing liabilities, accompanied
by a 40 basis point increase in the average rate paid for those funds.

Interest Rate Performance

Net interest margin, the profit margin achieved on Bancorp's earning assets, increased 2 basis points in 2001 compared to 2000. The net interest spread improved
by 1 basis point. On an average basis, interest rates were lower in 2001 than in 2000, and the decline in rates had an equivalent impact on both interest-bearing assets and liabilities which was
consistent with the Bancorp's interest rate risk profile. The decline in net interest margin was 8 basis points in 2000 compared to 1999 and the net interest spread declined 12 basis points.

During
2001 interest rates declined significantly from the beginning of the first quarter and until year-end. The decrease in the average interest rates earned on assets
outpaced the decrease in the average rate paid on deposit accounts largely due to competitive pressure on loan prices and a higher mix of investment securities that earn lower yields than loans.
Reducing expensive borrowings and lowering the cost of those borrowings offset the compression on the net interest margin by traditional bank products and services, by 179 basis points.

Provision for Credit Losses

Provisions for credit losses are charges to earnings to bring the total allowance for credit losses to a level considered by management as adequate to provide for
estimated losses based on management's evaluation of the collectibility of the loan portfolio. Management considers the nature of the loan portfolio, credit-concentration trends, historical loan loss
experience, specific impaired loans and economic conditions. Management also considers the level of problem assets that the Bancorp classifies in accordance with regulatory requirements. The provision
for credit losses was $3.7 million in 2001 which was $.4 million higher than in 2000. This increase in provision resulted primarily from Bancorp's conservative approach in factoring in
the impact of the recessionary environment on its borrowers.

Noninterest Income

Total noninterest income rose $2.1 million or 7% to $30.9 million for the year. Growth occurred mainly in gains on sales of loans, insurance income
and service charges on deposit accounts. Noninterest income grew 15% or $3.8 million in 2000 versus 1999.

Gains
on sales of loans from mortgage banking activities increased $1.7 million or 82% to $3.8 million in 2001 compared to 2000, after a decline of 6% or
$136 thousand in 2000 compared to 1999. Declining interest rates resulted in a shift in consumer demand toward fixed-rate mortgages which are generally not held in the loan
portfolio but are sold in the market. Lower interest rates also increased refinancing activity, resulting in higher origination fees, which are also included in this

15

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category. These gains reflect a reclassification of miscellaneous loan fees that had no impact on net income.

Insurance
commission income grew $767 thousand or 10% to $8.8 million. Revenues of $8.0 million for 2000 represented an increase of $1.1 million or 16% over
1999. Team-based selling efforts between the insurance subsidiaries and the bank affiliates have brought a vast array of consumer and commercial insurance products to the community bank
customer.

Bank
card income increased $382 thousand or 15% to $3.0 million. Revenues from debit card usage increased 26% or $535 thousand in 2000 versus 1999. This income is
derived primarily from debit card transactions. The continuing growth in this product resulted from increased consumer acceptance of the service, greater marketing focus to raise awareness and
increased customer usage of this product.

Revenues
from service charges on deposit accounts rose $465 thousand or 6% in 2001 and $822 thousand or 12% in 2000. This increase resulted from the overall level of new
deposit account customers and the conversion of acquired accounts in 2000 to Bancorp's fee schedule.

Commissions
and fees from alternative investments and brokerage services declined $336 thousand or 9% partly due to current market conditions. Revenues increased 8% or
$303 thousand in 2000 compared to 1999. It is the goal of our Wealth Management Group to provide innovative financial solutions individually designed for the affluent, emerging affluent and
small business customer.

TABLE 4. ANALYSIS OF CHANGES IN NONINTEREST INCOME

|                         |                                                 | Year Ended December 31, |        |       |   |        |      
|------------------------ | ----------------------------------------------- | ----------------------- | ------ | ----- | - | ------ | -----
|
|
|
|Noninterest Income       |                                                 |                         |        |       |   |        |      
|                         | Service charges on deposit accounts             |                         | $      | 8,370 |   | $      | 7,905
|                         | Insurance income                                |                         |        | 8,760 |   |        | 7,993
|                         | Gains on sales of loans                         |                         |        | 3,772 |   |        | 2,083
|                         | Gains on sales of securities                    |                         |        | 60    |   |        | 633  
|                         | Gains (losses) on sales of property             |                         |        | 498   |   |        | 51   
|                         | Alternative investment & stock brokerage income |                         |        | 3,554 |   |        | 3,890
|                         | Bank card income                                |                         |        | 2,957 |   |        | 2,574
|                         | Other operating income                          |                         |        | 2,883 |   |        | 3,640
|                         |                                                 |                         |        |       |   |        |      
|Total noninterest income |                                                 | $                       | 30,854 |       | $ | 28,769 |      
|                         |                                                 |                         |        |       |   |        |      

Noninterest Expense

Total noninterest expense rose $2.4 million or 4%, to $65.2 million in 2001 over 2000 and declined 7% or $4.4 million in 2000 over 1999.
Bancorp incurs additional costs in order to provide new services, expand its market, and support the growth of the company. Management controls operating costs with the goal of maximizing
profitability over time.

Management
views the efficiency ratio as an important measure of overall operating expense performance and cost management. Lower ratios indicate improved productivity. Bancorp's
efficiency ratio (the ratio of noninterest expense to the sum of net interest income on a tax equivalent basis and
noninterest income) decreased to 63.88% for 2001 compared to 64.73% and 74.60% for 2000 and 1999, respectively.

Total
personnel expense grew $2.0 million or 6% for 2001. Salary expense rose $1.6 million or 6%, primarily due to higher commission costs related to insurance activities,
normal employee merit

16

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increases and successful recruitment of open positions. Employee benefits increased by $449 thousand or 8% to $6.0 million primarily due to higher employee medical costs.

Efficient
staffing is a strategic priority of management. Staffing additions are tied directly to achieving gains in financial performance. Average full-time equivalent
employees declined to 740 in 2001 representing a decrease of 4% from 770 in 2000 which was 4% below the 803 recorded in 1999. The ratios of net income per full-time equivalent employee
increased to $29,000 in 2001, from $25,000 and $16,000 in 2000 and 1999, respectively. Total personnel expense grew $70 thousand or .2% in 2000 compared to 1999.

Merger-related
expense decreased to zero in 2001 from $318 thousand in 2000 and $5.0 million in 1999. These expenses are largely associated with legal and accounting fees,
severance payments, contract terminations, and similar expenses related to the acquisition and merger of Patapsco Valley Bancshares, Inc. which closed on December 30, 1999.

Professional
services decreased $542 thousand or 19.3% primarily due to fewer recruiting expenses associated with the efforts to fill open positions for 2001. Telephone expense
decreased $306 thousand or 16.6%. Computer software and maintenance costs decreased $193 thousand or 10.4%. These decreases are attributed to managing the cost associated with technology
investments to improve customer service and provide productivity enhancements to the organization.

TABLE 5. ANALYSIS OF CHANGES IN NONINTEREST EXPENSE

|                          |                                     | Year Ended December 31, |        |        |   |        |       
|------------------------- | ----------------------------------- | ----------------------- | ------ | ------ | - | ------ | ------
|
|
|
|Noninterest Expenses      |                                     |                         |        |        |   |        |       
|                          | Salaries                            |                         | $      | 30,484 |   | $      | 28,893
|                          | Pension and other employee benefits |                         |        | 5,974  |   |        | 5,525 
|                          | Merger-related expenses             |                         |        |       |   |        | 318   
|                          | Occupancy and equipment expense     |                         |        | 9,819  |   |        | 9,313 
|                          | Stationary and supplies             |                         |        | 1,469  |   |        | 1,446 
|                          | Professional services               |                         |        | 2,270  |   |        | 2,812 
|                          | Postage                             |                         |        | 932    |   |        | 1,011 
|                          | Telephone                           |                         |        | 1,534  |   |        | 1,840 
|                          | Computer software and maintenance   |                         |        | 1,659  |   |        | 1,852 
|                          | Other real estate owned             |                         |        | 190    |   |        | 29    
|                          | Amortization of intangibles         |                         |        | 1,120  |   |        | 1,173 
|                          | Other                               |                         |        | 9,731  |   |        | 8,562 
|                          |                                     |                         |        |        |   |        |       
|Total noninterest expense |                                     | $                       | 65,182 |        | $ | 62,774 |       
|                          |                                     |                         |        |        |   |        |       

Income Taxes

Income tax expense increased by 6% to $9.0 million for 2001 from $8.5 million for 2000 and $5.2 million in 1999. Tax expense varies with
changes in the level of income before taxes, the amount of tax-exempt income realized, and the relationship of these changes to each other. Also, the amount of income tax expense differs
from the amount computed at statutory rates primarily because the interest realized on state and municipal obligations and certain loans is tax-exempt.

The
effective tax rates, which is the provision for income taxes divided by income before taxes, were 29.8% for 2001, 30.5% for 2000, and 28.4% for 1999.

17

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FINANCIAL CONDITION

Bancorp's total assets reached $1.881 billion at December 31, 2001, an increase of 5% or $86.2 million from $1.795 billion at
December 31, 2000. Earning assets increased $83.7 million or 5% in 2001, to $1.751 billion at December 31, 2001 from $1.667 billion at the prior
year-end.

Investment Securities:The investment portfolio increased 28% or $120.3 million to $546.5 million at
December 31, 2001 from $426.2 million at December 31,2000. The investment securities portfolio is structured and managed to meet several important financial objectives:



For
accounting and reporting purposes, investments owned by Bancorp are held as available-for-sale ("AFS") securities, which are intended to be held for an
indefinite period of time, but not necessarily to maturity. This determination is made when the securities are purchased and is integral to Bancorp's asset/liability management ("ALM") policies.

Table
6, Investment Portfolio Distribution, displays the year-end amortized cost of the investment securities portfolio which increased to $542 million at
December 31, 2001 from $428 million at December 31, 2000.

TABLE 6. INVESTMENT PORTFOLIO DISTRIBUTIONAMORTIZED COST(1)

|                                                       |  | December 31,
|------------------------------------------------------ |  | ------------
|
|
|U.S. Treasury and government corporations and agencies |  | $           
|Obligations of state and political subdivisions        |  |             
|Mortgage-backed securities                             |  |             
|Other securities                                       |  |             
|                                                       |  |             
|Total                                                  |  | $           
|                                                       |  |             

---

As
shown in Table 7, Investment Portfolio Analysis, the amortized cost of AFS securities totaled $542 million and represented 100% of the total securities portfolio and 29% of
consolidated total assets
at December 31, 2001. AFS securities provide substantial liquidity, chiefly for unexpected loan growth or deposit withdrawal requirements.

18

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TABLE 7. INVESTMENT PORTFOLIO ANALYSISDECEMBER 31, 2001

|                                                       |  | Maturing In: |       
|------------------------------------------------------ |  | ------------ | ------
|
|
|
|Available-for-sale:(1)                                 |  |              |       
|U.S. Treasury and government corporations and agencies |  | $            | 25,050
|Obligations of state and political subdivisions(2)     |  |              | 8,351 
|Mortgage-backed securities(3)                          |  |              |      
|Equity securities                                      |  |              |      
|                                                       |  |              |       
|Total available-for-sale                               |  | $            | 33,401
|                                                       |  |              |       
|Total investment securities                            |  | $            | 33,401
|                                                       |  |              |       

---

In management's opinion, no securities presented any material risk characteristics at December 31, 2001. All obligations of state and
political subdivisions were rated A or higher by either Moody's Investors Service or Standard and Poors and approximately 85% were rated AAA at December 31, 2001.

Loans:Average loans are virtually unchanged in 2001 from 2000, whereas total loans at December 31, 2001 decreased 5%
to $1.16 billion from $1.22 billion at December 31, 2000 as shown in Table 8, Loan Portfolio Mix. The weakening economy and lower interest rates resulted in rampant refinancing
and decreased loan balances. Construction lending increased $4.5 million or 5.6% and non-residential real estate mortgages rose $31 million or 10.6%. Residential mortgages
reflect the sharpest decline of 15% to $296 million, due to lower interest rates, which significantly increased prepayment activity along with client preference for fixed rate mortgage products
which are not held in portfolio. During 2001, originations of mortgage loans increased 380% over 2000, yielding an increase of 82% on gain on sale of mortgage loans versus the prior year.

Management
believes that its underwriting standards are conservative and consistently applied. Although geographically focused on its growing primary marketplace, which has proven to be
economically vibrant and stable over the years, Bancorp's credit risk is well diversified as to loan type and average loan size.

