<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                                       OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
                         Commission file number 0-12638
 
                            ------------------------
 
                                  F&M BANCORP
 
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                  MARYLAND                                      52-1316473
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>
 
                            110 THOMAS JOHNSON DRIVE
                           FREDERICK, MARYLAND 21702
              (Address of principal executive offices) (Zip Code)
 
                                 (301) 694-4000
              (Registrant's telephone number, including area code)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                      NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK ($5 PAR VALUE)
                                (Title of class)
 
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
 
    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 March 5, 1999, the aggregate market value of 8,053,861 shares of Common
Stock outstanding and held by non-affiliates of Registrant was $257,723,560.
 
    DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the Proxy Statement dated
March 22, 1999 relating to the 1999 Annual Meeting of Stockholders of the
Registrant are incorporated herein by reference into Part III.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>         <C>                                                                                              <C>
PART 1
 
Item 1      Business.......................................................................................           3
                Acquisitions...............................................................................           3
                Farmers & Mechanics National Bank..........................................................           3
                Home Federal Savings Bank..................................................................           3
                Competition................................................................................           3
                Financial Information About Industry Segments..............................................           4
                Supervision and Regulation.................................................................           4
                    Bank Holding Company Regulation........................................................           4
                    Bank Regulation........................................................................           5
                    Savings Bank Regulation................................................................           5
                    Regulatory Restrictions................................................................           5
                    Capital Requirements...................................................................           5
                    Interstate Banking.....................................................................           6
                    Monetary Policy........................................................................           7
                    Legislation............................................................................           7
                Employees..................................................................................           7
Item 2      Properties.....................................................................................           7
Item 3      Legal Proceedings..............................................................................           8
Item 4      Submission of Matters to a Vote of Security Holders............................................           8
 
PART II
 
Item 5      Market for Registrant's Common Equity and Related Stockholder Matters..........................           8
Item 6      Selected Financial Data........................................................................           9
Item 7      Management's Discussion and Analysis of Financial Condition and Results of Operations..........          10
Item 7A     Quantitative and Qualitative Disclosures About Market Risk.....................................          27
Item 8      Financial Statements and Supplementary Data....................................................          31
Item 9      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........          63
 
PART III
 
Item 10     Directors and Executive Officers of the Registrant.............................................          64
Item 11     Executive Compensation.........................................................................          65
Item 12     Security Ownership of Certain Beneficial Owners and Management.................................          65
Item 13     Certain Relationships and Related Transactions.................................................          65
 
PART IV
 
Item 14     Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................          65
Signatures.................................................................................................          68
</TABLE>
 
                                       2
<PAGE>
                                     PART I
 
ITEM 1. BUSINESS
 
    F&M Bancorp ("Bancorp") is a Maryland corporation incorporated in 1984 and
is registered as a bank holding company under the Bank Holding Company Act of
1956. At December 31, 1998, Bancorp had consolidated total assets of $1.4
billion, total loans of $892 million, total deposits of $1.1 billion, and total
stockholders' equity of $131 million. Its principal subsidiaries are Farmers &
Mechanics National Bank (the "Bank") and Home Federal Savings Bank (the "Savings
Bank").
 
ACQUISITIONS
 
    On May 29, 1998, Bancorp acquired Keller-Stonebraker Insurance, Inc.
("K-S"), Hagerstown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. K-S 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 November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. and its commercial banking subsidiary, Taneytown Bank & Trust
Company, Taneytown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. Under the terms of the merger agreement, Taneytown Bank
was merged with and into the Bank at closing, increasing the Bank's assets by
approximately $304 million, loans by approximately $167 million, and deposits by
approximately $244 million.
 
FARMERS & MECHANICS NATIONAL BANK
 
    The 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 institutions dating from 1817. In 1915, the Bank acquired trust powers.
Following the acquisition of Taneytown Bank & Trust Company described above, it
provides broad-based commercial and retail banking services; personal trust,
investment management, and financial planning services; and a wide variety of
related financial products and services to individuals, businesses and
governmental units through 35 full-service community offices and 38 ATMs across
Frederick, Carroll, Montgomery, Baltimore and Howard Counties, MD, and Adams
County, PA. 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 banking access and with its 24-hour telephone banking
service, ExpressLine. At December 31, 1998, the Bank had total assets of $1.226
billion, total loans of $731 million, and total deposits of $957 million.
 
HOME FEDERAL SAVINGS BANK
 
    The Savings Bank is federally chartered and was acquired by Bancorp in 1996
through its merger with Home Federal Corporation. The transaction was completed
as a tax-free exchange of shares accounted for as a pooling-of-interests. The
Savings Bank provides consumer, commercial banking, mortgage and brokerage
services, and offers full-service banking through eight community offices, 18
ATMs, and other electronic banking systems in Washington and Allegany Counties,
MD. At December 31, 1998, Savings Bank had total assets of $226 million, total
loans of $161 million, and total deposits of $183 million.
 
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
 
                                       3
<PAGE>
such as insurance, brokerage, mutual funds, investment banking, securities
underwriting and asset management, and commercial enterprises such as insurance
companies, investment banking firms and retailers are gaining regulatory
approvals to operate thrift banking subsidiaries.
 
    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.
 
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
    New Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"), is
applicable to Bancorp beginning January 1, 1998 and establishes standards for
reporting financial information about "operating segments" of an enterprise.
Among other provisions, the standard sets forth the conditions under which two
or more segments may be combined into a single operating segment such that
disclosure of financial information pertaining to individual segments so
combined may not be required.
 
    As disclosed above, the principal business of the Bank and the Savings Bank
are similar inasmuch as both affiliates are engaged in community banking
services to consumers and commercial business establishments, offer similar
branch office and electronic delivery channels, and are subject to similar
regulation. In the aggregate, Bancorp derives more than 90% of its consolidated
revenue and net income and more than 90% of its consolidated assets from the
Bank and the Savings Bank.
 
    Accordingly, the financial information required in this section under the
provisions of SFAS No. 131 is contained in the consolidated financial statements
beginning on page 31 which are hereby incorporated by reference.
 
SUPERVISION AND REGULATION
 
    BANK HOLDING COMPANY REGULATION
 
    Bancorp is registered with the Federal Reserve Board (the "Board") as a bank
holding company and is subject to reporting requirements, supervision and
examination by the Board 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 Board 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.
 
                                       4
<PAGE>
    The Board may issue cease and desist orders against bank holding companies
and nonbank subsidiaries to stop actions believed to present a serious threat to
a subsidiary bank. The Board also regulates certain debt obligations of bank
holding companies.
 
    BANK REGULATION
 
    The Bank is subject to supervision and regulation by the Comptroller of the
Currency ("OCC"), the Board, and the Federal Deposit Insurance Corporation
("FDIC"). The regulator having primary supervisory and examination authority
over the Bank is the OCC. 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 throughout
Maryland with the prior approval of the OCC. 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 Board 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.
 
    SAVINGS BANK REGULATION
 
    The Savings Bank is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), and by the FDIC. The OTS has extensive
authority over the operations of savings associations. The OTS' enforcement
authority over all savings associations includes, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders, and to initiate injunctive actions.
 
    REGULATORY RESTRICTIONS
 
    See Note 14, Regulatory Restrictions, Notes to Consolidated Financial
Statements, page 61, for additional information regarding certain regulatory
restrictions on inter-company transfers of funds and on the payment of dividends
by Bank and Savings Bank to Bancorp.
 
    CAPITAL REQUIREMENTS
 
    Under regulatory capital adequacy guidelines discussed below, Bancorp, the
Bank and the Savings Bank were "well capitalized" at December 31, 1998 and 1997.
 
    The Board, OCC and OTS maintain capital adequacy guidelines applicable to
Bancorp, the Bank and the Savings 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% (1.5% for the Savings Bank) Tier 1 capital (primarily shareholders'
equity) to
 
                                       5
<PAGE>
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, 1998, Bancorp's tangible capital ratio was 8.81%.
 
    Bancorp and the Bank must also meet a minimum core, "Tier 1" capital to
risk-weighted assets ratio of 4% (3% for Savings Bank), and Bancorp, the Bank
and the Savings Bank must 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 and 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, 1998, Bancorp's Tier 1 and Total risk-weighted
capital ratios were 12.55% and 13.80%, 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, pages 27 and 28.
 
    INTERSTATE BANKING
 
    In September 1994, the Riegle-Neal Interstate Banking and Branching Act of
1994 (the "Banking and Branching Act") became law. The Banking and Branching Act
provides that, as of September 29, 1995, adequately capitalized and managed bank
holding companies may acquire banks in any state. State laws prohibiting
interstate banking or discriminating against out-of-state banks are preempted,
although states are permitted to require that target banks located within the
state be in existence for a period of up to five years before they become
subject to the Banking and Branching Act. Additionally, the Banking and
Branching Act establishes deposit caps that prohibit acquisitions if the
acquirer would thereafter control 30% or more of the deposits of insured banks
and thrifts held in the state in which the acquisition or merger is occurring or
in any state in which the target maintains a branch or 10% or more of the
deposits nationwide. State-level deposit caps are not preempted as long as they
do not discriminate against out-of-state acquirers, and the federal deposit caps
apply only to initial entry acquisitions.
 
    In addition, the Banking and Branching Act provides that, as of June 1,
1997, adequately capitalized and managed banks may engage in interstate
branching by merging banks in different states and by opening and maintaining de
novo, or new, branches in states other than the states in which the banks
maintain their principal place of business. With respect to interstate merger,
each state had the opportunity to "opt out" of the interstate merger provisions
and, thus, prohibit such activity. With respect to de novo branching, the
Banking and Branching Act permits such activity only if a state has "opted in"
and specifically allowed such activity. The State of Maryland permits interstate
branching, both by mergers and by establishing new branches.
 
                                       6
<PAGE>
    Under regulatory guidelines, Bancorp is "well-capitalized" and, therefore,
meets the "adequately-capitalized" standard required to participate in
interstate affiliations with out-of-state banks and bank holding companies.
 
    MONETARY POLICY
 
    The earnings and growth of Bancorp, the Bank, and the Savings Bank are
affected by general economic conditions as well as by monetary policies of
regulatory authorities, including the Board, which regulates the national money
supply in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the Board 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
 
    In addition to extensive existing government regulation, laws and
regulations in the states in which Bancorp and its subsidiaries do business can
change in unpredictable ways, often with significant effects on the way in which
financial institutions may conduct business. The enactment of banking
legislation such as the Financial Institution Reform, Recovery and Enforcement
Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") has affected the banking industry by, among other things,
broadening the powers of the federal banking agencies in a number of areas.
Later banking legislation, such as the Riegle Community Development and
Regulatory Improvement Act of 1994 and the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, have eased some of the regulatory burdens
imposed on banks and bank holding companies, including certain FDICIA
requirements, and is intended to make the bank regulatory system more efficient.
Other legislation that has been enacted in recent years has substantially
increased the level of competition among commercial banks, thrift institutions
and non-banking institutions, including insurance companies, brokerage firms,
mutual funds, investment banks and major retailers. The enactment of the Banking
and Branching Act in 1994 has facilitated, and is expected to continue to
facilitate, consolidation within financial institutions that have separate
operations in two or more states and within the financial services industry. See
"Interstate Banking" above.
 
    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 are significant
and, if adopted, could result in a fundamental restructuring of the financial
services industry. Although such legislation would likely have an effect on the
business of Bancorp and its subsidiaries, Bancorp cannot accurately predict what
that effect would be.
 
EMPLOYEES
 
    At December 31, 1998, Bancorp and its subsidiaries had 620 full-time
equivalent employees.
 
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 Savings Bank owns a fee simple
interest in its principal executive office and main banking facility, 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
 
                                       7
<PAGE>
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 40 additional branch offices of the Bank and the Savings
Bank at December 31, 1998, 22 were owned and 18 were leased. Information
concerning Bancorp's lease commitments is included in Note 12, Commitments and
Contingencies, Notes to Consolidated Financial Statements, page 57.
 
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, page 57, in the opinion of the management, there were no legal
matters pending as of December 31, 1998 which would have a material effect on
the consolidated financial statements.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    A special meeting of shareholders was held on November 24, 1998 to act upon
a proposal recommended by the Board of Directors of Bancorp to approve the
Agreement and Plan of Merger, dated as of September 4, 1998, by and between
Bancorp and Monocacy Bancshares, Inc. The following are the results of that
vote:
 
<TABLE>
<S>                          <C>
For                          4,929,872
Against or Withheld            123,755
Abstentions                     34,583
</TABLE>
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
         MATTERS
 
    The principal market on which F&M Bancorp Common Stock is traded is The
NASDAQ Stock Market. The following table sets forth share prices and dividend
payments for the periods indicated:
 
                         STOCK PRICE AND DIVIDENDS (1)
<TABLE>
<CAPTION>
                                                                    1998                                   1997
                                                --------------------------------------------  -------------------------------
                                                  HIGH        LOW       CLOSE     DIVIDEND      HIGH        LOW       CLOSE
                                                ---------  ---------  ---------  -----------  ---------  ---------  ---------
<S>                                             <C>        <C>        <C>        <C>          <C>        <C>        <C>
1st Q.........................................  $   39.28  $   32.86  $   39.28   $    0.24   $   25.85  $   20.87  $   24.49
2nd Q.........................................      44.05      36.42      42.44        0.24       25.85      23.13      25.17
3rd Q.........................................      43.00      32.50      33.88        0.25       33.10      24.27      31.67
4th Q.........................................      34.63      30.50      32.75        0.25       36.19      31.43      36.19
 
<CAPTION>
 
                                                 DIVIDEND
                                                -----------
<S>                                             <C>
1st Q.........................................   $    0.20
2nd Q.........................................        0.20
3rd Q.........................................        0.21
4th Q.........................................        0.21
</TABLE>
 
------------------------
 
(1) Data has been restated for 5% stock dividend paid in July 1998.
 
    Information concerning restrictions on the ability of affiliates to transfer
funds in the form of dividends to Bancorp is included in Note 14, Regulatory
Restrictions, Notes to Consolidated Financial Statements, page 61.
 
                                       8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
                         SELECTED FINANCIAL INFORMATION
                          F&M BANCORP AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE    --------------------------------------------------------------------
     DATA)                                       1998          1997          1996          1995          1994
                                             ------------  ------------  ------------  ------------  ------------
<S>                                          <C>           <C>           <C>           <C>           <C>
OPERATING INCOME
  Interest income..........................  $     99,179  $     96,397  $     90,473  $     87,203  $     76,600
  Interest expense.........................        46,878        44,602        42,378        40,286        31,222
                                             ------------  ------------  ------------  ------------  ------------
  Net interest income......................        52,301        51,795        48,095        46,917        45,378
  Provision for credit losses..............         3,056         2,910         1,822         2,536         1,875
                                             ------------  ------------  ------------  ------------  ------------
  Net interest income after provision for
    credit losses..........................        49,245        48,885        46,273        44,381        43,503
  Net gains (losses) on sales of
    securities.............................         1,104            76          (550)           20           (97)
  Other noninterest income.................        18,679        18,220        15,533        15,710        12,283
  Noninterest expense......................        50,890        47,704        47,659        43,836        39,947
                                             ------------  ------------  ------------  ------------  ------------
  Income before provision for income
    taxes..................................        18,138        19,477        13,597        16,275        15,742
  Provision for income taxes...............         5,046         5,251         3,196         3,261         4,077
                                             ------------  ------------  ------------  ------------  ------------
  Net income...............................  $     13,092  $     14,226  $     10,401  $     13,014  $     11,665
                                             ------------  ------------  ------------  ------------  ------------
                                             ------------  ------------  ------------  ------------  ------------
PER SHARE DATA
  Net income--basic........................  $       1.51  $       1.65  $       1.21  $       1.52  $       1.36
  Net income--diluted......................          1.49          1.64          1.21          1.51          1.36
  Cash dividends paid......................          1.06          0.68          0.49          0.48          0.41
  Book value...............................         15.07         14.56         13.39         12.75         11.10
KEY RATIOS
  Return on average assets.................          0.96%         1.10%         0.84%         1.14%         1.09%
  Return on average shareholders' equity...         10.13         11.96          9.35         12.77         12.43
  Average shareholders' equity to total
    average assets.........................          9.44          9.16          9.03          8.89          8.79
  Dividend payout ratio(1).................         70.20         41.21         40.50         31.58         30.15
SELECTED AVERAGE BALANCES
  Total average assets.....................  $  1,368,144  $  1,298,543  $  1,232,123  $  1,145,991  $  1,067,486
  Total average shareholders' equity.......       129,179       118,921       111,217       101,874        93,868
AT PERIOD END
  Loans, net of unearned income............  $    891,741  $    882,550  $    829,229  $    765,311  $    769,861
  Total assets.............................     1,449,682     1,338,559     1,273,265     1,221,859     1,123,252
  Total deposits...........................     1,138,194     1,053,562     1,022,854     1,008,037       925,180
  Total shareholders' equity...............       130,824       125,635       114,947       109,225        94,939
ASSET QUALITY
  Nonperforming assets.....................  $      5,901  $     12,549  $     16,187  $     18,949  $     28,558
  Nonperforming assets / total assets......          0.41%         0.94%         1.27%         1.55%         2.54%
  Net charge-offs to average loans
    outstanding............................          0.26          0.30          0.23          0.54          0.32
</TABLE>
 
(1) Reflects the percentage relationship of cash dividends paid to basic
    earnings per share.
 
                                       9
<PAGE>
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, 1998, and is intended to assist readers
in their analysis and understanding of the accompanying consolidated financial
statements and notes thereto.
 
    Bancorp's acquisition of Keller-Stonebraker Insurance, Inc. ("K-S"),
completed in May 1998, and Monocacy Bancshares, Inc. and its wholly owned
subsidiary, Taneytown Bank & Trust Company ("TBT"), completed in November 1998,
are accounted for as poolings-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 K-S and TBT. 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-interest
transactions.
 
FORWARD-LOOKING STATEMENTS
 
    Certain information included in the following section of this report, other
than historical information, may contain certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "likely", "unlikely", "continue",
or similar terms. Although Bancorp believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from those projected in the forward-looking statements.
 
1998 COMPARED TO 1997
 
OVERVIEW
 
    Net income for 1998 decreased 8% to $13.1 million, or $1.49 per share, from
$14.2 million, or $1.64 per share, for 1997, largely reflecting the influence of
special items of an unusual or nonrecurring nature recognized in the periods
compared and as set forth in Table 1. Excluding special items in both years, net
(operating) income INCREASED 7% to $15.0 million, or $1.71 per share, from $14.0
million, or $1.61 per share, for 1997. Per share amounts are stated throughout
this section on a diluted basis unless specifically noted otherwise.
 
SPECIAL ITEMS--1998
 
    Special items for 1998, as shown in Table 1 on an after-tax basis, included
$2.332 million of merger-related expense, or $0.27 per share. This amount
included $192 thousand ($0.02 per share) of merger-related expenses pertaining
to the 1998 integration of core processing systems and administrative functions
at the Savings Bank, acquired in November 1996, $190 thousand ($0.02 per share)
related to the May 1998 acquisition of K-S, and $1.922 million ($0.23 per share)
related to the acquisition and integration of TBT. A special provision for
possible loan losses related to the acquisition of TBT amounted to $460 thousand
after tax, or $0.05 per share The integration of TBT's core processing systems
and administrative functions was completed in February 1999. Net securities
gains realized by TBT during 1998 amounted to $661 thousand ($0.07 per share),
and Bancorp realized a net gain of $270 thousand ($0.03 per share) on the sale
of bank-owned real estate.
 