19

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TABLE 8. LOAN PORTFOLIO MIX

|                                  |  | December 31, |          
|--------------------------------- |  | ------------ | ---------
|
|
|
|Real estate:                      |  |              |          
|Construction and land development |  | $            | 85,138   
|Secured by farmland               |  |              | 5,902    
|Residential mortgage              |  |              | 295,436  
|Other mortgage                    |  |              | 323,643  
|Agricultural                      |  |              | 507      
|Commercial and industrial         |  |              | 175,307  
|Consumer                          |  |              | 274,361  
|Other loans                       |  |              | 1,931    
|                                  |  |              |          
|Total Loans                       |  | $            | 1,162,225
|                                  |  |              |          

TABLE 9. LOAN MATURITIES AND INTEREST SENSITIVITY(1) AT DECEMBER 31, 2001

|                          |                                   | Maturing In:
|------------------------- | --------------------------------- | ------------
|
|
|Real estate:              |                                   |             
|                          | Construction and land development |             
|                          | Secured by farmland               |             
|Agricultural              |                                   |             
|Commercial and industrial |                                   |             
|Other loans               |                                   |             
|                          |                                   |             
|                          | Total                             |             
|                          |                                   |             
|Rate sensitivity:         |                                   |             
|                          | Predetermined rate                |             
|                          | Floating rate                     |             
|                          |                                   |             
|                          | Total                             |             
|                          |                                   |             

---

Deposits:Representing the principal source of funds for loans and investments, average total deposits, as shown in Table 10,
Average Deposits and Rates Paid, increased by 9% in 2001 over 2000. Noninterest checking and certificates of deposit grew by 11% and 16%, respectively. Money market accounts also grew, generating
$28.5 million or 11% growth in deposits, primarily in the T-bill Plus money market product. Consumers show a strong preference for the flexibility and competitive rates of these
accounts. Savings and interest checking customers migrated to the T-bill Plus Account which is reflected in the lower balances in those products.

20

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Table
11, Maturity of Time Deposits $100,000 or More, reflects a growth rate of 64% for 2001, most notably in the shorter-term maturities. Generally the highest cost source
of deposits, they are also a relatively stable source coming largely from local municipalities. The events of September 11, 2001 and the down-turn in the stock market resulted in
the movement of funds into these products from other higher-risk non-bank investments.

TABLE 10. AVERAGE DEPOSITS AND RATES PAID

|                                    |              | 2001 |           | 2000    |      | 1999 |  
|----------------------------------- | ------------ | ---- | --------- | ------- | ---- | ---- | -
|
|
|Noninterest-bearing demand deposits |              | $    | 210,973   |         |      |      | $
|Interest-bearing deposits:          |              |      |           |         |      |      |  
|                                    | Checking     |      |           | 186,999 |      | 1.04 | %
|                                    | Money market |      |           | 285,975 |      | 3.04 |  
|                                    | Savings      |      |           | 149,726 |      | 1.79 |  
|                                    | Time         |      |           | 611,898 |      | 5.56 |  
|                                    |              |      |           |         |      |      |  
|Total interest-bearing deposits     |              |      | 1,234,598 |         | 3.84 |      |  
|                                    |              |      |           |         |      |      |  
|Total average deposits              |              | $    | 1,445,571 |         | 3.28 | %    | $
|                                    |              |      |           |         |      |      |  

TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE

|             |                                 | December 31,
|------------ | ------------------------------- | ------------
|
|
|Maturing in: |                                 |             
|             | 3 months or less                |             
|             | Over 3 months through 6 months  |             
|             | Over 6 months through 12 months |             
|             | Over 12 months                  |             
|             |                                 |             
|Total        |                                 | $           
|             |                                 |             

Borrowings:Short-term borrowings decreased $91.5 million to $117.6 million on average in 2001 and
average long-term borrowings increased $6.3 million to $49.7 million. With the drop in interest rates that occurred in 2001, Bancorp elected to secure additional
long-term fixed rate funding in the low interest rate environment. Much of the reduction reflected in 2001 short-term borrowings was the result of an increase in core deposit
balances.

21

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TABLE 12. SHORT-TERM BORROWINGS

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

|                          |                | Year Ended December 31, |        
|------------------------- | -------------- | ----------------------- | -------
|
|
|End of period outstanding |                | $                       | 114,505
|Highest month-end balance |                |                         | 116,893
|Average balance           |                |                         | 100,235
|Average rate of interest: |                |                         |        
|                          | At end of year |                         |        
|                          | During year    |                         |        

Short-term
Advances from Federal Home Loan Bank

|                          |                | Year Ended December 31, |       
|------------------------- | -------------- | ----------------------- | ------
|
|
|End of period outstanding |                | $                       | 1,151 
|Highest month-end balance |                |                         | 72,000
|Average balance           |                |                         | 15,778
|Average rate of interest: |                |                         |       
|                          | At end of year |                         |       
|                          | During year    |                         |       

LIQUIDITY MANAGEMENT

The goal of liquidity management is to ensure Bancorp's ability to meet current and future obligations, including loan commitments, deposit withdrawals, liability
maturities and other commitments, and to ensure that Bancorp is well positioned to take advantage of business opportunities in a timely and cost-efficient manner. Bancorp manages liquidity
at both the parent and subsidiary levels through active management of the balance sheet.

Parent
company liquidity comes from short-term investments that can be sold immediately and from dividends and interest income from subsidiaries. At December 31, 2001,
F&M Bancorp had $4.8 million in interest-bearing balances at Farmers & Mechanics Bank. During 2001, amounts available for the payment of dividends aggregated $21.1 million.

Liquidity
at the Bank is derived from its ability to generate core deposits from a large, diversified customer base and its ability to purchase noncore money market funds in the U.S. The
Bank's ability to attract funds in the wholesale markets rests on its strength of capital, collateral availability, earnings, reputation and high quality assets. The Bank draws on a diverse base of
wholesale funding sources, including large certificates of deposit, federal funds purchased, and securities sold under repurchase agreements. The Bank also has extensive access to funds from its
membership in the Federal Home Loan Bank of Atlanta.

Asset
liquidity is maintained through temporary investments, maturity management and the ability to liquidate securities in the available for sale portfolio. In addition, Bancorp limits
the level, maturity and concentrations of noncore funding through policy and internal guidelines. Management regularly reviews liquidity positions and reviews liquidity with the Board of Directors on
a semi-annual basis.

22

---

Market Risk and Asset/Liability Management

Market risk is defined as the future changes in market prices that increase or decrease the value of financial instruments, i.e. cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign currency exchange rate risk, commodity price risk and other relevant market risks. Bancorp's primary source of market risk is
interest rate risk. Market risk-sensitive financial instruments are entered into for purposes other than trading. Bancorp does not engage in foreign currency transactions.

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

There
are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on Bancorp's earnings and capital. Repricing risk arises largely
from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower rates. Basis risk
exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected
equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

In
determining the appropriate level of interest rate risk, Bancorp considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest
rates, regional economies, liquidity, business strategies and other factors. Bancorp uses a number of tools to measure interest rate risk including simulating net interest income, monitoring the
sensitivity of the net present value of the balance sheet and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods.

Management
believes that interest rate risk is best measured by simulation modeling which calculates expected net interest income based on projected interest-earning assets and
interest-bearing liabilities. The model projections are based upon historical trends and management's expectations of balance
sheet growth patterns, spreads to market rates, historical market rate relationships, prepayment behavior, current and expected product offerings and sales activities. Various sensitivity analyses are
performed on a regular basis to segregate interest rate risk into separate components and understand the risk attributable to prepayments, caps and floors and other options. Assumption testing is
performed to understand the degree of impact from changing key assumptions such as the speed of prepayments, the interest rate elasticity of core deposit rates and balance sheet growth. Bancorp's
policy guideline limit for net interest income simulation is a negative impact to net interest income of 15.0% for the up or down 300 basis points scenarios when compared with the flat rate scenario.
Management has generally maintained a risk position well within the policy guideline level. The model indicated the impact of a 300 basis point rise in rates over the next 12 months would cause
approximately a 5.6% decrease in net interest income at December 31, 2001. A 300 basis point decrease in rates over the next 12 months would cause approximately a 4% decrease in net
interest income. Note that certain short-term market rates and a majority of the Bank's deposit rates are below 3.0%. These rates cannot move below zero in a down 300 basis point scenario.
The impact of this zero percent floor on deposit rates is the primary reason that net interest income is negatively impacted in the down 300 basis point scenario.

Computations
of prospective effects of hypothetical interest rate changes are based on many assumptions including relative levels of market interest rates, loan prepayments and changes
in deposit

23

---

levels. They are not intended to be a forecast and should not be relied upon as indicative of actual results. Further, the computations do not contemplate certain actions that management could take
in response to changes in interest rates.

Capital Resources:It is Bancorp's policy to maintain a level of capital sufficient to protect the company's depositors,
creditors and shareholders and to support Bancorp's growth. The principal source of capital is retained earnings. Bancorp monitors historical and projected earnings, dividends, and asset growth, as
well as risks associated with various types of on-and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. During 2001, total
shareholder's equity increased 6% or $9.4 million to $167.4 million at December 31, 2001 from $158.0 million at December 31, 2000. Internal capital generation and
the change in accumulated other comprehensive income resulted in this increase in total shareholder's equity. Internal capital generation (net income less dividends) added $9.1 million to
equity in 2001, representing 5% in average stockholder's equity. Year-end accumulated other comprehensive income (comprised of net unrealized gains and losses on available for sale
securities) increased in 2001 as compared to 2000, by $4.6 million in higher total stockholder's equity.

External
capital formation resulting from stock issuances under the dividend reinvestment and stock option program totaled $307 thousand in 2001. Share repurchases reduced total
stockholder's equity by $4.6 million in 2001. The ratio of average equity to average assets was 9.3% in 2001 as compared to 8.6% for 2000 and 9.1% for 1999.

The
FRB maintains capital adequacy guidelines applicable to Bancorp and the Bank, respectively, as disclosed in, Shareholders' Equity, Notes to Consolidated Financial Statements. Under
each measure,
Bancorp and its subsidiaries were substantially in excess of the minimum regulatory requirements and, by definition, were "well capitalized" at December 31, 2001 and 2000.

In
accordance with regulatory guidelines, fair value adjustments to shareholders' equity for changes in the fair value of investment securities classified as
available-for-sale are excluded from the calculations.

Effects of Changing Prices:Inasmuch as virtually all of a financial institution's assets and liabilities are monetary in
nature, changes in interest rates may have a significant effect on earnings performance. Interest rates, though affected by inflation, do not necessarily move in the same direction, or in the same
magnitude, as the prices of other goods and services. Movements in interest rates are a result of the perceived changes in the rate of inflation and the effects of monetary and fiscal policies.
Reference to Net Interest Income and Market Risk in this section will assist the reader in understanding how Bancorp is positioned to address changing interest rates.

Several
major categories of noninterest expense are more directly affected by inflationary factors such as salaries and employee benefits and other operating expenses. Management
endeavors to overcome or mitigate the effects of inflation by seeking opportunities to improve operating efficiency and productivity and by developing strategies for growth that will exceed the
projected rate of inflation.

RISK ELEMENTS

Nonperforming Assets:Table 13, Nonperforming Assets and Contractually Past-Due Loans, displays a
five-year history of steadily declining nonperforming assets. Totaling just $1.9 million, or 0.10% of total consolidated assets at December 31, 2001, Bancorp reduced its
nonperforming assets at an average annual rate of 36% over the period shown.

Loans
that were past due 90 days or more and not classified as nonperforming totaled $2.8 million at December 31, 2001, or 0.24% of year-end total loans,
compared with $1.2 million one year earlier, or 0.10% of total loans at December 31, 2000. Historically, there has been no direct correlation between loans past due 90 days or
more and nonperforming loans or loan losses.

24

---

TABLE 13. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS

|                                                                 |                                                       | December 31, |      
|---------------------------------------------------------------- | ----------------------------------------------------- | ------------ | -----
|
|
|Nonperforming assets:                                            |                                                       |              |      
|                                                                 | Nonaccrual loans(1)                                   |              | $    
|                                                                 | Other real estate owned net of valuation allowance(2) |              |      
|                                                                 |                                                       |              |      
|Total nonperforming assets                                       |                                                       | $            | 1,917
|                                                                 |                                                       |              |      
|Loans past due 90 or more days as to interest or principal(3)    |                                                       | $            | 2,819
|Nonperforming loans to total loans                               |                                                       |              | 0.11 
|Nonperforming assets to total loans plus other real estate owned |                                                       |              | 0.16 
|Nonperforming assets to total assets                             |                                                       |              | 0.10 
|Allowance for credit losses times nonperforming loans            |                                                       |              | 10.90

---

Potential Problem Loans:At December 31, 2001, there were $16.0 million in loans that management had reasonable
concerns might become contractually past due or be classified as a nonperforming asset. These loans are subject to the same close attention and regular credit reviews as extended to loans past due
90 days or more and nonperforming assets.

Allowance for Credit Losses:The allowance for credit losses is maintained at a level, which in management's judgment is
adequate to absorb losses inherent in the loan portfolio. The adequacy of the allowance for credit losses is reviewed regularly by management. Additions to the allowance are
made by charges to the provision for credit losses. On a quarterly basis, a comprehensive review of the allowance is performed considering such factors as the levels of loans outstanding, loss
experience, delinquency levels, certain individual loan reviews, and an evaluation of the regional and national economic environment. The methodology for assessing the appropriateness of the allowance
consists of three primary elements:



25

---



As
reflected in Table 14, at December 31, 2001 the allowance for loan losses was $13.9 million, or 1.20% of total loans and almost eleven times the total
non-accrual loans. This compares to an allowance for loan losses at December 31, 2000 of $13.2 million, equivalent to 1.08% of total loans and 496% of non-accrual
loans. Net charge-offs during 2001 were $106 thousand less than 2000.