                                       10
<PAGE>
SPECIAL ITEMS--1997
 
    Special items for 1997, as shown in Table 1 on an after-tax basis, included
a $552 thousand gain on the sale of the credit card merchant processing business
($0.06 per share). Recognizing the difficulty in achieving sufficient economies
of scale over the near term, Bancorp elected to exit this highly competitive
line of business in favor of alternatives expected to produce greater
profitability over the long term. TBT incurred litigation costs of $177 thousand
($0.02 per share) and realized a $110 thousand gain on the sale of loans in 1997
($0.01 per share) and a $59 thousand gain on the sale of investment securities
($0.01 per share).
 
    Pursuant to the provisions of the Plan and Agreement to Merge with Home
Federal, compensatory payments were recognized in 1997 for two executive
officers who elected to resign during the year. Such compensation expense
totaled $294 thousand ($0.03 per share) and was to be paid over a 24-month
period.
 
TABLE 1. NET INCOME EXCLUDING SPECIAL ITEMS
 
<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                ------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                          1998      EPS(1)      1997      EPS(1)      1996       EPS(1)
--------------------------------------------------------------  ---------  ---------  ---------  ---------  ---------  -----------
<S>                                                             <C>        <C>        <C>        <C>        <C>        <C>
Net income as reported........................................  $  13,092  $    1.49  $  14,226  $    1.64  $  10,401   $    1.21
Adjustments (net of income taxes):
  Merger-related expense......................................      2,332       0.27        294       0.03      1,176        0.14
  Special provision for credit losses.........................        460       0.05         --         --        200        0.02
  Gain on sale of property....................................       (270)     (0.03)        --         --         --          --
  Gain on sale of merchant services...........................         --         --       (552)     (0.06)        --          --
  Gain on sale of loans.......................................         --         --       (110)     (0.01)        --          --
  Litigation expense..........................................         --         --        177       0.02         --          --
  SAIF assessment.............................................         --         --         --         --        724        0.08
  Securities losses (gains)...................................       (661)     (0.07)       (59)     (0.01)       203        0.02
                                                                ---------  ---------  ---------  ---------  ---------       -----
  Net income excluding special items..........................  $  14,953  $    1.71  $  13,976  $    1.61  $  12,704   $    1.47
                                                                ---------  ---------  ---------  ---------  ---------       -----
                                                                ---------  ---------  ---------  ---------  ---------       -----
</TABLE>
 
------------------------
 
(1) Diluted earnings per share
 
RESULTS OF OPERATIONS
 
NET INTEREST INCOME
 
    Approximately 72% of Bancorp's gross revenue was derived from net interest
income in 1998, down from 74% in 1997. Net interest income is principally the
sum of interest and fees on loans plus interest and discount on investment
securities, less interest paid on deposits and borrowings. Although
interest-bearing deposits continued to represent Bancorp's principal funding
source, factors largely related to intense competition for bank deposits
throughout the financial services industry have forced banks to seek dependable,
relatively low-cost alternative sources of funds. Bancorp frequently supplements
its funding with Federal Home Loan Bank ("FHLB") borrowings, which have proven
to be reliable and cost-effective across all maturities selected. Other, more
traditional, funding sources include repurchase agreements and federal funds
purchased.
 
    Net interest income is influenced by a number of external economic and
competitive factors such as Board monetary policy and its influence on market
interest rates; loan demand and competition from nonbank lenders; and
competition with investment managers, brokerage firms and investment bankers for
consumer and commercial business assets that might otherwise be deposited in
banks. Internal factors impacting levels and changes in net interest income are
attributed to Bancorp's interest rate risk management policies, which address a
variety of issues including loan and deposit pricing practices, funding
alternatives and maturity schedules. Historically, Bancorp has not made use of
derivatives, interest rate hedges or similar instruments or transactions to
manage interest rate risk, but is prepared to employ such instruments as
circumstances dictate.
 
                                       11
<PAGE>
TABLE 2. AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
                                                 1998                                1997                           1996
                                   ---------------------------------  -----------------------------------  ----------------------
                                    AVERAGE                AVERAGE     AVERAGE                  AVERAGE     AVERAGE
(DOLLARS IN THOUSANDS)             BALANCES   INTEREST      RATE      BALANCES    INTEREST       RATE      BALANCES    INTEREST
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
<S>                                <C>        <C>        <C>          <C>        <C>          <C>          <C>        <C>
ASSETS
INTEREST-EARNING ASSETS
Short-term funds.................  $  30,255  $   1,868        6.17%  $  12,729   $     619         4.86%  $  16,055   $     891
                                   ---------  ---------               ---------  -----------  -----------             -----------
Investment securities:(1)
    Taxable......................    255,798     15,772        6.17     221,361      14,273         6.45     224,510      14,039
    Tax-exempt(2)................    100,352      7,040        7.02      98,559       7,185         7.29     104,210       7,791
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
Total investment securities(2)...    356,150     22,812        6.40     319,920      21,458         6.71     328,720      21,830
                                   ---------  ---------  -----------  ---------  -----------  -----------             -----------
Loans, net, including loans held
  for sale(2)....................    879,705     77,129        8.77     864,986      76,892         8.89     789,604      70,560
                                   ---------  ---------  -----------  ---------  -----------  -----------             -----------
Total interest-earning assets and
  average yield(2)...............  1,266,110  $ 101,809        8.04%  1,197,635   $  98,969         8.26%  1,134,379   $  93,281
                                              ---------  -----------             -----------  -----------             -----------
Total noninterest-earning
  assets.........................    102,034                            100,908                               97,744
                                   ---------                          ---------                            ---------
Total assets.....................  $1,368,144                         $1,298,543                           $1,232,123
                                   ---------                          ---------                            ---------
                                   ---------                          ---------                            ---------
LIABILITIES AND SHAREHOLDERS'
  EQUITY
INTEREST-BEARING LIABILITIES
Interest bearing deposits:
    Checking.....................  $ 138,948  $   2,670        1.92%  $ 130,624   $   2,653         2.03%  $ 116,971   $   2,505
    Savings......................    154,762      3,893        2.52     163,897       4,310         2.63     172,101       4,707
    Money market accounts........    146,577      4,797        3.27     126,654       3,850         3.04     127,497       3,860
    Certificates of deposit......    502,458     27,439        5.46     482,398      26,428         5.48     464,991      25,792
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
  Total interest bearing
    deposits.....................    942,745     38,799        4.12     903,573      37,241         4.12     881,560      36,864
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
Short-term borrowings:
    Federal funds purchased and
      securities sold under
      agreements to repurchase...     49,095      2,399        4.89      44,280       2,264         5.11      38,565       1,908
    Other short-term
      borrowings.................     26,703      1,476        5.53      62,001       3,663         5.91      41,819       2,393
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
Total short-term borrowings......     75,798      3,875        5.11     106,281       5,927         5.58      80,384       4,301
Long-term borrowings.............     73,964      4,204        5.68      24,350       1,434         5.89      18,765       1,213
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
Total borrowed funds.............    149,762      8,079        5.39     130,631       7,361         5.63      99,149       5,514
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
Total interest-bearing
  liabilities and average rate
  incurred.......................  1,092,507     46,878        4.29   1,034,204      44,602         4.31     980,709      42,378
                                   ---------  ---------  -----------  ---------  -----------  -----------  ---------  -----------
NONINTEREST-BEARING LIABILITIES
Demand deposits..................    134,457                            131,769                              127,323
Other liabilities................     12,001                             13,649                               12,874
                                   ---------                          ---------                            ---------
Total noninterest-bearing
  liabilities....................    146,458                            145,418                              140,197
                                   ---------                          ---------                            ---------
Total liabilities................  1,238,965                          1,179,622                            1,120,906
                                   ---------                          ---------                            ---------
Shareholders' equity.............    129,179                            118,921                              111,217
                                   ---------                          ---------                            ---------
Total liabilities and
  shareholders' equity...........  $1,368,144                         $1,298,543                           $1,232,123
                                   ---------                          ---------                            ---------
                                   ---------                          ---------                            ---------
Net interest income..............             $  54,931                           $  54,367                            $  50,903
                                              ---------                          -----------                          -----------
                                              ---------                          -----------                          -----------
Net interest spread(3)...........                              3.75%                                3.95%
                                                         -----------                          -----------
                                                         -----------                          -----------
Net interest margin (4)..........                              4.34%                                4.54%
                                                         -----------                          -----------
                                                         -----------                          -----------
 
<CAPTION>
 
                                     AVERAGE
(DOLLARS IN THOUSANDS)                RATE
                                   -----------
<S>                                <C>
ASSETS
INTEREST-EARNING ASSETS
Short-term funds.................        5.55%
                                   -----------
Investment securities:(1)
    Taxable......................        6.25
    Tax-exempt(2)................        7.48
                                   -----------
Total investment securities(2)...        6.64
                                   -----------
Loans, net, including loans held
  for sale(2)....................        8.94
                                   -----------
Total interest-earning assets and
  average yield(2)...............        8.22%
                                   -----------
Total noninterest-earning
  assets.........................
 
Total assets.....................
 
LIABILITIES AND SHAREHOLDERS'
  EQUITY
INTEREST-BEARING LIABILITIES
Interest bearing deposits:
    Checking.....................        2.14%
    Savings......................        2.74
    Money market accounts........        3.03
    Certificates of deposit......        5.55
                                   -----------
  Total interest bearing
    deposits.....................        4.18
                                   -----------
Short-term borrowings:
    Federal funds purchased and
      securities sold under
      agreements to repurchase...        4.95
    Other short-term
      borrowings.................        5.72
                                   -----------
Total short-term borrowings......        5.35
Long-term borrowings.............        6.46
                                   -----------
Total borrowed funds.............        5.56
                                   -----------
Total interest-bearing
  liabilities and average rate
  incurred.......................        4.32
                                   -----------
NONINTEREST-BEARING LIABILITIES
Demand deposits..................
Other liabilities................
 
Total noninterest-bearing
  liabilities....................
 
Total liabilities................
 
Shareholders' equity.............
 
Total liabilities and
  shareholders' equity...........
 
Net interest income..............
 
Net interest spread(3)...........        3.90%
                                   -----------
                                   -----------
Net interest margin (4)..........        4.49%
                                   -----------
                                   -----------
</TABLE>
 
SEE FOOTNOTES, NEXT PAGE.
 
                                       12
<PAGE>
------------------------------
 
(1) Average Balances and the related average rate are based on amortized cost.
 
(2) Interest and yields on obligations of states and political subdivisions and
    tax-exempt loans are computed on a taxable equivalent basis using the U.S.
    statutory tax rate of 35 percent. In addition, loan fee income is included
    in the interest income calculations, and nonaccrual loans are included in
    the average loan base upon which the interest rate earned on loans is
    calculated.
 
(3) Net interest spread is the difference between the ratios (expressed as
    percentages) of taxable-equivalent interest income to earning assets and of
    interest expense to interest-bearing liabilities.
 
(4) Net interest margin is the difference between the ratios (expressed as
    percentages) of taxable-equivalent interest income to earning assets and of
    interest expense to earning assets.
 
    Table 2 displays average balances, interest and interest rates for each
major category of interest-earning assets and interest-bearing liabilities over
a three-year period. Total interest income, expressed on a taxable-equivalent
basis as if every dollar of interest income was fully taxable at the same
federal and state tax rate, increased 3% to $101.8 million for 1998 from $99.0
million for 1997. The increase was attributed largely to an 11% increase in
average investment securities supplementing a modest 2% growth in average loans.
Bancorp took deliberate action to reduce its indirect loan portfolio by
approximately $17.8 million in 1998 and was not willing to compete with the
aggressive tactics of loan syndicates regarding commercial loan pricing and
credit structure evident during most of the year. Favoring growth in lower
yielding investment securities then, the yield on average earning assets
declined to 8.04% for 1998, from 8.26% for 1997.
 
    Total interest expense increased 5%, to $46.9 million for 1998, from $44.6
million for 1997, but trailed the rate of growth of interest-bearing liabilities
as the average cost of funds declined to 4.29% for 1998, from 4.31% for 1997.
Average interest-bearing deposits, led by a $27.4 million increase in Bancorp's
successful new T-Bill Plus Money Market Deposit Account, with interest rates
tied to the 13-week Treasury Bill, increased by 4% for 1998, and average
borrowings, principally long term, increased by 15%. While the 11% growth in
average repurchase balances between 1998 and 1997 reflected growth in underlying
commercial account relationships, a 19% increase in FHLB borrowings was related
chiefly to investment opportunities with unusually attractive terms and
contributions to growth in net interest income in 1998.
 
    The net interest margin ("margin"), which is the ratio of taxable-equivalent
net interest income to average earning assets, has been under considerable
pressure throughout the banking industry, especially over the past two years. In
contrast to 1997, when loan growth and a stable cost of funds prevented
Bancorp's margin from declining, a moderate decline in the margin to 4.34% for
1998 compared with 4.54% for 1997 was principally the result of modest growth in
total average loans, with stronger growth in lower-yielding investment
securities. Furthermore, Bancorp's earning assets have a tendency to re-price
more quickly than its interest-bearing liabilities, further exacerbating the
margin decline as interest rates moved lower in 1998. Inasmuch as interest rates
may decline further in 1999, Bancorp is prepared to evaluate available options
to mitigate any possible adverse impact on net interest income.
 
    Table 3, Analysis of Changes in Net Interest Income, quantifies the change
in net interest income for the periods presented and, as discussed above, shows
how much was attributed to volume factors and how much was influenced by
interest rate movements. Bancorp endeavors to maintain a relatively balanced
position between interest-sensitive assets and interest-sensitive liabilities
without forgoing opportunities to benefit from relevant interest rate conditions
within the boundaries of prudent risk management and established corporate
policy. Further information may be found on page 26, Asset and Liability
Management ("ALM"), Market Risk, and in Table 15, Effects of Changes in Interest
Rates on MVE, page 28.
 
                                       13
<PAGE>
TABLE 3. ANALYSIS OF CHANGES IN NET INTEREST INCOME
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------------------
                                                           1998 OVER 1997                     1997 OVER 1996
                                                  ---------------------------------  ---------------------------------
                                                               DUE TO CHANGE IN(1)                DUE TO CHANGE IN(1)
                                                   INCREASE    --------------------   INCREASE    --------------------
(IN THOUSANDS)                                    (DECREASE)    VOLUME      RATES    (DECREASE)    VOLUME      RATES
                                                  -----------  ---------  ---------  -----------  ---------  ---------
<S>                                               <C>          <C>        <C>        <C>          <C>        <C>
INTEREST INCOME
  Interest and fees on loans(2)(3)..............   $     237   $   1,299  $  (1,062)  $   6,332   $   6,703  $    (371)
  Interest and dividends on investment
    securities:
    Taxable.....................................       1,499       2,146       (647)        234        (199)       433
    Tax-exempt(4)...............................        (145)        129       (274)       (606)       (416)      (190)
  Interest on federal funds sold................         335          77        258        (319)       (345)        26
  Interest-bearing deposits with banks..........         914         834         80          47         124        (77)
                                                  -----------  ---------  ---------  -----------  ---------  ---------
  Total.........................................       2,840       4,485     (1,645)      5,688       5,867       (179)
                                                  -----------  ---------  ---------  -----------  ---------  ---------
INTEREST EXPENSE
  Interest on deposits..........................       1,558       1,662       (104)        377         993       (616)
  Interest on federal funds purchased and
    securities sold under agreements to
    repurchase..................................         135         238       (103)        356         290         66
  Interest on other short-term borrowings.......      (2,187)     (1,966)      (221)      1,270       1,190         80
  Interest on long-term borrowings..............       2,770       2,820        (50)        221         336       (115)
                                                  -----------  ---------  ---------  -----------  ---------  ---------
  Total.........................................       2,276       2,754       (478)      2,224       2,809       (585)
                                                  -----------  ---------  ---------  -----------  ---------  ---------
  Net Interest Income...........................   $     564   $   1,731  $  (1,167)  $   3,464   $   3,058  $     406
                                                  -----------  ---------  ---------  -----------  ---------  ---------
                                                  -----------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
(1) The change in interest due to both rate and volume has been allocated to
    rate and volume changes in porportion to the relationship of the absolute
    dollar amounts of the change in each.
 
(2) Included in the change in interest income are decreased fees on loans of
    $431 for the year ended December 31, 1998 over 1997 and increased fees on
    loans of $355 for the year ended December 31, 1997 over 1996.
 
(3) Tax equivalent adjustments of $235 for 1998, $127 for 1997 and $160 for 1996
    are included in the calculation of rate changes for interest and fees on
    loans.
 
(4) Tax-equivalent adjustments of $2,394 for 1998, $2,443 for 1997 and $2,648
    for 1996 are included in the calculation of rate changes for tax-exempt
    investment securities changes for tax-exempt investment securities.
 
PROVISION FOR CREDIT LOSSES
 
    The provision for credit losses was increased by 5% for 1998, to $3.1
million, from $2.9 million for 1997, related to modest loan growth for the year
and the relatively high, but declining, level of consumer loan losses. Total net
loan losses for 1998 declined by 11% from 1997, and amounted to 0.26% of average
total loans for the year. The decrease was attributed principally to a 25%
reduction in net consumer loan losses. A five-year history of the allowance for
credit losses is displayed in Table 13, page 23.
 
                                       14
<PAGE>
NONINTEREST INCOME
 
    Noninterest income increased 8% in 1998, to $19.8 million, from $18.3
million in 1997. Excluding special items of an unusual or nonrecurring nature
described below, noninterest income from continuing operations increased 7% in
1998.
 
    Included in the results for 1998 were net investment securities gains of
$1.0 million realized by TBT in the eleven-month period prior to the merger and
a $467 thousand gain realized by Bancorp on the sale of real estate previously
used as a branch office facility. Noninterest income for 1997 included a $179
thousand gain on the sale of loans and $89 thousand in gains on sales of
investment securities by TBT. Bancorp realized a $900 thousand gain on the sale
of the credit card merchant processing business discussed earlier. If the
operating income recognized in 1997 from this line of business was also
eliminated, comparable noninterest income before special items increased 12% in
1998.
 
    Trust income declined 2% in 1998. Excluding approximately $240 thousand
represented by an unusually large estate administration fee realized in 1997,
the underlying rate of increase in trust income was 8% for 1998. Trust assets
under management, having declined significantly related to the late-summer 1998
stock market correction, rebounded to close 1998 at $432 million, 13% above $383
million in assets under management at year-end 1997.
 
    Service charges on deposit accounts increased 3% in 1998, to $6.0 million,
from $5.8 million for 1997 related largely to transaction volume.
 
    Insurance income increased 15% to $2.3 million for 1998 from $2.0 million
for 1997 related to increased sales of consumer and commercial business
insurance products.
 
    Gains on sales of loans increased 38% to $2.0 million for 1998 from $1.4
million for 1997. The historically low mortgage rate environment that was
sustained throughout 1998 triggered high refinancing volume.
 
    Other operating income declined 15% to $5.3 million for 1998 from $6.2
million for 1997 principally related to the mid-year 1997 sale of the credit
card merchant processing business and the termination of revenue therefrom.
 
NONINTEREST EXPENSE
 
    Total noninterest expense, sometimes referred to as overhead expense,
increased 7% to $50.9 million for 1998 from $47.7 million for 1997. Excluding
merger related expense and other special items of an unusual or nonrecurring
nature as disclosed in Table 1 and discussed below, noninterest expense
increased 2% reflecting stringent cost controls and significant efficiencies
realized through the 1998 integration of the Savings Bank's core processing
systems and administrative functions.
 
    Salaries increased 5% to $21.6 million for 1998 from $20.6 million for 1997.
Excluding $454 thousand in 1997 compensation expense recognized pursuant to the
provisions of an agreement with Savings Bank, salaries increased 7% attributed
to merit increases, new hires, promotions, and performance-based incentive
payments.
 
    Pension and other employee benefits declined 1% to $4.88 million for 1998
from $4.95 million for 1997 related to favorable experience in medical and
health programs.
 
    Merger-related expense increased to $3.2 million for 1998 from $0.5 million
for 1997 largely associated with legal and accounting fees, severance payments,
contract terminations, and similar expenses incurred in connection with the
acquisition and merger of Monocacy Bancshares, Inc. which closed on November 30,
1998.
 
                                       15
<PAGE>
    Occupancy and equipment expense declined 1% to $7.8 million for 1998 from
$7.9 million for 1997 attributed to cost reductions associated with a systems
conversion at the Savings Bank completed in June 1998.
 
    Other operating expense decreased 3% to $13.4 million for 1998 from $13.8
million for 1997 related principally to discontinued operating expense
associated with the sale of the credit card merchant processing business in the
third quarter of 1997.
 
INCOME TAXES
 
    Income tax expense decreased by 4% to $5.0 million for 1998, from $5.3
million for 1997, largely related to a 7% decrease in income before taxes. 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 interest realized on state and municipal
obligations and certain loans is tax-exempt. See Note 8, INCOME TAXES, Notes to
Consolidated Financial Statements.
 
    The effective tax rate, which is the provision for income taxes divided by
income before taxes, increased slightly to 27.8% for 1998 compared with 27.0%
for 1997 largely related to non-tax-deductible expenses associated with the
acquisitions of K-S and Monocacy Bancshares in 1998.
 
FINANCIAL CONDITION
 
SOURCES AND USES OF FUNDS
 
    Bancorp's financial condition can be evaluated by analyzing its sources and
uses of funds. The comparison of average balances in Table 4 shows an increase
in average earning assets ("Uses") for 1998 of $68.5 million, or 6% above 1997,
and indicates how that increase was funded ("Sources").
 
INVESTMENT SECURITIES
 
    The investment securities portfolio is structured and managed to meet
several important financial objectives:
 
    - To maintain sufficient balance sheet liquidity to meet any reasonable
      decline in deposits and any anticipated increase in loans.
 
    - To insure safety of principal and interest by investing only in securities
      permitted by regulation.
 
    - To maximize income consistent with liquidity and safety requirements.
 
    - To maintain a source of assets which can be pledged as collateral for
      federal, state and municipal deposits.
 
    The investment securities portfolio is held in two categories for accounting
and reporting purposes: (1) available-for-sale ("AFS") securities are those
which are intended to be held for an indefinite period of time, but not
necessarily to maturity, and (2) held-to-maturity ("HTM") securities are those
for which there is both a positive intent and an ability to hold to maturity.
These determinations are made when the securities are purchased and are integral
to Bancorp's asset/liability ("ALM") policies. The accounting policy for
investment securities is set forth in Note 1, NATURE OF BANKING ACTIVITIES AND
SIGNIFICANT ACCOUNTING POLICIES, Notes to Consolidated Financial Statements.
 
    Short-term uses of funds, shown in Table 4 as federal funds and
interest-bearing deposits with banks, are principally a function of the
management of Bancorp's daily cash and liquidity requirements. An increase in
these accounts, for example, may indicate a temporary excess of investable funds
not otherwise required for increases in loans or investments, or decreases in
deposits. Conversely, a decrease in these categories usually indicates the
opposite.
 
                                       16
<PAGE>
TABLE 4. SOURCES AND USES OF FUNDS
 
<TABLE>
<CAPTION>
                                           1998                               1997                   1996
                             ---------------------------------  ---------------------------------  ---------
                              AVERAGE    INCREASE                AVERAGE    INCREASE                AVERAGE
                              BALANCE   (DECREASE)       %       BALANCE   (DECREASE)       %       BALANCE
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
                                                         (DOLLARS IN THOUSANDS)
<S>                          <C>        <C>          <C>        <C>        <C>          <C>        <C>
FUNDING USES
  Federal funds sold.......  $   5,959   $   1,123        23.2% $   4,836   $  (5,972)      (55.3)% $  10,808
  Interest-bearing deposits
    with banks.............     24,296      16,403       207.8      7,893       2,646        50.4      5,247
  Taxable investment
    securities.............    255,798      34,437        15.6    221,361      (3,149 )      (1.4)   224,510
  Tax-exempt investment
    securities.............    100,352       1,793         1.8     98,559      (5,651 )      (5.4)   104,210
  Loans, net...............    879,705      14,719         1.7    864,986      75,382         9.5    789,604
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
  Total uses...............  $1,266,110 $   68,475         5.7% $1,197,635 $   63,256         5.6% $1,134,379
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
FUNDING SOURCES
  Interest-bearing
    checking...............  $ 138,948  $    8,324         6.4% $ 130,624  $   13,653        11.7% $ 116,971
  Savings..................    154,762      (9,135 )      (5.6)   163,897      (8,204 )      (4.8)   172,101
  Money market accounts....    146,577      19,923        15.7    126,654        (843 )      (0.7)   127,497
  Certificates of
    deposit................    502,458      20,060         4.2    482,398      17,407         3.7    464,991
  Short-term borrowings....     75,798     (30,483 )     (28.7)   106,281      25,897        32.2     80,384
  Long-term borrowings.....     73,964      49,614       203.8     24,350       5,585        29.8     18,765
  Noninterest-bearings
    funds (net)(1).........    173,603      10,172         6.2    163,431       9,761         6.4    153,670
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
  Total sources............  $1,266,110 $   68,475         5.7% $1,197,635 $   63,256         5.6% $1,134,379
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
                             ---------  -----------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
------------------------
 
(1) Noninterest-bearing liabilities and shareholders' equity, less
    noninterest-earning assets.
 
TABLE 5. INVESTMENT PORTFOLIO DISTRIBUTION-AMORTIZED COST(1)
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                -------------------------------
                                                                  1998       1997       1996
                                                                ---------  ---------  ---------
                                                                        (IN THOUSANDS)
<S>                                                             <C>        <C>        <C>
U. S. Treasury securities and obligations of U.S. government
  corporations and agencies...................................  $ 118,271  $ 116,387  $ 103,553
Obligations of states and political subdivisions..............    125,347    102,545    100,272
Mortgage-backed securities....................................    154,848     89,544    103,632
Other securities..............................................     22,055     18,217      8,512
                                                                ---------  ---------  ---------
Total.........................................................  $ 420,521  $ 326,693  $ 315,969
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>
 
------------------------
 
(1) Reflects the cost of securities purchased, adjusted for amortization of
    premiums and accretion of discounts, which differs from the amounts
    reflected in the consolidated balance sheets due to fair value adjustments
    made in accordance with Financial Accounting Standards Board Statement No.
    115.
 
                                       17
<PAGE>
TABLE 6. INVESTMENT PORTFOLIO ANALYSIS--DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                                         MATURING IN:
                                      -----------------------------------------------------------------------------------
                                                                      AFTER ONE               AFTER FIVE
                                              ONE YEAR                 THROUGH                 THROUGH          AFTER TEN
                                              OR LESS                 FIVE YEARS              TEN YEARS           YEARS
                                        AMOUNT        YIELD      AMOUNT       YIELD      AMOUNT       YIELD      AMOUNT
                                      -----------     -----     ---------     -----     ---------     -----     ---------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>          <C>        <C>          <C>        <C>          <C>
Available-for-sale:(1)
  U.S. Treasury securities and
    obligations of U.S. government
    corporations and agencies.......   $  13,016         5.29%  $  56,065        5.72%  $  49,190        6.46%  $      --
  Obligations of states and
    political subdivisions(2).......         250         6.21       5,082        6.87      16,285        6.60      19,973
  Other bonds.......................          --           --       2,328        5.51          --          --          --
  Mortgage-backed securities(3).....       5,862         7.24      61,979        6.19      23,186        6.49      49,347
  Equity securities.................          --           --          --          --          --          --      19,727
                                      -----------         ---   ---------         ---   ---------         ---   ---------
  Total available-for-sale..........      19,128         5.90     125,454        5.99      88,661        6.50      89,047
                                      -----------         ---   ---------         ---   ---------         ---   ---------
Held-to-maturity:
  Obligations of states and
    political subdivisions(2).......       7,471         7.75      29,868        7.22      25,855        6.97      20,563
  Mortgage-backed securities(3).....          --           --       2,355        6.78      10,932        7.11       1,187
                                      -----------         ---   ---------         ---   ---------         ---   ---------
Total held-to-maturity..............       7,471         7.75      32,223        7.19      36,787        7.01      21,750
                                      -----------         ---   ---------         ---   ---------         ---   ---------
Total investment securities.........   $  26,599         6.42%  $ 157,677        6.24%  $ 125,448        6.65%  $ 110,797
                                      -----------         ---   ---------         ---   ---------         ---   ---------
                                      -----------         ---   ---------         ---   ---------         ---   ---------
 
<CAPTION>
 
                                                           TOTAL
                                         YIELD      AMOUNT       YIELD
                                         -----     ---------     -----
 
<S>                                   <C>          <C>        <C>
Available-for-sale:(1)
  U.S. Treasury securities and
    obligations of U.S. government
    corporations and agencies.......          --%  $ 118,271        5.98%
  Obligations of states and
    political subdivisions(2).......        6.56      41,590        6.61
  Other bonds.......................          --       2,328        5.51
  Mortgage-backed securities(3).....        6.44     140,374        6.37
  Equity securities.................        5.42      19,727        5.42
                                             ---   ---------         ---
  Total available-for-sale..........        6.24     322,290        6.19
                                             ---   ---------         ---
Held-to-maturity:
  Obligations of states and
    political subdivisions(2).......        6.62      83,757        7.04
  Mortgage-backed securities(3).....        6.40      14,474        7.00
                                             ---   ---------         ---
Total held-to-maturity..............        6.61      98,231        7.04
                                             ---   ---------         ---
Total investment securities.........        6.31%  $ 420,521        6.39%
                                             ---   ---------         ---
                                             ---   ---------         ---
</TABLE>
 
------------------------------
 
(1) Reflects the cost of securities purchased, adjusted for amortization of
    premiums and accretion of discounts, which differs from the amounts
    reflected in the 1998 consolidated balance sheet due to fair value
    adjustments made in accordance with Financial Accounting Standards Board
    Statement No. 115.
 
(2) Yields are presented on a fully taxable equivalent basis using the federal
    statutory rate of 35%.
 
(3) Estimated prepayment assumptions have been incorporated into the maturities
    for mortgage-backed securities based upon historical trends.
 
    Table 5, Investment Portfolio Distribution, displays the year-end amortized
cost of the investment securities portfolio, which increased 29% in 1998 to
$420.5 million at December 31. The most significant change was evidenced by a
$65.3 million, or 73% increase in mortgage-backed securities as yields and terms
were relatively attractive in 1998.
 
    As shown in Table 6, Investment Portfolio Analysis, the amortized cost of
AFS securities totaled $322.3 million and represented 77% of the total
securities portfolio and 22% of consolidated total assets at December 31, 1998.
AFS securities provide substantial liquidity, chiefly for unexpected loan growth
or deposit withdrawal requirements. Conversely, HTM securities, which amounted
to $98.2 million, or 23% of the total portfolio at December 31, 1998, are
expected to be held until their scheduled maturities and are composed of
longer-term, tax-exempt state and municipal obligations and mortgage-backed
securities.
 
    In management's opinion, no securities presented any material risk
characteristics at December 31, 1998. Approximately 99% of all obligations of
states and political subdivisions were rated A or higher by either Moody's
Investors Service or Standard and Poors, and approximately 83% were rated AAA at
December 31, 1998.
 
LOANS
 
    As presented in Table 4, Sources and Uses of Funds, average loans increased
2% in 1998, whereas total loans at December 31, 1998 increased 1% to $891.7
million from $882.6 million at December 31, 1997 as shown in Table 7, Loan
Portfolio Mix. The table reveals an $18.2 million, or 7% reduction in consumer
loans, primarily lower-yielding indirect automobile loans, and a $27.4 million,
or 16% increase in higher-
 
                                       18
<PAGE>
yielding commercial mortgage loans. The mix change improved the overall quality
and yield of the total loan portfolio.
 
    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.
 
TABLE 7. LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                              -------------------------------------------------------------------------------------------------
                                      1998                  1997                  1996                  1995            1994
                              --------------------  --------------------  --------------------  --------------------  ---------
                               AMOUNT        %       AMOUNT        %       AMOUNT        %       AMOUNT        %       AMOUNT
                              ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Real estate:
  Construction and land
    development.............  $  61,328       6.9%  $  67,026       7.6%  $  65,453        7.9% $  53,149        6.9% $  56,808
  Secured by farmland.......      8,452        0.9      8,479        1.0      9,006        1.1      8,633        1.1      8,645
  Residential mortgage......    265,394       29.8    257,121       29.1    241,275       29.1    232,543       30.4    225,185
  Other mortgage............    198,131       22.2    170,742       19.3    161,284       19.4    155,754       20.4    173,153
Agricultural................        560        0.1        819        0.1        985        0.1      1,690        0.2      2,183
Commercial and industrial...     92,091       10.3     99,043       11.2     84,569       10.2     80,957       10.6     71,348
Consumer....................    257,968       28.9    276,134       31.3    258,493       31.2    227,764       29.8    226,802
Other loans.................      7,817        0.9      3,186        0.4      8,164        1.0      4,821        0.6      5,737
                              ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Total loans.................  $ 891,741     100.0%  $ 882,550     100.0%  $ 829,229      100.0% $ 765,311      100.0% $ 769,861
                              ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                              ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
 
<CAPTION>
 
                                  %
                              ---------
 
<S>                           <C>
Real estate:
  Construction and land
    development.............        7.4%
  Secured by farmland.......        1.1
  Residential mortgage......       29.3
  Other mortgage............       22.5
Agricultural................        0.3
Commercial and industrial...        9.3
Consumer....................       29.4
Other loans.................        0.7
                              ---------
Total loans.................      100.0%
                              ---------
                              ---------
</TABLE>
 
Loans are classified according to security, borrower or purpose.
 
TABLE 8. LOAN MATURITIES AND INTEREST SENSITIVITY(1)AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                                                       MATURING IN:
                                                                      -----------------------------------------------
<S>                                                                   <C>          <C>          <C>        <C>
                                                                                    AFTER ONE     AFTER
                                                                       ONE YEAR      THROUGH      FIVE
                                                                      OR LESS(2)   FIVE YEARS     YEARS      TOTAL
                                                                      -----------  -----------  ---------  ----------
 
<CAPTION>
                                                                                      (IN THOUSANDS)
<S>                                                                   <C>          <C>          <C>        <C>
Real estate:
  Construction and land development.................................   $  24,485    $  23,585   $  13,258  $   61,328
  Secured by farmland...............................................       1,367        6,599         486       8,452
Agricultural........................................................         167          394          --         561
Commercial and industrial...........................................      38,582       39,997      13,511      92,090
Other loans.........................................................       6,064          547       1,206       7,817
                                                                      -----------  -----------  ---------  ----------
  Total.............................................................   $  70,665    $  71,122   $  28,461  $  170,248
                                                                      -----------  -----------  ---------  ----------
                                                                      -----------  -----------  ---------  ----------
Rate sensitivity:
  Predetermined rate................................................                $  54,117   $  22,959
  Floating rate.....................................................                   17,005       5,502
                                                                                   -----------  ---------
                                                                                   -----------  ---------
  Total.............................................................                $  71,122   $  28,461
                                                                                   -----------  ---------
                                                                                   -----------  ---------
</TABLE>
 
------------------------
 
(1) Excludes real estate mortgage loans and consumer loans.
 
(2) Includes demand loans, loans having no stated schedule of repayments and no
    stated maturity, and overdrafts.
 
                                       19
<PAGE>
DEPOSITS
 
    Representing the principal source of funds for loans and investments,
average total deposits, as shown in Table 9, Average Deposits and Rates Paid,
increased by 4% in 1998 over 1997, with increases in every major deposit type
except Savings. However, owing to the strong inflow of deposits in the fourth
quarter of 1998, total deposits for the year increased 8% to $1.138 billion at
December 31 from $1.054 billion at December 31, 1997. The Bank's new money
market deposit account called T-Bill Plus, introduced in the last half of 1997,
increased 250%, or $31.0 million in 1998, from $12.4 million at December 31,
1997, to $43.4 million at December 31, 1998. The yield on T-Bill Plus re-sets
weekly with the 13-week Treasury Bill providing a tangible, money market rate of
return to depositors. Of further significance, both noninterest-bearing and
interest-bearing checking balances increased by 10% during 1998 contributing to
Bancorp's overall lower cost of deposits for the year compared with 1997.
 
    Table 10, Maturity of Time Deposits $100,000 and Over, reflects a growth
rate of 45% for 1998, most notably in the popular six- through twelve-month
maturities. Generally the highest cost source of deposits, they are also a
relatively stable source coming largely from local municipalities. Bancorp does
not expect to see this category exceed recent levels of 5-7% of total deposits.
 
TABLE 9. AVERAGE DEPOSITS AND RATES PAID
 
<TABLE>
<CAPTION>
                                                   1998                  1997                  1996
                                           --------------------  --------------------  --------------------
                                            AVERAGE               AVERAGE               AVERAGE
                                            BALANCE     RATE      BALANCE     RATE      BALANCE     RATE
                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                                (DOLLARS IN THOUSANDS)
<S>                                        <C>        <C>        <C>        <C>        <C>        <C>
Noninterest-bearing demand deposits......  $ 134,457             $ 131,769             $ 127,323
                                           ---------             ---------             ---------
Interest-bearing deposits:
  Checking...............................    138,948       1.92%   130,624       2.03%   116,971       2.14%
  Money market...........................    146,577       3.27    126,654       3.04    127,497       3.03
  Savings................................    154,762       2.52    163,897       2.63    172,101       2.74
  Time...................................    502,458       5.46    482,398       5.48    464,991       5.55
                                           ---------        ---  ---------        ---  ---------        ---
      Total interest-bearing deposits....    942,745       4.12    903,573       4.12    881,560       4.18
                                           ---------        ---  ---------        ---  ---------        ---
  Total average deposits.................  $1,077,202      3.60% $1,035,342      3.60% $1,008,883      3.65%
                                           ---------        ---  ---------        ---  ---------        ---
                                           ---------        ---  ---------        ---  ---------        ---
</TABLE>
 
TABLE 10. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                   -------------------------------
                                                                     1998       1997       1996
                                                                   ---------  ---------  ---------
                                                                           (IN THOUSANDS)
<S>                                                                <C>        <C>        <C>
Maturing in:
  3 months or less...............................................  $  23,793  $  15,543  $  15,318
  Over 3 months through 6 months.................................     13,092      9,887     12,781
  Over 6 months through 12 months................................     20,830     10,849      7,738
  Over 12 months.................................................     13,308     12,568     14,592
                                                                   ---------  ---------  ---------
Total............................................................  $  71,023  $  48,847  $  50,429
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
BORROWINGS
 
    Table 4, Sources and Uses of Funds, reveals a shift from short-term
borrowings, which are composed principally of federal funds purchased and
securities sold under agreements to repurchase, to long-term borrowings.
Short-term borrowings decreased $30.5 million to an average of $75.8 million for
1998, and
 
                                       20
<PAGE>
long-term borrowings, which are mainly composed of Federal Home Loan Bank
advances maturing beyond one year, increased $49.6 million to an average of
$74.0 million for 1998. As a member of the Federal Home Loan Bank of Atlanta,
Bancorp takes advantage of a wide variety of attractively priced funding options
supported by residential mortgage lending and community reinvestment activities.
 