Table
14, Analysis of Allowance for Credit Losses shows a five-year history of activity reflecting relative stability in both the annual charge-off ratio and the
level of the allowance related to total loans. Bancorp had loans amounting to approximately $1.3 million and $2.7 million at December 31, 2001 and
December 31, 2000, respectively, that were specifically classified as impaired and included in non-accrual loans in Table 13.

At
December 31, 2001 the allowance for loan losses was $13.9 million, consisting of $12.4 million representing the formula allowance, a $1.3 million specific
allowance, and a $223 thousand unallocated allowance. Table 15, Allocation of Allowance for Credit Losses, discloses management's allocation of the allowance to various loan categories. This
reflects the underlying trends in loan growth and the change in mix. As they are estimates, this allocation is not intended to limit the amount of the allowance available to absorb losses from any
type of loan and should not be viewed as an indicator of the specific amount or specific loan category in which future charge-offs may ultimately occur.

See
NOTE 4, Loans, Notes to Consolidated Financial Statements, for disclosures pertaining to impaired loans and the specific allowance related thereto.

While
management believes the allowance for credit losses was adequate at December 31, 2001, the estimate of losses and related allowance may change in the near term due to
economic and other uncertainties inherent in the estimation process.

26

---



TABLE 14. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES

|                                                 |                           | Year Ended December 31, |       
|------------------------------------------------ | ------------------------- | ----------------------- | ------
|
|
|Allowance for credit losses at beginning of year |                           | $                       | 13,232
|Charge-offs:                                     |                           |                         |       
|                                                 | Real estate               |                         |       
|                                                 | Commercial and industrial |                         |       
|                                                 | Consumer                  |                         |       
|                                                 |                           |                         |       
|Total charge-offs                                |                           |                         | 5,814 
|Recoveries:                                      |                           |                         |       
|                                                 | Real estate               |                         |       
|                                                 | Commercial and industrial |                         |       
|                                                 | Consumer                  |                         |       
|                                                 |                           |                         |       
|Total recoveries                                 |                           |                         | 2,848 
|                                                 |                           |                         |       
|Net charge-offs                                  |                           |                         | 2,966 
|Additions charged to operating expense           |                           |                         | 3,681 
|                                                 |                           |                         |       
|Allowance for credit losses at end of year       |                           | $                       | 13,947
|                                                 |                           |                         |       
|Net charge-offs to average loans outstanding     |                           |                         | 0.25  
|Allowance for credit losses to total loans       |                           |                         | 1.20  

---

TABLE 15. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

|                                  |  | December 31, |       
|--------------------------------- |  | ------------ | ------
|
|
|
|Real estate:                      |  |              |       
|Construction and land development |  | $            | 1,655 
|Residential mortgage              |  |              | 481   
|Other mortgage                    |  |              | 2,534 
|Commercial and industrial         |  |              | 3,131 
|Consumer                          |  |              | 5,923 
|Unallocated                       |  |              | 223   
|                                  |  |              |       
|Total allowance for credit losses |  | $            | 13,947
|                                  |  |              |       

---

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is set forth in "Market Risk and Asset/Liability Management" of this Form 10-K and is expressly
incorporated herein by this reference.

27

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Responsibility for Financial Reporting

The management of F&M Bancorp is responsible for the preparation of the financial statements, related financial data and other information in this annual report.
The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial
information appearing throughout this annual report is consistent with the financial statements.

In
meeting its responsibility both for the integrity and fairness of these statements and information, management depends on the accounting system and related internal controls that are
designed to provide reasonable assurance that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and proper and reliable records are
maintained.

The
concept of reasonable assurance is based on the recognition that the cost of internal controls should not exceed the related benefits. As an integral part of internal controls,
Bancorp contracted with Arthur Andersen LLP, to maintain a professional staff of internal auditors who monitor compliance with and assess the effectiveness of internal controls and coordinate audit
coverage with the independent auditors.

The
Audit Committee of F&M Bancorp's Board of Directors, composed solely of outside directors, meets regularly with the Bancorp's management, internal auditors, and independent auditors
to review matters relating to financial reporting, internal controls and the nature, extent and results of the audit effort. The independent auditors and internal auditors have direct access to the
Audit Committee with or without management present.

The
financial statements have been audited by Arthur Andersen LLP, independent auditors, who render an independent professional opinion on management's financial statements. Their
appointment was recommended by the Audit Committee, approved by the Board of Directors and reported to the shareholders. Their examination provides an objective assessment of the degree to which
Bancorp's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing the internal controls and
performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are
presented fairly in all material respects.

28

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors and
Shareholders of F&M Bancorp:

We
have audited the accompanying consolidated balance sheets of F&M Bancorp (a Maryland bank holding company) and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of F&M Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of F&M Bancorp and subsidiaries as of December 31, 2001
and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted
in the United States.

SIG

Vienna,
Virginia
January 15, 2002

29

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F&M Bancorp and Subsidiaries        CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                      | December 31,   |          
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | -------------- | ---------
|
|
|ASSETS                                     |                                                                                                                                      |                |          
|Cash and due from banks                    |                                                                                                                                      | $              | 65,570   
|Federal funds sold                         |                                                                                                                                      |                | 360      
|Interest- bearing deposits with banks      |                                                                                                                                      |                | 13,178   
|                                           |                                                                                                                                      |                |          
|                                           | Total cash and cash equivalents                                                                                                      |                |          
|Loans held for sale                        |                                                                                                                                      |                | 28,779   
|Investment securities:                     |                                                                                                                                      |                |          
|                                           | Available-for-sale, at fair value                                                                                                    |                |          
|                                           | Held-to-maturity, fair value of $89,584 in 2000                                                                                      |                |          
|                                           |                                                                                                                                      |                |          
|                                           | Total investment securities                                                                                                          |                |          
|Loans, net of unearned income              |                                                                                                                                      |                | 1,162,225
|Less: Allowance for credit losses          |                                                                                                                                      |                | (13,947  
|                                           |                                                                                                                                      |                |          
|                                           | Net loans                                                                                                                            |                |          
|Bank premises and equipment, net           |                                                                                                                                      |                | 35,563   
|Other real estate owned, net               |                                                                                                                                      |                | 638      
|Interest receivable                        |                                                                                                                                      |                | 9,417    
|Intangible assets                          |                                                                                                                                      |                | 3,898    
|Other assets                               |                                                                                                                                      |                | 29,231   
|                                           |                                                                                                                                      |                |          
|                                           | Total other assets                                                                                                                   |                |          
|                                           |                                                                                                                                      |                |          
|Total assets                               |                                                                                                                                      | $              | 1,881,434
|                                           |                                                                                                                                      |                |          
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                                                                                                                      |                |          
|Liabilities:                               |                                                                                                                                      |                |          
|Deposits:                                  |                                                                                                                                      |                |          
|                                           | Noninterest-bearing                                                                                                                  |                | $        
|                                           | Interest-bearing                                                                                                                     |                |          
|                                           |                                                                                                                                      |                |          
|                                           |                                                                                                                                      | Total deposits |          
|Short-term borrowings:                     |                                                                                                                                      |                |          
|                                           | Federal funds purchased and securities sold under agreements to repurchase                                                           |                |          
|                                           | Other short-term borrowings                                                                                                          |                |          
|Long-term borrowings                       |                                                                                                                                      |                | 63,444   
|Accrued taxes and other liabilities        |                                                                                                                                      |                | 16,952   
|                                           |                                                                                                                                      |                |          
|Total liabilities                          |                                                                                                                                      |                | 1,714,009
|                                           |                                                                                                                                      |                |          
|Shareholders' equity:                      |                                                                                                                                      |                |          
|                                           | Common stock, par value $5 per share; authorized 50,000,000 shares; issued and outstanding 10,862,257 in 2001 and 11,014,529 in 2000 |                |          
|                                           | Surplus                                                                                                                              |                |          
|                                           | Retained earnings                                                                                                                    |                |          
|                                           | Accumulated other comprehensive income (loss)                                                                                        |                |          
|                                           |                                                                                                                                      |                |          
|Total shareholders' equity                 |                                                                                                                                      |                | 167,425  
|                                           |                                                                                                                                      |                |          
|Total liabilities and shareholders' equity |                                                                                                                                      | $              | 1,881,434
|                                           |                                                                                                                                      |                |          

The accompanying notes are an integral part of these consolidated financial statements.

30

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F&M Bancorp and Subsidiaries    CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

|                                                                                       |                                                                                                                | Year Ended December 31, |        
|-------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----------------------- | -------
|
|
|Interest Income                                                                        |                                                                                                                |                         |        
|Interest and fees on loans                                                             |                                                                                                                | $                       | 95,836 
|Interest on deposits with banks                                                        |                                                                                                                |                         | 537    
|Interest and dividends on investment securities:                                       |                                                                                                                |                         |        
|                                                                                       | Taxable                                                                                                        |                         |        
|                                                                                       | Tax-exempt                                                                                                     |                         |        
|Interest on federal funds sold                                                         |                                                                                                                |                         | 685    
|                                                                                       |                                                                                                                |                         |        
|Total interest income                                                                  |                                                                                                                |                         | 122,460
|                                                                                       |                                                                                                                |                         |        
|Interest Expense                                                                       |                                                                                                                |                         |        
|Interest on deposits                                                                   |                                                                                                                |                         | 47,375 
|Interest on federal funds purchased and securities sold under agreements to repurchase |                                                                                                                |                         | 3,377  
|Interest on long-term borrowings                                                       |                                                                                                                |                         | 2,583  
|Interest on other short-term borrowings                                                |                                                                                                                |                         | 1,011  
|                                                                                       |                                                                                                                |                         |        
|Total interest expense                                                                 |                                                                                                                |                         | 54,346 
|                                                                                       |                                                                                                                |                         |        
|Net interest income                                                                    |                                                                                                                |                         | 68,114 
|Provision for credit losses                                                            |                                                                                                                |                         | 3,681  
|                                                                                       |                                                                                                                |                         |        
|Net interest income after provision for credit losses                                  |                                                                                                                |                         | 64,433 
|Noninterest Income                                                                     |                                                                                                                |                         |        
|Service charges on deposit accounts                                                    |                                                                                                                |                         | 8,370  
|Insurance income                                                                       |                                                                                                                |                         | 8,760  
|Gains on sales of loans                                                                |                                                                                                                |                         | 3,772  
|Gains on sales of securities                                                           |                                                                                                                |                         | 60     
|Gains (losses) on sales of property                                                    |                                                                                                                |                         | 498    
|Alternative investment and stock brokerage income                                      |                                                                                                                |                         | 3,554  
|Other operating income                                                                 |                                                                                                                |                         | 5,840  
|                                                                                       |                                                                                                                |                         |        
|Total noninterest income                                                               |                                                                                                                |                         | 30,854 
|Noninterest Expenses                                                                   |                                                                                                                |                         |        
|Salaries                                                                               |                                                                                                                |                         | 30,484 
|Pension and other employee benefits                                                    |                                                                                                                |                         | 5,974  
|Merger-related expenses                                                                |                                                                                                                |                         |       
|Occupancy and equipment expense                                                        |                                                                                                                |                         | 9,819  
|Other operating expense                                                                |                                                                                                                |                         | 18,905 
|                                                                                       |                                                                                                                |                         |        
|Total noninterest expense                                                              |                                                                                                                |                         | 65,182 
|                                                                                       |                                                                                                                |                         |        
|Income before provision for income taxes                                               |                                                                                                                |                         | 30,105 
|Provision for income taxes                                                             |                                                                                                                |                         | 8,984  
|                                                                                       |                                                                                                                |                         |        
|Net Income                                                                             |                                                                                                                | $                       | 21,121 
|                                                                                       |                                                                                                                |                         |        
|Other comprehensive income (loss), net of tax:                                         |                                                                                                                |                         |        
|                                                                                       | Unrealized gain (losses) on securities available-for-sale                                                      |                         | $      
|                                                                                       | Reclassification adjustment for gains included in net income                                                   |                         |        
|                                                                                       |                                                                                                                |                         |        
|Other comprehensive income (loss)                                                      |                                                                                                                |                         | 4,567  
|                                                                                       |                                                                                                                |                         |        
|Comprehensive income                                                                   |                                                                                                                | $                       | 25,688 
|                                                                                       |                                                                                                                |                         |        
|Earnings per Common ShareBasic                                                        |                                                                                                                |                         |        
|                                                                                       | Based on weighted average shares outstanding of 10,968,256 in 2001, 11,010,476 in 2000, and 10,981,125 in 1999 |                         | $      
|Earnings per Common ShareDiluted                                                      |                                                                                                                |                         |        
|                                                                                       | Based on weighted average shares outstanding of 11,017,481 in 2001, 11,030,262 in 2000, and 11,040,986 in 1999 |                         | $      

The accompanying notes are an integral part of these consolidated financial statements.

31

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F&M Bancorp and Subsidiaries    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

|                                          |  | Shares     |   | Common Stock
Par Value |        | Surplus |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |         | Total |  
|----------------------------------------- |  | ---------- | - | ---------------------- | ------ | ------- | - | ----------------- | - | --------------------------------------------- | ------- | ----- | -
|
|Balance, December 31, 1998                |  | 10,439,434 |   | $                      | 52,196 |         | $ | 65,020            |   | $                                             | 30,694  |       | $
|Net income                                |  |           |   |                        |       |         |   |                  |   |                                               | 13,063  |       |  
|Dividend reinvestment plan                |  | 10,620     |   |                        | 55     |         |   | 171               |   |                                               | (138    | )     |  
|Cash dividend ($.97 per share)            |  |           |   |                        |       |         |   |                  |   |                                               | (10,646 | )     |  
|Stock consideration for options exercised |  | (11,554    | ) |                        | (58    | )       |   | (50               | ) |                                               | (81     | )     |  
|Stock options exercised                   |  | 105,437    |   |                        | 527    |         |   | 1,444             |   |                                               |        |       |  
|Stock dividend                            |  | 455,684    |   |                        | 2,278  |         |   | 11,663            |   |                                               | (13,941 | )     |  
|Other comprehensive loss                  |  |           |   |                        |       |         |   |                  |   |                                               |        |       |  
|                                          |  |            |   |                        |        |         |   |                   |   |                                               |         |       |  
|Balance, December 31, 1999                |  | 10,999,621 |   | $                      | 54,998 |         | $ | 78,248            |   | $                                             | 18,951  |       | $
|Net income                                |  |           |   |                        |       |         |   |                  |   |                                               | 19,324  |       |  
|Dividend reinvestment plan                |  |           |   |                        | (14    | )       |   | 13                |   |                                               | (82     | )     |  
|Cash dividend ($1.08 per share)           |  |           |   |                        |       |         |   |                  |   |                                               | (12,332 | )     |  
|Stock consideration for options exercised |  | (651       | ) |                        | (3     | )       |   | (5                | ) |                                               | (4      | )     |  
|Stock options exercised                   |  | 18,465     |   |                        | 92     |         |   | 232               |   |                                               |        |       |  
|Stock repurchase and retirement           |  | (2,906     | ) |                        |       |         |   |                  |   |                                               |        |       |  
|Other comprehensive loss                  |  |           |   |                        |       |         |   |                  |   |                                               |        |       |  
|                                          |  |            |   |                        |        |         |   |                   |   |                                               |         |       |  
|Balance, December 31, 2000                |  | 11,014,529 |   | $                      | 55,073 |         | $ | 78,488            |   | $                                             | 25,857  |       | $
|Net income                                |  |           |   |                        |       |         |   |                  |   |                                               | 21,121  |       |  
|Dividend reinvestment plan                |  |           |   |                        |       |         |   |                  |   |                                               | (203    | )     |  
|Cash dividend ($1.09 per share)           |  |           |   |                        |       |         |   |                  |   |                                               | (11,977 | )     |  
|Stock consideration for options exercised |  | (1,702     | ) |                        | (3     | )       |   | (4                | ) |                                               | (16     | )     |  
|Stock options exercised                   |  | 27,830     |   |                        | 133    |         |   | 400               |   |                                               |        |       |  
|Stock repurchase and retirement           |  | (178,400   | ) |                        | (892   | )       |   | (3,737            | ) |                                               |        |       |  
|Other comprehensive income                |  |           |   |                        |       |         |   |                  |   |                                               |        |       |  
|                                          |  |            |   |                        |        |         |   |                   |   |                                               |         |       |  
|Balance, December 31, 2001                |  | 10,862,257 |   | $                      | 54,311 |         | $ | 75,147            |   | $                                             | 34,782  |       | $
|                                          |  |            |   |                        |        |         |   |                   |   |                                               |         |       |  

The
accompanying notes are an integral part of these consolidated financial statements.

32

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F&M Bancorp and Subsidiaries    CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                           |                                                   | Year Ended December 31, |         
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------- | --------
|
|
|Cash Flows from Operating Activities                                                                       |                                                   |                         |         
|Net Income                                                                                                 |                                                   | $                       | 21,121  
|Adjustments to reconcile net income to net cash provided by operating activities:                          |                                                   |                         |         
|                                                                                                           | Provision for credit losses                       |                         |         
|                                                                                                           | Depreciation and amortization                     |                         |         
|                                                                                                           | Amortization of intangibles                       |                         |         
|                                                                                                           | Net premium amortization on investment securities |                         |         
|                                                                                                           | Decrease (increase) in interest receivable        |                         |         
|                                                                                                           | (Decrease) increase in interest payable           |                         |         
|                                                                                                           | (Gains) losses on sales of property               |                         |         
|                                                                                                           | Gains on sales of securities                      |                         |         
|                                                                                                           | (Increase) decrease in loans held for sale        |                         |         
|                                                                                                           | Decrease (increase) in other assets               |                         |         
|                                                                                                           | (Decrease) increase in other liabilities          |                         |         
|                                                                                                           | Gains on sales of loans                           |                         |         
|                                                                                                           | Other operating activities                        |                         |         
|                                                                                                           |                                                   |                         |         
|Net cash provided by operating activities                                                                  |                                                   |                         | 4,557   
|                                                                                                           |                                                   |                         |         
|Cash Flows from Investing Activities                                                                       |                                                   |                         |         
|Purchases of investment securities held to maturity                                                        |                                                   |                         |        
|Purchases of investment securities available for sale                                                      |                                                   |                         | (347,687
|Proceeds from sales/maturities of securities held to maturity                                              |                                                   |                         |        
|Proceeds from sales/maturities of securities available for sale                                            |                                                   |                         | 233,075 
|Net decrease (increase) in loans                                                                           |                                                   |                         | 58,193  
|Purchases of premises and equipment                                                                        |                                                   |                         | (3,440  
|Proceeds from sales of property                                                                            |                                                   |                         | 1,411   
|Other investing activities                                                                                 |                                                   |                         |        
|                                                                                                           |                                                   |                         |         
|Net cash used in investing activities                                                                      |                                                   |                         | (58,447 
|                                                                                                           |                                                   |                         |         
|Cash Flows from Financing Activities                                                                       |                                                   |                         |         
|Net increase in noninterest-bearing deposits, interest-bearing checking, savings and money market accounts |                                                   |                         | 64,347  
|Net increase (decrease) in certificates of deposit                                                         |                                                   |                         | 87,689  
|Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase      |                                                   |                         | (12,890 
|Net (decrease) increase in other short-term borrowings                                                     |                                                   |                         | (107,636
|Net increase (decrease) in long-term borrowings                                                            |                                                   |                         | 47,654  
|Cash dividends paid                                                                                        |                                                   |                         | (11,977 
|Dividend reinvestment plan                                                                                 |                                                   |                         | (203    
|Proceeds from issuance of common stock                                                                     |                                                   |                         | 510     
|Common stock purchased and retired                                                                         |                                                   |                         | (4,629  
|                                                                                                           |                                                   |                         |         
|Net cash provided by financing activities                                                                  |                                                   |                         | 62,865  
|                                                                                                           |                                                   |                         |         
|Net increase (decrease) in cash and cash equivalents                                                       |                                                   |                         | 8,975   
|Cash and cash equivalents at beginning of year                                                             |                                                   |                         | 70,133  
|                                                                                                           |                                                   |                         |         
|Cash and cash equivalents at end of period                                                                 |                                                   | $                       | 79,108  
|                                                                                                           |                                                   |                         |         
|Supplemental Disclosures of Cash Flow Information                                                          |                                                   |                         |         
|Cash payments for interest                                                                                 |                                                   |                         | 69,592  
|Cash payments for income tax                                                                               |                                                   |                         | 9,240   
|Non-Cash Investing and Financing Activities                                                                |                                                   |                         |         
|Fair value adjustment for securities available for sale, net of income taxes                               |                                                   |                         | 4,567   
|Transfer of held-to-maturity securities to available-for-sale securities                                   |                                                   |                         | 89,405  

The accompanying notes are an integral part of these consolidated financial statements.

33

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Banking Activities and Significant Accounting Policies

F&M Bancorp (the "Parent Company") is a bank holding company that provides its customers with banking and bank-related financial services through its
wholly-owned subsidiary, Farmers & Mechanics Bank and Subsidiaries (the "Bank"). The Bank offers various loan, deposit and other financial products and services to individuals and commercial
businesses located primarily within the State of Maryland. The primary market area encompasses Frederick, Carroll, Howard, Montgomery and Washington Counties, MD, with additional community office
presence in Allegany, and Baltimore County, MD. The Bank maintains correspondent banking relationships that allow it to execute daily federal funds transactions on an unsecured basis.

The
accounting and reporting policies and practices of F&M Bancorp and Subsidiaries ("Bancorp") conform with United States generally accepted accounting principles ("GAAP") and with
prevailing practice in the banking industry. The following is a summary of Bancorp's significant accounting policies:

Principles of Consolidation:The consolidated financial statements include the accounts of the Parent Company and its
wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. In the Parent Company financial statements, investment in subsidiaries is accounted for
using the equity method of accounting.

Comprehensive Income:Other comprehensive income consists entirely of unrealized gains (losses) on
available-for-sale securities. Income taxes allocated to other comprehensive income amounted to a provision of ($2,874,000) in 2001 and ($4,401,000), in 2000, respectively and
a benefit of $5,444,000 in 1999.

Use of Estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Presentation of Cash Flows:For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks, cash items in the process of clearing, federal funds sold, and interest-bearing deposits with banks. Generally, federal funds are sold for one-day periods.

Loans Held for Sale:Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is estimated to
equal the carrying amount due to the anticipated short holding period of these loans.

Investment Securities:Bancorp classifies its investment securities as held-to-maturity ("HTM"),
available-for-sale ("AFS"), or trading.

Securities
classified as HTM are those debt securities that Bancorp has both the positive intent and ability to hold until maturity. These securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method.

Securities
classified as AFS are equity securities with readily determinable fair values and those debt securities that Bancorp intends to hold for an indefinite period of time but not
necessarily to maturity. These securities may be sold as part of Bancorp's asset/liability management strategy, in response to significant movements in interest rates, for liquidity needs, for
regulatory capital considerations, or for other similar purposes. These securities are carried at fair value, with any

34

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unrealized gains and losses included in other comprehensive income as a separate component of shareholders' equity, net of the related deferred tax effect.

Securities
classified as trading, if any, are those securities bought and held principally for the purpose of selling them in the near term. These securities are carried at fair value,
with any unrealized gains and losses included in noninterest income in the consolidated statements of income and comprehensive income.

Regardless
of the classification, dividend and interest income, including amortization of premiums and accretion of discounts arising at acquisition, are included in interest income in
the consolidated statements of income and comprehensive income. Realized gains and losses, if any, determined based
on the adjusted cost of the specific securities sold, are reported in noninterest income in the consolidated statements of income and comprehensive income.

Interest and Fees on Loans:Interest on loans is accrued at the contractual rate on the principal amount outstanding.
However, the accrual of interest is discontinued when reasonable doubt exists as to the full, timely collection of interest or principal. Loans on which the accrual of interest has been discontinued,
which includes impaired loans, are designated as nonaccrual loans. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period
interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans
only when they are brought current with respect to interest and principal and when, in management's judgment, the loans are estimated to be fully collectible as to both principal and interest.

Loan
fees and related direct costs of loan origination are deferred and recognized over the life of the loan as a component of interest income.

Allowance for Credit Losses:The allowance for credit losses (the "allowance") is maintained at a level that, in management's
judgment, is adequate to absorb losses inherent in the loan portfolio.

The
adequacy of the allowance is reviewed regularly by management. Additions to the allowance are made by charges to the provision for credit losses. On a quarterly basis, a
comprehensive review of the adequacy of the allowance is performed considering factors such as historical relationships among loans outstanding, loss experience, delinquency levels, individual loan
reviews, and evaluation of the present and future local and national economic environment. Management's estimates regarding the allowance are subject to change related to economic and other
uncertainties inherent in the estimation process.

Bank Premises and Equipment:Bank premises, furniture and equipment, and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are computed principally by the straight-line method for bank premises and leasehold improvements, and by
accelerated methods for equipment. The estimated useful lives for computing depreciation and amortization are as follows:

|                        |  | Years   
|----------------------- |  | --------
|Bank premises           |  | 15 to 50
|Furniture and Equipment |  | 3 to 10 
|Leasehold improvements  |  | 10 to 25

Leasehold
improvements are amortized over the shorter of the terms of the leases or their estimated useful lives. Major alterations and improvements to bank premises are capitalized and
depreciated over the remaining useful life of the asset. Gains and losses on dispositions are included in net income in the year of disposition. Maintenance and repairs are reflected in noninterest
expense as incurred.

35

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Other Real Estate Owned:Other real estate owned ("OREO") includes real estate acquired in foreclosure (in partial or
complete satisfaction of debt), or otherwise surrendered by the borrower to Bancorp's possession.