    Table 11, Short-Term Borrowings, discloses continued growth, largely in repo
relationships with commercial business customers, to $57.6 million at December
31, 1998. Short-term advances from the Federal Home Loan Bank declined to $23.9
million at December 31, 1998 as Bancorp locked in some attractive longer-term
spreads during the year.
 
TABLE 11. SHORT-TERM BORROWINGS
 
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
<S>                                                                                <C>        <C>        <C>
                                                                                     1998       1997       1996
                                                                                   ---------  ---------  ---------
 
<CAPTION>
                                                                                       (DOLLARS IN THOUSANDS)
<S>                                                                                <C>        <C>        <C>
End of period outstanding........................................................  $  57,626  $  45,051  $  41,876
Highest month-end balance........................................................     62,266     61,745     52,079
Average balance..................................................................     49,095     44,280     38,565
Average rate of interest:
  At end of year.................................................................       4.13%      5.33%      5.03%
  During year....................................................................       4.89       5.11       4.95
</TABLE>
 
SHORT-TERM ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
<S>                                                                                <C>        <C>        <C>
                                                                                     1998       1997       1996
                                                                                   ---------  ---------  ---------
 
<CAPTION>
                                                                                       (DOLLARS IN THOUSANDS)
<S>                                                                                <C>        <C>        <C>
End of period outstanding........................................................  $  14,228  $  54,051  $  62,728
Highest month-end balance........................................................     50,051     68,551     64,808
Average balance..................................................................     23,858     58,745     36,452
Average rate of interest:
  At end of year.................................................................       5.62%      5.95%      5.92%
  During year....................................................................       5.63       5.91       6.15
</TABLE>
 
RISK ELEMENTS
 
NONPERFORMING ASSETS
 
    Table 12, Nonperforming Assets and Contractually Past-Due Loans, displays a
five-year history of steadily declining nonperforming assets. Totaling just $5.9
million, or 0.41% of total consolidated assets at December 31, 1998, Bancorp
resolved its historical loan problems at an annual rate of 33% over the period
shown, largely reflecting substantial progress by the Savings Bank in dealing
with a legacy of the late-1980s. Furthermore, as nonaccrual loans have continued
to decline, the coverage ratio of the allowance-to-nonperforming loans increased
to a five-year high of 305%.
 
    Loans that were past due 90 days or more and not classified as nonperforming
totaled $2.0 million at December 31, 1998, or 0.22% of year-end total loans,
compared with $1.3 million one year earlier, or 0.15% of total loans at December
31, 1997. Historically, there has been no direct correlation between loans past
due 90 days or more and nonperforming loans or loan losses.
 
                                       21
<PAGE>
TABLE 12. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                              -----------------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>        <C>
                                                                1998       1997       1996       1995       1994
                                                              ---------  ---------  ---------  ---------  ---------
 
<CAPTION>
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Nonperforming assets:
  Nonaccrual loans(1).......................................  $   4,196  $   7,357  $   8,074  $   8,212  $  18,271
  Other real estate owned net of valuation allowance(2).....      1,705      5,192      8,113     10,737     10,287
                                                              ---------  ---------  ---------  ---------  ---------
Total nonperforming assets..................................  $   5,901  $  12,549  $  16,187  $  18,949  $  28,558
                                                              ---------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------  ---------
Loans past due 90 or more days as to interest or
  principal(3)..............................................  $   1,991  $   1,298  $   2,977  $   1,121  $   1,379
                                                              ---------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------  ---------
Nonperforming loans to total loans..........................       0.47%      0.83%      0.97%      1.07%      2.37%
Nonperforming assets to total loans plus other real estate
  owned.....................................................       0.66%      1.41%      1.93%      2.44%      3.66%
Nonperforming assets to total assets........................       0.41       0.94       1.27       1.55       2.54
Allowance for credit losses times nonperforming loans.......       3.05X      1.64X      1.45X      1.42X      0.73X
Allowance for credit losses times nonperforming assets......       2.17       0.96       0.73       0.62       0.47
</TABLE>
 
------------------------
 
(1) Loans are placed on nonaccrual status when, in the option of management,
    reasonable doubt exists as to the full, timely collection of interest or
    principle or a specific loan meets the criteria for nonaccrual status
    established by regulatory authorities. When a loan is placed on nonaccrual
    status, all interest previously accrued but not collected is reversed
    against current period interest income. No interest is taken into income on
    nonaccrual loans unless received in cash or until such time the borrower
    demonstrates sustained performance over a period of time in accordance with
    contractual terms.
 
(2) Other real estate owned includes: banking premises no longer used for
    business purposes, real estate acquired by foreclosure (in partial or
    complete satisfaction of debt) or otherwise surrendered by by the borrower
    to Bancorp's possession. Other real estate owned is recorded at the lower of
    cost or fair value on the date of acquisition or transfer from loans.
    Write-downs to fair value at the date of acquisition are charged to the
    allowance for credit losses. Subsequent to transfer, these assets are
    adjusted through a valuation allowance to the lower of the net carrying
    value or the fair value (net of estimated selling expenses) based on
    periodic appraisals.
 
(3) Nonaccrual loans are not included.
 
POTENTIAL PROBLEM LOANS
 
    At December 31, 1998, there were $23.1 million in loans that management had
reasonable concerns might become contractually past due or be classified as a
nonperforming asset. This amount includes $5.1 in loans to borrowers who may not
be able to meet the contractual terms of their obligations because of
uncertainties pertaining to their state of readiness for Year 2000 issues as
disclosed under the caption, Year 2000 Computer Readiness, which follows.
 
    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.
 
                                       22
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
 
    Provisions charged to earnings are made to the allowance for credit losses
in periodic amounts determined by management as necessary to absorb possible
future loan losses. Bancorp's policy regarding the maintenance of an adequate
allowance is set forth in Note 1, Notes to Consolidated Financial Statements, on
page 39.
 
    Table 13, 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. Of particular
significance is that net consumer loan losses, which had been increasing
annually to a peak of $2.0 million in 1997, declined substantially in 1998 to
$1.5 million. Stringent credit standards pertaining to indirect consumer loans
have resulted in a substantial decrease in losses and a recovery ratio of 57%
for 1998.
 
    Table 14, Allocation of Allowance for Credit Losses, discloses management's
allocation of the allowance to various loan categories, notably a re-allocation
from consumer and construction loans to commercial and commercial real estate
loans, with a substantial increase in the unallocated portion. This reflects the
underlying trends in loan growth and the change in mix discussed earlier. 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, 1998, the estimate of losses and related allowance may change in
the near term due to economic and other uncertainties inherent in the estimation
process.
 
TABLE 13. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------------
<S>                                                    <C>         <C>         <C>         <C>         <C>
(IN THOUSANDS)                                            1998        1997        1996        1995        1994
                                                       ----------  ----------  ----------  ----------  ----------
Average loans outstanding less average unearned
  income(1)..........................................  $  875,196  $  860,585  $  788,669  $  777,394  $  707,837
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
Allowance for credit losses at beginning of year.....  $   12,069  $   11,739  $   11,700  $   13,336  $   13,705
                                                       ----------  ----------  ----------  ----------  ----------
Charge-offs:
  Real estate........................................       1,053         849         605       2,855       1,000
  Commericial and industrial.........................         273         168          10         570         332
  Consumer...........................................       4,010       4,426       3,629       2,942       2,215
                                                       ----------  ----------  ----------  ----------  ----------
Total charge-offs....................................       5,336       5,443       4,244       6,367       3,547
                                                       ----------  ----------  ----------  ----------  ----------
Recoveries:
  Real estate........................................         430         431         462         435          79
  Commercial and industrial..........................         104           7           2          63          18
  Consumer...........................................       2,494       2,425       1,997       1,697       1,206
                                                       ----------  ----------  ----------  ----------  ----------
Total recoveries.....................................       3,028       2,863       2,461       2,195       1,303
                                                       ----------  ----------  ----------  ----------  ----------
Net charge-offs......................................       2,308       2,580       1,783       4,172       2,244
                                                       ----------  ----------  ----------  ----------  ----------
Additions charged to operating expense...............       3,056       2,910       1,822       2,536       1,875
                                                       ----------  ----------  ----------  ----------  ----------
Allowance for credit losses at end of year...........  $   12,817  $   12,069  $   11,739  $   11,700  $   13,336
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
Net charge-offs to average loans outstanding.........        0.26%       0.30%       0.23%       0.54%       0.32%
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
Allowance for credit losses to year-end loans........        1.44%       1.37%       1.42%       1.53%       1.73%
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
</TABLE>
 
(1) Excludes loans held for sale.
 
                                       23
<PAGE>
TABLE 14. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                         ------------------------------------------------------------------------------------------------------
                                   1998                      1997                      1996                      1995
                         ------------------------  ------------------------  ------------------------  ------------------------
                                        % GROSS                   % GROSS                   % GROSS                   % GROSS
(DOLLARS IN THOUSANDS)     AMOUNT      LOANS(1)      AMOUNT      LOANS(1)      AMOUNT      LOANS(1)      AMOUNT      LOANS(1)
                         -----------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Real estate:
  Construction and land
    development........   $   1,767          6.9%   $   2,193          7.6%   $   2,121          7.9%   $   2,617          6.9%
  Residential
    mortgage...........         920         29.8          737         29.1          570         29.1          554         30.4
  Other mortgage.......       3,419         22.2        2,936         19.3        2,987         19.4        2,670         20.4
Commercial and
  industrial...........       1,764         10.3        1,088         11.2        1,105         10.2        1,396         10.6
Consumer...............       3,599         28.9        4,167         31.3        2,837         31.2        2,449         29.8
Unallocated............       1,348          1.9          948          1.5        2,119          2.2        2,014          1.9
                         -----------       -----   -----------       -----   -----------       -----   -----------       -----
Total allowance for
  credit losses........   $  12,817        100.0%   $  12,069        100.0%   $  11,739        100.0%   $  11,700        100.0%
                         -----------       -----   -----------       -----   -----------       -----   -----------       -----
                         -----------       -----   -----------       -----   -----------       -----   -----------       -----
 
<CAPTION>
 
                                   1994
                         ------------------------
                                        % GROSS
(DOLLARS IN THOUSANDS)     AMOUNT      LOANS(1)
                         -----------  -----------
<S>                      <C>          <C>
Real estate:
  Construction and land
    development........   $   3,055          7.4%
  Residential
    mortgage...........       1,048         29.3
  Other mortgage.......       4,189         22.5
Commercial and
  industrial...........       1,647          9.3
Consumer...............       2,643         29.4
Unallocated............         754          2.1
                         -----------       -----
Total allowance for
  credit losses........   $  13,336        100.0%
                         -----------       -----
                         -----------       -----
</TABLE>
 
(1) Reflects the percentage of loans in each category to total loans.
 
YEAR 2000 COMPUTER READINESS
 
    This disclosure is provided pursuant to the Securities and Exchange
Commission's Interpretation entitled "Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies and
Municipal Securities Issuers" effective August 4, 1998.
 
    The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year (such
as "98" for the year 1998). Bancorp and its subsidiaries have undertaken to
review their operating and information technology systems and other mechanical
equipment such as elevators to identify systems in which the Year 2000 issue
exists and to undertake the necessary renovation or replacement of these systems
so that the companies will continue to operate as usual after January 1, 2000.
 
    In July 1997, Bancorp established a Year 2000 issue task force comprised of
representatives across functional lines representing all of its subsidiaries.
The Year 2000 issue task team developed a Year 2000 issue assurance plan to
coordinate and direct its efforts. The plan was approved by the board of
directors on September 11, 1997. The task force provides quarterly reports to
the board outlining the status of its efforts and its anticipated work in the
coming quarter.
 
    The assurance plan is composed of five phases: 1) awareness; 2) assessment;
3) renovation; 4) validation; and, 5) implementation, which mirror guidelines
developed by the Federal Financial Institutions Examination Council ("FFIEC") to
deal with the Year 2000 issue. The assurance plan includes a timeline for
completion of all tasks identified. As of December 31, 1998, all critical tasks
are current to the timeline. Activities under each of the phases are ongoing as
new vendor and customer relationships are created, including specifically, as
the result of Bancorp's November 30, 1998 acquisition of Monocacy Bancshares,
Inc. and its principal subsidiary, Taneytown Bank & Trust Company.
 
    The task team has undertaken the education of all associates regarding the
Year 2000 issue both for internal systems and as the problem may affect
customers. Education of customers has begun through periodic information in the
form of brochures and seminars. The task team has also received guidance from
various regulators including the OCC, Securities and Exchange Commission
("SEC"), OTS, and FFIEC.
 
                                       24
<PAGE>
    All vendors who supply hardware, software and/or services of any type which
may be affected by this issue have been identified and contacted. A total of
four hundred and eighty-seven (487) products and services are represented by
this vendor listing and have been categorized as either mission critical (those
that directly impact daily operations), concern (those that can be replaced with
manual processes), or low priority (little or no impact on daily operations).
Vendors have been surveyed as to their Year 2000 issue readiness. The task team
has confirmed vendor responses by testing products and services where possible
to verify their readiness.
 
    Of the one hundred and eighteen (118) products and services identified as
mission critical:
 
       A.  Thirty-eight (38) are not date sensitive and are deemed Year 2000
           issue ready.
 
       B.  Twenty-one (21) cannot be tested internally. The progress of these
           service providers' efforts addressing the Year 2000 issue are being
           closely monitored. All twenty-one (21) advise that their products
           and/or services are either Year 2000 issue ready now or will be in
           advance of January 1, 2000. Examples of products and/or services that
           are not capable of internal testing include utilities and
           communications services.
 
       C.  Forty-six (46) have been successfully tested.
 
       D.  One (1) has been tested and failed. A Year 2000 issue ready
           replacement system has been identified and is being installed
           currently.
 
       E.  Twelve (12) have not yet been tested. Testing on these twelve (12)
           was suspended because of vendor commitments to either update existing
           products and/or services or to support testing. Bancorp anticipates
           that these twelve (12) remaining products and/or services will be
           tested by March 31, 1999. Of the twelve (12), six (6) are the same
           make and model ATM machine.
 
    Bancorp relies on Kirchman Corporation's Dimension 3000 software for
maintaining customer accounting records. Kirchman is a provider of accounting
systems for more than 1,000 banking clients worldwide. Kirchman's internal
methodologies addressing Year 2000 issues have been reviewed and have received
ITAA*2000 certification by the Information Technology Association of America, an
independent non-profit organization. Further, Kirchman systems have passed all
internal tests and testing is complete. Conversion of the Monocacy Bancshares,
Inc. core processing system, also Kirchman, to Bancorp's system is scheduled for
February, 1999.
 
    The task team has developed procedures for assessing Year 2000 issue risk
for its funds providers including depositors, which are intended to manage and
limit potential risks associated with large or significant concentrations of
retail and commercial deposits. The Year 2000 issue readiness of providers of
lines of credit have been reviewed.
 
    The task team has also established procedures, utilizing the standard risk
classifications employed to manage credit risk, for reviewing the Year 2000
issue readiness of borrowers. Loan relationships with balances exceeding
$250,000 or which are particularly computer reliant have been reviewed. Fifteen
(15) relationships totaling $4,916,400 have been risk rated "watch" one (1)
totaling $689,500 has been risk rated "OLEM" and one (1) totaling $1,720,000 has
been risk rated "substandard". The total value of these seventeen (17)
relationships is $7,325,900. The increase over the last quarter reflects loan
relationships acquired through the Monocacy Bancshares, Inc. transaction. These
credits are being reviewed further to determine borrower progress in becoming
Year 2000 issue ready.
 
    The internal audit department is performing progress audits of the work of
the Year 2000 issue task force and reporting those results to Bancorp's audit
committee quarterly.
 
    During the last quarter, efforts have been made to enhance Bancorp's
existing contingency plan for Year 2000 issues. The contingency planning
committee adopted the four phase model as recommended by the FFIEC and OCC
advisory letter 98-7. Phase 1, organization and planning, and Phase 2, business
impact
 
                                       25
<PAGE>
analysis, were complete at September 30, 1998 as required by regulators. Phase
3, the contingency plan itself, and Phase 4, designing a method of validation,
were completed at December 31, 1998, also as required by the regulators. Testing
of business resumption plans will be complete by March 31, 1999.
 
    To date, Bancorp has spent a total of $102,000 addressing Year 2000 issues
and anticipates additional out-of-pocket expenses of $177,000 to complete. Work
is done predominantly by existing associates as part of their normal work
responsibilities. Bancorp has hired one additional associate whose primary
responsibility is testing. Bancorp does not separately track these internal
costs which are principally payroll related.
 
    Bancorp believes its efforts, and those of its third-party providers will
effectively address Year 2000 issues before January 1, 2000. Because Bancorp is
so reliant on third-party providers (which products and services cannot be
effectively tested) for support, normal business operations could be disrupted
in the event one or more third-party providers fail to provide products and
services as contracted. The most reasonably likely worst case Year 2000 issue
scenario identified to date involves Bancorp's inability, for short periods, to
provide services to customers. The worst case scenario is mitigated somewhat by
an ability to manually process customer transactions, by the geographic
penetration of the branch network, and by alternative service delivery methods,
which include both proprietary and network ATMs, PC banking, telephone banking,
and Express Bank, a full-service mobile branch. Power and telecommunication
services are critical but might be interrupted for only a part of the branch
network. Bancorp has a generator to provide power to operate computer systems
and, by contract, has geographically-remote facilities served by alternative
sources of power to process work, if needed. Longer periods of disruption could
affect Bancorp's ability to develop new business and could increase costs of
operation and decrease revenues.
 
ASSET AND LIABILITY MANAGEMENT
 
    The primary objectives for ALM are to identify opportunities to maximize net
interest income while ensuring adequate liquidity and carefully managing
interest rate risk. ALM policies are approved by the Board of Directors and
administered by the Asset/Liability Management Committee ("ALCO"), which is
primarily composed of executive officers. ALCO's principal responsibilities
include:
 
    - Monitoring corporate financial performance.
 
    - Determining liquidity requirements.
 
    - Establishing interest rates, indices, and terms for loan and deposit
      products.
 
    - Assessing and evaluating the competitive rate environment.
 
    - Reviewing and ratifying investment portfolio transactions under
      established policy guidelines.
 
    - Monitoring and measuring interest rate risk.
 
LIQUIDITY
 
    Liquidity management involves the ability to meet the demand for funds from
both depositors and borrowers with either balance sheet assets or access to
incremental borrowings. These needs are met with cash on hand, the sale of
non-cash assets, or with funds received from depositors or lenders. The primary
focus of liquidity management is to match the cash inflows and outflows within
Bancorp's natural market for loans and deposits. The primary cash and liquidity
management tools are short-term investments, FHLB borrowings and repurchase
agreements. Secondary liquidity is provided by the investment securities
portfolio.
 
    Asset liquidity includes monitoring the amount of available cash on hand and
assets maturing in the near term, limiting the amount of securities that may be
pledged, and maintaining relatively short duration of investment securities.
Tables 6 and 8 show a combined total of $97.3 million of investment securities
and certain loans coming due within 12 months, or approximately 7% of total
assets at December 31, 1998.
 
                                       26
<PAGE>
    Funding liquidity is monitored primarily by the ratio of loans to deposits.
As deposit growth resumed in 1998, the loan-to-deposit ratio declined sharply to
78% at December 31, 1998 from 84% one year earlier. Funding liquidity is also
augmented by a wide variety of borrowing sources including the FHLB and credit
lines available through correspondent banking relationships.
 
MARKET RISK
 
    Market risk is defined as the future changes in market prices that increase
or decrease the value of financial instruments, i.e., cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign
currency exchange risk, commodity price risk, and other relevant market risks.
The primary source of market risk is interest rate risk. Market risk-sensitive
financial instruments are entered into for purposes other than trading.
 