OREO
is recorded at the lower of cost or fair value on the date of acquisition. Write-downs to fair value at the date of acquisition are charged to the allowance for credit losses.
Subsequently, OREO is adjusted through a valuation allowance to the lower of net carrying value or fair value (net of estimated selling expenses) based upon periodic appraisals. Adjustments arising
from changes in the valuation allowance and operating expenses are reflected in noninterest expense, and gains and losses realized on disposition are reflected in noninterest income.

Intangible Assets:Intangible assets represent the excess of the fair value of liabilities assumed over the fair value of
tangible assets acquired in branch office acquisitions, as well as non-compete contracts and mortgage servicing rights. These intangible assets are initially amortized over a period of
10 years using the straight-line method subject to periodic review and acceleration should subsequent events and circumstances dictate.

Income Taxes:FASB Statement No. 109, "Accounting for Income Taxes," is applied in calculating the provision for
income taxes. As prescribed therein, provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of nontaxable income such as interest on state and
municipal securities) and deferred taxes on temporary differences between the amount of
taxable income and pre-tax financial income, and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities
are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Per Share Data:Earnings per share ("EPS") are computed and presented in accordance with FASB Statement No. 128,
"Earnings Per Share." As prescribed therein, the presentation of primary EPS has been replaced with the dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common shareholders ("numerator") by the weighted-average number of common shares outstanding for the period after giving retroactive effect to stock dividends and
stock splits ("denominator"). Diluted EPS reflects the potential dilution that could occur if outstanding stock options or other contracts to issue common stock, if any, were exercised or converted
into common stock or resulted in the issuance of common stock that then shared in the earnings of Bancorp. Diluted EPS is equal to the numerator divided by the denominator plus 49,225 shares, 19,786
shares, and 59,861 shares, represented by outstanding stock options assumed to be exercised for the years ended December 31, 2001, 2000 and 1999, respectively.

Trust Assets and Income:Assets held in an agency or fiduciary capacity are not assets of Bancorp and, accordingly, are not
included in the accompanying consolidated balance sheets. Trust income is recorded on an accrual basis and is included in alternative investment and stock brokerage income in the accompanying
statement of income and comprehensive income.

Deferred Compensation:The cost of supplemental retirement benefits (deferred compensation) payable to certain key employees
is accrued over their service periods to the date such employees, or their beneficiaries, are fully eligible for benefits.

Stock Compensation:Employee stock options are recorded under the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and disclosures pertaining to fair value-based accounting of stock options under the provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," are included in Note 9. FASB Statement No. 123 provides for a fair value-based method of accounting for

36

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stock options and similar equity transactions to be reported in the financial statements, or alternatively, disclosure of the fair-value impact on net income and EPS, on a pro forma
basis, in the notes to consolidated financial statements.

Reclassifications:Certain reclassifications to prior year amounts have been made to conform with the current year
presentation.

2.    Acquisitions/Reorganizations/Liquidations

On November 20, 2001, Bancorp through Farmers & Mechanics Bank, sold assets and liabilities associated with the Fairfield and Gettysburg,
Pennsylvania branch offices to Adams County National Bank. Under the terms of the agreement, Adams County National Bank assumed responsibility for services related to checking, savings, and
certificates of deposit products totaling $24.3 million and purchased the branch office and real estate located at 20 East Main Street, Fairfield, PA. Adams County National Bank also assumed
the lease for the Middle St. office in Gettysburg.

On
July 16, 2001, Bancorp dissolved Home Appraisals, Inc. and Founders Mortgage Co. Both businesses were acquired in previous acquisitions. Farmers & Mechanics Bank
has assumed the services rendered by these companies.

On
June 1, 2001, Bancorp completed the consolidation of its two banking subsidiaries into one state banking charter. Home Federal Savings Bank began operating as a division of
Farmers & Mechanics Bank. The consolidation of F&M Bancorp's two banking subsidiaries into a single state-chartered institution will provide enhanced operating efficiencies for the company.

On
May 10, 2001, Bancorp consolidated two insurance affiliates into Keller Stonebraker Insurance, Inc. ("KS"), Hagerstown, MD, (Charles S. Gardner Insurance
Agency, Inc. and JRH Insurance, Inc). KS operates as an independent, wholly-owned subsidiary of the Bank and provides a full line of consumer and commercial business insurance products through
offices in Hagerstown and Cumberland, MD and Keyser, WV. Consumer insurance products include annuities, homeowners, automobile, life and personal umbrellas. Commercial business products include
property and casualty packages, workers' compensation, bonds, professional liability, umbrella, and 401(K) and other benefit plans.

On
May 10, 2001, Bancorp consolidated C&F Insurance Agency into Potomac Basin Group Associates, Inc. ("PB"), Beltsville, MD., PB operates as an independent, wholly-owned
subsidiary of the Bank and is an independent insurance agency specializing in corporate employee benefit plans through its offices in Beltsville and Ellicott City, MD.

On
April 26, 2001, Bancorp dissolved TBT Title VIII, Inc., Central Maryland Service Corp., CLC Associates, Inc. Family Home Insurance Agency, Inc. and
Keystone General Partnership. These businesses were inactive companies that were acquired in previous acquisitions. Farmers & Mechanics Bank and its affiliates have assumed any services
rendered by these companies.

On
December 30, 1999, Bancorp completed the acquisition of Patapsco Valley Bancshares, Inc. ("PVB") and its commercial banking subsidiary, Commercial & Farmers Bank
("C&F"), Ellicott City, MD, in a tax-free exchange of shares accounted for as a pooling-of-interests. Under the terms of the merger agreement, C&F was merged with
and into the Bank at closing, increasing the Bank's assets by
approximately $173 million, loans by approximately $119 million, and deposits by approximately $150 million.

On
July 15, 1999, Bancorp consummated a merger with Potomac Basin Group Associates, Inc. ("PB"), in a tax-free exchange of shares accounted for as a
pooling-of-interests. PB is a Beltsville, MD-based, full-line independent insurance agency specializing in corporate employee benefit plans.

37

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3.    Investment Securities

The amortized cost and estimated fair value of investments at December 31, 2001 and 2000, summarized by contractual maturity, are presented in a table that
follows. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with, or without, call or prepayment penalties.

Proceeds
from sales of investment securities available-for-sale during 2001 were $14,700,000. Gross gains of $60,000 were realized on those sales. Proceeds from
sales/calls of investment securities available-for-sale during 2000 were $2,941,000. Gross gains of $633,000 were realized on those sales.    Proceeds from
sales/calls of investment securities available-for-sale during 1999 were $14,976,000. Gross gains of $36,000 and gross losses of $26,000 were realized on those sales.

The
carrying value of investment securities pledged to secure public deposits, securities sold under repurchase agreements, Federal Home Loan Bank (the "FHLB") advances, and for other
purposes as required and permitted by law, totaled $232,644,000 at December 31, 2001, and $226,957,000 at December 31, 2000.

Interest
earned on obligations of states and political subdivisions is exempt from federal income taxes. However, the federal interest expense deduction is limited for interest deemed to
be incurred to purchase or carry tax-exempt obligations. Such tax-exempt securities comprised 21.7% and 28.6% of the total carrying value of the investment portfolio at
December 31, 2001 and 2000, respectively.

|                                    |                                                                                        | December 31, 2001          
|----------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------
|
|
|Available-for-sale:                 |                                                                                        |                            
|                                    | U.S. Treasury securities and obligations of U.S. government corporations and agencies: |                            
|                                    |                                                                                        | Within 1 year              
|                                    |                                                                                        | After 1 but within 5 years 
|                                    |                                                                                        | After 5 but within 10 years
|                                    |                                                                                        |                            
|                                    |                                                                                        |                            
|                                    | Obligations of states and political subdivisions:                                      |                            
|                                    |                                                                                        | Within 1 year              
|                                    |                                                                                        | After 1 but within 5 years 
|                                    |                                                                                        | After 5 but within 10 years
|                                    |                                                                                        | After 10 years             
|                                    |                                                                                        |                            
|                                    |                                                                                        |                            
|Mortgage-backed securities          |                                                                                        |                            
|                                    |                                                                                        |                            
|Total debt securities               |                                                                                        |                            
|Equity securities                   |                                                                                        |                            
|                                    |                                                                                        |                            
|Total securities available-for-sale |                                                                                        | $                          
|                                    |                                                                                        |                            
|Held-to-maturity:                   |                                                                                        |                            
|                                    | Total securities held-to-maturity                                                      |                            
|                                    |                                                                                        |                            

38

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|                                    |                                                                                        | December 31, 2000          
|----------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------
|
|
|Available-for-sale:                 |                                                                                        |                            
|                                    | U.S. Treasury securities and obligations of U.S. government corporations and agencies: |                            
|                                    |                                                                                        | Within 1 year              
|                                    |                                                                                        | After 1 but within 5 years 
|                                    |                                                                                        | After 5 but within 10 years
|                                    |                                                                                        |                            
|                                    |                                                                                        |                            
|                                    | Obligations of states and political subdivisions:                                      |                            
|                                    |                                                                                        | Within 1 year              
|                                    |                                                                                        | After 1 but within 5 years 
|                                    |                                                                                        | After 5 but within 10 years
|                                    |                                                                                        | After 10 years             
|                                    |                                                                                        |                            
|                                    |                                                                                        |                            
|Mortgage-backed securities          |                                                                                        |                            
|                                    |                                                                                        |                            
|Total debt securities               |                                                                                        |                            
|Equity securities                   |                                                                                        |                            
|                                    |                                                                                        |                            
|Total securities available-for-sale |                                                                                        | $                          
|                                    |                                                                                        |                            
|Held-to-maturity:                   |                                                                                        |                            
|                                    | Obligations of states and political subdivisions:                                      |                            
|                                    |                                                                                        | Within 1 year              
|                                    |                                                                                        | After 1 but within 5 years 
|                                    |                                                                                        | After 5 but within 10 years
|                                    |                                                                                        | After 10 years             
|                                    |                                                                                        |                            
|                                    |                                                                                        |                            
|Mortgage-backed securities          |                                                                                        |                            
|                                    |                                                                                        |                            
|Total securities held-to-maturity   |                                                                                        | $                          
|                                    |                                                                                        |                            

39

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4.    Loans

Loans consist of the following:

|                          |                                   | December 31,
|------------------------- | --------------------------------- | ------------
|
|
|Real estate:              |                                   |             
|                          | Construction and land development |             
|                          | Secured by farmland               |             
|                          | Residential mortgage              |             
|                          | Other mortgage                    |             
|Agricultural              |                                   |             
|Commercial and industrial |                                   |             
|Consumer                  |                                   |             
|Other loans               |                                   |             
|                          |                                   |             
|                          | Total Loans                       |             
|                          |                                   |             

Loans
to states and political subdivisions and industrial revenue bonds are included in commercial and industrial loans and in total loans in the consolidated balance sheets. Interest
income from these loans is included in interest and fees on loans in the consolidated statements of income and comprehensive income.

Transactions
in the allowance for credit losses were:

|                                           |  | December 31, |       
|------------------------------------------ |  | ------------ | ------
|
|
|Balance at beginning of year               |  | $            | 13,232
|Provision for credit losses                |  |              | 3,681 
|Recoveries of loans previously charged-off |  |              | 2,848 
|Loans charged-off                          |  |              | (5,814
|                                           |  |              |       
|Balance at end of year                     |  | $            | 13,947
|                                           |  |              |       

In
the ordinary course of business, directors and officers of the Bank and their affiliates were customers of and had other transactions with the Bank. Loan transactions with directors
and officers were made on substantially the same terms as those prevailing at the time for comparable loans to other persons, and did not involve more than normal risk of collectibility nor presented
other unfavorable features. The aggregate dollar amount of all loans to officers, directors, and their affiliates was $12,870,000 and $14,069,000 at December 31, 2001 and 2000, respectively.
During 2001, $13,937,000 of new loans were made, or became reportable, and repayments and other decreases totaled $15,136,000.

40

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The
loan portfolio includes loans that are not currently accruing interest income. The total outstanding principal amount of these loans at December 31, 2001, 2000, and 1999 and
the effect on interest income for the years then ended, are as follows:

|                                                                             |  | December 31,
|---------------------------------------------------------------------------- |  | ------------
|
|
|Principal balance                                                            |  | $           
|Gross amount of interest which would have been recorded under original terms |  |             
|Recorded interest income on those loans                                      |  |             

The
net reduction in interest income on renegotiated loans was not material in 2001, 2000, and 1999. At December 31, 2001, there were no material commitments to lend additional
funds to borrowers whose loans had been modified in troubled debt restructurings or were in a nonaccrual status.

The
average balance of impaired loans amounted to $1,689,000 and $3,590,000 for the years ended December 31, 2001 and 2000, respectively. Cash receipts totaling $926,491 and
$1,002,124 during 2001 and 2000, respectively, were applied to reduce the principal balance of those impaired loans, and no interest income was recognized. The specific allowance for credit losses for
these impaired loans was $327,000 and $140,000 at December 31, 2001 and 2000, respectively.

5.    Bank Premises and Equipment

Investments in bank premises and equipment are as follows:

|                                                |  | December 31,
|----------------------------------------------- |  | ------------
|
|
|Bank premises and land                          |  | $           
|Furniture and equipment                         |  |             
|Leasehold improvements                          |  |             
|                                                |  |             
|                                                |  |             
|Less: accumulated depreciation and amortization |  |             
|                                                |  |             
|Net premises and equipment                      |  | $           
|                                                |  |             

Depreciation
and amortization related to premises and equipment in the consolidated statement of income and comprehensive income amounted to $3,546,000 in 2001, $3,617,000 in 2000, and
$3,764,000 in 1999.

41

---

6.    Deposits

The carrying amounts of deposits are as follows:

|                                    |                          | December 31,     
|----------------------------------- | ------------------------ | -----------------
|
|
|Noninterest-bearing demand deposits |                          | $                
|Interest-bearing deposits:          |                          |                  
|                                    | Checking                 |                  
|                                    | Money market             |                  
|                                    | Savings                  |                  
|                                    | Certificates of deposit: |                  
|                                    |                          | Under $100,000   
|                                    |                          | $100,000 and over
|                                    |                          |                  
|Total deposits                      |                          | $                
|                                    |                          |                  

7.    Borrowings

Short-term Borrowings:Short-term borrowings include securities sold under agreements to repurchase,
which are secured transactions with customers and generally mature in one day. Short-term borrowings may also include balances in the treasury tax and loan account, federal funds
purchased, which are unsecured overnight borrowings from other financial institutions, and advances from the Federal Home Loan Bank ("FHLB"), which are secured either by 1-4 family
residential properties, FHLB Stock, or other mortgage-related assets.

Unused
lines of credit for short-term borrowings totaled approximately $694,844,000 at December 31, 2001.

The
table below presents selected information on the combined totals of repurchase agreements and other short-term borrowings:

|                                          |  | December 31, |        
|----------------------------------------- |  | ------------ | -------
|
|
|Maximum month end balance during the year |  | $            | 212,593
|Average balance for the year              |  |              | 117,607
|Average rate for the year                 |  |              | 3.73   
|Average rate at year end                  |  |              | 1.13   
|Estimated fair value                      |  | $            | 117,545

Long-term Borrowings:The table below presents a summary of long-term FHLB advances:

|                                   |  | December 31,
|---------------------------------- |  | ------------
|
|
|Due within 1 to 5 years            |  | $           
|Due after 5 years through 10 years |  |             
|Due after 10 years                 |  |             
|                                   |  |             
|                                   |  | $           
|                                   |  |             

These
advances had weighted average interest rates of 4.99% and 5.39% at December 31, 2001 and 2000, respectively. These advances are secured either by a blanket floating lien on
all real estate

42

---

mortgage loans secured by 1-4 family residential properties, FHLB Stock, or other mortgage-related assets. As of December 31, 2001, all advances carried a fixed rate. Advances are
convertible at the FHLB's option to a LIBOR based variable rate which totaled $25.0 million in 2002, $10.0 million in 2003, and $10.0 million in 2006.

8.    Income Taxes

Significant components of deferred tax assets and liabilities is as follows:

|                          |                                                         | December 31,                                        |  
|------------------------- | ------------------------------------------------------- | --------------------------------------------------- | -
|
|
|Deferred tax assets:      |                                                         |                                                     |  
|                          | Allowance for credit and other real estate owned losses |                                                     | $
|                          | Depreciation and amortization                           |                                                     |  
|                          | Unrealized losses on securities available for sale      |                                                     |  
|                          | Deferred compensation                                   |                                                     |  
|                          | Intangibles                                             |                                                     |  
|                          | Other                                                   |                                                     |  
|                          |                                                         |                                                     |  
|                          |                                                         | Total deferred tax assets                           |  
|                          | Valuation allowance for deferred tax assets             |                                                     |  
|                          |                                                         |                                                     |  
|                          |                                                         | Total deferred tax assets after valuation allowance |  
|                          |                                                         |                                                     |  
|Deferred tax liabilities: |                                                         |                                                     |  
|                          | Depreciation and amortization                           |                                                     |  
|                          | Unrealized gains on securities available for sale       |                                                     |  
|                          | Other                                                   |                                                     |  
|                          |                                                         |                                                     |  
|                          |                                                         | Total deferred tax liabilities                      |  
|                          |                                                         |                                                     |  
|                          |                                                         | Net deferred tax asset                              |  
|                          |                                                         |                                                     |  

A
reconciliation of the statutory income tax rate to the provision for income taxes attributed to continuing operations included in the consolidated statements of income and
comprehensive income, is as follows:

|                                             |                                                     | Year Ended December 31, |       
|-------------------------------------------- | --------------------------------------------------- | ----------------------- | ------
|
|
|Income before income tax                     |                                                     | $                       | 30,105
|Tax rate                                     |                                                     |                         | 35    
|                                             |                                                     |                         |       
|Income tax at statutory rate                 |                                                     |                         | 10,537
|(Decreases) increases in tax resulting from: |                                                     |                         |       
|                                             | Tax-exempt interest income                          |                         |       
|                                             | State income tax, net of federal income tax benefit |                         |       
|                                             | Other                                               |                         |       
|                                             |                                                     |                         |       
|Actual tax expense                           |                                                     | $                       | 8,984 
|                                             |                                                     |                         |       
|Effective tax rate                           |                                                     |                         | 29.8  
|                                             |                                                     |                         |       

43

---

Significant
components of the provision for income taxes attributed to continuing operations is as follows:

|                           |         | Year Ended December 31,
|-------------------------- | ------- | -----------------------
|
|
|Currently payable:         |         |                        
|                           | Federal |                        
|                           | State   |                        
|                           |         |                        
|                           |         | Total currently payable
|Deferred                   |         |                        
|                           |         |                        
|Provision for income taxes |         | $                      
|                           |         |                        

The
components of the provision for deferred tax expense (benefit) is as follows:

|                            |                                | Year Ended December 31, |       
|--------------------------- | ------------------------------ | ----------------------- | ------
|
|
|Provision for credit losses |                                | $                       | (277  
|Amortization of intangibles |                                |                         | 365   
|Other                       |                                |                         | (1,997
|                            |                                |                         |       
|                            | Deferred tax expense (benefit) |                         | $     
|                            |                                |                         |       

44

---

9.    Employee Benefits

The Bank Profit Sharing Plan:Retirement benefits are provided through a Section 401(k) profit sharing plan (the
"Plan") to employees meeting certain age and service eligibility requirements. The annual profit sharing contribution to the Plan is discretionary, based primarily on earnings, and amounted to
$561,000 for 2001, $685,000 for 2000, and $520,000 for 1999. The Plan also provides for employer matching contributions up to 4% of eligible compensation dependent on the level of voluntary
contributions. Employer matching contributions totaled $755,000 in 2001, $802,000 in 2000, and $352,000 in 1999.

Defined Benefit Plan:Commercial & Farmers Bank ("C&F"), which was merged with and into the Bank on
December 30, 1999, had a defined benefit pension plan covering substantially all of the employees, and a supplemental plan covering certain executives. Benefits were based on years of service
and the employee's highest average rate of earnings for the five consecutive years during the last ten years before retirement. C&F made contributions to these plans in amounts sufficient to satisfy
minimum funding standards determined using the frozen entry age actuarial method. Assets of these plans are held in trust and invested in listed stocks and bonds.

The
following table sets forth the financial status of these plans:

|                                                      |                                         | 2001                                     |           | 2000       |        
|----------------------------------------------------- | --------------------------------------- | ---------------------------------------- | --------- | ---------- | -------
|Change in plan assets                                 |                                         |                                          |           |            |        
|Fair value of plan assets at beginning of year        |                                         | $                                        | 1,099,851 |            | $      
|                                                      | Actual return on plan assets            |                                          |           | 5,650      |        
|                                                      | Employer contributions                  |                                          |           | 283,422    |        
|                                                      | Benefits paid                           |                                          |           | (1,369,028 | )      
|                                                      |                                         |                                          |           |            |        
|                                                      |                                         | Fair value of plan assets at end of year |           | $          | 19,895 
|                                                      |                                         |                                          |           |            |        
|Change in benefit obligation                          |                                         |                                          |           |            |        
|                                                      | Benefit obligation at beginning of year |                                          | $         | 1,197,092  |        
|                                                      | Interest cost                           |                                          |           | 89,127     |        
|                                                      | Benefits paid                           |                                          |           | (1,386,506 | )      
|                                                      | Actuarial loss                          |                                          |           | 1,220      |        
|                                                      | Change in discount rate                 |                                          |           | 6,974      |        
|                                                      | Loss on settlement                      |                                          |           | 296,873    |        
|                                                      |                                         |                                          |           |            |        
|                                                      |                                         | Benefit obligation at end of year        |           | $          | 204,780
|                                                      |                                         |                                          |           |            |        
|Funded status                                         |                                         | $                                        | (184,885  | )          | $      
|Unamortized prior service cost                        |                                         |                                          | (1,046    | )          |        
|Unamortized net gain                                  |                                         |                                          | (48,813   | )          |        
|Unamortized net obligation from transition            |                                         |                                          |          |            |        
|                                                      |                                         |                                          |           |            |        
|                                                      | Accrued pension expense                 |                                          | $         | (234,744   | )      
|                                                      |                                         |                                          |           |            |        
|Net pension expense includes the following components |                                         |                                          |           |            |        
|Interest cost                                         |                                         | $                                        | 89,127    |            | $      
|Expected return on assets                             |                                         |                                          | (82,489   | )          |        
|Net amortization and deferral                         |                                         |                                          | (23,490   | )          |        
|Effect of settlement                                  |                                         |                                          | 125,508   |            |        
|                                                      |                                         |                                          |           |            |        
|                                                      | Net pension expense                     |                                          | $         | 108,656    |        
|                                                      |                                         |                                          |           |            |        

Effective
December 30, 1999, benefits for participants of the defined benefit pension plan which covered substantially all of the C&F employees, were frozen and will not increase
after that date.

45

---

During 2001 this plan was liquidated whereby assets of the plan were paid out to participants. C&F also had contributory thrift plans qualifying under Section 401(k) of the Internal Revenue
Code. All employees age 21 or more with one year of service were eligible for participation in the plans. Bancorp's contributions to these plans, included in expenses, were $370,765 in 1999.

Executive Supplemental Income Plan:Supplemental retirement benefits (deferred compensation) for certain key employees are
provided under an Executive Supplemental Income Plan (the "ESIP"). Benefits payable under the ESIP are integrated with other retirement benefits expected to be received by ESIP participants, including
those under the 401(k) profit sharing plan. Amounts paid under the ESIP will be partially or fully recovered through life insurance policies purchased on the lives of the participants.

Deferred
compensation costs charged to expense for the years ended December 31, 2001, 2000 and 1999 were $431,000, $154,000, and $392,000, respectively.

Other Benefits:The Bancorp maintains a director's deferred compensation program pursuant to which directors may elect to
defer their fees in order to provide retirement benefits. The expense for these benefits was $174,000, $160,000, and $161,000, for 2001, 2000, and 1999, respectively.

Employee Stock Purchase Plan:Bancorp has an Employee Stock Purchase Plan (the "ESPP") whereby eligible employees may
authorize payroll deductions ranging from $120 to $2,400 per year for the purpose of acquiring Bancorp Common Stock at current market prices. To encourage employee participation in the ESPP, Bancorp
contributes an additional 20% of each participant's voluntary payroll deduction. Bancorp's contributions amounted to $24,000, $28,000, and $7,000, for 2001, 2000, and 1999, respectively. Contributions
to the ESPP are typically transmitted to Bancorp's designated agent to acquire Bancorp Common Stock in the open market. Under the terms of the ESPP, shares may also be purchased directly from Bancorp
at current market prices. A total of 63,814 shares of Bancorp Common Stock are reserved for this purpose. Bancorp pays all administrative costs of the ESPP and, at its discretion, reserves the right
to amend, modify, suspend, or terminate the ESPP at any time.

Stock Option Plan:Bancorp has a 1983 Stock Option Plan, a 1995 Stock Option Plan and a 1999 Stock Option Plan (collectively
the "Employee Plans") which are coordinated in their administration and similar in their terms and conditions for key employees. Bancorp also has a 1999 Non-Employee Director Stock Option
Plan (the "Director Plan") which is similar in its terms and conditions to the Employee Plans except as noted below. The Employee Plans permit the granting of both incentive stock options and
nonqualified stock options to purchase Bancorp Common Stock, while the Director Plan permits only the granting of nonqualified stock options. The Employee Plans require the exercise price per share
for incentive stock options and nonqualified stock options not to be less than 100% and 85%, respectively, of the fair market value of a share of Common Stock on the date of grant and may be exercised
in increments commencing after one year from the date of grant. Employee Options are fully exercisable after four years from the date of grant and expire after 10 years. The Director Plan
requires the exercise price per share for nonqualified stock options to not be less than 100% of the fair

46

---

market value of a share of Common Stock on the date of grant and are fully exercisable after 6 months from the date of grant and expire after 10 years.

|                           |  | Options Issued
and Outstanding |   | Price
|-------------------------- |  | ------------------------------ | - | -----
|Balance, December 31, 1998 |  | 304,985                        |   | $    
|Exercised                  |  | (102,192                       | ) |      
|Granted                    |  | 95,757                         |   |      
|Forfeited                  |  | (17,227                        | ) |      
|                           |  |                                |   |      
|Balance, December 31, 1999 |  | 281,323                        |   |      
|Exercised                  |  | (18,465                        | ) |      
|Granted                    |  | 114,962                        |   |      
|Forfeited                  |  | (32,395                        | ) |      
|                           |  |                                |   |      
|Balance, December 31, 2000 |  | 345,425                        |   |      
|Exercised                  |  | (27,830                        | ) |      
|Granted                    |  | 95,372                         |   |      
|Forfeited                  |  | (40,224                        | ) |      
|                           |  |                                |   |      
|Balance, December 31, 2001 |  | 372,743                        |   | $    
|                           |  |                                |   |      

At
December 31, 2001, there were 199,330 options exercisable at prices ranging from $10.15 to $32.09. Shares reserved for future grants totaled 340,107 at December 31,
2001.