    Interest rate risk refers to the exposure of earnings and capital to changes
in interest rates. The magnitude of the effect of changes in market rates
depends on the extent and timing of such changes and on Bancorp's ability to
adjust. The ability to adjust is controlled by the time remaining to maturity on
fixed-rate obligations, the contractual ability to adjust rates prior to
maturity, competition, and customer actions.
 
    There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on earnings and capital.
Re-pricing risk arises largely from timing differences in the pricing of assets
and liabilities. Reinvestment risk refers to the reinvestment of cash flows from
interest payments and maturing assets at lower rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same
time or in the same magnitude such that assets and liabilities with the same
maturity are not 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 for interest
rates, potential changes in interest rates, regional economies, liquidity,
business strategies, and other factors. To effectively measure and manage
interest rate risk, traditional cumulative gap and simulation analyses are used
to determine the impact on net interest income and the market value of portfolio
equity ("MVE"). Bancorp attempts to manage interest rate sensitivity on the
basis of when assets and liabilities WILL reprice as opposed to when they CAN
reprice.
 
    Cumulative gap analysis presents the net amount of assets and liabilities
that will most likely reprice through specified periods if there are no changes
in balance sheet mix. Using that analysis, the effect of changes in market
interest rates, both rising and falling, on net interest income can be
calculated. Because of inherent limitations in traditional cumulative gap
analysis, however, ALCO also employs more sophisticated interest rate risk
measurement techniques. Simulation analysis is used to subject the current
re-pricing conditions to rising and falling interest rates in increments and
decrements of 100, 200, and 300 basis points, and to determine how net interest
income varies under alternative interest rate and business activity scenarios.
ALCO also measures the effects of changes in interest rates on the MVE, i.e.,
the net present value of all future cash flows from financial instruments
expressed as the percentage change in portfolio value of equity for any given
change in prevailing interest rates. Table 15 presents MVE at December 31, 1998.
 
                                       27
<PAGE>
TABLE 15. EFFECTS OF CHANGES IN INTEREST RATES ON MVE AT DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S>                                                         <C>           <C>           <C>            <C>
                                                                                               PERCENT CHANGE
                                                                          HYPOTHETICAL  ----------------------------
                                                            MARKET VALUE     CHANGE     HYPOTHETICAL
CHANGE IN                                                   OF PORTFOLIO    INCREASE      INCREASE         BOARD
INTEREST RATES                                                 EQUITY      (DECREASE)    (DECREASE)      LIMIT(1)
----------------------------------------------------------  ------------  ------------  -------------  -------------
300 bp rise...............................................   $  155,454    $  (27,830)        (15.2)%        (30.0)%
200 bp rise...............................................      174,011        (9,273)         (5.1)%        (20.0)%
100 bp rise...............................................      179,247        (4,037)         (2.2)%        (10.0)%
Base scenario.............................................      183,284            --            --             --
100 bp decline............................................      179,426        (3,858)         (2.1)%        (10.0)%
200 bp decline............................................      173,618        (9,666)         (5.3)%        (20.0)%
300 bp decline............................................      168,261       (15,023)         (8.2)%        (30.0)%
</TABLE>
 
(1) Established by Bancorp's Board of Directors
 
    Computations of prospective effects of hypothetical interest rate changes
are based on many assumptions, including relative levels of market interest
rates, loan prepayments and changes in deposit levels. They are not intended to
be a forecast and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate certain actions that management
could take in response to changes in interest rates. At December 31, 1998 and
1997, the changes in net interest income and or MVE calculated under these
alternative methods were within limits established by the Board of Directors and
monitored by ALCO.
 
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.
 
    The Board, the OCC and the OTS maintain capital adequacy guidelines
applicable to Bancorp, the Bank, and the Savings Bank, respectively, as
disclosed in Note 15, 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, 1998 and 1997.
 
    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, or the price paid
for money, 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's
understanding of 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.
 
                                       28
<PAGE>
1997 COMPARED TO 1996
 
OVERVIEW
 
    Net income for 1997 increased 37% to $14.2 million, or $1.64 per share, from
$10.4 million, or $1.21 per share, for 1996, largely reflecting the influence of
special items in both years as set forth in Table 1. Excluding special items in
both years, net (operating) income increased 10% to $14.0 million, or $1.61 per
share, from $12.7 million, or $1.47 per share for 1996.
 
SPECIAL ITEMS--1997
 
    Special items for 1997, as shown in Table 1 on an after-tax basis, included
a $552 thousand gain on the sale of the credit card merchant processing business
($0.06 per share). Recognizing the difficulty in achieving sufficient economies
of scale over the near term, Bancorp elected to exit this highly competitive
line of business in favor of alternatives expected to produce greater
profitability over the long term. TBT incurred litigation costs of $177 thousand
($0.02 per share) and realized a $110 thousand gain on the sale of loans in 1997
($0.01 per share) and a $59 thousand gain on the sale of investment securities
($0.01).
 
    Pursuant to the provisions of the Plan and Agreement to Merge with Home
Federal, compensatory payments were recognized in 1997 for two executive
officers who elected to resign during the year. Such compensation expense
totaled $294 thousand ($0.03 per share) and was to be paid over a 24-month
period.
 
SPECIAL ITEMS--1996
 
    Special items for 1996, as shown in Table 1 on an after-tax basis, included
merger-related expenses of $1.2 million ($0.14 per share) and securities losses
of $203 thousand ($0.02 per share) incurred in Bancorp's acquisition of the
Savings Bank. A one-time assessment by the FDIC on deposits insured by the
Savings Association Insurance Fund amounted to $724 thousand ($0.08 per share).
 
NET INTEREST INCOME
 
    Net interest income, on a tax-equivalent basis, increased 7% to $54.4
million for 1997, from $50.9 million for 1996, related principally to a 10%
increase in average loans coupled with effective management of funding sources.
The yield on average earning assets increased four basis points driven by the
increase in average loans and an increase in average rates earned on the
investment securities portfolio. Although there was an increased reliance on
borrowed funds in 1997, the average rate paid on interest-bearing liabilities
declined one basis point assisted by lower average rates paid on core deposit
products. The net interest margin increased to 4.54% for 1997, from 4.49% for
1996.
 
NONINTEREST INCOME
 
    Noninterest income increased 22% to $18.3 million for 1997, from $15.0
million for 1996. Excluding special items in both years as previously described,
operating noninterest income increased 12% for 1997 over 1996 driven largely by
a 39% increase in trust income and investment management fees, including an
unusually large estate settlement fee realized in 1997. Service charges on
deposit accounts increased 14% to $5.9 million for 1997, from $5.1 million for
1996. The increase was related primarily to service fee adjustments made early
in 1997, but also included fees related to new services and special promotions.
Other components of noninterest income, exclusive of special items, increased
6%.
 
NONINTEREST EXPENSE
 
    Noninterest expense was virtually flat at $47.7 million for both 1997 and
1996. Excluding merger related expense and other special items in both years as
previously described, noninterest expense increased 5% for 1997 from 1996.
 
                                       29
<PAGE>
    Salaries, the largest component on noninterest expense, increased 10% to
$20.6 million for 1997, from $18.7 million for 1996, attributed to merit
increases, new hires, promotions, and performance-based incentive and bonus
payments. Pension and other employee benefits increased 5% to $4.9 million for
1997, from $4.7 million for 1996, reflecting cost containment initiatives and
favorable experience in medical and health programs.
 
    Occupancy and equipment expense increased 11% to $7.9 million for 1997, from
$7.1 million for 1996 primarily associated with branch and corporate
headquarters expansion and additional investments in computer hardware and
software technology.
 
    Other operating expense, exclusive of special items in both years, declined
4% related principally to the sale of the credit card merchant processing
business.
 
INCOME TAXES
 
    Income tax expense increased 64% to $5.3 million for 1997, from $3.2 million
for 1996, largely related to a 43% increase in income before taxes. The
effective tax rate was 27% for 1997 compared with 24% for 1996. The ratio of
tax-exempt income on investment securities to income before taxes declined in
1997 to 24.3%, from 37.8% in 1996, thereby accounting for most of the increase
in the effective tax rate.
 
FINANCIAL CONDITION
 
    Total assets were $1.339 billion at December 31, 1997, up $65.3 million, or
5%, from a year earlier. The increase was principally reflected in loans, which
were funded by a variety of sources, the largest component being short-term
borrowings, closely followed by certificates of deposit and interest-bearing
checking products. The capital position was strengthened as the increase in
average shareholders' equity, 6.9% over 1996, outpaced the 5.4% growth in
average assets leading to an increase in the average equity capital-to-assets
ratio to 9.16% for 1997, from 9.03% for 1996. All capital ratios were
substantially in excess of regulatory minimums for Bancorp and its subsidiaries
at each of the years ended December 31, 1997 and 1996.
 
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
 
    The provision for credit losses was increased by 60%, to $2.9 million for
1997, from $1.8 million for 1996, due to a $797 thousand increase in net
charge-offs coupled with a 6.4% increase in total loans. The ratio of net
charge-offs to average loans outstanding increased to 0.30% for 1997, from 0.23%
for 1996.
 
NONPERFORMING ASSETS
 
    Continuing a trend extending over the previous four years, nonperforming
assets declined further in 1997, by 22% to $12.5 million at December 31, 1997,
from $16.2 million at year-end 1996. The ratio of nonperforming assets to total
assets declined to 0.94% at December 31, 1997 from 1.27% one year earlier.
 
                                       30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                    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, 1998 and
1997, 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, 1998. These financial statements are the
responsibility of Bancorp's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of Monocacy Bancshares, Inc., a bank holding
company acquired during 1998 in a transaction accounted for as a
pooling-of-interests, as discussed in Note 2, for the years ended December 31,
1997 and 1996. Such statements are included in the consolidated financial
statements of F&M Bancorp and reflect 22% of consolidated total assets at
December 31, 1997 and 21% of consolidated total income for 1997 and 1996. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for Monocacy
Bancshares, Inc., is based solely on the report of the other auditors.
 
    We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors provide a reasonable
basis for our opinion.
 
    In our opinion, based on our audits and the report of the other auditors,
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
 
                                                  [SIGNATURE]
 
Washington, D.C.
January 19, 1999
 
                                       31
<PAGE>
                          INDEPENDENT AUDITORS' REPORT
 
THE BOARD OF DIRECTORS AND STOCKHOLDERS
 
MONOCACY BANCSHARES, INC.
 
    We have audited the consolidated balance sheet of Monocacy Bancshares, Inc.
and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1997. These consolidated statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monocacy
Bancshares, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
                                                      [LOGO]
 
Baltimore, Maryland
 
January 23, 1998
 
                                       32
<PAGE>
                          CONSOLIDATED BALANCE SHEETS
 
                          F&M BANCORP AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                            --------------------
<S>                                                                                         <C>        <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                                              1998       1997
                                                                                            ---------  ---------
ASSETS
Cash and due from banks...................................................................  $  47,330  $  37,281
Federal funds sold........................................................................     11,652     14,314
Interest-bearing deposits with banks......................................................     16,737      9,073
                                                                                            ---------  ---------
      Total cash and cash equivalents.....................................................     75,719     60,668
                                                                                            ---------  ---------
Loans held for sale.......................................................................      4,810      5,223
                                                                                            ---------  ---------
Investment Securities:
      Held-to-maturity, fair value of $100,478 in 1998 and $96,650 in 1997................     98,231     94,940
      Available-for-sale, at fair value...................................................    322,651    232,413
                                                                                            ---------  ---------
      Total investment securities.........................................................    420,882    327,353
                                                                                            ---------  ---------
Loans, net of unearned income of $406 in 1998 and $643 in 1997............................    891,741    882,550
Less: Allowance for credit losses.........................................................    (12,817)   (12,069)
                                                                                            ---------  ---------
      Net loans...........................................................................    878,924    870,481
                                                                                            ---------  ---------
Bank premises and equipment, net..........................................................     31,184     33,127
Other real estate owned, net..............................................................      1,705      5,192
Interest receivable.......................................................................      9,478      9,545
Intangible assets.........................................................................      4,424      4,737
Other assets..............................................................................     22,556     22,233
                                                                                            ---------  ---------
      Total other assets..................................................................     69,347     74,834
                                                                                            ---------  ---------
Total assets..............................................................................  $1,449,682 $1,338,559
                                                                                            ---------  ---------
                                                                                            ---------  ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
      Noninterest-bearing.................................................................  $ 152,076  $ 138,440
      Interest-bearing....................................................................    986,118    915,122
                                                                                            ---------  ---------
      Total deposits......................................................................  1,138,194  1,053,562
                                                                                            ---------  ---------
Short-term borrowings:
      Federal funds purchased and securities sold under agreements to repurchase..........     57,626     45,051
      Other short-term borrowings.........................................................     14,776     57,252
Long-term borrowings......................................................................     94,246     43,862
Accrued interest and other liabilities....................................................     14,016     13,197
                                                                                            ---------  ---------
Total liabilities.........................................................................  1,318,858  1,212,924
                                                                                            ---------  ---------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share; authorized 50,000,000 shares;
      issued and outstanding 8,680,908 in 1998 and 8,324,376 in 1997......................     43,405     41,622
Surplus...................................................................................     61,980     49,640
Retained earnings.........................................................................     25,220     34,020
Accumulated other comprehensive income....................................................        219        353
                                                                                            ---------  ---------
Total shareholders' equity................................................................    130,824    125,635
                                                                                            ---------  ---------
Total liabilities and shareholders' equity................................................  $1,449,682 $1,338,559
                                                                                            ---------  ---------
                                                                                            ---------  ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       33
<PAGE>
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                          F&M BANCORP AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                        -------------------------------
<S>                                                                                     <C>        <C>        <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                                          1998       1997       1996
                                                                                        ---------  ---------  ---------
INTEREST INCOME
Interest and fees on loans............................................................  $  76,894  $  76,764  $  70,400
Interest and dividends on investment securities:
      Taxable.........................................................................     15,772     14,273     14,039
      Tax-exempt......................................................................      4,645      4,741      5,143
Interest on deposits with banks.......................................................      1,253        339        292
Interest on federal funds sold........................................................        615        280        599
                                                                                        ---------  ---------  ---------
        Total interest income.........................................................     99,179     96,397     90,473
                                                                                        ---------  ---------  ---------
INTEREST EXPENSE
Interest on deposits:
      Checking........................................................................      2,670      2,653      2,505
      Savings.........................................................................      3,893      4,310      4,707
      Money market accounts...........................................................      4,797      3,850      3,860
      Certificates of deposit.........................................................     27,439     26,428     25,792
Interest on federal funds purchased and securities sold
      under agreements to repurchase..................................................      2,399      2,264      1,908
Interest on Federal Home Loan Bank borrowings.........................................      5,529      4,907      3,453
Interest on other short-term borrowings...............................................        151        190        153
                                                                                        ---------  ---------  ---------
        Total interest expense........................................................     46,878     44,602     42,378
                                                                                        ---------  ---------  ---------
Net interest income...................................................................     52,301     51,795     48,095
Provision for credit losses...........................................................      3,056      2,910      1,822
                                                                                        ---------  ---------  ---------
Net interest income after provision for credit losses.................................     49,245     48,885     46,273
                                                                                        ---------  ---------  ---------
NONINTEREST INCOME
Trust income..........................................................................      2,671      2,715      1,956
Service charges on deposit accounts...................................................      6,007      5,855      5,122
Insurance income......................................................................      2,326      2,031      2,097
Gains on sales of loans...............................................................      1,968      1,421      1,187
Net gains (losses) on sales of securities.............................................      1,104         76       (550)
Net gains on sales of property........................................................        450         17        140
Other operating income................................................................      5,257      6,181      5,031
                                                                                        ---------  ---------  ---------
        Total noninterest income......................................................     19,783     18,296     14,983
                                                                                        ---------  ---------  ---------
NONINTEREST EXPENSE
Salaries..............................................................................     21,643     20,602     18,744
Pension and other employee benefits...................................................      4,880      4,948      4,697
Merger-related expense................................................................      3,217        480      1,795
Occupancy and equipment expense.......................................................      7,786      7,864      7,105
Other operating expense...............................................................     13,364     13,810     15,318
                                                                                        ---------  ---------  ---------
        Total noninterest expense.....................................................     50,890     47,704     47,659
                                                                                        ---------  ---------  ---------
Income before provision for income taxes..............................................     18,138     19,477     13,597
Provision for income taxes............................................................      5,046      5,251      3,196
                                                                                        ---------  ---------  ---------
NET INCOME............................................................................  $  13,092  $  14,226  $  10,401
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized (losses) gains on securities...............................................  $    (812) $   1,274  $    (631)
Reclassification adjustment for gains (losses) included in income.....................        678         47       (338)
                                                                                        ---------  ---------  ---------
Other comprehensive income (loss).....................................................       (134)     1,321       (969)
                                                                                        ---------  ---------  ---------
Comprehensive income..................................................................  $  12,958  $  15,547  $   9,432
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
EARNINGS PER COMMON SHARE-BASIC
Based on weighted average shares outstanding of 8,655,895 in 1998,
      8,605,660 in 1997, and 8,577,410 in 1996........................................  $    1.51  $    1.65  $    1.21
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
EARNINGS PER COMMON SHARE-DILUTED
Based on weighted average shares outstanding of 8,768,648 in 1998,
      8,676,177 in 1997, and 8,626,287 in 1996........................................  $    1.49  $    1.64  $    1.21
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       34
<PAGE>
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
                          F&M BANCORP AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                         THREE YEARS ENDED DECEMBER 31, 1998
                                                      --------------------------------------------------------------------------
                                                                                                        ACCUMULATED
                                                           COMMON STOCK                                    OTHER
                                                      ----------------------               RETAINED    COMPREHENSIVE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)       SHARES     PAR VALUE     SURPLUS    EARNINGS    INCOME (LOSS)     TOTAL
                                                      ---------  -----------  -----------  ---------  ---------------  ---------
<S>                                                   <C>        <C>          <C>          <C>        <C>              <C>
BALANCE AT DECEMBER 31, 1995........................  7,980,786   $  39,904    $  40,956   $  28,363     $       1     $ 109,224
Net income..........................................         --          --           --      10,401            --        10,401
Dividend reinvestment plan..........................         --          --           --         (25)           --           (25)
Cash dividends paid ($.49 per share)................         --          --           --      (4,225)           --        (4,225)
Stock consideration for options exercised...........     (7,448)        (37)         (40)       (137)           --          (214)
Stock options exercised.............................     25,133         126          629          --            --           755
Other comprehensive income..........................                     --           --          --          (969)         (969)
                                                      ---------  -----------  -----------  ---------        ------     ---------
 
BALANCE AT DECEMBER 31, 1996........................  7,998,471      39,993       41,545      34,377          (968)      114,947
Net income..........................................         --          --           --      14,226            --        14,226
Dividend reinvestment plan..........................         --          --           --         (80)           --           (80)
Cash dividends paid ($.68 per share)................         --          --           --      (5,853)           --        (5,853)
Stock consideration for options exercised...........     (9,514)        (48)         (59)       (221)           --          (328)
Stock options exercised.............................     52,097         260        1,142          --            --         1,402
Stock dividend......................................    283,322       1,417        7,012      (8,429)           --            --
Other comprehensive income..........................         --          --           --          --         1,321         1,321
                                                      ---------  -----------  -----------  ---------        ------     ---------
 