The
plans are accounted for pursuant to the provisions of APB Opinion No. 25. Had compensation cost for the Plans been determined in accordance with the provisions of FASB
Statement No. 123 (see Note 1), net income and earnings per share would have been reduced to the following pro forma amounts:

|            |  |                      |  | 2001 |        | 2000 |   | 1999  
|----------- |  | -------------------- |  | ---- | ------ | ---- | - | ------
|Net Income: |  | As reported          |  | $    | 21,121 |      | $ | 19,324
|            |  | Pro forma            |  |      | 20,917 |      |   | 19,168
|EPS:        |  | As reported, basic   |  |      | 1.93   |      |   | 1.76  
|            |  | As reported, diluted |  |      | 1.92   |      |   | 1.75  
|            |  | Pro forma, basic     |  |      | 1.91   |      |   | 1.74  
|            |  | Pro forma, diluted   |  |      | 1.90   |      |   | 1.74  

Because
the FASB Statement No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not
be representative of the cost to be expected in future years.

47

---

A
summary of the status of the plans at December 31, 2001 and 2000, and changes during the years then ended, is presented as follows:

|                                                               |  | 2001    |   | 2000
|-------------------------------------------------------------- |  | ------- | - | ----
|
|Outstanding at beginning of year                               |  | 345,425 |   | $   
|Granted                                                        |  | 95,372  |   |     
|Exercised                                                      |  | (27,830 | ) |     
|Forfeited                                                      |  | (40,224 | ) |     
|                                                               |  |         |   |     
|Outstanding at end of year                                     |  | 372,743 |   | $   
|                                                               |  |         |   |     
|Exercisable at end of year                                     |  | 199,330 |   | $   
|                                                               |  |         |   |     
|Weighted average fair value of options granted during
the year |  |         |   | $   

OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2001

|Range of
Exercise Prices |  | Number
Outstanding
as of 12/31/01 |  | Weighted average
Remaining
Contractual Life |  | Weighted
Average
Exercise |       | Number
Exercisable
as of 12/31/01 |         | Weighted
Average
Exercise Price
|------------------------ |  | --------------------------------- |  | ------------------------------------------- |  | ------------------------- | ----- | --------------------------------- | ------- | -------------------------------
|
|$10.15$14.07            |  | 33,814                            |  | 1.81                                        |  | $                         | 12.75 |                                   | 33,814  |                                
|16.10  19.49            |  | 112,056                           |  | 7.45                                        |  |                           | 18.81 |                                   | 51,600  |                                
|23.22  24.37            |  | 35,649                            |  | 4.07                                        |  |                           | 23.82 |                                   | 35,649  |                                
|25.16  25.16            |  | 105,610                           |  | 8.40                                        |  |                           | 24.71 |                                   | 28,275  |                                
|30.12  32.09            |  | 85,614                            |  | 7.08                                        |  |                           | 30.51 |                                   | 49,992  |                                
|                         |  |                                   |  |                                             |  |                           |       |                                   |         |                                
|$10.15$32.09            |  | 372,743                           |  | 6.80                                        |  | $                         | 23.10 |                                   | 199,330 |                                
|                         |  |                                   |  |                                             |  |                           |       |                                   |         |                                

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in
2001, 2000, and 1999, respectively: risk-free interest rates of 4.2%, 4.9%, and 6.8%; expected dividend yields of 4.3%, 5.2%, and 4.8%, expected lives of 3.26, 3.06, and 2.96 years,
and expected volatility of 27%, 23%, and 21%.

48

---

10.  Other Operating Income and Expense

Other operating income and expense in the consolidated statements of income and comprehensive income includes the following:

|                                 |                              | Year Ended December 31,
|-------------------------------- | ---------------------------- | -----------------------
|
|
|Bank card income                 |                              | $                      
|Bank owned life insurance income |                              |                        
|Other                            |                              |                        
|                                 |                              |                        
|                                 | Total other operating income |                        
|                                 |                              |                        

|                                  |                               | Year Ended December 31,
|--------------------------------- | ----------------------------- | -----------------------
|
|
|Stationery and supplies           |                               | $                      
|Professional services             |                               |                        
|Advertising                       |                               |                        
|Postage                           |                               |                        
|Telephone                         |                               |                        
|Computer software and maintenance |                               |                        
|Other real estate owned           |                               |                        
|Amortization of intangibles       |                               |                        
|Other                             |                               |                        
|                                  |                               |                        
|                                  | Total other operating expense |                        
|                                  |                               |                        

49

---



11.  Condensed Financial Information of F&M Bancorp (Parent Company)

F&M BANCORP BALANCE SHEETS (PARENT COMPANY)

|                                           |                                   | December 31, |        
|------------------------------------------ | --------------------------------- | ------------ | -------
|
|
|ASSETS                                     |                                   |              |        
|Cash and cash equivalents                  |                                   | $            | 2,605  
|Investment securities                      |                                   |              |        
|                                           | Available-for-sale, at fair value |              |        
|Investment in subsidiaries                 |                                   |              | 160,496
|Other assets                               |                                   |              | 4,113  
|                                           |                                   |              |        
|                                           | Total assets                      |              | $      
|                                           |                                   |              |        
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                   |              |        
|Other liabilities                          |                                   | $            | 4,016  
|                                           |                                   |              |        
|Common stock                               |                                   |              | 54,311 
|Surplus                                    |                                   |              | 75,147 
|Retained earnings                          |                                   |              | 34,782 
|Accumulated other comprehensive income     |                                   |              | 3,185  
|                                           |                                   |              |        
|                                           | Total shareholders' equity        |              |        
|                                           |                                   |              |        
|Total liabilities and shareholders' equity |                                   | $            | 171,441
|                                           |                                   |              |        

F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)

|                                                                                       |                     | Year Ended December 31, |       
|-------------------------------------------------------------------------------------- | ------------------- | ----------------------- | ------
|
|
|INCOME                                                                                 |                     |                         |       
|Interest on investment securities                                                      |                     | $                       | 148   
|                                                                                       |                     |                         |       
|                                                                                       | Net interest income |                         |       
|Dividends from subsidiaries                                                            |                     |                         | 18,077
|Other income                                                                           |                     |                         |      
|                                                                                       |                     |                         |       
|                                                                                       | Total income        |                         |       
|EXPENSE                                                                                |                     |                         |       
|Other expense                                                                          |                     |                         | 382   
|                                                                                       |                     |                         |       
|Income before income tax benefits and equity in undistributed earnings of subsidiaries |                     |                         | 17,843
|Income tax expense (benefit)                                                           |                     |                         | (63   
|                                                                                       |                     |                         |       
|Income before equity in undistributed earnings of subsidiaries                         |                     |                         | 17,906
|Equity in undistributed earnings of subsidiaries                                       |                     |                         | 3,215 
|                                                                                       |                     |                         |       
|Net income                                                                             |                     | $                       | 21,121
|                                                                                       |                     |                         |       

50

---

F&M BANCORP STATEMENTS OF CASH FLOWS (PARENT COMPANY)

|                                                                                 |                                                      | Year Ended December 31, |        
|-------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------- | -------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |                                                      |                         |        
|Net income                                                                       |                                                      | $                       | 21,121 
|Adjustments to reconcile net income to net cash provided by operating activities |                                                      |                         |        
|(Increase) decrease in other assets                                              |                                                      |                         | (4,023 
|Increase in other liabilities                                                    |                                                      |                         | 153    
|Equity in undistributed earnings of subsidiaries                                 |                                                      |                         | (3,215 
|Other                                                                            |                                                      |                         |       
|                                                                                 |                                                      |                         |        
|                                                                                 | Net cash provided by operating activities            |                         |        
|                                                                                 |                                                      |                         |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |                                                      |                         |        
|Purchase of investment securities available-for-sale                             |                                                      |                         |       
|Gains on sales of securities                                                     |                                                      |                         |       
|Other investing activity                                                         |                                                      |                         |       
|                                                                                 |                                                      |                         |        
|                                                                                 | Net cash provided by (used in) investing activities  |                         |        
|                                                                                 |                                                      |                         |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |                                                      |                         |        
|Cash dividends paid                                                              |                                                      |                         | (11,977
|Dividends reinvested                                                             |                                                      |                         | (203   
|Common stock purchased & retired                                                 |                                                      |                         | (4,629 
|Proceeds from issuance of common stock                                           |                                                      |                         | 510    
|                                                                                 |                                                      |                         |        
|                                                                                 | Net cash used in financing activities                |                         |        
|                                                                                 |                                                      |                         |        
|                                                                                 | Net (decrease) increase in cash and cash equivalents |                         |        
|                                                                                 | Cash and cash equivalents at beginning of year       |                         |        
|                                                                                 |                                                      |                         |        
|                                                                                 | Cash and cash equivalents at end of year             |                         | $      
|                                                                                 |                                                      |                         |        

12.  Commitments and Contingencies

Leases:Bancorp conducts part of its branch banking operations from leased facilities. The initial terms of the leases range
from a period of 1-25 years. Most of the existing leases contain options which allow renewals for periods up to 20 years. In addition to minimum rentals, certain leases have
escalation clauses based upon various price indexes and include provisions for the payment of taxes, insurance and maintenance.

Total
rental expense was as follows:

|              |                      | Year ended December 31,
|------------- | -------------------- | -----------------------
|
|
|Bank premises |                      | $                      
|Equipment     |                      |                        
|              |                      |                        
|              | Total rental expense |                        
|              |                      |                        

51

---

The
future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 is:

|Year ended December 31, |                                 | (in thousands)
|----------------------- | ------------------------------- | --------------
|2002                    |                                 | $             
|2003                    |                                 |               
|2004                    |                                 |               
|2005                    |                                 |               
|2006                    |                                 |               
|Later Years             |                                 |               
|                        |                                 |               
|                        | Total minimum payments required |               
|                        |                                 |               

Contingencies:Bancorp is subject to various legal proceedings which are incidental to the ordinary course of business. It is
management's opinion that there were no legal matters pending as of December 31, 2001 that would have a material effect on the consolidated financial statements.

Credit Extension Commitments:Bancorp is a party to financial instruments in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the consolidated financial statements.

Exposure
to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by
the contractual amount of those instruments. The same credit policies are applied to commitments and conditional obligations as are applied to on-balance sheet instruments.

A
summary of the contractual amount of exposure under these financial instruments is as follows:

|                                                                        |  | December 31,
|----------------------------------------------------------------------- |  | ------------
|
|
|Financial instruments whose contractual amounts represents credit risk: |  |             
|Commitments to extend credit                                            |  | $           
|Stand-by letters of credit                                              |  |             

Commitments
to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Certain commitments have fixed
expiration dates or other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon. Accordingly, the total commitment amounts do
not necessarily represent future cash requirements. Each customer's credit worthiness is evaluated on a case-by-case basis, and the amount of collateral or other security
obtained, if any, is based upon management's assessment of credit risk. Collateral varies, but may include deposits held in financial institutions, U.S. Treasury or other marketable securities,
accounts receivable, inventory, property and equipment, personal residences, income-producing commercial properties, and land under development. Personal guarantees are also obtained to provide added
security for certain commitments.

Stand-by
letters of credit are conditional commitments issued to guarantee the performance of a contract to a third party and are used primarily to guarantee the installation
of real property infrastructure and similar transactions. Credit risk involved in issuing letters of credit is essentially the same as that involved in lending and may involve collateral and personal
guarantees as deemed appropriate.

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13.  Fair Value of Financial Instruments

The following table summarizes the carrying amounts and fair value estimates of financial instruments at December 31, 2001 and 2000. All fair value
estimates were made at a specific point in time and were based on existing on- and off-balance sheet financial instruments without consideration of the value of anticipated
future business or the value of assets and liabilities that were not considered financial instruments. These estimates do not reflect any premium or discount that could result from a block sale of a
particular instrument. Because of the absence of a genuine market for a significant portion of these financial instruments, fair value estimates were based on judgments regarding risk characteristics,
economic conditions, and other subjective factors and uncertainties that do not allow such estimates to be made with precision. Changes in assumptions or methodologies could have a significant effect
on the estimates.

|                       |                                          | December 31,
|---------------------- | ---------------------------------------- | ------------
|
|
|
|Financial assets:      |                                          |             
|                       | Cash and cash equivalents                |             
|                       | Loans held for sale                      |             
|                       | Investment securities held-to-maturity   |             
|                       | Investment securities available-for-sale |             
|                       | Net loans                                |             
|Financial liabilities: |                                          |             
|                       | Deposits                                 |             
|                       | Borrowings                               |             

The
following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents:Because of the short-term nature of these financial instruments, carrying amounts were
deemed to approximate fair value.