BALANCE AT DECEMBER 31, 1997........................  8,324,376      41,622       49,640      34,020           353       125,635
Net income..........................................         --          --           --      13,092            --        13,092
Dividend reinvestment plan..........................         --          --           --        (121)           --          (121)
Cash dividends paid ($1.06 per share)...............         --          --           --      (9,190)           --        (9,190)
Stock consideration for options exercised...........     (3,217)        (16)         (19)        (90)           --          (125)
Stock options exercised.............................     56,930         285        1,382          --            --         1,667
Stock dividend......................................    302,819       1,514       10,977     (12,491)           --            --
Other comprehensive income..........................         --          --           --          --          (134)         (134)
                                                      ---------  -----------  -----------  ---------        ------     ---------
BALANCE AT DECEMBER 31, 1998........................  8,680,908   $  43,405    $  61,980   $  25,220     $     219     $ 130,824
                                                      ---------  -----------  -----------  ---------        ------     ---------
                                                      ---------  -----------  -----------  ---------        ------     ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       35
<PAGE>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                          F&M BANCORP AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                                                    YEAR ENDED DECEMBER 31,
                                                                                               ---------------------------------
(DOLLARS IN THOUSANDS)                                                                            1998        1997       1996
                                                                                               ----------  ----------  ---------
<S>                                                                                            <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................................  $   13,092  $   14,226  $  10,401
Adjustments to reconcile net income to net cash provided by operating activities:
      Provision for credit losses............................................................       3,056       2,910      1,822
      Provision for other real estate owned..................................................           2         156        436
      Depreciation and amortization..........................................................       2,701       2,820      3,031
      Amortization of intangibles............................................................         779         758      1,001
      Net premium amortization on investment securities......................................          36         424        615
      Decrease (increase) in interest receivable.............................................          67        (905)      (448)
      Increase in interest payable...........................................................         760         208        197
      Deferred income tax benefit............................................................        (452)       (413)      (316)
      Amortization (accretion) of net loan origination costs (fees)..........................        (221)        (75)        67
      Gains on sales of property.............................................................        (450)        (17)      (140)
      (Gains) losses on sales/calls of securities............................................      (1,104)        (76)       550
      (Increase) decrease in loans held for sale.............................................         413       6,347     (8,695)
      Increase in other assets...............................................................        (568)       (282)    (3,629)
      Increase (decrease) in other liabilities...............................................          59      (1,098)     1,117
      Gains on sales of loans................................................................      (1,968)     (1,421)    (1,187)
      Other..................................................................................        (864)      1,021     (1,072)
                                                                                               ----------  ----------  ---------
Net cash provided by operating activities....................................................      15,338      24,583      3,750
                                                                                               ----------  ----------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities to be held-to-maturity....................................     (26,729)     (7,722)   (62,945)
Purchases of investment securities available-for-sale........................................    (426,451)   (178,099)   (93,704)
Proceeds from calls of securities held-to-maturity...........................................      17,038       8,420     10,728
Proceeds from sales/calls of securities available-for-sale...................................     129,322      58,059     63,197
Proceeds from maturing securities available-for-sale.........................................     209,194     106,889     47,470
Proceeds from maturing securities held-to-maturity...........................................       6,103       3,719     13,023
Net increase in loans........................................................................      (7,999)    (54,201)   (66,033)
Purchases of premises and equipment..........................................................      (1,660)     (3,148)   (10,048)
Proceeds from sales of property..............................................................       4,173       1,699        746
Other investing activities...................................................................        (624)       (862)     2,022
                                                                                               ----------  ----------  ---------
Net cash used in investing activities........................................................     (97,633)    (65,246)   (95,544)
                                                                                               ----------  ----------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits, interest-bearing
      checking, savings and money market accounts............................................      49,446      20,515       (189)
Net increase in certificates of deposits.....................................................      35,186      10,533     11,941
Net increase in federal funds purchased and securities sold under
      agreements to repurchase...............................................................      12,575       3,175      1,718
Net increase (decrease) in other short-term borrowings.......................................     (42,476)     (7,926)    36,581
Net increase (decrease) in long-term borrowings..............................................      50,384      28,691     (8,298)
Cash dividends paid..........................................................................      (9,190)     (5,853)    (4,225)
Dividend reinvestment plan...................................................................        (121)        (80)       (25)
Proceeds from issuance of common stock.......................................................       1,542       1,074        541
                                                                                               ----------  ----------  ---------
Net cash provided by financing activities....................................................      97,346      50,129     38,044
                                                                                               ----------  ----------  ---------
Net increase (decrease) in cash and cash equivalents.........................................      15,051       9,466    (53,750)
Cash and cash equivalents at beginning of year...............................................      60,668      51,202    104,952
                                                                                               ----------  ----------  ---------
Cash and cash equivalents at end of year.....................................................  $   75,719  $   60,668  $  51,202
                                                                                               ----------  ----------  ---------
                                                                                               ----------  ----------  ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest...................................................................  $   46,554  $   44,717  $  42,507
Cash payments for income tax.................................................................       5,989       6,258      4,744
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value adjustment for securities available for sale,
      net of income taxes....................................................................        (134)      1,321       (969)
Transfers of securities from the held-to-maturity portfolio to the
      available-for-sale portfolio...........................................................          --      24,027         --
Loans originated on sale of real estate owned held for sale..................................          --       1,320        636
Net transfer to real estate owned held for sale from loans receivable........................         705          73        716
Transfers of loans to held for sale..........................................................          --          --     10,118
Retirement of common stock...................................................................         117          --         --
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       36
<PAGE>
                   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 subsidiaries, Farmers & Mechanics National Bank and Subsidiaries
(the "Bank") and Home Federal Savings Bank and Subsidiaries (the "Savings
Bank"). The Bank and the Savings Bank offer 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, Montgomery and Washington Counties, MD, with additional
community office presence in Allegany, Baltimore, and Howard Counties, MD and
Adams County, PA. The Bank and the Savings Bank maintain correspondent banking
relationships with whom they may 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 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 inter-company 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
 
    Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No.
130, "Reporting Comprehensive Income", effective January 1, 1998. Other
comprehensive income consists entirely of unrealized gains (losses) on
available-for-sale securities. Income taxes allocated to other comprehensive
income amounted to benefits of $84,000 and $609,000 in 1998 and 1996,
respectively, and a provision of $831,000 in 1997.
 
USE OF ESTIMATES
 
    The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect 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.
 
                                       37
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 net income.
 
    Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, is
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.
 
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
 
    In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
provides accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishment of
liabilities. The standards are based on consistent application of a
financial-components approach that focuses on control, and the appropriate
measurement and allocation of the financial components at fair value, if
practical.
 
    In addition, Statement No. 125 requires that a liability be de-recognized
if, and only if, either (a) the debtor pays the creditor and is relieved of its
obligation for the liability, or (b) the debtor is legally released from being
the primary obligor under the liability either judicially or by the creditor.
Therefore, a liability is not considered extinguished by an in-substance
defeasance.
 
    Statement No. 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which were
delayed until after December 31, 1997 by FASB Statement No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment
of FASB Statement No. 125." The adoption of Statements No. 125 and 127 were not
material to Bancorp's financial statements.
 
                                       38
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
which, 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:
 
<TABLE>
<CAPTION>
                                                                                       YEARS
                                                                                     ---------
<S>                                                                                  <C>
Bank premises......................................................................  15 to 50
Furniture and equipment............................................................  3 to 10
Leasehold improvements.............................................................  10 to 25
</TABLE>
 
    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.
 
OTHER REAL ESTATE OWNED
 
    Other real estate owned ("OREO") includes: banking premises no longer used
for business operations, real estate acquired in foreclosure (in partial or
complete satisfaction of debt), or otherwise surrendered by the borrower to
Bancorp's possession.
 
                                       39
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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. 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 112,753 shares, 70,720 shares, and 56,004 shares
represented by outstanding stock options assumed to be exercised for the years
ended December 31, 1998, 1997 and 1996, 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 a cash basis and would not be materially
different using the accrual method.
 
                                       40
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 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, Employee Benefits, Notes to Consolidated Financial
Statements. Statement No. 123 provides for a fair value-based method of
accounting for 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
 
    On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. ("MNOC"), headquartered in Taneytown, MD, in a tax-free
exchange of stock, and the merger of its principal subsidiary, Taneytown Bank &
Trust Company ("TBT"), into the Bank. Shareholders of MNOC received 1.251 newly
issued shares of Bancorp Common Stock, or a total of 2,267,790 shares, for all
1,812,777 outstanding shares of MNOC and cash in lieu of each fractional share
at the rate of $33.696. At closing, TBT had reported total assets of $304.3
million, loans of $167.0 million, and deposits of $243.8 million.
 
    On May 29, 1998, Bancorp completed the acquisition of Keller-Stonebraker
Insurance, Inc. ("K-S"), a Hagerstown, MD-based independent insurance agency, in
a tax-free exchange of 52,117 shares of newly issued Bancorp Common Stock for
all outstanding shares of K-S.
 
    On November 15, 1996, Bancorp completed its merger with Home Federal
Corporation ("HF"), Hagerstown, MD, in a tax-free exchange of stock.
Shareholders of HF received .49535 shares of newly issued Bancorp Common Stock,
or a total of 1,247,791 shares, for all 2,519,010 shares of HF Common Stock and
cash in lieu of each fractional share at the rate of $23.90. At closing, the
Savings Bank, HF's principal subsidiary, had total assets of $230.1 million,
loans of $154.0 million, and deposits of $162.7 million.
 
    All three acquisitions are accounted for as poolings of interest.
 
3. INVESTMENT SECURITIES
 
    The amortized cost and estimated fair value of investments at December 31,
1998 and 1997, summarized by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay obligations with, or without, call or prepayment
penalties.
 
                                       41
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3. INVESTMENT SECURITIES (CONTINUED)
    Proceeds from sales/calls of investment securities available-for-sale during
1998 were $129,322,000. Gross gains of $1,162,000 and gross losses of $83,000
were realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1998 were $17,038,000. Gross gains of $25,000 were
realized on those calls.
 
    Proceeds from sales/calls of investment securities available-for-sale during
1997 were $58,059,000. Gross gains of $128,000 and gross losses of $58,000 were
realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1997 were $8,420,000. Gross gains of $6,000 were
realized on those calls.
 
    Proceeds from sales/calls of investment securities available-for-sale during
1996 were $63,197,000. Gross gains of $89,000 and gross losses of $380,000 were
realized on those sales. Proceeds from calls of investment securities
held-to-maturity during 1996 were $10,728,000. Gross losses of $259,000 were
realized on those calls.
 
    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 $158,458,000 at December 31, 1998, and $148,888,000 at December 31,
1997.
 
    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 composed 29.9% and 31.6% of
the total carrying value of the investment portfolio at December 31, 1998 and
1997, respectively.
 
                                       42
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3. INVESTMENT SECURITIES (CONTINUED)
                             INVESTMENT SECURITIES
 
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31, 1998
                                                                   ------------------------------------------------
<S>                                                                <C>         <C>          <C>          <C>
                                                                                  GROSS        GROSS     ESTIMATED
                                                                   AMORTIZED   UNREALIZED   UNREALIZED      FAIR
(IN THOUSANDS)                                                        COST        GAINS       LOSSES       VALUE
                                                                   ----------  -----------  -----------  ----------
Available-for-sale:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies:
      Within 1 year..............................................  $   13,016   $      29    $       1   $   13,044
      After 1 but within 5 years.................................      56,065         301           13       56,353
      After 5 but within 10 years................................      49,190         288           96       49,382
                                                                   ----------  -----------  -----------  ----------
                                                                      118,271         618          110      118,779
                                                                   ----------  -----------  -----------  ----------
  Obligations of states and political subdivisions:
      Within 1 year..............................................         250           1           --          251
      After 1 but within 5 years.................................       5,082          94           --        5,176
      After 5 but within 10 years................................      16,285         323           19       16,589
      After 10 years.............................................      19,973         136          214       19,895
                                                                   ----------  -----------  -----------  ----------
                                                                       41,590         554          233       41,911
                                                                   ----------  -----------  -----------  ----------
  Other bonds:
      After 1 but within 5 years.................................       2,328           9           --        2,337
                                                                   ----------  -----------  -----------  ----------
  Mortgage-backed securities.....................................     140,374         275          485      140,164
                                                                   ----------  -----------  -----------  ----------
Total debt securities............................................     302,563       1,456          828      303,191
Equity securities................................................      19,727          --          267       19,460
                                                                   ----------  -----------  -----------  ----------
Total securities available-for-sale..............................  $  322,290   $   1,456    $   1,095   $  322,651
                                                                   ----------  -----------  -----------  ----------
                                                                   ----------  -----------  -----------  ----------
Held-to-maturity:
  Obligations of states and political subdivisions:
      Within 1 year..............................................  $    7,471   $      72    $      --   $    7,543
      After 1 but within 5 years.................................      29,868         953           --       30,821
      After 5 but within 10 years................................      25,855         925           --       26,780
      After 10 years.............................................      20,563         216          140       20,639
                                                                   ----------  -----------  -----------  ----------
                                                                       83,757       2,166          140       85,783
                                                                   ----------  -----------  -----------  ----------
  Mortgage-backed securities.....................................      14,474         221           --       14,695
                                                                   ----------  -----------  -----------  ----------
Total securities held-to-maturity................................  $   98,231   $   2,387    $     140   $  100,478
                                                                   ----------  -----------  -----------  ----------
                                                                   ----------  -----------  -----------  ----------
</TABLE>
 
                                       43
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3. INVESTMENT SECURITIES (CONTINUED)
                             INVESTMENT SECURITIES
 
<TABLE>
<CAPTION>
                                                                                   DECEMBER 31, 1997
                                                                   --------------------------------------------------
<S>                                                                <C>         <C>          <C>            <C>
                                                                                  GROSS         GROSS      ESTIMATED
                                                                   AMORTIZED   UNREALIZED    UNREALIZED       FAIR
(IN THOUSANDS)                                                        COST        GAINS        LOSSES        VALUE
                                                                   ----------  -----------  -------------  ----------
Available-for-sale:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies:
      Within 1 year..............................................  $   14,570   $      14     $      14    $   14,570
      After 1 but within 5 years.................................      50,318         103           109        50,312
      After 5 but within 10 years................................      46,532         368             7        46,893
                                                                   ----------  -----------        -----    ----------
                                                                      111,420         485           130       111,775
                                                                   ----------  -----------        -----    ----------
  Obligations of states and political subdivisions:
      Within 1 year..............................................       2,101           8            --         2,109
      After 1 but within 5 years.................................       4,027          24             4         4,047
      After 5 but within 10 years................................      28,338         596             4        28,930
                                                                   ----------  -----------        -----    ----------
                                                                       34,466         628             8        35,086
                                                                   ----------  -----------        -----    ----------
  Mortgage-backed securities.....................................      67,650         276           441        67,485
                                                                   ----------  -----------        -----    ----------
Total debt securities............................................     213,536       1,389           579       214,346
Equity securities................................................      18,217          --           150        18,067
                                                                   ----------  -----------        -----    ----------
Total securities available-for-sale..............................  $  231,753   $   1,389     $     729    $  232,413
                                                                   ----------  -----------        -----    ----------
                                                                   ----------  -----------        -----    ----------
Held-to-maturity:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies:
      After 1 but within 5 years.................................  $    4,967   $      33     $      --    $    5,000
                                                                   ----------  -----------        -----    ----------
                                                                        4,967          33            --         5,000
                                                                   ----------  -----------        -----    ----------
  Obligations of states and political subdivisions:
      Within 1 year..............................................       4,073          33            --         4,106
      After 1 but within 5 years.................................      33,293         713             2        34,004
      After 5 but within 10 years................................      30,607         697             8        31,296
      After 10 years.............................................         106           1            --           107
                                                                   ----------  -----------        -----    ----------
                                                                       68,079       1,444            10        69,513
                                                                   ----------  -----------        -----    ----------
  Mortgage-backed securities.....................................      21,894         243            --        22,137
                                                                   ----------  -----------        -----    ----------
Total securities held-to-maturity................................  $   94,940   $   1,720     $      10    $   96,650
                                                                   ----------  -----------        -----    ----------
                                                                   ----------  -----------        -----    ----------
</TABLE>
 
                                       44
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4. LOANS
 
    Loans consist of the following:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
(IN THOUSANDS)                                                             1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Real estate loans:
  Construction and land development...................................  $   61,328  $   67,026
  Secured by farmland.................................................       8,452       8,479
  Residential mortgage................................................     265,394     257,121
  Other mortgage......................................................     198,131     170,742
Agricultural..........................................................         560         819
Commercial and industrial loans.......................................      92,091      99,043
Consumer..............................................................     257,968     276,134
Other loans...........................................................       7,817       3,186
                                                                        ----------  ----------
Total loans...........................................................  $  891,741  $  882,550
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    Loans to states and political subdivisions and industrial revenue bonds are
included in other loans and in total loans in the consolidated balance sheet.
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:
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                               -------------------------------
(IN THOUSANDS)                                                   1998       1997       1996
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
Balance at beginning of year.................................  $  12,069  $  11,739  $  11,700
Provision for credit losses..................................      3,056      2,910      1,822
Recoveries of loans previously charged-off...................      3,028      2,863      2,461
Loans charged off............................................     (5,336)    (5,443)    (4,244)
                                                               ---------  ---------  ---------
Balance at end of year.......................................  $  12,817  $  12,069  $  11,739
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
</TABLE>
 
    In the ordinary course of business, directors and officers of the Bank, the
Savings Bank, and their affiliates, were customers of, and had other
transactions with the Bank and/or the Savings 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 neither
involved 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 $16,592,027 and $19,246,376 at December 31, 1998 and 1997,
respectively. During 1998, $46,939,657 of new loans were made, or became
reportable, and repayments and other decreases totaled $49,594,006.
 
                                       45
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4. LOANS (CONTINUED)
    The loan portfolio includes loans that are not currently accruing interest
income. The total outstanding principal amount of these loans at December 31,
1998, 1997, and 1996, and the effect on interest income for the years then
ended, are as follows:
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                   -------------------------------
(IN THOUSANDS)                                                       1998       1997       1996
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
Principal balance................................................  $   4,196  $   7,357  $   8,074
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
Gross amount of interest which would have been recorded under
  original terms.................................................  $     468  $     847  $     754
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
Recorded interest income on these loans..........................  $     167  $     246  $     188
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
    The net reduction in interest income on renegotiated loans was not material
in 1998, 1997, and 1996. At December 31, 1998, 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.
 
    Loans amounting to approximately $2,508,000 and $8,105,000 at December 31,
1998 and 1997, respectively, were specifically classified as impaired and are
included in nonaccrual loans disclosed above. The average balance of impaired
loans amounted to $9,083,000 and $7,081,000 for the years ended December 31,
1998 and 1997, respectively. Cash receipts totaling $2,512,000 and $3,965,000
during 1998 and 1997, respectively, were applied to reduce the principal balance
of those impaired loans, and no interest income was recognized. The specific
allowance for credit losses related to these impaired loans was $296,000 and
$732,000 at December 31, 1998 and 1997, respectively.
 
5. BANK PREMISES AND EQUIPMENT
 
    Investments in bank premises and equipment are as follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
(IN THOUSANDS)                                                              1998       1997
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Bank premises and land..................................................  $  28,978  $  29,184
Furniture and equipment.................................................     24,224     23,272
Leasehold improvements..................................................      2,908      2,901
                                                                          ---------  ---------
                                                                             56,110     55,357
Less accumulated depreciation and amortization..........................     24,926     22,230
                                                                          ---------  ---------
Bank premises and equipment, net........................................  $  31,184  $  33,127
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    Depreciation and amortization related to premises and equipment in the
consolidated statements of income and comprehensive income amounted to
$2,701,000 in 1998, $2,820,000 in 1997, and $3,031,000 in 1996.
 