Loans Held for Sale:Fair value was deemed equal to the carrying amounts because the anticipated holding period of these
instruments is very short.

Investment securities:Fair value for obligations of state and political subdivisions was estimated by an independent pricing
service using a pricing matrix, and the fair value for all other securities was based on quoted market prices or dealer quotes.

Loans:Fair value was estimated by segregating the portfolio into categories having similar financial characteristics. Each
loan category was then further segmented into fixed-rate and variable-rate interest terms and by their status as performing or nonperforming.

The
fair value of performing loans was estimated by discounting estimated future cash flows using discount rates equal to the current rates at which similar loans would be made with
similar credit ratings and for the same remaining maturity except that, in the absence of increased credit risk, the carrying amount was generally deemed to approximate fair value for
variable-rate loans because of the frequent repricing of these instruments at market rates.

The
fair value of nonperforming loans was based principally on recent external appraisals. If appraisals were not available, estimated cash flows were discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and

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discount rates were judgmentally determined using available market information and specific borrower information.

Deposits:The fair value of deposits with no stated maturity, such as noninterest-bearing deposits, interest-bearing
checking, savings, and money market accounts, was equal to the carrying amount. Carrying amount approximates fair value for variable-rate certificates of deposit, because of the frequent
repricing of these instruments at market rates. The fair value for fixed-rate certificates of deposit was estimated by discounting contractual cash flows using discount rates equal to the
rates currently offered for deposits of similar remaining maturities.

Borrowings:Fair value was estimated by discounting contractual cash flows using discount rates equal to the current rates
for long-term borrowings with similar remaining maturities. Because of the frequent repricing of short-term borrowings at current market rates, fair value was deemed to
approximate the carrying amounts for other borrowings.

Off-balance Sheet Financial Instruments:Carrying amounts for commitments to extend credit and standby letters of
credit represent the deferred income attributed to these unrecognized financial instruments. The majority of commitments to extend credit and standby letters of credit are at variable rates and/or
have relatively short maturities. Therefore, fair value of these financial instruments were deemed to closely approximate their carrying amounts, which were immaterial.

14.  Regulatory Restrictions

Restriction on Dividends:Approval of regulatory authorities is required to pay dividends which exceed the Bank's net profits
for the current year plus its retained net profits for the preceding two years. Amounts available for the payment of dividends during 2001 aggregated $33,468,000.

Restriction on Lending from Affiliates to Parent:Section 23A of the Federal Reserve Act (the "Act") prohibits
affiliates from transferring funds to the Parent Company in the form of loans or advances exceeding 10% of its capital stock and surplus, as defined in the Act. In addition, all loans or advances to
nonbank affiliates must be secured by specific collateral. Based on the limitation, there was approximately $17,230,000 available for loans or advances to the Parent Company as of December 31,
2001, at which time there were no material loans or advances outstanding.

Restriction on Cash and Due from Banks:The Bank is required to maintain average daily reserve balances with the Federal
Reserve Bank. The amount of these required reserves, calculated based on percentages of certain deposit balances, was $20,319,000 at December 31, 2001.

15.  Shareholders' Equity

Capital Requirements:Bancorp and the Bank are required by regulation to maintain specified minimum levels of capital. Under
the regulatory framework pertaining to prompt corrective action, each entity is considered to be "well-capitalized" at December 31, 2001, as disclosed in the following table:

|                 |  | Bancorp |         | The Bank |      
|---------------- |  | ------- | ------- | -------- | -----
|
|
|Tangible capital |  | $       | 161,123 |          | 8.71 
|Tier 1           |  |         | 161,123 |          | 12.24
|Total capital    |  |         | 175,070 |          | 13.30

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16.  Quarterly Results of Operations (unaudited)

Following is a summary of unaudited quarterly results of operations:

|                                       |         | Three Months Ended |        | Three Months Ended
|-------------------------------------- | ------- | ------------------ | ------ | ------------------
|
|
|Interest income                        |         | $                  | 29,347 |                   
|Interest expense                       |         |                    | 11,657 |                   
|Net interest income                    |         |                    | 17,690 |                   
|Provision for credit losses            |         |                    | 621    |                   
|Income before provision for income tax |         |                    | 8,168  |                   
|Net income                             |         |                    | 5,418  |                   
|Earnings per common share:             |         |                    |        |                   
|                                       | Basic   |                    |        | 0.50              
|                                       | Diluted |                    |        | 0.50              

17.  Changes in Accounting Principles

In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities," which calls for derivatives to be recognized
in the consolidated balance sheet at fair value and for subsequent changes in fair value to be recognized in the consolidated statement of income and comprehensive income. However, because
non-derivative and non-financial transactions are still measured using a mix of historical and current prices, the Statement keeps special accounting for gains and losses when
derivatives are used in qualifying hedges of assets, liabilities, and future transactions.
The Statement unifies qualifying criteria for hedges involving all kinds of derivatives, requiring that a company document, designate, and assess the effectiveness of its hedges. For hedges that meet
the Statement's criteria, the derivative's gains and losses will be allowed to offset gains and losses on, or forecasted cash flows of, the hedged item.

Among
a number of other provisions, the Statement allows entities to reclassify held-to-maturity securities without calling into question management's intent for
the remainder of its securities portfolios. On January 1, 2001 the Bancorp adopted this Statement and elected to reclassify its entire held-to -maturity portfolio into the
available-for-sale portfolio.

As
of December 31, 2001 and for the year then ended, Bancorp had no derivative instruments as defined by SFAS Nos. 133.

In
June 2001, 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 Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS
No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There
were no changes in, or disagreements with, accountants on accounting and financial disclosure.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



ITEM 11. EXECUTIVE COMPENSATION

Information in the section under "Compensation Committee Report on Executive Compensation" and "Directors' Fees and Deferred Compensation Plan" located in the
2002 Proxy Statement is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in the section under "Security Ownership of Management" and the notes thereto, and "Security Ownership of Certain Beneficial Owners" located in the
2002 Proxy Statement is hereby incorporated by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in the section under "Certain Transactions with Directors and Officers" located in the 2002 Proxy Statement is hereby incorporated by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| |  | 3.1  |  | Articles of Incorporation of F&M Bancorp with all Articles of Amendment. Filed as exhibit 3.1 of the company's quarterly report on Form 10-Q for the period ended June 30, 1997 and incorporated herein by
reference.                                                        
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3.2  |  | By-Laws of F&M Bancorp with all amendments. Filed as Exhibit 3.2 of the Company's quarterly report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference.                                                                                
| |  | 4    |  | Description of F&M Bancorp common stock and rights of security holders. Filed as Exhibit 4 of the Company's quarterly report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference.                                                      
| |  | 10.1 |  | 1983 Stock Option Plan of F&M Bancorp as amended in April, 1996. Filed as Exhibit 10.1 to Registration Statement on Form S-8 (File #002-88390) and incorporated herein by reference.                                                                                         
| |  | 10.2 |  | Unfunded Deferred Compensation Plan for Non-Employee Directors of F&M Bancorp as amended and restated effective August 18, 1998. Filed as Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
| |  | 10.3 |  | Farmers & Mechanics National Bank Executive Supplemental Income Plan as amended and restated effective August 18, 1998. Filed as Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.         
| |  | 10.4 |  | F&M Bancorp Employee Stock Purchase Plan. Filed as Prospectus to Registration Statement on Form S-8 (File #33-39941) and incorporated herein by reference.                                                                                                                   
| |  | 10.5 |  | F&M Bancorp Dividend Reinvestment and Stock Purchase Plan. Filed as Prospectus to Registration Statement on Form S-3 (File #33-39940) and incorporated herein by reference.                                                                                                  
| |  | 10.6 |  | 1995 Stock Option Plan of F&M Bancorp. Filed as Exhibit 10.1 to Registration Statement on Form S-8 (File #333-02433) and incorporated herein by reference.                                                                                                                   
| |  | 10.7 |  | Employment Agreement between F&M Bancorp, Home Federal Savings Bank and Richard W. Phoebus, Sr. Filed as an Exhibit hereto an incorporated herein by reference.                                                                                                              
| |  |      |  |                                                                                                                                                                                                                                                                              

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| |  | 10.8  |  | F&M Bancorp 1999 Employee Stock Option Plan. Filed as Exhibit 10.19 of the Company's quarterly report on Form 10-Q for the period ended March 31, 1999 and incorporated herein by reference.                                                                                                                                                               
| |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.9  |  | F&M Bancorp 1999 Stock Option Plan for Non-Employee Directors. Filed as Exhibit 10.20 of the Company's quarterly report on Form 10-Q for the period ended March 31, 1999 and incorporated herein by reference.                                                                                                                                             
| |  | 10.10 |  | Form of F&M Bancorp Stock Options substituted for Patapsco Valley Bancshares, Inc. stock options issued under the Patapsco Valley Bancshares, Inc. Incentive Stock Option Plan, Director Stock Option Plan and Employee Stock Option Plan.
Filed as an Exhibit on Form 10K for the year ended December 1999 hereto and incorporated herein by reference.   
| |  | 10.11 |  | Form of F&M Bancorp Stock Options substituted for Home Federal Corporation Stock Options granted under the Home Federal Corporation 1988 Stock Option and Stock Appreciation Rights Plan filed as Exhibit 99.3 to Registration Statement on
Form S-8 (File #333-16709) and incorporated herein by reference.                                               
| |  | 10.12 |  | Form of F&M Bancorp stock options substituted for Monocacy Bancshares, Inc. stock options issued under the Monocacy Bancshares, Inc. 1994 Stock Incentive plan and the Monocacy Bancshares, Inc. 1997 Independent Director Stock Option
Plan. Filed as an Exhibit on Form 10K for the year ended December 1999 hereto and incorporated herein by reference.
| |  | 10.13 |  | F&M Bancorp Employment Agreement with Kaye A. Simmons as of April 10, 2000. Filed as Exhibit 10.13 of the Company's Quartly Report on Form 10-Q for the quarter ended September 2000 and incorporated herein by
reference.                                                                                                                                 
| |  | 11.   |  | Statement re: computation of per share earnings. Filed as an Exhibit hereto an incorporated herein by reference.                                                                                                                                                                                                                                           
| |  | 21.   |  | Subsidiaries of F&M Bancorp. Filed as an Exhibit hereto an incorporated herein by reference.                                                                                                                                                                                                                                                               

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                      |  | F&M BANCORP (REGISTRANT)
|--------------------- |  | ------------------------
|Dated: March 15, 2002 |  | By:                     

Pursuant
to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|               |  | PRINCIPAL EXECUTIVE OFFICERS:                                        
|-------------- |  | ---------------------------------------------------------------------
|March 15, 2002 |  | /S/  R. CARL BENNAR. Carl Benna Chairman of the Board                
|March 15, 2002 |  | /S/  FAYE E. CANNONFaye E. Cannon President & Chief Executive
Officer
|               |  | PRINCIPAL FINANCIAL & ACCOUNTING OFFICER:                            
|March 15, 2002 |  | /S/  KAYE A. SIMMONSKaye A. Simmons Treasurer                        
|               |  | A MAJORITY OF THE BOARD OF DIRECTORS:                                
|March 15, 2002 |  | /S/  HOWARD B. BOWENHoward B. Bowen Director                         
|March 15, 2002 |  | /S/  JOHN D. BRUNKJohn D. Brunk Director                             
|March 15, 2002 |  | /S/  BEVERLY B. BYRONBeverly B. Byron Director                       

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|March 15, 2002 |  | /S/  FAYE E. CANNONFaye E. Cannon Director                  
|-------------- |  | ------------------------------------------------------------
|March 15, 2002 |  | /S/  ALBERT H. COHENAlbert H. Cohen Director                
|March 15, 2002 |  | /S/  MAURICE A. GLADHILLMaurice A. Gladhill Director        
|March 15, 2002 |  | /S/  HOWARD E. HARRISON IIIHoward E. Harrison III Director  
|March 15, 2002 |  | /S/  CHARLES W. HOFF, IIICharles W. Hoff, III Director      
|March 15, 2002 |  | /S/  DONALD R. HULLDonald R. Hull Director                  
|March 15, 2002 |  | /S/  JAMES K. KLUTTZJames K. Kluttz Director                
|March 15, 2002 |  | /S/  RICHARD W. PHOEBUS, SR.Richard W. Phoebus, Sr. Director
|March 15, 2002 |  | /S/  H. DEETS WARFIELD, JR.H. Deets Warfield, Jr. Director  
|March 15, 2002 |  | /S/  THOMAS R. WINKLERThomas R. Winkler Director            

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