                                       46
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
6. DEPOSITS
 
    The carrying amounts of deposits are as follows:
 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                    --------------------------
(IN THOUSANDS)                                                          1998          1997
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Noninterest-bearing...............................................  $    152,076  $    138,440
Interest-bearing:
  Checking........................................................       152,609       138,868
  Savings.........................................................       151,970       156,327
  Money market accounts...........................................       160,071       133,645
  Certificates of deposits:
    Under $100,000................................................       450,445       437,435
    $100,000 and over.............................................        71,023        48,847
                                                                    ------------  ------------
Total deposits....................................................  $  1,138,194  $  1,053,562
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>
 
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 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
$210,313,000 at December 31, 1998.
 
    The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings.
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
(DOLLARS IN THOUSANDS)                                                     1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Maximum balance at any month end during the year......................  $  100,259  $  122,663
Average balance for the year..........................................      74,872     105,415
Weighted average rate for the year....................................        5.47%       5.55%
Weighted average rate at year end.....................................        4.42%       5.66%
Estimated fair value..................................................  $   72,402  $  102,303
</TABLE>
 
                                       47
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7. BORROWINGS (CONTINUED)
LONG-TERM BORROWINGS
 
    The table below presents a summary of long-term advances from the FHLB:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
(IN THOUSANDS)                                                              1998       1997
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Due within 1 to 5 years.................................................  $  37,121  $  39,726
Due after 5 years through 10 years......................................     56,991      3,998
Due after 10 years......................................................        134        138
                                                                          ---------  ---------
                                                                          $  94,246  $  43,862
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    These advances had weighted average interest rates of 5.29% and 5.90% at
December 31, 1998 and 1997, respectively. These advances are secured either by a
blanket floating lien on all real estate mortgage loans secured by 1-4 family
residential properties, FHLB Stock, or other mortgage-related assets. All
advances carry a fixed rate. In 1999, 2000 and 2003, $38.5 million, $25.0
million and $10.0 million, respectively, of advances are convertible at the
FHLB's option to a variable rate based on LIBOR.
 
8. INCOME TAXES
 
    Significant components of deferred tax assets and liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
(IN THOUSANDS)                                                                 1998       1997
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Deferred tax assets:
  Allowances for credit and other real estate owned losses.................  $   4,805  $   4,227
  Deferred compensation....................................................      1,645      1,591
  Intangibles..............................................................      1,202        941
  Other....................................................................        883        624
                                                                             ---------  ---------
    Total deferred tax assets..............................................      8,535      7,383
  Valuation allowance for deferred tax assets..............................       (474)      (474)
                                                                             ---------  ---------
    Total deferred tax assets after valuation allowance....................      8,061      6,909
                                                                             ---------  ---------
Deferred tax liabilities:
  Depreciation and amortization............................................      1,144        721
  Unrealized gains on securities available for sale........................         83        165
  Other....................................................................        354         77
                                                                             ---------  ---------
    Total deferred tax liabilities.........................................      1,581        963
                                                                             ---------  ---------
    Net deferred tax assets................................................  $   6,480  $   5,946
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
                                       48
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8. INCOME TAXES (CONTINUED)
    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:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                               -------------------------------
(DOLLARS IN THOUSANDS)                                           1998       1997       1996
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
Income before income tax.....................................  $  18,138  $  19,477  $  13,597
Tax rate.....................................................         35%        35%        35%
                                                               ---------  ---------  ---------
Income tax at statutory rate.................................      6,348      6,817      4,759
Increases (decreases) in tax resulting from:
  Tax-exempt interest income.................................     (1,787)    (1,778)    (1,362)
  State income taxes, net of federal income tax benefit......        272        326        152
  Other......................................................        213       (114)      (237)
  Change in valuation allowance..............................         --         --       (116)
                                                               ---------  ---------  ---------
Actual tax expense...........................................  $   5,046  $   5,251  $   3,196
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
Effective tax rate...........................................       27.8%      27.0%      23.5%
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
</TABLE>
 
    Significant components of the provision for income taxes attributed to
continuing operations are as follows:
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                   -------------------------------
(IN THOUSANDS)                                                       1998       1997       1996
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
Current payable:
  Federal........................................................  $   5,258  $   5,074  $   3,221
  State..........................................................        240        590        291
                                                                   ---------  ---------  ---------
    Total currently payable......................................      5,498      5,664      3,512
                                                                   ---------  ---------  ---------
Deferred tax benefit.............................................       (452)      (413)      (200)
                                                                   ---------  ---------  ---------
  Change in valuation allowance..................................         --         --       (116)
                                                                   ---------  ---------  ---------
Provision for income taxes.......................................  $   5,046  $   5,251  $   3,196
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
    The components of the provision for deferred tax expense (benefit) are as
follows:
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                      -------------------------------
(IN THOUSANDS)                                                          1998       1997       1996
                                                                      ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>
Provision for credit losses.........................................  $    (578) $    (166) $      46
Amortization of intangibles.........................................       (261)      (128)      (213)
Other...............................................................        387       (119)       (33)
                                                                      ---------  ---------  ---------
  Deferred tax benefit..............................................  $    (452) $    (413) $    (200)
                                                                      ---------  ---------  ---------
                                                                      ---------  ---------  ---------
</TABLE>
 
                                       49
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
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 $468,000 for 1998,
$540,000 for 1997, and $430,000 for 1996. The Plan also provides for employer
matching contributions equal to 2% for the first 2% of eligible compensation,
and an additional 1% for the next 2% of eligible compensation for a maximum
total matching contribution of 3% for the first 4% of eligible compensation.
Employer matching contributions totaled $343,000 in 1998, $268,000 in 1997, and
$234,000 in 1996.
 
    TBT, which was merged with and into the Bank on November 30, 1998, had a
401(k) contributory thrift plan which was terminated in conjunction with the
merger. Contributions to this plan, included in pension and other employee
benefits expense, were $79,000 for 1998, $75,000 for 1997, and $61,000 for 1996.
 
THE SAVINGS BANK PROFIT SHARING PLAN
 
    The Savings Bank provides a retirement savings plan and trust, which is a
deferred compensation plan (401(k)) and a profit sharing plan (the "Savings
Plan") for all employees who meet certain age and eligibility requirements. The
Savings Plan permits eligible participants to defer up to 15% of their annual
salary and the Savings Bank to contribute to the 401(k) part of the Savings Plan
on a matching basis. The Savings Bank may also elect to contribute a portion of
its profits to the profit sharing portion of the Savings Plan.
 
    Contributions are made based on matching $0.50 of every dollar up to 5% of
the employee's salary. The Savings Bank's additional matching contribution
amounted to $57,000 in 1998, $58,000 in 1997, and $52,000 in 1996. In addition,
the Savings Bank made profit sharing contributions of $180,000, $135,000, and
$185,000, in 1998, 1997, and 1996, respectively.
 
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, 1998, 1997, and 1996 were $372,000, $344,000, and $292,000, respectively.
 
OTHER BENEFITS
 
    Both the Savings Bank and Bancorp maintain a director's deferred
compensation program pursuant to which directors may elect to defer their fees
for attending meetings in order to provide retirement benefits. The expense for
these benefits was $117,000, $128,000, and $242,000, for 1998, 1997, and 1996,
respectively.
 
                                       50
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9. EMPLOYEE BENEFITS (CONTINUED)
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 $17,000, $11,000, and $9,000, for 1998, 1997, and 1996,
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 60,775 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 PLANS
 
    Bancorp has a 1983 Stock Option Plan and a 1995 Stock Option Plan (the
"Plans") which are coordinated in their administration and similar in their
terms and conditions for key employees. The Plans permit the granting of both
incentive stock options and nonqualified stock options to purchase Bancorp
Common Stock. The exercise price per share for incentive stock options and
nonqualified stock options shall not 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.
Options are fully exercisable after four years from the date of grant and expire
after 10 years.
 
<TABLE>
<CAPTION>
                                                                          OPTIONS ISSUED
                                                                          AND OUTSTANDING               PRICE
                                                                          ---------------  -------------------------------
<S>                                                                       <C>              <C>        <C>        <C>
Balance, December 31, 1995..............................................       266,817     $   10.66         to  $   25.59
Exercised...............................................................       (27,657)        10.66         to      25.59
Granted.................................................................        38,263         13.98         to      26.42
Terminated..............................................................       (12,772)        10.66         to      26.42
                                                                               -------     ---------             ---------
Balance, December 31, 1996..............................................       264,651         10.66         to      26.42
Exercised...............................................................       (55,716)        10.66         to      26.42
Granted.................................................................        88,036         14.54         to      24.38
Terminated..............................................................        (6,309)        18.44         to      26.42
                                                                               -------     ---------             ---------
Balance, December 31, 1997..............................................       290,662         10.66         to      26.42
Exercised...............................................................       (58,750)        10.66         to      26.42
Granted.................................................................        45,330         19.59         to      33.69
Terminated..............................................................        (5,873)        19.33         to      33.69
                                                                               -------     ---------             ---------
Balance, December 31, 1998..............................................       271,369     $   10.66         to  $   33.69
                                                                               -------     ---------             ---------
                                                                               -------     ---------             ---------
</TABLE>
 
    At December 31, 1998, there were 207,133 options exercisable at prices
ranging from $10.66 to $26.42. Shares reserved for future grants totaled 86,195
at December 31, 1998.
 
                                       51
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9. EMPLOYEE BENEFITS (CONTINUED)
    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:
 
<TABLE>
<CAPTION>
                                                                                     1998       1997       1996
                                                                                   ---------  ---------  ---------
<S>             <C>                                                                <C>        <C>        <C>
Net Income:     As reported......................................................  $  13,092  $  14,226  $  10,401
                Pro forma........................................................     12,855     13,682     10,179
EPS:            As reported, basic...............................................       1.51       1.65       1.21
                As reported, diluted.............................................       1.49       1.64       1.21
                Pro forma, basic.................................................       1.49       1.59       1.19
                Pro forma, diluted...............................................       1.47       1.58       1.18
</TABLE>
 
    Because the 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.
Additionally, the pro forma amounts include a de minimus amount related to the
purchase discount offered under the Employee Stock Purchase Plan.
 
    A summary of the status of the Plans at December 31, 1998 and 1997, and
changes during the years then ended, is presented as follows:
 
<TABLE>
<CAPTION>
                                                                                1998                    1997
                                                                       ----------------------  ----------------------
                                                                                   WTD. AVG.               WTD. AVG.
                                                                        SHARES     EX. PRICE    SHARES     EX. PRICE
                                                                       ---------  -----------  ---------  -----------
<S>                                                                    <C>        <C>          <C>        <C>
Outstanding at beginning of year.....................................    290,662   $   18.58     264,651   $   17.82
Granted..............................................................     45,330       28.40      88,036       19.44
Exercised............................................................    (58,750)      17.10     (55,716)      16.11
Forfeited............................................................     (5,873)      25.51      (2,116)      24.01
Expired..............................................................         --          --      (4,193)      18.44
Outstanding at end of year...........................................    271,369       20.39     290,662       18.58
Exercisable at end of year...........................................    207,133       17.77     212,620       16.36
Weighted average fair value of options granted
  during the year....................................................         --       33.97          --       28.54
</TABLE>
 
       OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                   ----------------------------------------------------  -------------------------------
                      NUMBER                                                NUMBER
                   OUTSTANDING    WEIGHTED AVERAGE                       EXERCISABLE
    RANGE OF          AS OF           REMAINING       WEIGHTED AVERAGE      AS OF      WEIGHTED AVERAGE
 EXERCISE PRICES     12/31/98     CONTRACTUAL LIFE     EXERCISE PRICE      12/31/98     EXERCISE PRICE
-----------------  ------------  -------------------  -----------------  ------------  -----------------
<S>                <C>           <C>                  <C>                <C>           <C>
$10.66--$15.00....      79,737             4.78           $   13.35           79,737       $   13.35
 15.01-- 20.00...       82,098             7.61               17.82           82,098           17.28
 20.01-- 25.00...       27,663             8.20               24.30           11,867           24.19
 25.01-- 30.00...       55,021             6.72               25.98           33,431           25.92
 30.01-- 33.69...       26,850             9.06               33.69               --              --
                   ------------             ---              ------      ------------         ------
$10.66--$33.69....     271,369             6.80           $   20.39          207,133       $   17.77
                   ------------             ---              ------      ------------         ------
                   ------------             ---              ------      ------------         ------
</TABLE>
 
    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 1998, 1997, and 1996, respectively: risk-free
interest rates of 5.0%, 4.8%, and 4.3%; expected dividend yields of 3.2%, 3.2%,
and 3.2%; expected lives of 3.26, 3.38, and 3.55 years; and expected volatility
of 19%, 15%, and 12%.
 
                                       52
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
10. OTHER OPERATING INCOME AND EXPENSE
 
    Other operating income in the consolidated statements of income and
comprehensive income includes the following:
 
<TABLE>
<CAPTION>
(IN THOUSANDS)                                                                       1998       1997       1996
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Bank card income.................................................................  $     877  $   1,341  $   1,714
Miscellaneous....................................................................      4,380      4,840      3,317
                                                                                   ---------  ---------  ---------
Total other operating income.....................................................  $   5,257  $   6,181  $   5,031
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
    Other operating expense in the consolidated statements of income and
comprehensive income includes the following:
 
<TABLE>
<CAPTION>
(IN THOUSANDS)                                                                       1998       1997       1996
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Insurance (including FDIC).......................................................  $     626  $     542  $   2,396
Stationery and supplies..........................................................      1,095      1,117      1,294
Advertising......................................................................        974        998        894
Professional services............................................................      2,383      2,069      1,571
Credit card processing...........................................................        203        623      1,465
Postage..........................................................................        848        904        906
Director fees....................................................................        329        334        276
Telephone........................................................................      1,021        957        758
Computer software and maintenance................................................        705        503        625
Other real estate owned expense..................................................        262        199        531
Amortization of intangibles......................................................        779        758      1,001
Miscellaneous....................................................................      4,139      4,806      3,601
                                                                                   ---------  ---------  ---------
Total other operating expense....................................................  $  13,364  $  13,810  $  15,318
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
    Transactions in the allowances for other real estate owned are summarized as
follows:
 
<TABLE>
<CAPTION>
(IN THOUSANDS)                                                                           1998       1997       1996
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Balance at beginning of of year......................................................  $   1,792  $   2,016  $   2,218
Provision for decline in value and selling expenses..................................          2        156        436
Losses charged to the allowances.....................................................     (1,369)      (380)      (638)
                                                                                       ---------  ---------  ---------
Balance at end of year...............................................................  $     425  $   1,792  $   2,016
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
                                       53
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)
 
                  F&M BANCORP BALANCE SHEETS (PARENT COMPANY)
 
<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
(IN THOUSANDS)                                                                                 1998        1997
                                                                                            ----------  ----------
ASSETS
Cash and cash equivalents.................................................................  $    4,351  $    1,851
Investment securities
      Available-for-sale, at fair value...................................................       2,882       2,012
Investment in subsidiaries................................................................     123,819     121,759
Other assets..............................................................................       1,967         282
                                                                                            ----------  ----------
Total assets..............................................................................  $  133,019  $  125,904
                                                                                            ----------  ----------
                                                                                            ----------  ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities.........................................................................  $    2,195  $      269
                                                                                            ----------  ----------
Common stock..............................................................................      43,405      41,622
Surplus...................................................................................      61,980      49,640
Retained earnings.........................................................................      25,220      34,020
Accumulated other comprehensive income....................................................         219         353
                                                                                            ----------  ----------
Total shareholder's equity................................................................     130,824     125,635
                                                                                            ----------  ----------
Total liabilities and shareholders' equity................................................  $  133,019  $  125,904
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
                                       54
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED)
               F&M BANCORP STATEMENTS OF INCOME (PARENT COMPANY)
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
<S>                                                                                <C>        <C>        <C>
(IN THOUSANDS)                                                                       1998       1997       1996
                                                                                   ---------  ---------  ---------
INCOME
Interest on investment securities................................................  $     246  $     150  $     123
Interest expense on borrowings...................................................         --         --        101
                                                                                   ---------  ---------  ---------
      Net interest income........................................................        246        150         22
Dividends from subsidiaries......................................................     11,207      5,887      5,487
                                                                                   ---------  ---------  ---------
Total income.....................................................................     11,453      6,037      5,509
EXPENSE..........................................................................        618        436        696
                                                                                   ---------  ---------  ---------
Income before income tax benefits and
      equity in undistributed earnings
      of subsidiaries............................................................     10,835      5,601      4,813
Income tax benefit...............................................................       (112)       (95)      (164)
                                                                                   ---------  ---------  ---------
Income before equity in undistributed
      earnings of subsidiaries...................................................     10,947      5,696      4,977
Equity in undistributed earnings
      of subsidiaries............................................................      2,145      8,530      5,424
                                                                                   ---------  ---------  ---------
Net income.......................................................................  $  13,092  $  14,226  $  10,401
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
                                       55
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
11. CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY) (CONTINUED)
             F&M BANCORP STATEMENTS OF CASH FLOWS (PARENT COMPANY)
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
<S>                                                                                <C>        <C>        <C>
(IN THOUSANDS)                                                                       1998       1997       1996
                                                                                   ---------  ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................................................  $  13,092  $  14,226  $  10,401
Adjustments to reconcile net
    income to net cash provided by
    operating activities
      (Increase) decrease in other assets........................................     (1,685)        61         --
      Increase (decrease) in other expenses payable..............................      1,926         (6)       (60)
      Equity in undistributed earnings of subsidiaries...........................     (2,145)    (8,530)    (5,424)
                                                                                   ---------  ---------  ---------
Net cash provided by operating activities........................................     11,188      5,751      4,917
                                                                                   ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
    available-for-sale...........................................................       (994)    (1,992)        (4)
Distribution of undivided profits of
    Bank subsidiary..............................................................         --         --        868
                                                                                   ---------  ---------  ---------
Net cash (used in) provided by investing activities..............................       (994)    (1,992)       864
                                                                                   ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid..............................................................     (9,190)    (5,853)    (4,225)
Other financing activities.......................................................      1,496        997        510
Repayments of debt...............................................................         --         --     (3,000)
                                                                                   ---------  ---------  ---------
Net cash used in financing activities............................................     (7,694)    (4,856)    (6,715)
                                                                                   ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents.............................      2,500     (1,097)      (934)
Cash and cash equivalents at beginning of year...................................      1,851      2,948      3,882
                                                                                   ---------  ---------  ---------
Cash and cash equivalents at end of year.........................................  $   4,351  $   1,851  $   2,948
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available-for-sale, net of income taxes.....  $    (134) $   1,321  $    (969)
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
                                       56
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
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:
 
<TABLE>
<CAPTION>
(IN THOUSANDS)                                                         Year ended December 31,
                                                                   -------------------------------
<S>                                                                <C>        <C>        <C>
                                                                     1998       1997       1996
                                                                   ---------  ---------  ---------
Bank premises....................................................  $   1,094  $   1,079  $     978
Equipment........................................................         43         46         92
                                                                   ---------  ---------  ---------
Total rental expense.............................................  $   1,137  $   1,125  $   1,070
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
    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, 1998 are:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                                        (IN THOUSANDS)
------------------------------------------------------------------------------  ---------------
<S>                                                                             <C>
1999..........................................................................     $   1,036
2000..........................................................................         1,062
2001..........................................................................           966
2002..........................................................................           883
2003..........................................................................           786
Later years...................................................................         3,363
                                                                                      ------
Total minimum payments required...............................................     $   8,096
                                                                                      ------
                                                                                      ------
</TABLE>
 
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, 1998 which 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.
 
                                       57
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
    A summary of the contractual amount of exposure under these financial
instruments is as follows:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
(IN THOUSANDS)                                                             1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Financial instruments whose contractual amounts represent credit risk:
  Commitments to extend credit........................................  $  177,751  $  168,476
  Stand-by letters of credit..........................................      14,048      15,949
</TABLE>
 
    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.
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    The following table summarizes the carrying amounts and fair value estimates
of financial instruments at December 31, 1998 and 1997. 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
 
                                       58
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
made with precision. Changes in assumptions or methodologies could have a
significant effect on the estimates.
 
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                           ------------------------------------------------------
                                                                      1998                        1997
                                                           --------------------------  --------------------------
                                                             CARRYING        FAIR        CARRYING        FAIR
(IN THOUSANDS)                                               AMOUNTS        VALUE        AMOUNTS        VALUE
                                                           ------------  ------------  ------------  ------------
<S>                                                        <C>           <C>           <C>           <C>
Financial assets:
  Cash and cash equivalents..............................  $     75,719  $     75,719  $     60,668  $     60,668
  Loans held for sale....................................         4,810         4,810         5,223         5,223
  Investment securities held-to-maturity.................        98,231       100,478        94,940        96,650
  Investment securities available-for-sale...............       322,651       322,651       232,413       232,413
  Net loans..............................................       878,924       888,529       870,481       894,593
  Interest receivable....................................         9,478         9,478         9,545         9,545
Financial liabilities:
  Deposits...............................................     1,138,194     1,030,336     1,053,562     1,053,514
  Short-term borrowings..................................        72,402        72,402       102,303       102,303
  Long-term borrowings...................................        94,246        95,346        43,862        42,464
  Interest payable.......................................         2,864         2,864         2,375         2,375
</TABLE>
 
    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 of the
anticipated short holding period of these instruments.
 
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 debt 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
 
                                       59
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 re-pricing 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 discount rates
were judgmentally determined using available market information and specific
borrower information.
 
INTEREST RECEIVABLE
 
    Because of the short-term nature of interest receivable, fair value was
deemed to approximate carrying amounts.
 
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, and fixed-rate
certificates of deposit with original maturities of 12 months or less, because
of the frequent re-pricing of these instruments at market rates. The fair value
for all other 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.
 
SHORT-TERM BORROWINGS
 
    Because of the frequent re-pricing of these instruments at current market
rates, fair value was deemed to approximate the carrying amounts.
 
LONG-TERM 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.
 
INTEREST PAYABLE
 
    Because of the short-term nature of interest payable, fair value was deemed
to approximate carrying amounts.
 
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.
 
                                       60
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
14. REGULATORY RESTRICTIONS
 
RESTRICTIONS ON DIVIDENDS
 
    Approval of the Comptroller of the Currency 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 1998 aggregated $22,383,000. The rules and regulations of the
OTS require prenotification of dividend payments by the Savings Bank, and such
payments may not exceed prescribed formulas without OTS approval. Also, the
Savings Bank's earnings appropriated to loan loss reserves and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the then current income tax rates on the amount used.
 
RESTRICTIONS ON LENDING FROM AFFILIATES TO PARENT
 
    Section 23A of the Federal Reserve 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 this limitation, there was approximately
$13,671,000 available for loans or advances to the Parent Company as of December
31, 1998, at which time there were no material loans or advances outstanding.
 
RESTRICTIONS 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 $7,889,000 at December 31, 1998.
 
15. SHAREHOLDERS' EQUITY
 
CAPITAL REQUIREMENTS
 
    Bancorp, the Bank, and the Savings 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, 1998, as disclosed in the following table:
 
<TABLE>
<CAPTION>
                                                                             BANCORP
                                                               -----------------------------------
<S>                                                            <C>          <C>        <C>
                                                               COMPONENTS    ACTUAL     REQUIRED
(DOLLARS IN THOUSANDS)                                         OF CAPITAL     RATIO       RATIO
                                                               -----------  ---------  -----------
Tangible capital.............................................   $ 124,922        8.81%       3.00%
Core capital.................................................     124,922       12.55        4.00
Core and supplementary capital...............................     132,047       13.80        8.00
</TABLE>
 
<TABLE>
<CAPTION>
                                                                            THE BANK
                                                               -----------------------------------
<S>                                                            <C>          <C>        <C>
                                                               COMPONENTS    ACTUAL     REQUIRED
                                                               OF CAPITAL     RATIO       RATIO
                                                               -----------  ---------  -----------
Tangible capital.............................................   $  99,536        8.33%       3.00%
Core capital.................................................      99,536       11.75        4.00
Core and supplementary capital...............................     109,569       12.94        8.00
</TABLE>
 
                                       61
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
15. SHAREHOLDERS' EQUITY (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                        THE SAVINGS BANK
                                                               -----------------------------------
<S>                                                            <C>          <C>        <C>
                                                               COMPONENTS    ACTUAL     REQUIRED
                                                               OF CAPITAL     RATIO       RATIO
                                                               -----------  ---------  -----------
Tangible capital.............................................   $  18,304        8.13%       1.50%
Core capital.................................................      18,304        8.13        3.00
Core and supplementary capital...............................      20,074       14.25        8.00
</TABLE>
 
DIVIDEND REINVESTMENT PLAN
 
    Registered shareholders are eligible to participate in Bancorp's Dividend
Reinvestment and Stock Purchase Plan (the "DRP"). The DRP allows participants to
purchase additional shares of Bancorp Common Stock, at a 5% discount to the
market price, through the automatic reinvestment of cash dividends.
Additionally, shareholders may make optional cash payments of $25 to $3,000 in a
single calendar quarter to purchase additional shares at 100% of the market
price. Typically, DRP shares are purchased in the open market by Bancorp's
agent, but the DRP also provides for purchases directly from Bancorp at current
market prices. A total of 60,775 shares are reserved for direct purchase.
Bancorp absorbs all costs of administering the DRP and reserves the right to
amend, modify, suspend, or terminate the DRP at its discretion.
 
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
    Following is a summary of unaudited quarterly results of operations:
 
<TABLE>
<CAPTION>
1998                                                             THREE MONTHS ENDED
(DOLLARS IN THOUSANDS,                              --------------------------------------------
EXCEPT PER SHARE AMOUNTS)                            DEC. 31   SEPT. 30    JUNE 30    MARCH 31
--------------------------------------------------  ---------  ---------  ---------  -----------
<S>                                                 <C>        <C>        <C>        <C>
Interest income...................................  $  25,005  $  24,838  $  24,661   $  24,675
Interest expense..................................     12,172     11,768     11,562      11,376
Net interest income...............................     12,833     13,070     13,099      13,299
Provision for credit losses.......................      1,275        625        525         631
Income before income taxes........................      1,318      5,671      5,222       5,927
Net income........................................      1,058      4,059      3,786       4,189
Earnings per common share:
  Net income, basic...............................       0.12       0.47       0.44        0.48
  Net income, diluted.............................       0.12       0.46       0.43        0.48
</TABLE>
 
                                       62
<PAGE>
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
 
<TABLE>
<CAPTION>
1997                                                             THREE MONTHS ENDED
(DOLLARS IN THOUSANDS,                              --------------------------------------------
EXCEPT PER SHARE AMOUNTS)                            DEC. 31   SEPT. 30    JUNE 30    MARCH 31
--------------------------------------------------  ---------  ---------  ---------  -----------
<S>                                                 <C>        <C>        <C>        <C>
Interest income...................................  $  25,072  $  24,573  $  23,668   $  23,084
Interest expense..................................     11,748     11,460     10,783      10,611
Net interest income...............................     13,324     13,113     12,885      12,473
Provision for credit losses.......................        500        850        930         630
Income before income taxes........................      4,779      5,323      4,802       4,573
Net income........................................      3,550      3,821      3,494       3,361
Earnings per common share:
  Net income, basic...............................       0.41       0.44       0.41        0.39
  Net income, diluted.............................       0.41       0.44       0.40        0.39
</TABLE>
 
17. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
 
    In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", which calls for derivatives to be
recognized in the consolidated balance sheet at fair value and for subsequent
changes in fair value to be recognized in the consolidated statement of income.
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 will also allow entities
to reclassify available-for-sale and held-to-maturity securities without calling
into question management's intent for the remainder of its securities
portfolios.
 
    For calendar-year companies such as Bancorp, the Statement will take effect
beginning January 1, 2000. Historically, Bancorp has not made use of hedges and
other financial derivatives and is unable to predict the impact, if any, that
the application of Statement No. 133 will have on consolidated financial
statements issued after 1999.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
       AND FINANCIAL DISCLOSURE
 
    There were no changes in, or disagreements with, accountants on accounting
and financial disclosure.
 
                                       63
<PAGE>
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
(A) IDENTIFICATION OF DIRECTORS.
 
    Information set forth under the caption "Election of Directors" on pages 4
through 6 of Bancorp's definitive 1999 Proxy Statement furnished to shareholders
in connection with its Annual Meeting on April 20, 1999 (the "1999 Proxy
Statement") with respect to the name of each nominee or director, that person's
age, positions and offices with Bancorp, business experience, directorships in
other public companies, service on Bancorp's Board and certain family
relationships, and information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 17 of the 1999 Proxy
Statement with respect to Section 16 matters, is hereby incorporated by
reference.
 
(B) IDENTIFICATION OF EXECUTIVE OFFICERS.
 
    Following are the names and ages of all executive officers of Bancorp, the
Bank and the Savings Bank as of December 31, 1998 and all persons chosen to
become executive officers since that date. All executive officers are elected to
serve a one-year period. There are no arrangements or understandings between
such persons and any other person pursuant to which they were selected as an
officer.
 
    FAYE E. CANNON, age 49, President of Bancorp and the Bank since 1993 and
Chief Executive Officer of Bancorp and the Bank since 1996.
 
    DAVID R. STAUFFER, age 51, Vice President of Bancorp since 1990 and Senior
Executive Vice President and Chief Operating Officer of the Bank since 1999;
previously Executive Vice President of the Bank since 1990.
 
    RICHARD W. PHOEBUS, age 60, Vice President of Bancorp since 1996, when
Savings Bank was acquired by Bancorp, and President and Chief Executive Officer
of the Savings Bank since 1981.
 
    DAVID L. SPILMAN, age 56, Treasurer of Bancorp and Senior Vice President and
Chief Financial Officer of the Bank since 1997; served as Investor
Relations/Financial Communications Consultant to Bancorp from 1996 to 1997; and
was President and Chief Operating Officer of Trust Company of America,
Washington, DC from 1995 to 1996. He is a Certified Public Accountant with over
30 years of management experience in banking with responsibility for accounting,
financial and regulatory reporting, strategic planning, budgeting,
asset/liability management, corporate finance, investor and media relations, and
financial communications. Mr. Spilman previously held senior management
positions with Baltimore Bancorp (1994), MNC Financial (1990) and Equitable
Bancorporation (1982), in Baltimore.
 
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
 
    Pursuant to specific instructions related hereto, this section is
inapplicable to Bancorp.
 
(D) FAMILY RELATIONSHIPS.
 
    There is no family relationship between any director, executive officer, or
person nominated or chosen to become a director or executive officer.
 
(E) BUSINESS EXPERIENCE.
 
    All executive officers have been employed by Bancorp, the Bank, or the
Savings Bank more than five years, except Mr. Spilman whose prior business
experience and responsibilities are disclosed in Item 10 (b) above.
 
                                       64
<PAGE>
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
 
    Pursuant to specific instructions related hereto, none of the events
identified have occurred during the past five years as would be applicable to
any director, person nominated to become a director, or executive officer of
Bancorp.
 
(G) PROMOTERS AND CONTROL PERSONS.
 
    Pursuant to specific instructions related hereto, this section is
inapplicable to Bancorp.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    Information in the section under "Compensation Committee Report on Executive
Compensation" located on pages 6 and 7, and "Directors' Fees and Deferred
Compensation Plan" located on page 11 of the 1999 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 located on page 1, and "Security Ownership of Certain Beneficial
Owners" located on page 3 of the 1999 Proxy Statement is hereby incorporated by
reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Information in the section under "Certain Transactions with Directors and
Officers" located on page 11 of the 1999 Proxy Statement is hereby incorporated
by reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
    (a) Filed documents:
 
       (1) Financial Statements:
 
           See listing in Item 8.
 
       (2) Financial Statement Schedules:
 
           Schedules I and II, inclusive, are omitted because of the absence of
           the conditions under which they are required.
 
       (3) Exhibits:
 
<TABLE>
<S>          <C>
         2   Agreement and Plan of Merger by and between F&M Bancorp and Monocacy
             Bancshares, Inc. Filed as Appendix A to Registration Statement on Form
             S-4 (File #333-65727) and incorporated herein by reference. Post
             effective Amendment #1 to Deregister 13,963 shares was filed December
             31, 1998, (File # 333-65727).
       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 September 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.
</TABLE>
 
                                       65
<PAGE>
<TABLE>
<S>          <C>
      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 an
             exhibit hereto and incorporated herein by reference.
      10.3   Farmers and Mechanics National Bank Executive Supplemental Income Plan
             as amended and restated effective August 18, 1998. Filed as an Exhibit
             hereto 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 on Exhibit 10.7 to the Annual Report on
             Form 10K for the year ended December 31, 1996 and incorporated herein by
             reference.
      10.8   Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
             Steven G. Hull. Filed on Exhibit 10.8 to the Annual Report on Form 10K
             for the year ended December 31, 1996 and incorporated herein by
             reference.
      10.9   Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
             Salvatore M. Savino. Filed on Exhibit 10.9 to the Annual Report on Form
             10K for the year ended December 31, 1996 and incorporated herein by
             reference.
     10.10   Employment Agreement between F&M Bancorp, Home Federal Savings Bank and
             Celia S. Ausherman. Filed on Exhibit 10.9 to the Annual Report on Form
             10K for the year ended December 31, 1996 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   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's Inc, 1997 Independent Director Stock
             Option Plan. Registration Statement on Form S-8 (File #333-68473) and
             incorporated herein by reference.
     10.13   F&M Bancorp Executive Deferred Compensation Plan adopted April 21, 1998.
             Filed as an exhibit hereto and incorporated herein by reference.
     10.14   F&M Bancorp Change in Control Employment Agreement. Filed as Exhibit
             hereto and incorporated herein by reference.
     10.15   Employment Agreement for Michael K. Walsch dated as of July 31,1998.
             Copy attached and incorporated as an Exhibit hereto.
</TABLE>
 
                                       66
<PAGE>
<TABLE>
<S>          <C>
     10.16   Supplemental Retirement Plan Agreement dated November 17, 1994 by and
             between Taneytown Bank & Trust Company and Michael K. Walsch.
     10.17   Taneytown Bank & Trust Company Key Employee life insurance program.
     10.18   Home Federal Corporation Deferred Compensation Plan for Non-Employee
             Directors.
        11   Statement re: computation of per share earnings.
        21   Subsidiaries of F&M Bancorp. Filed as an Exhibit hereto an incorporated
             herein by reference.
        27   Financial Data Schedule.
</TABLE>
 
(b) Reports on Form 8-K
 
<TABLE>
<S>          <C>
        1.   A report on Form 8-K, Item 5. Other Event, was filed on November 20,
             1998 to announce an anticipated date for the merger of Monocacy
             Bancshares Inc. with and into F&M Bancorp (File #000-12638)
        2.   A report on Form 8-K Item 2. Acquisition and Disposition of Assets was
             filed on December 15, 1998 to announce the completion of the Monocacy
             Bancshares, Inc. acquisition, effective November 30, 1998. (File
             #000-12638)
        3.   A Report on Form 8-K/A Item 2. Acquisition and Disposition of Assets was
             filed on December 31, 1998 to publish financial statements, pro forma
             financial statements and required exhibits related to the Company's
             acquisition of Monocacy Bancshares, Inc. effective November 30, 1998
             (File #000-12638).
        4.   A report on Form 8-K Item 5. Other event was filed on January 20, 1999
             to publish 30 days of post-merger combined operations to satisfy the
             risk-sharing rules set forth in SEC Accounting Series Release 135. (File
             #000-12638).
</TABLE>
 
                                       67
<PAGE>
                                   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.
 
<TABLE>
<S>                             <C>  <C>
                                F&M BANCORP
                                (Registrant)
 
Dated: March 16, 1999           By:              /s/ FAYE E. CANNON
                                     -----------------------------------------
                                                   Faye E. Cannon
                                        PRESIDENT & CHIEF EXECUTIVE OFFICER
</TABLE>
 
    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 16, 1999                   /s/ CHARLES W. HOFF, III
                                ---------------------------
                                   Charles W. Hoff, III
                                   CHAIRMAN OF THE BOARD
 
March 16, 1999                      /s/ FAYE E. CANNON
                                ---------------------------
                                      Faye E. Cannon
                                PRESIDENT & CHIEF EXECUTIVE
                                          OFFICER
 
                                Principal Financial &
                                Accounting Officer:
 
March 16, 1999                     /s/ DAVID L. SPILMAN
                                ---------------------------
                                     David L. Spilman
                                         TREASURER
 
                                A Majority of the Board of
                                Directors
 
March 16, 1999                       /s/ R. CARL BENNA
                                ---------------------------
                                       R. Carl Benna
                                         DIRECTOR
 
March 16, 1999                      /s/ HOWARD B. BOWEN
                                ---------------------------
                                      Howard B. Bowen
                                         DIRECTOR
 
                                       68
<PAGE>
<TABLE>
<S>                             <C>
March 16, 1999                       /s/ JOHN D. BRUNK
                                ---------------------------
                                       John D. Brunk
                                         DIRECTOR
 
March 16, 1999                     /s/ BEVERLY B. BYRON
                                ---------------------------
                                     Beverly B. Byron
                                         DIRECTOR
 
March 16, 1999                      /s/ FAYE E. CANNON
                                ---------------------------
                                      Faye E. Cannon
                                         DIRECTOR
 
March 16, 1999                     /s/ MARTHA E. CHURCH
                                ---------------------------
                                     Martha E. Church
                                         DIRECTOR
 
March 16, 1999                      /s/ ALBERT H. COHEN
                                ---------------------------
                                      Albert H. Cohen
                                         DIRECTOR
 
March 16, 1999                    /s/ MAURICE A. GLADHILL
                                ---------------------------
                                    Maurice A. Gladhill
                                         DIRECTOR
 
March 16, 1999                       /s/ ERIC E. GLASS
                                ---------------------------
                                       Eric E. Glass
                                         DIRECTOR
 
March 16, 1999                      /s/ CHARLES W. HOFF
                                ---------------------------
                                   Charles W. Hoff, III
                                         DIRECTOR
 
March 16, 1999                      /s/ DONALD R. HULL
                                ---------------------------
                                      Donald R. Hull
                                         DIRECTOR
 
March 16, 1999                      /s/ JAMES K. KLUTTZ
                                ---------------------------
                                      James K. Kluttz
                                         DIRECTOR
 
March 16, 1999                   /s/ CHARLES A. NICODEMUS
                                ---------------------------
                                   Charles A. Nicodemus
                                         DIRECTOR
 
March 16, 1999                    /s/ RICHARD W. PHOEBUS,
                                            SR.
                                ---------------------------
                                  Richard W. Phoebus, Sr.
                                         DIRECTOR
</TABLE>
 
                                       69
<PAGE>
<TABLE>
<S>                             <C>
March 16, 1999                    /s/ H. DEETS WARFIELD,
                                            JR.
                                ---------------------------
                                  H. Deets Warfield, Jr.
                                         DIRECTOR
 
March 16, 1999                     /s/ JOHN C. WARFIELD
                                ---------------------------
                                     John C. Warfield
                                         DIRECTOR
 
March 16, 1999                     /s/ THOMAS R. WINKLER
                                ---------------------------
                                     Thomas R. Winkler
                                         DIRECTOR
</TABLE>
 
                                       70